In the first two parts of our expose on Cosmetic Asia and Silka Papaya which you'll find here and here, we revealed the company's astounding Net Sales growth. In three years from 2009 to 2011, Cosmetic Asia and Silka Papaya Net Sales expanded by 272%, from P365,034,832 in 2008 to to P994,928,845 in 2011.
Averaging out its Net Sales over 3 years, Cosmetic Asia unbelievably posted an average of 90 percent annual increase in Net Sales. For Tax Examiners, this alone could be a tip off that a company may have been under reporting its Net Sales to hide its real income and in the process, dodge paying the right taxes.
Of course, it could really happen that a company can experience enormous Net Sales.
What would tend to confirm if the Net Sales growth is real and not simulated is if the source of this sales growth can be traced to the contraction of the Net Sales of similar and alternative products. Alternatively, one could look for signs that the market has grown, such as if more people are buying whitening soaps or if the market has expanded geographically in areas where skin whitening products were not previously being sold.
However, if market data doesn't show that Cosmetique Asia Silka Papaya's Net Sales Growth isn't coming from the contraction of a competitor's market share or from market expansion, it could be a strong indication that it isn't correctly reporting its Net Sales. To put it bluntly, it is an indication that Cosmetique Asia Silka Papaya is making up its Net Sales figures!
This is just one of several methods for evading taxes!
Another indication is its extraordinarily high Cost of Sales which is at 75% to 86% of its Net Sales!
When you talk about taxes, in essence, what is really being taxed is an individual's Net Income or the individual's income after expenses have been deducted.
In Cosmetic Asia Silka Papaya's case, apart from under stating its real net sales, it seems it is also overstating its expenses or Cost of Sales to make it appear that its Net Income is smaller than what it really is. By padding its Cost of Sales, Cosmetique Asia decreases its Net Income making the taxable amount smaller and the resulting tax computation even smaller.
In 2008, Cosmetique Asia Silka Papaya declared its Cost of Sales at P273,335,746. With its Net Sales at P365,034,832, its Gross Profit amounted to P91,899,086 -- a gross profit rate of 25%.
In 2009, it declared its Cost of Sales at P324,508,893 and Net Sales at P426,881,955, coming out with a Gross Profit of P102,373,062 -- a Gross Profit of just 24%.
In 2010, Cost of Sales was at 469,298,415 and Net Sales was at P628,327,383, its Gross Profit was at P159,028,768 or again, just 25%.
In 2011, Cosmetique Asia Silka Papaya's Cost of Sales nearly doubled to P833,597,551! It's Net Sales was at P994,928,845 and its Gross Profit was at P161,331,294, making its Gross Profit Rate EVEN SMALLER at 16%!
To clarify things further, Cosmetic Asia Silka Papaya is claiming to have spent over P800 Million to make a gross profit of P160 Million. That's like spending 80 pesos just to make 15 pesos at the end of the day -- which, if you asked any businessman, is hardly worth the effort and expense.
Further illustrating how incredulous Cosmetic Asia Silka Papaya's Gross Profit is, the gross profit rates of other larger companies are at 50% -- which is most likely the norm.
(In the next post, we will compare Cosmetique Asia Silak Papaya's Gross Profits with companies like Johnson and Johnson, Unilever, and Colgate Palmolive.)
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