BIR Ruling No. 567-12

September 11, 2012 BIR RULING NO. 567-12 Section 41 of the Tax Code of 1997, as amended; Section 145 of RR No. 2; BIR Ruling No. 041-99 Manabat, Sanagustin & Co. CPAs The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Ma. Georgina J. Soberano Principal, Tax Gentlemen : This refers to your letter dated September 7, 2010 requesting on behalf of your client, SIIX LOGISTICS PHILS., INC. ("SLPI"), for the approval of the authority to change accounting method on inventory costing from "first-in-first-out" (FIFO) to weighted average effective 1 January 2011. It is represented that SLPI with Tax Identification Number (TIN) 005-238-685, is a wholly-owned subsidiary of SIIX Corporation of Japan, duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. A1997-2203 dated 21 February 1997 with registered office at No. 125 Technology Avenue, Phase 4, Special Processing Economic Zone, Laguna Technopark, Bian, Laguna; and that it is primarily engaged in the importation of electronic parts and components, in sorting and kitting them for subsequent sale, and in the operation of a warehouse facility for the storage, deposit and safekeeping of intermediate products. It is further represented that from the time of its incorporation, SLPI has consistently adopted the FIFO method in costing its inventory. In order to facilitate its cost accounting and optimizing the use of its computerized system, the Company will install computerized cost accounting system. The computerized accounting system to be adopted is PRO-NES & SIBOS System which recognizes only the "weighted average" costing method. The change will lead to a more accurate indication of the Company's income and financial position at any given period. ESIcaC In reply, please be informed that on the basis of the above representations, SLPI is hereby granted permission to change its accounting method from first-in-first-out (FIFO) method to weighted 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 portions of which provide that "Section 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 the 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 its 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. TCHEDA 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 can not 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 "first-in-first-out" method of inventory is no longer compatible with SLPI's newly installed computerized accounting system and the "weighted average" method will conform to the best accounting practice in its trade or business, this Office hereby grants authority to SLPI the use of "weighted average" method in their inventory costing effective 1 January 2011. (BIR Ruling No. 041-99 dated March 30, 1999) 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