Mr. Pedro Q. Roldan, Sr.

April 1, 2009 BIR RULING [DA-(C-047) 179-09] 27 (E) (4) Mr. Pedro Q. Roldan, Sr. 44 Gold Street, SSS Village Marikina City Sir : This refers to your letter dated June 25, 2008 requesting for a ruling on the following: 1. Is the computation of the gross profit rate made by the revenue officers correct, without taking up the purchase costs and expenses incurred in bringing the goods to the place of sale? 2. Is there a BIR regulation prescribing the computation of the gross profit rate made by the internal revenue officer, without taking the additional preceding costs? 3. What is the percentage of gross profit rate as well as the net profit rates allowed by the BIR? It is represented that E.M. Fashions, Inc. is a domestic corporation organized under Philippine laws; that it is engaged in the buying and selling of ready-made dresses and pants both imported and sourced from local suppliers; that the computation of the gross profit rate was made by the BIR officer without taking the direct costs such as purchase costs, expenses to bring the merchandise to the place where selling of merchandise or goods would be made and rental of the place and electric current used by the store were not taken up. In reply, please be informed of the following: Section 27 (E) (4) of the Tax Code of 1997 provides, viz. : "Sec. 27. Rates of Income Tax on Domestic Corporations . (E) Corporate Income Tax on Domestic Corporations. (4) Gross Income Defined. . . ., the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit." cEaDTA xxx xxx xxx On the other hand, 'Gross Margin', also called gross profit, is the excess of sales over the cost of goods sold, that is, over the cost of the merchandise inventory that is acquired and resold. Gross profit rate is expressed as a percent of sales or as a percent of cost of goods sold. The gross profit rate on sales is computed by dividing the amount of gross profit by the net sales while the gross profit on cost is computed by dividing the gross profit by the cost of goods sold. To illustrate: Net Sales Less: Cost of goods sold Gross Profit Cost of Goods Sold Merchandise Inventory, Beginning xxx Add: Purchases xxx Less: Purchases Returns and Allowances xxx Purchases Discounts xxx xxx xxx Add: Transportation In xxx Net Purchases xxx Goods Available for Sale xxx Less: Merchandise Inventory, End xxx Cost of Goods Sold xxx === Thus, it can be gleaned from the foregoing that purchases and transportation are part of the cost of goods sold. Moreover, the rental and electric current used by the store, are classified as operating expenses, which are not included in the determination of gross profit or gross profit rate. HECaTD 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner