BIR Ruling No. 153-14

May 29, 2014 BIR RULING NO. 153-14 Sections 41 & 145 of the Tax Code of 1997; BIR Ruling No. 567-12 Uni-President (Philippines), Corporation G/F Topys Bldg., Economia St. cor. Industria St. Bagumbayan, Quezon City Attention: Erlinda T. Odfina Finance Manager Min-Hung Hsu AVP-Finance Gentlemen : This refers to your letter dated February 1, 2011, indorsed to this Office by Revenue Region No. 7, Quezon City, by way of Memorandum dated January 3, 2012, requesting on behalf of Uni-President (Philippines) Corporation ("Uni-President", for brevity), authority to change its inventory costing method from First In First Out (FIFO) Method to Simple Average Method effective January 1, 2011. In your supplemental letter dated October 17, 2012, it was requested that the change in the inventory costing method be allowed from FIFO to Average Method, instead of the Simple Average Method. ETHIDa Verification report dated August 22, 2011 by Revenue Officer (RO) Angelita C. De Guzman of Revenue District Office No. 40, Cubao, Quezon City disclosed that Uni-President, a domestic corporation with business address at G/F Topys Bldg., Economia St. cor. Industria St., Bagumbayan, Quezon City, was registered with Revenue District Office (RDO) No. 40, Cubao, Quezon City, on May 10, 2001, with Tax Identification No. 210-971-253-000; that Uni-President's primary business is the manufacture and sale of instant noodles and related products; that the reason for Uni-President's application for authority to change its costing method of inventories is in order to align its costing method to that of its mother company, Uni-President Enterprises Corporation (UPEC); that it was verified that due to the frequent change in the cost of raw materials such as flour and other ingredients to produce the products, as well as the constant change in the price of noodles in the market, Uni-President was directed by UPEC to change its inventory Costing Method to Average Method for easier monitoring of the costing and pricing of its products; that the Average Method is acceptable not only in the Philippines but internationally as well since this method complies with the International Financial Reporting Standards (IFRS); and that the change in inventory costing from FIFO Method to Average Method will have no significant effect for taxation purposes since the valuation used in both FIFO Method and Average Method is the same, that is, at "cost"; that the use of the Average Method will only result to "timing difference" but once the inventories are sold/consumed, the total cost and consequently, the gross profit will not be different using both methods, as illustrated below: Gross Profit Computation (Finished Product) FIFO Method Month January February March Total Sales 6,000,000.00 4,800,000.00 5,200,000.00 16,000,000.00 Cost of Goods 3,800,000.00 3,190,000.00 3,560,000.00 10,550,000.00 Gross Profit (GP) 2,200,000.00 1,610,000.00 1,640,000.00 5,450,000.00 GP Percentage 36.67% 33.54% 31.54% 34.06% Gross Profit Computation (Finished Product) Average Method Month January February March Total Sales 6,000,000.00 4,800,000.00 5,200,000.00 16,000,000.00 Cost of Goods 3,825,000.00 3,180,000.00 3,545,000.00 10,550,000.00 Gross Profit (GP) 2,175,000.00 1,620,000.00 1,655,000.00 5,450,000.00 GP Percentage 36.25% 33.75% 31.83% 34.06% In support of its application, Uni-President submitted the following documents: cSEDTC 1) Photocopy of duly filed Inventory Listing as of December 2010 (as amended); 2) Photocopy of duly filed Financial Statements for Taxable Year 2010; 3) Photocopies of the Finished Goods Monthly Report for the years 2009, 2010 and January to June 2011; 4) Photocopies of the Raw Materials Consolidated Report and Packaging Materials Consolidated Report for the years 2009, 2010 and January to June 2011; and 5) Other documents. In reply, please be informed that on the basis of the above representations, Uni-President is hereby granted permission to change its accounting method from FIFO method to average method pursuant to the provisions of Section 41 of the National Internal Revenue Code (Tax Code) of 1997, as amended, in relation to Section 145 of Revenue Regulations No. 2, pertinent portion of which provide 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 SDAaTC (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." xxx xxx xxx "Section 145. Valuation of Inventories . The law provides two tests to which each inventory must conform. (1) it must conform as nearly as possible to the best accounting practice in the trade or business, and (2) it must clearly reflect the income. It follows, therefore, that inventory rules cannot be uniform but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than to any particular method of inventory or basis of valuation, as long as the method of basis used is substantially in accord with these regulations, an inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer is, as a general rule, regarded as clearly reflecting his income." Considering that Uni-President's request for authority to change its inventory costing method is in order to synchronize its accounting system to that of its mother company, Uni-President Enterprises Corporation, this Office hereby grants Uni-President the authority to use the Average Method. (BIR Ruling No. 567-12 dated September 11, 2012) acEHCD 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. Recommended by: (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Approved by: (SGD.) HON. CESAR V. PURISIMA Secretary Department of Finance