Clarification Regarding Section 2, Paragraph (i) of Revenue Regulations No. 2-94 on Whether the Word "Discount" Should be Treated as a "Tax Credit" or as a "Deduction from Gross Sales"

April 11, 1995 BIR RULING NO. 067-95 R.A. 7432 000-00 067-95 Mr. Bernardino de Guzman Chairman Office of the Senior Citizens Affairs Office of the City Mayor Morlan Bldg. MacArthur Highway Angeles City S i r : This refers to your letter dated November 24, 1994 requesting for some clarification regarding Section 2, paragraph (i) of Revenue Regulations No. 2-94, dated August 23, 1993, on whether the word "discount" should be treated as a "tax credit" or as a "deduction from gross sales." cdta In reply, please be informed that this Office has been consistent that the word "discount" as contemplated under Section 4 of Republic Act 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. [Sec. 2 (i), accounting principles, "discount" are treated as follows: "1. The discount can be recorded as a reduction 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 customers who do not take the discount would then be recorded as additional revenue. Thus, a $1,000 sale subject to a 2% cash discount would be recorded at the time of sale as: dr. Sales Revenue $980 cr. Accounts Receivable $980 If the discount were not taken, the entry would be: dr. Cash 1.000 cr. Discounts not Taken 20 Accounts Receivable 980" (p. 142, Accounting, Text and Cases by Anthony and Reece, 1979 Edition). Simply put, it can be said that "sales discount" is merely a deduction from gross income/sales/receipts to arrive at the taxable net 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 due must be paid first by a taxpayer (which payment may be erroneously or excessively paid), after which he could request for a tax refund or tax credit. Section 204 (3) of the Tax Code, as amended, provides as follows: "(3) . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty." It many be noteworthy to state that the Highest Court in the case of San Carlos Milling Co., Inc. vs. CA, G.R. No. 103379, 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 RA 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, as it hereby hold, that the treatment of "sales discounts" as deductions from the gross income for income tax purpose and from the gross sales for value-added tax or other percentage tax purposes as provided for under Sec. 2, par. (i) of R.R. No. 2-94, is the better interpretation rather than as a "tax credit." aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue