January
16, 1980
REVENUE REGULATIONS
NO. 01-80
SUBJECT : Rules Requiring Petroleum Refining
Companies to Change their Method of Inventory Valuation from LIFO to Moving
Average Methods.
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. Requirements to change inventory valuation
method from LIFO to moving 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
companies are hereby required to change their inventory valuation method from
last-in, first-out (LIFO) to moving average method on a per product basis. The
change shall be effected by phasing out the LIFO 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 manufactured products and raw materials
which shall form an integral part of the manufactured products as of December
31, 1979 shall be valued under the method heretofore used by the taxpayer,
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 method heretofore used by the taxpayer; and,
(b) the excess over 75% of the inventory as
of January 1, 1979 shall be valued the moving average method.
SECTION 4. Phase 2: Valuation of Inventory as of
December 31, 1980.
— The inventory of manufactured products and raw materials which shall form an
integral part of the manufactured products as of December 31, 1980 shall be
valued under the method theretofore used by the taxpayer, 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 of January 1, 1979
shall be valued under the method heretofore used by the taxpayer; and,
(b) the excess over the 50% of the inventory
of January 1, 1979 shall be valued under the moving average method.
SECTION 5. 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 the oil refining 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
products during the taxable year, whether sold during the taxable year or in
inventory at the close of taxable year. Thus, the taxpayer must include as part
of inventoriable cost all direct production cost and to a certain extent,
indirect production cost.
Direct
production costs are generally those costs which are incident to and necessary
for production or manufacturing operations or processes and are components of
the cost of either materials or direct labor or both. Direct materials cost
includes 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 includes 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 product cost as
part of inventoriable cost, depends upon the treatment adopted by taxpayers
which, in all cases, must be applied consistently and not inconsistent with
generally accepted accounting principles.
Indirect
production cost includes all costs which are incident to and necessary for
production or manufacturing operations or processes other than direct
production cost.
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 6. Valuation of Inventories after January 1,
1981. —
After January 1, 1981, inventories shall be valued fully under the moving
average method. For this purpose, the inventory on December 31, 1980 shall be
deemed as the first product acquired, manufactured or produced in applying the
moving method during 1981.
SECTION 7. Requirements for the Use of Moving Average
Method. —
The following requirements shall be complied with in adopting the moving
average method:
(a) The moving average method shall be
applicable to all types of inventory of manufactured products and raw materials
which will form an integral part of the finished products.
(b) The inventory shall 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 a
approved by the Commissioner; or
(ii) A modification is required by the
Commissioner.
SECTION 8. Repealing Clause. — Any regulations,
ruling or portions thereof which are inconsistent with the provisions of these
Regulations are hereby revoked or amended accordingly.
SECTION 9. Effectively. — These Regulations
shall apply to taxable years beginning January 1, 1979.
ALFREDO PIO DE RODA,
JR.
Acting Minister of
Finance
Recommending
Approval:
EFREN
I. PLANA
Acting
Commissioner
