The TRAIN has arrived! For most workers, small business owners, and salaried individuals, TRAIN (or Tax Reform for Acceleration and Inclusion Law) maybe a New Year blessing. Most of us will pay lower tax (if not exempted) so we will have more cash to bring home, and eventually, spend. Whether or not our tax savings would be enough to cover the anticipated increase in the prices of basic commodities, public transport and other necessities, remains to be seen.
For the rich and privileged ones, their main concern before the TRAIN arrival is the impact of increased excise tax on automobiles. Months before the arrival of TRAIN, the car industry was abuzz with speculation. Many media outfits, along with car enthusiasts, were predicting substantial price increases across all vehicle models sold locally. The simulations of the effects of the House and Senate bills suggested substantial price increases, which last year made some people buy luxury cars (priced at above P3 million prior to TRAIN’s effect), before the TRAIN arrived.
Many tried to beat the TRAIN before 2017 ended to avail of lower car prices. Sales agents of car dealers may have promised that making down payments or reservations would protect buyers from a price increase. This may have been promised in good faith but some may have taken advantage of the impending price increase to get more sales incentives.
Pay the down payment or reserve now – documentation and other requirements will follow later. Is this a valid sale? Let us look the requirements of the accounting standards.
‘Bill and Hold’ arrangements for sale of automobile
In shopping malls, we see items tagged or marked as “sold,” bearing the name of the buyer. These items are usually visible and are separated from unsold items. When we buy big or heavy appliances, we ask the retailer to deliver the goods to our house. These are practical examples of Bill and Hold sales.
In the sale of cars (or any other goods in the ordinary course of business), the Bill and Hold sales are valid if certain conditions on the date of the sale are met. These are very important to car dealers (as well as retailers) to avoid risk of erroneous recording of sales (i.e. being recorded early), which may give rise to serious tax consequences and non-compliance with rules.
So how do we make Bill and Hold sales valid? Here are the requirements:
a) The object of the sale (in this case, the car) must exist on the date of sale. This generally means that the car physically exists and is in the dealer’s possession. A car that is still being assembled or manufactured cannot be sold. What if the car is yet to be imported and will arrive, say, a few weeks after the date of sale? In this case, the sale, generally speaking, may not be valid as the transaction may just constitute a mere reservation.
Can cars still in transit be effectively sold? Yes, but only under certain circumstances. First, the dealer must transfer ownership under a binding contract. This means that the buyer unconditionally takes the risk of loss or damage while the vehicle is in transit. Second, usual payment terms apply and must be enforced. Third, the contract specifies the details of the car being sold (engine, color, chassis, and other vehicle identification).
b) The car must be physically segregated or tagged as sold to a specific buyer and cannot be offered to any other prospective buyer. This is self-explanatory but for a sale to be valid, the car dealer and the buyer need to have a binding document containing the car details, such as engine number, conduction sticker, chassis number, and vehicle identification number, among others. The dealers must possess ownership of the car at the time of the sale.
c) Usual terms – that is, credit and collection policies – will apply. If the policy of the dealer is to have the buyer pay the down payment and issue postdated checks for the balance, or to get approved bank financing before a deal is consummated, any of these policies will have to be enforced. If the sales agent promises those requirements, such as postdated checks or bank loan approvals that can be submitted at a later date, the sales contract, written or unwritten, will not be valid for accounting and tax purposes.
Aggressive sales practices maybe abused just for the sake of meeting volume targets and enjoying sales incentives. I must emphasize that the above guidance applies to car dealers for the purpose of complying with rules and acceptable practices. If established policies are overridden because of volume-related targets, car dealers maybe exposed to a number of risks, including but not limited to employee fraud and unnecessary tax assessments. Remember the fundamental rule: tax generally follows accounting. Compliance then starts with correct and consistent application of accounting rules.
For car owners, enjoy the sheer pleasure of driving your dream car. Happy driving this weekend.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.