In 2010, before the electorate chose the “tuwid na landas” (English translation: the right path), we have seen the passing of Republic Act (RA) No. 9994, otherwise known as “The Expanded Senior Citizens Act of 2010”, a popular and noble law which gave our geriatrics the benefit of generally a 20-percent discount and exemption from VAT on their purchases of certain items. One salient, if not peculiar, feature of the said law is the sharing of the burden of the senior citizens’ (SC) discount among retailers, manufacturers and distributors of medicines, essential medical supplies, accessories and equipment. The RA imposes compulsory rebates which should consider the respective margins of the different stakeholders of the industry’s supply chain. Note that rebates may not be necessarily similar to a discount. A rebate connotes a refund or a return of a portion of what has been previously paid while a discount is customarily understood as a portion of the selling price that does not need to be paid based on a condition present at the time of sale or a condition that has been met after the point of sale but on or before the date of payment or a specified period.
The RA has tasked the Department of Health (DOH) to establish the guidelines and mechanisms for the rebates. The DOH has issued Administrative Order No. 2010-0032 dated Oct. 9, 2010 and prescribed that in instances where sharing of the burden of SC discount applies, 30 percent of which shall be borne by the retailer and can be claimed by the same as a deduction for income tax purposes. However, the remaining 70 percent, which is actually the amount subject to compulsory rebates, shall be borne by the manufacturer/distributor or wholesaler-retailer but is not categorically characterized as a deduction for income tax purposes.
The Bureau of Internal Revenue (BIR), on the other hand, has been tasked to prescribe guidelines for the implementation and availment of the law’s tax privilege provisions. In Revenue Regulations (RR) No. 7-2010, the BIR prescribed that the SC discount shall be characterized as a deduction from gross income, provided that, the total amount of the claimed tax deduction net of VAT, if applicable, shall be included in the gross sales receipts for tax purposes and shall be subject to proper documentation in accordance with the provisions of the Tax Code. Note, however, that this RR only prescribes guidelines for implementation of the tax privilege provision on transactions between the seller and the senior citizen-purchaser. Unfortunately, I believe that the RR did not clarify how the share of the manufacturer/distributor and/or wholesaler-retailer shall be characterized for income tax purposes. In fact, the RR only echoed the provision of the RA that the DOH shall be the party responsible to establish the mechanisms of compulsory rebates. Further, the BIR simply added that the DOH’s mechanisms shall be issued in consultation with the Department of Finance (DOF) and the BIR.
Since we are nearing the 15th of April, the DOF and the BIR may want to issue clarification and address the following questions:
1. Whether the manufacturer/distributor or wholesaler-retailer’s share of the SC discount should also be characterized as a deduction (operating expense) from gross income or a deduction from sales to arrive at net sales for income tax purposes.
2. Whether rebates pertaining to sales made in prior years will be allowed as deduction in the current year. This concern streams from the principle of matching cost (in this case, deduction) with revenues.
3. Whether for VAT purposes, the manufacturer/distributor or wholesaler-retailer can use an estimated senior citizen-discount-rebate rate that shall be applied to all of its sales to the retailer so that its share of the SC discount is included at the time the invoice is made. Note that for VAT purposes, only discounts determined at the time of sale or invoice date shall be allowed as a deduction to arrive at VATable sales.
4. In the case of the retailer, whether the rebates it may receive will be subject to income tax and VAT.
If such issues remain unsettled, affected companies will face challenges in tax compliance – this may not be parallel to the current administration’s advocacy. Since the issues surrounding the sharing of the SC discount are relatively new, the government should nip them in the bud by issuing the appropriate RR to address them.
(Leandro Ben M. Robediso is an assistant manager for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.comor lrobediso@kpmg.com)