BIR Ruling [DA-172-01]

September 25, 2001 BIR RULING [DA-172-01] R.A. 7432 65-97 The Retailers Council of the Philippines Bureau of Domestic Trade Promotion 2nd Floor Trade and Industry Building 361 Se. Gil Puyat Avenue, Makati City Attention: Mr. Roberto Claudio Vice Chairman Gentlemen : This refers to your letter dated September 26, 2000 requesting for a ruling on interpretation of Section 4 of Republic Act 7432, otherwise known as the Senior Citizens Act regarding the grant of 20% discount for senior citizens which business establishments may claim tax credit but is treated, as a mere "promotional discount" instead of a tax credit in favor of the retailer by this Office. It is represented that The Retailers Council of the Philippines is composed of government and private sector entities, established in 1998 through the DTI-Department Order No. 36 and is composed of the Chamber of Philippine Department Stores and Retailers, Inc. (CPDSRI) now the Philippine Retailers Association (PRA), Philippine Association of Supermarkets, Inc. (PASI), National Market Vendors Cooperative Service Federation, Inc. (NAMVESCO), Drugstore Association of the Philippines (DSAP), Filipino-Chinese Chamber of Commerce and Industry, Inc., and the Bureau of Domestic Trade Promotion of the Department of Trade and Industry; and that one of the Council's objectives is to assist in the formulation and adoption of legislative/executive orders and government policies concerning retail trade in the Philippines. THIcCA 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", pertinent portion of which reads: "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 In this connection, paragraph (I) Section 2 of the Revenue Regulations No. 2-94, implementing R.A. 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 from 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. This Office, by virtue of the Revenue Regulations No. 2-94 approved by the Department of Finance, has been consistent in interpreting that the word "discount" as contemplated under the aforequoted Section 4 of RA No. 7432 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. 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. Amount 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 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. It may be noteworthy to state that the Highest Court in the case off 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." It is likewise important to note that the legal provision in question (Sec. 4 of R.A. No. 7432) employs the word "may" in the clause, "Provided, that private establishments MAY claim the cost as tax credit" implying 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. Accordingly, it is 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 better interpretation rather than as a "tax credit." Very truly yours, Commissioner of Internal Revenue (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group