UNDER Section 27(E)(4) of the Tax Code, ‘cost of goods sold’ has been defined as all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a manufacturing concern, ‘cost of goods sold’ shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
The Bureau of Internal Revenue (BIR) has strictly construed the definition of ‘cost of goods sold.’ In BIR Ruling No. 026-01 dated 13 June 2001, the BIR ruled that ‘cost of goods sold’ for a trading or merchandising concern only includes those expenses that are direct and incidental to the acquisition of the merchandise intended for resale.
It has excluded from the definition such expenses incurred in selling the products. Thus, the BIR ruled as follows:
“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 definition, 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 these are actually sold including insurance while they 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’. xxx
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.”
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