Damosa Land, Inc.

May 19, 2021 BIR BIR RULING NO. OT-179-21 Sec. 41, NIRC; BIR Ruling No. 049-16 Damosa Land, Inc. Damosa Corporate Center Lanang, Davao City 8000 Attention: AAA _______________ Gentlemen : This refers to your letter dated October 4, 2019 requesting for authority, pursuant to Section 41 of the National Internal Revenue Code of 1997 (Tax Code), as amended, to change the accounting method on inventory costing of DAMOSA LAND, INC. ("the Company") from First-In, First-Out (FIFO) method to Moving Average method effective January 1, 2019. As represented, DAMOSA LAND, INC., with Taxpayer Identification Number (TIN) 000-000-000-00000, is a corporation duly organized and existing under Philippine laws, with office address at Damosa Corporate Center, Lanang, Davao City 8000. It is primarily engaged in the business of acquiring by purchase, lease, donation or otherwise, and owning, using, improving, developing, subdividing, selling, mortgaging, exchanging, leasing and holding for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments and other structures of whatever kind, together with their appurtenances. From the time of its incorporation, the company has consistently adopted the FIFO method in costing its raw materials. In order to facilitate its cost accounting and optimize the use of its computerized system, the Company will install computerized cost accounting system. The computerized accounting system to be adopted is Systems Applications and Products (SAP) Enterprise Resource Planning (ERP) Software which recognizes the Moving Average method for raw materials. The Bureau of Internal Revenue issued a Permit to Use (PTU) Computerized Accounting System in favor of the Company on December 28, 2018. The PTU is valid from January 7, 2019 to January 6, 2024. Consequently, per Corporate Secretary's Certificate, the Board of Directors approved and authorized the Company to change its inventory costing method for raw materials from FIFO costing method under Microsoft GP ERP (Enterprise Resource Planning) Software to Moving Average costing method under SAP (Systems Applications and Products) ERP Software: HESIcT From To Raw Materials FIFO Moving Average In reply, please be informed that Section 41 of the Tax Code, as amended, provides: "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 AcICHD (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 ." (Emphasis provided.) In relation to the above Section of the Tax Code, as amended, Section 145 of Revenue Regulations No. 2 states: "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 or 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." Since the change in the Company's accounting method will best conform to the accounting practice applicable in the trade or business of the Company and that said valuation will clearly reflect its income and financial position, DAMOSA LAND, INC. is hereby granted permission to change its accounting method from FIFO method to Moving Average method in valuing its raw materials pursuant to the provision of Section 41 of the Tax Code, as amended, effective January 1, 2019. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue