Scope of Direct Costs in Cost of Services for MCIT

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BIR REVENUE MEMORANDUM CIRCULAR NO. 24-2008: Scope of Direct Costs in Cost of Services for MCIT

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Title Supreme Court: Scope of Direct Costs in Cost of Services for MCIT

Law: Bir Revenue Memorandum Circular No. 24-2008

Decision Date: Mar 18, 2008

The BIR clarifies that "direct costs and expenses" for computing the 2% minimum corporate income tax must exclusively include costs directly incurred in providing services, such as salaries and facility expenses, excluding any unrelated costs.

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Scope and Meaning of "Cost of Services"

"Cost of services" includes all direct costs and expenses that are necessarily incurred to provide the required services to customers and clients.
Specifically includes:
- (A) Salaries and employee benefits of personnel, consultants, and specialists directly rendering the service.
- (B) Cost of facilities directly utilized in providing the service, such as depreciation or rental of equipment used and cost of supplies.

Characteristics of Direct Costs and Expenses

Must be exclusively and directly related to the revenue generated by the seller of services.
Indispensable to the earning of the revenue, meaning without these costs, no revenue could be generated.

Exclusions from Cost of Services

Expenses and costs that are not exclusively and directly incurred in relation to the revenue generated cannot be included as part of the "cost of services".
Only direct costs as defined are allowed for deduction from gross receipts in computing gross income subject to the 2% MCIT.

Enforcement and Publicity

Internal revenue officers are instructed to widely publicize this clarification circular to ensure proper understanding and compliance.
Emphasizes the importance of strict interpretation to prevent inclusion of non-direct costs in the cost of services calculation.

Legal Authority and Adoption

The circular was adopted on 18 March 2008 by the Commissioner of Internal Revenue, Lilian B. Hefti.
It clarifies the application of Sections 27(E) and 28(A)(2) of the 1997 National Internal Revenue Code, as amended, regarding MCIT computations.

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