BIR Ruling [DA-044-01]

March 22, 2001 BIR RULING [DA-044-01] R.A. 7432, R.R.-2-94 065-97 Department of Health San Lazaro Compound Rizal Avenue, Sta. Cruz Manila Attention: The Honorable Secretary Gentlemen : This refers to your letter to then Secretary Jose T. Pardo dated February 2, 2001 requesting the Office of the Secretary of Finance to immediately comply with the mandate of Section 4 of Republic Act No. 7432 (Senior Citizens Law). It is represented that most drugstores cannot comply with the 20% discount for the purchase of medicines because the Bureau of Internal Revenue (BIR) cannot give the appropriate tax credit provided in Section 4 of RA No. 7432. In reply, please be informed that Section 4 of R.A. 7432, "AN ACT TO MAXIMIZE THE CONTRIBUTIONS OF SENIOR CITIZENS TO NATION BUILDING, GRANT BENEFITS AND SPECIAL PRIVILEGES AND FOR OTHER PURPOSES", provides in part, to wit: "SEC. 4. Privileges for the Senior Citizens . The senior citizens shall be entitled to the following: "xxx xxx xxx" "(a) the grant of twenty (20%) discount from all establishments relative to the utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicine anywhere in the country: Provided, the private establishments may claim the cost as tax credit; "xxx xxx xxx" This Office has been consistent that the word "discount" as contemplated in the aforequoted provision shall be considered as deduction from gross income for income tax purposes and from the gross sales for value-added tax or other percentage tax purposes. (Sec . 2(l), Rev. Regs. 2-94) . As aptly applied under the generally accepted accounting principles, "discounts" are treated as follows: 1. The discount can be recorded as a reduction from gross sales. 2. The discount can be recorded as an expense of the period. 3. Sales revenue can be initially recorded at the net amount after deduction of the discount. Amounts received from the customers who do not take the discount would then be recorded as additional revenue. (p. 142, Accounting, Text and Cases by Anthony and Reece, 1979 Edition). Simply put, it can be said that "promotional discount" is merely a deduction from gross income/sales receipts to arrive at the taxable income, while a tax credit is in the nature of a tax refund, which is treated as a return for tax payments erroneously or excessively assessed against a taxpayer. In other words, in order that one can claim a tax credit, the taxes must be paid first by the taxpayer (which payment may be erroneously or excessively paid), after which he could request for a tax refund or tax credit. (BIR Ruling No. 065-97 dated May 15, 1997) On the other hand, the proviso of Section 4 of said RA No. 7432 employs the word "may" in the clause, viz: "Provided, That private establishments MAY claim the cost as tax credit". Paragraph (l) of Section 2 of Revenue Regulations No. 2-94, implementing R.A. No. 7432 defines "tax credit" as follows: " Tax credit refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores. recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added or other percentage tax purposes." The term "tax credit" as used in the law (i.e., RA No. 7432) is a misnomer. The term "may" implies that the availability of the remedy of tax credit is not absolute and mandatory; it does not confer an absolute right on the taxpayer to avail of the tax credit scheme if it so chooses; neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer. HaAISC In this connection, it may be noteworthy to state that the Highest Court in the case of San Carlos Milling Co., Inc. vs. CA, GR No. 193379, November 23, 1993, although not squarely in point, has touched on a significant aspect directly related to the issue at hand. There it was said: ". . . . An opportunity must be given the internal revenue branch of the government to investigate and confirm the veracity of the claims of the taxpayer. The absolute freedom that petitioner seeks to automatically credit tax payments against tax liabilities for a succeeding taxable year can easily give rise to confusion and abuse, depriving the government of authority and control over the manner by which the taxpayers credit and offset their tax liabilities, not to mention the resultant loss of revenue to the government under such a scheme." Accordingly, it is of the opinion of this Office that the treatment of "sales or promotional discounts" as deduction from the gross income for income tax purposes and from the gross sales for value added tax or other percentage tax purposes as provided for under Sec. 2, par. (I) of Revenue Regulations No. 2-94, is the proper interpretation rather than as a "tax credit". Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group