TRADE AND CASH DISCOUNT PRACTICES IN THE PHILIPPINES*

Per our groups research on TRADE AND CASH DISCOUNT PRACTICES IN THE PHILIPPINES, we found an article on Inventory Discounts and Rebates by Vilma Cruz-Silvederio in the website of Punongbayan-Araullo (www.punongbayan-araullo.com).

Thus, we quote her article on the succeeding paragraphs:*

Under Philippine Accounting Standard (PAS) 2 on Inventories, trade discounts, rebates and other similar items are deducted in determining the cost of purchase. Trade discount as used in the Standard is interpreted to mean cash discounts that are immediately granted at the time of sale and are not dependent upon the happening of a future event. Hence, on the part of the purchaser, it is commonly called purchase discount or on the part of the seller, a sales discount."

The treatment of trade discounts is clear in PAS 2, that is, as deductions from cost of purchases. And while PAS 2 does not include specific examples of other similar items, this same treatment could be used for settlement discounts (i.e., discounts for prompt payments) and, under certain circumstances, for contractual rebates (i.e., retroactive, volume-based rebates).

Hence, settlement discounts should also be deducted from the cost of purchased inventories at the time the inventory and the related liability are initially booked. However, in case the purchaser does not take advantage of the discount (i.e., the early payment is not made), the additional amount paid is recorded as a finance charge. Contractual rebates, on the other hand, are recognized as reduction from the cost of inventories once receipt or availment of the same becomes probable. Any adjustment should be reversed if circumstances change, such that the rebate becomes less than probable. Since the accounting is driven by the best estimate of unit cost, the rebate should be recognized only to the extent of the units purchased.

Other rebates that do not relate to inventory purchases (i.e., contributions to promotional costs) should not be deducted from the cost of inventories. There are many types of rebate arrangements, and the appropriate accounting treatment will depend on the specific arrangement. Rebates received in exchange for services rendered in the course of the entitys ordinary activities give rise to either revenues or other income." Thus, rebates that specifically and genuinely refund selling expenses should not be deducted from the cost of inventories.

After having explained the treatment of discounts and rebates under the new accounting standards, now comes the question on taxation, mainly relating to the period when the discounts and rebates are recognized for tax purposes.

Pursuant to Section 37 of the 1977 Tax Code, as amended (now Section 43 of the Tax Code of 1997), "the net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in section twenty or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year."

Based on the foregoing, there seems to be a basis to argue that settlement discounts and contractual rebates should be allowed as deduction from the cost of inventories in the period when the same were purchased by the purchaser, or when sold, in the case of the seller.

However, existing rules do not specifically provide for such treatment and, thus, entities are advised to cautiously study the implications of such treatment. Compliance with the r e quirement that charges against expenses or reductions from sales must be substantiated should also be given importance, taking into account that settlement discounts and contractual rebates are not supported with actual credit notes or debit notes, as the case may be, at the time they are recognized, under the accounting treatment discussed earlier.

For purposes of value-added tax (VAT), the rules are quite specific that only sales discounts granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event are excluded from gross sales. Thus, for VAT purposes, settlement discounts and contractual rebates, both of which depend upon the happening of a future event, shall not be allowed as deduction from gross sales. Hence, entities that report their sales net of discounts should be able to capture these items so they can adjust the sales they will be reporting in their VAT returns.

As there are many differences in the treatment required in new accounting rules and in taxation, companies should be aware of these differences to enable them to address the issues that may be raised by the tax authorities. At the same time, tax authorities should also be well-informed about these new accounting rules so that their assessments would focus on valid issues relating to the application of tax rules and not just on the application of the new accounting rules.

(The author is a tax manager at Punongbayan & Araullo, member firm of Grant Thornton International. For comment)

*SOURCE:

www.punongbayan-araullo.com