Propriety of Certain Deductions from Gross Sales for Purposes of Computing the Minimum Corporate Income Tax

June 13, 2001 BIR RULING NO. 026-01 Erlinda R . Victoria Unit 3-E Fersal Apartelle 245 P. Tuazon, Cubao Quezon City M a d a m : This refers to your letter dated March 15, 2000 requesting for a ruling, as to whether your client may deduct the following items from its gross sales for purposes of computing the Minimum Corporate Income Tax (MCIT): 1. gasoline expenses, repairs, maintenance and depreciation of service vehicles used in the delivery of goods or merchandise to customers; and 2. salaries and commissions of its sales people and drivers doing the peddling, direct selling and delivery to the customers. It is represented that your client is a corporation engaged in direct selling which is now covered by the application of the MCIT; that the company spends a lot of expenses in gasoline, repairs, maintenance and depreciation of motor vehicles, salaries and commissions of its many drivers and sales people who do the daily canvassing on an office-to-office or door-to-door selling, and delivering of the products sold to the offices and homes of customers; that you are of the opinion that based on the facts and circumstances of the case, the gasoline expenses, repairs, maintenance and depreciation of service vehicles, salaries and commissions referred to, being direct expenses necessary in the sales production shall be deductible from the gross sales to determine the gross income for purposes of the application of the MCIT; and that any position to the contrary would seem unfair and inequitable. In reply, please be informed that pursuant to Section 27(E)(4) in relation to paragraph (1) of the same Section, both of the 1997 Tax Code, as implemented by Revenue Regulations No. 9-98, the term 'gross income', for the purpose of applying the minimum corporate income tax, shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. For 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. As inferred from the above definition, the items which can be included as part of the 'cost of sales' of a trading or merchandising concern business, in addition to the invoice cost of the goods sold, are those expenses which are directly incurred in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. Thus, the items of expenses mentioned will exclude such expenses incurred in selling the products. Furthermore, the cost composition of 'cost of goods sold' includes only those items which are direct and incidental to the acquisition of the merchandise intended for resale. It therefore, excludes items of expenses which the company may incur when it sells the merchandise. The latter shall form part of the company's operating or administrative overhead which are likewise necessary in the business operation. But these costs do not form part of the 'cost of goods sold'. The phrase 'transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit" contemplates a situation where the point of origin of the goods is the place where the products were bought and thereafter transported to the place where it shall be sold or the point of destination of the goods, hence, all the expenses like, freight and insurance or import duties are assumed by the buyer-trader and therefore form part of the cost of the goods to be sold. In view of the foregoing, this Office hereby holds that the expenses for gasoline, repairs, maintenance and depreciation of motor vehicles, the salaries and commissions of the drivers and sales people who canvass on an office-to-office or door-to-door selling, as well as the cost of delivery of the products sold by the trader-company are not items of 'cost of goods sold' which can be deducted from the gross sales for the purpose of computing the MCIT. TSHEIc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue