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[SPBUS]

 ALLOWABLE  DEDUCTIONS  02  


RC    

COMMISSIONER OF INTERNAL REVENUE v. •   Tax refunds or credits do not exclusively pertain to


CENTRAL LUZON DRUG CORPORATION illegally collected or erroneously paid taxes as they may
G.R. No. 159647, April 15, 2005 | PANGANIBAN, J.: be other circumstances where a refund is warranted. The
tax refund provided under Section 229 deals exclusively
TAX TREATMENT (DOCTRINE): with illegally collected or erroneously paid taxes but
The 20 percent discount required by the law to be given to there are other possible situations, such as the refund of
senior citizens is a tax credit, not merely a tax deduction excess estimated corporate quarterly income tax paid, or
from the gross income or gross sale of the establishment that of excess input tax paid by a VAT-registered
concerned. A tax credit is used by a private establishment person, or that of excise tax paid on goods locally
only after the tax has been computed; a tax deduction, produced or manufactured but actually exported. The
before the tax is computed. RA 7432 unconditionally grants standards and mechanics for the grant of a refund or
a tax credit to all covered entities. Thus, the provisions of credit under these situations are different from that
the revenue regulation that withdraw or modify such grant under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another
are void. Basic is the rule that administrative regulations instance of a tax credit and it does not in any way refer
cannot amend or revoke the law. to illegally collected or erroneously paid taxes

FACTS THE CA AFFIRMED IN TOTO TO THE RESOLUTION


OF THE CTA ORDERING THE CIR TO ISSUE A TAX
CENTRAL LUZON DRUG CORP is a domestic CREDIT IN FAVOR OF MERCURY DRUG.
corporation engaged in retailing of medicines and other
pharmaceutical products. ISSUE(S)
•   In 1996, it operated six drugstores under the business
name “Mercury Drug”. WHAT IS THE TAX TREATMENT OF THE 20% SALES
•   It granted 20% sales discount to senior citizens on their DISCOUNT? IT IS A TAX CREDIT OR A DEDUCTION
medicine purchases pursuant to RA 74321 and its IRR. FROM GROSS INCOME OR GROSS SALES? [TAX
For the sales peiod, the amount granted by Mercury CREDIT]
Drug to qualified senior citizens representing 20% sales
discount amounted to P 904,769.00. WHETHER MERCURY DRUG DESPITE NESS LOSS,
MAY STILL CLAIM THE 20% SALES DISCOUNT AS
IT FILED ITS ANNUAL INCOME TAX RETURN A TAX CREDIT? [YES]
FOR THE YEAR 1996 ON ARPIL 15, 1997 AND
SUBSEQUENTLY FILED A CLAIM FOR TAX RULING
REFUND ON JANUARY 16, 1998. CLAIM OF 20% SALES DISCOUNT AS TAX
•   It filed the claim for tax refund/credit for the amount of CREDIT DESPITE NET LOSS.
P 904,769.00 allegedly arising from the 20% sales •   Section 4(a) of RA 7432 10 grants to senior citizens the
discount granted by the respondent to qualified senior privilege of obtaining a 20 percent discount on their
citizens in compliance with RA 7432. purchase of medicine from any private establishment in
the country. 11 The latter may then claim the cost of the
CIR (PETITIONER) DENIED THE REFUND discount as a tax credit.
CLAIM. RESPONDENT ELEVATED ITS CLAIM TO
THE COURT OF TAX APPEALS. TAX CREDIT versus TAX DEDUCTION
•   CTA dismissed Mercury Drug’s petition and ruled that, •   Tax credit (Not specifically defined in our Tax Code)
it could logically be deduced that tax credit is premised generally refers to an amount that is subtracted directly
on the existence of tax liability on the part of taxpayer. from one’s total tax liability. It is an allowance against
If there is no tax liability, tax credit is not available. the tax itself or a deduction from what is owed by a
taxpayer to the government. Examples: withheld taxes,
MERCURY DRUG FILED A MOTION FOR payments of estimated tax, and investment tax credits.
RECONSIDERATION AND WAS GRATED BY THE •   Tax deduction is defined as a subtraction “from income
CTA (citing SC’s 4th Division ruling on CLDC v CIR) tax purposes, or an amount that is allowable by law to
reduce income prior to the application of the tax rate to
compute the amount of tax which is due. Example: any

