BIR Ruling No. 096-11

April 5, 2011 BIR RULING NO. 096-11 Sec. 41 of the NIRC of 1997; BIR Ruling No. DA-263-01 Yo-Zuri Philippines, Inc. Lot 12, Block 4, Phase 2 Philippine Economic Zone Authority Rosario, Cavite Attention: Kazutoshi Onohara Managing Director Gentlemen : This refers to your letters dated June 19, 2009, June 15, 2010 and July 5, 2010 requesting for the approval to change the method of costing the inventories from First-In, First Out (FIFO) Method to Average Cost Method starting from April 1, 2009, the start of Yo-Zuri Philippines, Inc.'s ("Yo-Zuri", for brevity) fiscal year. CaAIES It is represented that Yo-Zuri manufactures fishing tackles such as plastic and metal lures, vinyl baits, swivels and other related products; that 100% of these products were exported to Japan and distributed to different countries such as Europe, Canada, United States, South America and Japan; that the reason for the change is due to the fact that the FIFO method of costing its inventories is no longer appropriate due to the change in its marketing strategy; that its strategy before was to compete based on price; that efficient system of production played a major role in the company and now its strategy is market driven that requires to stay close to the customers and respond to their needs as fast as possible; that this has resulted to shorter cycle of its products from what used to be two to three years, to only six months and sometimes even as short as three months; that as a result, raw materials are not necessarily used in the order that they purchased thus, making the FIFO method inappropriate; and that the management has studied carefully the situation and found out that an Average Cost Method would be more appropriate; that the above change resulted in the increase in the inventories as of March 31, 2010 by 7,562,177.25 which decrease the cost of sales and therefore increase the gross profit and taxable income by the same amount; that income tax which is 5% of gross taxable income increase by 378,108.86; and that it is not aware of any other manufacturer in the Philippines producing the same product as Yo-Zuri, its costing practice therefore is the industry practice in the Philippines. In support of your request, you have submitted the following documents: 1) Photocopy of the SEC Certificate of Filing of Amended Articles of Incorporation; 2) Photocopy of the Audited Financial Statements for Fiscal Year ended March 31, 2009; 3) Inventory of RM, Supplies and Tools using the Average Method; 4) FIFO Inventory as of March 31, 2010. In reply thereto, please be informed that Section 41 of the National Internal Revenue Code of 1997, as amended provides that "SEC. 41. Inventories. Whenever in the judgment of the Commissioner, the use of inventories is necessary in order to determine clearly the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations, prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. If a taxpayer, after having complied with the terms and conditions prescribed by the Commissioner, uses a particular method of valuing its inventory for any taxable year, then such method shall be used in all subsequent taxable years unless: (i) with the approval of the Commissioner, a change to a different method is authorized; or (ii) the Commissioner finds that the nature of the stock on hand ( e.g. , its scarcity, liquidity, marketability and price movements) is such that inventory gains should be considered realized for tax purposes and, therefore, it is necessary to modify the valuation method for purposes of ascertaining the income, profits, or loss in a more realistic manner: Provided, however, That the Commissioner shall not exercise his authority to require a change in inventory method more often than once every three (3) years: Provided, further, That any change in an inventory valuation method must be subject to approval by the Secretary of Finance." ACEIac Finding merit to your request we have endorsed your papers to the Secretary of Finance. Having secured the approval of the Secretary of Finance, this Office hereby grants authority to Yo-Zuri the use of Average Cost method in its inventory costing effective April 1, 2009. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue