BIR Ruling [DA-493-05]

December 7, 2005 BIR RULING [DA-493-05] RR 2-94; DA 172-01 The Bengzon Law Firm 9th Floor, Ayala Life-FGU Center 6811 Ayala Avenue Makati City Attention: Atty. Manolito S. Soller Gentlemen : This refers to your letter dated April 15, 2005 requesting for an opinion that the 20% discount given to the senior citizens, prior to the effectivity of Republic Act (R.A.) No. 9257, should be treated as a tax credit in its annual financial statements and consequently in its income tax returns. It is represented that your client, Professional Services, Incorporated (PSI) is a corporation duly organized and existing under the laws of the Philippines; that PSI owns and operates the Medical City Hospital located at Ortigas Avenue, Pasig City; that its primary purpose as contained in its Articles of Incorporation is: "to establish, operate, manage, own and maintain a hospital or hospitals, medical and chemical clinics and/or laboratories and such other enterprises which may have similar or analogous undertakings or dedicated services in connection therewith, and to do any and all things and to enter into any and all kinds of transactions that will achieve the purposes so mentioned, provided that purely professional medical or surgical services in connection therewith shall be performed by duly qualified physicians or surgeons who may or may not be connected with the corporation and who shall be freely and individually contracted by patients."; that the medical services provided by PSI to its senior citizen-patients are discounted and such discounts have been treated as tax credits pursuant to Section 4 of the Republic Act (R.A.) No. 7432, otherwise known as "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grants Benefits and Special Privileges, and for other purposes," which provides: "Section 4. Senior Citizens shall be entitled to the following: Grant of twenty (20%) percent 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, that private establishments may claim the cost as tax credit."; that in a decision of the Court of Appeals entitled Tropical Hut Food Market, Inc. vs. Commissioner of Internal Revenue (CTA Case No. 5600, February 8, 2001 ), it was held that the discounts given should be claimed as tax credits and not as deductions from its gross income/sales, to wit: "The issue presented has already been addressed by this Court in a number of analogous cases elevated before us, the latest of which is CTA Case No. 5612 entitled Mercury Drug Corporation vs. Commissioner of Internal Revenue, promulgated on January 9, 2000 where we ruled: "A cursory review of the wordings of Section 4 of R.A. No. 7432 would reveal that the law literally intended the cost of the 20% discount to be claimed as tax credit by the private establishment. We could not see any plausible reason for the respondent to interpret the phrase in a different way. The discount being available for tax credit as stated in the law cannot be made incoherent to mean that such discount be utilized instead as deduction from gross income and from gross sales as what is provided in Revenue Regulations No. 2-94. xxx xxx xxx In declaring that the provisions of R.A. No 7432 prevail over Revenue Regulations No. 2-94, it is important to point out that the cost of the 20% discount shall not be treated as deduction from the gross income of petitioner nor deducted from its gross sales for VAT or other percentage tax purposes. The benefit that can be derived by the taxpayer is the privilege of claiming these discount as tax credit and no longer as deductions as what other taxpayers have done. . . . this is to make clear for both the taxpayers and respondent that the tax credit privilege takes the place of claiming these discounts as deductions pursuant to this Court's stand that Section 2(i) of Revenue Regulations No. 2-94 is null and void and it is Section 4(a) of R.A. No. 7432 that will apply in cases of this nature." In reply thereto, please be informed that the Supreme Court, in a decision promulgated on April 15, 2005 entitled Commissioner of Internal Revenue vs. Central Luzon Drug Corporation docketed as G.R. No. 159647 , in affirming the decision of the Court of Appeals, ruled that "The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed. . . . . R.A. 7432 unconditionally grants a tax credit to all covered entities. A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including whenever applicable the income tax that is determined after applying the corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in order to arrive at taxable income." WHEREFORE, in view of the foregoing , this Office holds that, prior to the effectivity of R.A. No. 9257, the appropriate and applicable tax treatment by PSI would be to treat the 20% discount given to senior citizens as a tax credit in its annual financial statements and consequently in its income tax returns. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue