REVENUE REGULATION NO. 3-80

April 14, 1980                                                                                        January 1, 1979

REVENUE REGULATION NO. 3-80

SUBJECT         :           Amending Revenue Regulations No. 1-80 which prescribe the rules requiring petroleum refining and marketing companies to change their method of inventory valuation.

TO                    :           All Internal Revenue Officers and Others Concerned

 

SECTION 1.      Scope. — These regulations, promulgated in accordance with Section 326 of the National Internal Revenue Code, implement the authority vested in the Commissioner of Internal Revenue by Section 36 of the same Code, as amended by Section 4 of Batas Pambansa Blg. 41, to require certain taxpayers to change or modify their inventory valuation method.

SECTION 2.      Requirement to Change Inventory Valuation Method from LIFO to Weighted Average Method. — Pursuant to the authority vested in the Commissioner of Internal Revenue by Section 36 of the National Internal Revenue Code, as amended by Batas Pambansa Blg. 41, all petroleum refining and marketing companies are hereby required to change their inventory valuation method from last-in, first-out (LIFO) to weighted average method on a per product basis. The change shall be effected by a gradual shift to the weighted average method of inventory valuation in two stages as prescribed in Section 3 and 4 of these regulations.  

SECTION 3.      Phase 1: Valuation of Inventories as of December 31, 1979. — The inventory of refined or blended petroleum products, crude and other base stocks, (hereinafter referred to as "petroleum products") as of December 31,1979 shall be valued under the LIFO unless it exceeds 75% of the inventory as of January 1, 1979, in which case the inventory as of December 31, 1979 shall consist of and be valued in accordance with the following:  

(a)        75% of the inventory on January 1, 1979 shall be valued under the LIFO method; and,

(b)        the excess over 75% of the inventory as of January 1, 1979 shall be valued under the weighted average method. For this purpose, the inventory on January 1, 1979 shall be deemed as the first product acquired, manufactured or produced in applying the weighted average method during 1979.  

SECTION 4.      Phase 2: Valuation of Inventory as of December 31, 1980. — The inventory of "petroleum products" as of December 31, 1980 shall be valued under the LIFO method unless it exceeds 50% of the inventory as of January 1, 1979, in which case the inventory as of December 31, 1980 shall consist of and be valued in accordance with the following:

(a)        50% of the inventory on January 1, 1979 shall be valued under the LIFO method; and

(b)        the excess over the 50% of the inventory as of January 1, 1979 shall be valued under the weighted average method. For this purpose, the inventory on January 1, 1980 shall be deemed as the first product acquired, manufactured or produced in applying the weighted average method during 1980.  

SECTION 5.      Valuation of inventories after January 1, 1981. — January 1, 1981, the inventory of "petroleum products" shall be valued fully under the weighted average method. For this purpose, the inventory on January 1, 1981 shall be deemed as the first product acquired, manufactured or produced in applying the weighted average method during 1981.

SECTION 6.      Adoption of Full Absorption Method. — In order to conform as clearly as may be possible to the best accounting practices and to clearly reflect income, taxpayers engaged in oil refining and marketing industries must adhere to the full absorption method of inventory costing. Under the full absorption method of inventory costing, production cost must be allocated to goods produced during the taxable year, whether sold during the taxable year or inventory at the close of taxable year. Thus, the taxpayer must include as part of the cost of inventory all direct production cost and to a certain extent, indirect production cost.

Direct production costs include those costs which are incident to and necessary for production or manufacturing operations or processes and are components of the cost of either direct materials or direct labor. Direct material costs include the cost of those materials which become an integral part of the specific product and those materials which are consumed in the ordinary course of manufacturing and can be identified or associated with particular units or groups of units of that product. Direct labor cost includes the cost of labor which can be identified or associated with particular units or groups of units of a specific product. The elements of the direct labor cost include such items as basic compensation, over-time pay, vacation and holiday pay, sick leave pay, shift differential, payroll taxes, etc.

In general, the inclusion or exclusion of elements of indirect production cost as part of the cost of inventory depends upon the treatment adopted by taxpayers which, in all cases, must be applied consistently with generally accepted accounting principles.

Indirect production cost includes all costs which are incident to and necessary for production or manufacturing operations or processes.

The elements of indirect production cost included in the inventoriable cost are general and administrative expenses incident to and necessary for the taxpayer's production or manufacturing operations or processes, indirect labor and production supervisory wages, indirect materials and supplies, utilities such as heat, power and light, repairs and expenses, maintenance expenses, etc.

To be excluded under indirect production cost are marketing expenses, advertising expenses, selling expenses, interest, research and experimental expenses, including product development expenses; general and administrative expenses incident to and necessary for the taxpayer's activities as a whole rather than to production or manufacturing operations or processes; and salaries paid to officers attributable to the performances of services which are incident to and necessary for the taxpayer's activities taken as a whole rather than to production or manufacturing operations or processes.

SECTION 7.      Requirements for the Use of Weighted Average Method. — The following requirements shall be complied with in adopting the weighted average:

(a)        The weighted average method shall be applicable to all inventory of "petroleum products".

(b)        The inventory shall be taken at cost, using the full absorption method, regardless of market value.

(c)        The method shall be used consistently from year to year, unless —

(i)         A change to a different method is approved by the Commissioner; or  

(ii)         A modification is required by the Commissioner.

SECTION 8.      Repealing Clause. — This amends Revenue Regulations No. 1-80.

SECTION 9.      Effectivity — These regulations shall apply to taxable year beginning January 1, 1979.

(SGD.) CESAR VIRATA

Minister of Finance

Recommending Approval:

(Sgd.) RUBEN B. ANCHETA

Acting Commissioner