Tax Treatment of Output VAT as Part of Operating Expenses, thereby Resulting to a Seemed Reduced Taxable Income

December 6, 1995 BIR RULING NO. 182-95 108 (b) 000-00 182-95 Alphadent Corporation Suite 801 State Center 333 Juan Luna St. Binondo, Manila 1006 Attention: Ms . Lyn V . Reyes Accountant Gentlemen : This refers to your letter dated February 13, 1995 requesting for clarification on the implications of your alleged erroneous treatment of output VAT as part of your operating expenses, thereby resulting to a seemed reduced taxable income. cdll It is represented that Alphadent Corporation was examined by Mr. Arthuro de Guzman as per Letter of Authority No. 0014641 dated February 10, 1993; that the said Examiner, after a thorough examination of all your transactions, questioned the presentation of your output VAT in your Income Statement and assessed you to pay additional taxes for declaring an understated net income; that you explained; however, that the said understatement was brought about by the fact that you recognized the gross amount of sales for the whole amount of the invoice, inclusive of the VAT, in effect overstating your sales by the amount equal to the output VAT; that, however, in order to correct the said erroneous entry, you reflected the correct sales value by using a VAT expense account and treated the VAT output as a liability and thereby filed a VAT quarterly return; that the said VAT expense account is used only to reflect the correct sales value, which was previously declared as inclusive of output VAT; and that the net effect of this entry does not affect the net income declared. In reply, please be informed that reflecting your sales as gross of output VAT and treating the latter as an expense is contrary to the prescribed bookkeeping procedures on Value-Added Tax. Considering, however, that you have already corrected the said erroneous bookkeeping procedure by reflecting the correct sales value by using a VAT expense account and treating the VAT output as a liability, the said procedure corrected the bookkeeping error that you have committed and in effect did not have any bearing on the amount of your Net Income Before Taxes. In view thereof, this Office will not interpose any objection to the said bookkeeping treatment for as long as your amended income statement was not falsified but was merely amended in accordance with the prescribed BIR entry which did not any way alter the Net Income Before Taxes and was done in accordance with sound auditing practices. LLjur Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue