BIR Ruling 128-08

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 1

August 11, 2008

BIR RULING [DA-(TAR-002) 128-08]

DA033-04

Pilipinas Shell Petroleum CorporationShell House156 Valero Street, Salcedo VillageMakati City

Attention: Ms. Maycel Baltazar-BarataIndirect Tax Planner

and Atty. Nigel T. Avila

Country Tax Manager

Gentlemen :

This refers to your letter dated May 26, 2008 stating that Philippines ShellPetroleum Corporation (PSPC), Shell Gas Trading (Asia Pacific), Inc. (SGTAP),and Shell Gas Eastern, Inc. (SGEI), collectively referred to as "Shell Companies"are domestic corporations organized and existing under the laws of the Philippinesduly registered with the Securities and Exchange Commission (SEC) on variousdates; that the ultimate parent company of Shell Companies is Royal Dutch ShellPlc (RDS), a company incorporated in the United Kingdom; that Shell Companiesare primarily engaged in the manufacture, importation, distribution and marketingof petroleum products in the Philippines and are using the Weighted AverageMethod (WAVE) in the valuation of its inventories both for statutory and incometax reporting; that RDS, and all its affiliates worldwide, is adopting a newcomputerized accounting system based on Global Systems Application andProduct Data Processing or GSAP; that this new system is globally standardizedand will only calculate inventory costs using First-In-First Out (FIFO) method,which is widely accepted in the oil and gas industry worldwide; that under GSAP,the WAVE method of inventory valuation will not be supported, as it is notcompatible with the new system for Shell; and that to be consistent with theaccounting system used by its parent company and affiliates abroad, ShellCompanies will be adopting the use of the FIFO method of inventory valuation fortaxable year 2008 for SGTAP and SGEI and 2009 for PSPC.


Based on the foregoing representations, you now request for an authority tochange the inventory method used by Shell Companies from WAVE to FIFO. Thechange in inventory valuation will be used for statutory and tax reporting purposesfor the taxable year 2008 for SGTAP and SGEI, and taxable year 2009 for PSPC.

In reply thereto, please be informed that Section 41 of the Tax Code of1997 provides that

"SEC. 41. Inventories. Whenever in the judgment of theCommissioner, the use of inventories is necessary in order to determineclearly the income of any taxpayer, inventories shall be taken by suchtaxpayer upon such basis as the Secretary of Finance, uponrecommendation of the Commissioner, may, by rules and regulations,prescribe as conforming as nearly as may be to the best accounting practicein the trade or business and as most clearly reflecting the income.

If a taxpayer, after having complied with the terms and conditionsprescribed by the Commissioner, uses a particular method of valuing itsinventory for any taxable year, then such method shall be used in allsubsequent taxable years unless: ECSaAc

(i) with the approval of the Commissioner, achange to a different method is authorized; or

(ii) the Commissioner finds that the nature of thestock on hand (e.g., its scarcity, liquidity, marketability andprice movements) us such that inventory gains should beconsidered realized for tax purposes and, therefore, it isnecessary to modify the valuation method for purposes ofascertaining the income, profits, or loss in a more realisticmanner: Provided, however, That the Commissioner shallnot exercise his authority to require a change in inventorymethod more often than once every three (3) years:Provided, further, That any change in an inventory valuationmethod must be subject to approval by the Secretary ofFinance."

Corollarily, Section 2 of Revenue Regulations No. 3-80 provides that

"SEC. 2. Requirement to Change Inventory Valuation Methodfrom LIFO to Weighted Average Method. Pursuant to the authorityvested in the Commissioner of Internal Revenue Code, as amended byBatas Pambansa Blg. 41, all petroleum refining and marketing companiesare hereby required to change their inventory valuation method fromlast-in, first-out (LIFO) to weighted average method on a per productbasis. The change shall be effected by a gradual shift to the weighted


average method of inventory valuation in two stages as prescribed inSections 3 and 4 of these regulations."

Moreover, Section 7, supra provides that

"SEC. 7. Requirements for the Use of Weighted AverageMethod. The following requirements shall be complied with in adoptingthe weighted average: (a) The weighted average method shall be applicableto all inventory of 'petroleum products'; (b) The inventory shall be taken atcost, using the full absorption method, regardless of market value; (c) Themethod shall be used consistently from year to year, unless (i) A change toa different method is approved by the Commissioner; or (ii) A modificationis required by the Commissioner."

In the instant case, Shell Companies have been consistently using theweighted average method of reporting inventory values for statutory and incometax purposes in compliance with Revenue Regulations No. 3-80. However, sincethe WAVE method of costing inventory is no longer compatible with the newaccounting system to be introduced in the Philippines by 2009, and to beconsistent with the method of inventory costing used by its parent company andaffiliates around the world, Shell Companies will have to shift to FIFO method ofinventory effective on the taxable year 2008 for SGTAP and SGEI, and taxableyear 2009 for PSPC. The earlier period is to allow SGEI and SGTAP to haveannualized values for its inventory at the end of taxable year 2008 which will bethe value of its beginning inventory for the taxable year 2009. On the other hand,since PSPC has a number of product inventories in its various terminals and depotsall over the country, it will be equipped to adopt FIFO valuation of inventoriesonly in 2009. EcTDCI

Considering that the purpose of Shell Companies' change in its inventorymethod will best conform to its accounting practice as said valuation will clearlyreflect the income of the said companies, this Office hereby grants authority toShell Companies the use of FIFO method in its inventory costing.

This ruling is being issued on the basis of the foregoing facts asrepresented. However, if upon investigation, it will be disclosed that the facts aredifferent, then this ruling shall be considered null and void.

Very truly yours,

(SGD.) JAMES H. ROLDANAssistant Commissioner


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BIR Ruling 128-08