Interpretation of the Term "Discount" as Provided for under Section 4 of R.A. 7432, as Implemented by Revenue Regulations No. 2-94

December 6, 1995 BIR RULING NO. 183-95 R.A. 7432 000-00 183-95 The Honorable Corazon Alma G. de Leon Secretary Department of Social Welfare & Development Constitution Hills Quezon City M a d a m : This refers to you letter dated January 30, 1995 requesting for clarification on the Bureau's interpretation of the term "discount" as provided for under Section 4 of R.A. 7432, as implemented by Revenue Regulations No. 2-94. llcd In reply, please be informed that this Office has been consistent in its interpretation of the term "discount" as contemplated under Section 4 of R.A. No. 7432 to mean as deduction from the gross income for income tax purposes and from the gross sales for value-added tax or other percentage tax purposes. [Section 2 (i), Revenue Regulations No. 2-94]. It is to be noted that the law itself used the term "discount". Under the generally accepted accounting principles, discounts are treated as follows: "1. The discount can be recorded as a reduction of the 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, Tax and Cases by Anthony and Reece, 1979 Edition). On the other hand, "tax credit" is just life a "tax refund" which is not granted automatically but a taxpayer who want to avail of the said tax credit has to apply for it within a period of two (2) years from the time the subject have been paid (Sec. 204, NIRC). In other words, the granting of "tax credit" is not automatic and is never presumed. One has to prove that his grounds are valid before the same is granted. In view thereof, this Office is of the opinion, as it hereby holds, that the treatment of "sales discount" as deduction sales for value-added tax or other percentage tax purposes is the better interpretation rather than treat it as a "tax credit" or tax against tax. For one to deviate from the "generally accepted accounting principles, standards and practice" would create chaos to the business community and in the end, the Bureau will have a hard time monitoring the proper taxes payable by the concerned taxpayers. LLphil Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue