BIR Ruling [DA-391-00]

November 17, 2000 BIR RULING [DA-391-00] House of Representatives Batasan Hills, Quezon City Attention: Committee on Population and Family Relations Committee on Ways and Means Gentlemen : This Office respectfully requests for an amendment of Section 20(a) of Republic Act No. 7432, otherwise known as "AN ACT TO MAXIMIZE THE CONTRIBUTION OF SENIOR CITIZENS TO NATION BUILDING, GRANT BENEFITS AND SPECIAL PRIVILEGES AND FOR OTHER PURPOSES", reading: "a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicine anywhere in the country, Provided, That private establishment may claim the cost as tax credit :" (Emphasis supplied) to be amended as follows: a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicine anywhere in the country, Provided. That private establishment may claim the cost as discount ; cDHCAE in order to avoid double interpretation of the said provision. This request stemmed from the several cases filed against the Commissioner of Internal Revenue by several taxpayers, especially drugstore establishments since it is their contention that the 20% sales discount granted to qualified senior citizens on their purchases of medicines should be treated as tax credit under R.A. No. 7432 as implemented by Revenue Regulations No. 2-94. It is their opinion that the wordings of R.A. No. 7432 is clear that the sales discount granted to qualified senior citizens should be treated as tax credit, and that Revenue Regulations No. 2-94 implementing said law violates the rule on statutory construction. They further contend that a revenue regulation cannot amend, alter or modify the meaning of the law by interpreting tax credit as mere deduction from gross income. This Office is of the opinion that the stand of the petitioners are erroneous conclusion of law bereft of factual and legal basis. It is a recognized principle in this jurisdiction that with the proliferation of specialized activities and their attendant peculiar problems, the national legislature has found it more and more necessary to entrust to administrative agencies the "power of subordinate legislation." With this power, administrative bodies may implement the broad policies laid down in a statute by " filling in " the details which the Congress may not have the opportunity or competence to provide. This is effected by their promulgation of what are known as supplementary regulations, such as the implementing rules issued by the Department. These regulations have the force and effect of law (p. 95-96 Phil. Pol. Law - Isagani Cruz). Accordingly, we respectfully submit that Revenue Regulations No. 2-94 did not alter, modify or amend the intent of the law to consider/treat the 20% discount granted to qualified senior citizen as deductible cost against petitioners gross income and not against its tax liability as petitioners insist . With the accumulation of experience and growth of specialized capabilities by the agency charged with implementing a particular statute, it is now a recognized principle that the construction given to a statute by an administrative agency charged with the interpretation and application of the statute is entitled to great respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws (Nestle Philippines Inc. vs. CA, et al., 203 SCRA 504). It is well-settled principle that the contemporaneous construction of a statute by executive officers of the government whose duty is to execute it is entitled to great respect and should ordinarily control the construction so firmly embedded in our jurisprudence that no authorities need be cited to support it. (Phil. Association of Free Labor Unions vs. Bureau of Labor Relations 72 SCRA 396). Executive officials are presumed to have familiarized themselves with all the consideration pertinent to the meaning and purpose of the law and to have formed an independent, conscientious and competent expert opinion thereon (Richard vs. Drewry-Hughes Co. 94 S.E. 989). IaAEHD For clarification and as a curative measure, Revenue Regulations No. 2-94 defines "tax credit" as used in the law providing therein the manner of claiming the same, i.e., by deduction from the establishment's gross income and not from its income tax liability . Otherwise, an absurdity, not intended by law, will arise. To illustrate: AS A TAX CREDIT AS A DEDUCTION Gross Sales P100 P100 Less: Cost of Sales 60 - 60 Net Sales 40 40 Operating Expense 20 - 20 Senior Citizens Discount -- - 20 Net Income 20 Year 2000 32% Income Tax 6.4 -- Less: Tax Credit 20.0 0 Income Tax Due (Refundable) (13.6) 0 Assuming: Cost of Sale 60 Operating Expense 20 Senior Citizens Discount 20 If the sales discount of 20% is treated as a deduction in the manner provided for in the regulations, no income tax would be paid. However, if such discounts are deductible against the establishment's income tax liability, a refundable amount of P13.60 will result to the great prejudice of the government as it would be refunding an amount it never collected. In effect, the government would be subsidizing private establishments, a clear violation of the cardinal rule in taxation that public funds should be used for public purpose/use. It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the agencies continue to operate and with the State effects its functions for the welfare of its constituents. Furthermore, this Office asserts that any discount granted to qualified senior citizens should only be treated as an "above the line" deduction or deduction from gross sales. A tax credit mechanism has severe revenue and administrative implications. Attached hereto is a list of drugstores claiming refund/tax credit pursuant to R.A. 7432. In view of the foregoing, this Office respectfully prays for you to sponsor the passage of this urgent proposed bill. For this purpose, please find enclosed a draft of the proposed bill for your review and consideration. Very truly yours, DAKILA B. FONACIER Undersecretary Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group