BIR Ruling No. 007-14

January 9, 2014 BIR RULING NO. 007-14 Sections 49 (A) and (D) of NIRC; RR 02 Manabat Sanagustin & Co., CPAs The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Herminigildo G. Murakami Principal, Tax Gentlemen : This refers to your letter dated 25 June 2012 requesting on behalf of RICOH PHILIPPINES, INC. ("RPI") for permission to change accounting method of reporting income for tax purposes, from Accrual Method to Installment Basis, effective 1 April 2012. It is represented that RPI is a wholly-owned subsidiary of Ricoh Company Ltd. of Japan with Securities and Exchange Commission (SEC) registration no. A1996-11670 and is engaged as the exclusive distributor of Ricoh copiers, fax and other document solutions in the Philippines. RPI sells its products and inventories to dealers on installment basis over a period of 3 to 5 years, and issues invoice and official receipt for each and every installment due. It is further represented that the change in accounting method of reporting income from Accrual Method to Installment Basis would be appropriate for RPI considering that RPI sells its inventories on Installment Basis and recognizes income tax and VAT based on the invoices issued for each and every installment due. IEaHSD In support of your letter-request you submitted the following documents: 1. Certified True Copy of SEC Certificate of Registration; 2. Certified True Copy of Amended Articles of Incorporation; 3. Certified True Copy of Amended By-Laws; 4. BIR Certificate of Registration; and 5. Schedule of Accounts Affected by the Change in Accounting Method. In reply please be informed that on the basis of the representations, RICOH PHILIPPINES, INC. is hereby granted permission to change its accounting method from Accrual Method to Installment Basis pursuant to the provisions of Section 49 (A) of the Tax Code of 1997, as amended, in relation to Section 174 of Revenue Regulations No. 2, pertinent portion of which provide that: "Sec. 49. Installment Basis (A) Sales of Dealers in Personal Property . Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that the proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price." IcSHTA "Sec. 174. Sale of Personal Property on Installment Basis . Dealers in personal property ordinarily sell either for cash or on the personal credit of the purchaser or on the installment plan. Dealers who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default. (a) By an agreement that title is to remain with the vendor until the purchaser has completely performed his part of the transaction; (b) By a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the selling price; (c) By a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the vendor; or (d) By conveyance to a trustee pending performance of the contract and subject to its provisions. The general purpose and effect being the same in all cases, the same rule is uniformly applicable. The general rule prescribed is that a person who regularly sells or otherwise disposes of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total gross profit (that is, sales less cost of goods sold) realized or to be realized when the property is paid for, bears to the total contract price, Thus, the income of the dealer in personal property on installment plan may be ascertained by taking as income that proportion of the total payments received in the taxable year from installment sales (such payments being allocated to the year against the sales which they apply) which the total or gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during the respective year. No payments received in the taxable year shall be excluded in computing the amount of income to be returned on the ground that they were received under a sale the total profit from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income. Deductible items are not to be allocated to the years in which the profits from the sale of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are "paid or incurred" or paid or accrued," . . . . A dealer who designed to compute his income on the installment basis shall maintain books of accounts in such a manner as to enable an accurate computation to be made on such basis in accordance with the provisions of this section." Considering that the purpose of RICOH PHILIPPINES, INC.'s change of its accounting method will best conform to its accounting practice as said Installment Basis will clearly reflect the income of the said corporation, this Office hereby grants authority to RICOH PHILIPPINES, INC. the use of Installment Basis in reporting income for Income tax and VAT purposes. Moreover, in computing the income for the year of change or any subsequent year, amounts actually received during such year on account of sales or dispositions of property made in any prior year shall not be excluded. (Section 49 (D) Tax Code of 1997, as amended) 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 as null and void. STIHaE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue