BIR Ruling No. 282-15

August 25, 2015 BIR RULING NO. 282-15 Sec. 41; Sec. 145 of RR 2; BIR Ruling No. 034-12; BIR Ruling No. 567-12 ROHM Electronics Philippines, Inc. People's Technology Complex-Special Economic Zone Carmona, Cavite Attention: Ms. Sandra D. Alkuino Accounting Deputy Division Manager Gentlemen : This refers to your letter dated September 20, 2012, which was indorsed by the Large Taxpayers Service on March 26, 2013, stating that ROHM Electronics Philippines, Inc. ("REPI") is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 168050 with TIN 000-143-055-000; that it is engaged in the business of manufacturing, assembling, selling and exporting electrical and electronic products and components or parts, including but not limited to integrated circuits, semiconductors, liquid crystals, print heads, transistors, resistors, capacitors, sensors and computer chips; that REPI is a PEZA-registered Ecozone Export Enterprise with Registration Certificate No. 00-081 dated October 9, 2000; that its revenues from products with Income Tax Holiday (ITH) are exempt from corporate income tax, while those products with lapsed ITH are subject to the preferential tax rate of 5% based on the gross income earned; that REPI wants to change its inventory costing from First-In-First-Out (FIFO) to Weighted Average Cost (WAC) for its supplies inventory to arrive at a more effective costing method for all its inventories; that REPI is currently using the weighted average cost formula for its raw materials, work-in-process and finish products inventories; and that REPI now wants to standardize its cost formula by applying WAC for its entire inventory, including supplies inventory, starting from April 1, 2012 and for the succeeding fiscal years. Based on the foregoing representations, you now request permission to change REPI's inventory costing method from FIFO cost formula to the WAC formula. In reply thereto, please be informed that on the basis of the above representations, REPI is hereby granted permission to change its inventory costing method from first-in-first-out (FIFO) cost formula to the WAC formula 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 (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." ISHaCD 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 the change in the method of inventory costing of REPI, from FIFO to WAC, is aimed at arriving in a more effective costing method for all of its inventories, this Office hereby grants authority to REPI to use the weighted average cost formula for all of its inventories. (BIR Ruling Nos. 034-12 dated January 31, 2012 and 567-12 dated September 11-2012) 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. Recommending Approval: (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Approved: (SGD.) CESAR V. PURISIMA Secretary of Finance