1   AN   ACT   TO   MAXIMIZE   THE   CONTRIBUTIONS   OF   SENIOR  


CITIZENS   TO   NATION   BUILDING,   GRANTING   BENEFITS   AND  
SPECIAL  PRIVILEGES  AND  FOR  OTHER  PURPOSES  
 
 
[SPBUS]  ALLOWABLE  DEDUCTIONS  02  
RC    

of the allowable deductions enumerated in Sec 34 of the the part of the seller and a purchase discount on the part
Tax Code. of the buyer, it may be expressed in such terms as "5/10,
•   A tax credit differs from a tax deduction. On the one n/30."
hand, a tax credit reduces that tax due, including •   A quantity discount is a "reduction in price allowed for
whenever applicable – the income tax that is determined purchases made in large quantities, justified by savings
after applying the corresponding tax rates to taxable in packaging, shipping, and handling." It is also called a
income. A tax deduction, on the other, reduces the volume or bulk discount
income that is subject to tax in order to arrive at taxable •   A trade discount A "percentage reduction from the list
income. To think of the former as the latter is to avoid, price . . . allowed by manufacturers to wholesalers and
if not entirely confuse, the issue. A tax credit is used by wholesalers to retailers"
only after tax has been computed; a tax deduction, •   A chain discount — a series of discounts from one list
before. price — is recorded at net.
•   Functional discount (akin to a trade discount) is "a
TAX LIABILITY REQUIRED FOR TAX CREDIT supplier's price discount given to a purchaser based on
•   Since a tax credit is used to reduce directly the tax that the [latter's] role in the [former's] distribution system.".
is due, there ought to be a tax liability before the tax It usually involves warehousing or advertising.
credit can be applied.
•   By its nature, the tax credit may still be deducted from a DISTINGUISHING FEATURE OF IRR OF RA 7432
future, not a present, tax liability, without which it does IS THE ESTABLISHMENT’S OUTRIGHT
not have any use. In the meantime, it need not move. DEDUCTION OF THE DISCOUNT FROM THE
INVOICE PRICE OF THE MEDICINE SOLD TO
PRIOR TAX PAYMENTS NOT REQUIRED TAX SENIOR CITIZENS.
CREDITS •   Although prompt payment is made for an arm's-length
(The SC just cites different examples of tax credits – Input transaction by the senior citizen, the real and compelling
tax credits, zero-rated or effectively zero-rated, tax treaties, reason for the private establishment giving the discount
etc.) is that the law itself makes it mandatory.
•   RA 7432 grants the senior citizen is a mere discount
SEC 2.I AND 4 REVENUE OF REVENUE privilege, not a sales discount or any of the above
REGAULTIONS NO. 2-94 ERRONEOUS discounts in particular.
•   RA 7432 and its IRR specifically allows private
establishments to claim as tax credit the amount of ERRONEOUSLY, UNDER THE IRR this benefit has
discount they grant. TO DENY SUCH CREDT, been erroneously likened and confined to a sales
DESPITE THE PLAIN MANDATE OF THE LAW discount INSTEAD OF A TAX CREDIT benefit
AND REGULATIONS CARRYING OUT THAT enjoyed by the private establishment granting the
MANDATE IS INDEFENSIBLE. discount.
•   In ordinary business language, the tax credit represents •   Sections 2.i and 4 of Revenue Regulations No. (RR) 2-
the amount of such discount. However, the manner by 94 define tax credit as the 20 percent discount deductible
which the discount shall be credited against taxes has from gross income for income tax purposes, or from
not been clarified by the revenue regulations. gross sales for VAT or other percentage tax purposes. In
•   By ordinary acceptation, a discount is an "abatement or effect, the tax credit benefit under RA 7432 is related to
reduction made from the gross amount or value of a sales discount. This contrived definition is improper,
anything." 36 To be more precise, it is in business considering that the latter has to be deducted from gross
parlance "a deduction or lowering of an amount of sales in order to compute the gross income in the income
money;" 37 or "a reduction from the full amount or statement and cannot be deducted again, even for
value of something, especially a price." 38 In business purposes of computing the income tax. The definition
there are many kinds of discount, the most common of must be stricken down.
which is that affecting the income statement 39 or
Financial report upon which the income tax is based. LAWS CANNOT BE AMENDED BY
REGULATIONS.
BUSINESS DISCOUNTS DEDUCTED FROM GROSS
SALES
•   A cash discount, for example, is one granted by AVAILMENT OF TAX CREDIY IS VOLUNTARY
business establishments to credit customers for their
prompt payment. Also referred to as a sales discount on
 
 
[SPBUS]  ALLOWABLE  DEDUCTIONS  02  
RC    

•   For the tax authorities to compel respondent to deduct


the 20 percent discount from either its gross income or
its gross sales 74 is, therefore, not only to make an
imposition without basis in law, but also to blatantly
contravene the law itself.
•   Respondent is given two options — either to claim or
not to claim the cost of the discounts as a tax credit. In
fact, it may even ignore the credit and simply consider
the gesture as an act of beneficence, an expression of its
social conscience.

IT IS THE EXISTENCE OR LACK OF A TAX


LIABILITY THAT DETERMINES WHETHER THE
COST OF THE DISCOUNTS CAN BE USED AS A TAX
CREDIT.

TAX BENEFIT DEEMED AS JUST COMPENSATION.

RA 7432 IS AN EARLIER SPECIAL LAW NOT


EXPRESSLY REPEALED AND THEREFORE
REMAINS AN EXCEPTION TO THE TAX CODE A
GENERAL LAW.

DISPOSITIVE PORTION
e.g. Petition DENIED. CA decision AFFIRMED.

 
 

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