Clarification on Tax Credit under Senior Citizens Act

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BIR REVENUE MEMORANDUM CIRCULAR NO. 35-97: Clarification on Tax Credit under Senior Citizens Act

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Title Source: Supreme Court: Clarification on Tax Credit under Senior Citizens Act

Law: Bir Revenue Memorandum Circular No. 35-97

Decision Date: Nov 21, 1997

BIR Revenue Memorandum Circular No. 35-97 clarifies that the "discount" for senior citizens under the Senior Citizens Act is a deduction from gross income rather than a tax credit, suggesting an amendment to the law to eliminate confusion.

Law Summary

Treatment of Discounts According to Generally Accepted Accounting Principles (GAAP)

Discounts are treated either as:
1. A reduction from gross sales,
2. An expense of the period,
3. Sales revenue recorded net of the discount initially.
Discounts reduce taxable income rather than create tax credit claims.

Distinction Between "Sales Discount" and "Tax Credit"

Sales discount is a deduction from gross income/sales to determine taxable income.
Tax credit is a refund or credit of taxes already paid, usually after filing a claim.
Tax credit requires prior payment of taxes which may be erroneously or excessively paid.

Legal Requirements for Claiming Tax Credit

Under Section 204(3) of the Tax Code, taxpayers must file a written claim within two years after tax payment to claim credit or refund.
The BIR stresses government control over tax credits to prevent abuse and revenue loss.

Judicial Precedent on Tax Credit Claims

The Supreme Court (San Carlos Milling Co., Inc. vs. CA) highlights that automatic tax credit without proper government investigation can lead to confusion and abuse.
The government's authority over the crediting and offsetting process is essential.

Interpretation of the Word "May" in the Law

The use of "may" in Section 4(a) implies discretion, not an absolute or mandatory right to claim tax credit.
Government is not obliged to honor tax credit claims without proper verification.

BIR's Recommended Treatment and Suggested Amendment

BIR opines that discounts related to senior citizen benefits should be treated as deductions rather than tax credits.
To avoid confusion, an amendment to RA No. 7432 is recommended to explicitly state that discounts are deductions.

Summary of Key Points

Discounts to senior citizens reduce taxable sales/income rather than constitute a tax credit.
Tax credit claims are bound by strict procedural requirements and government discretion.
The current legal and accounting framework supports treating the discount as a deduction.
Legislative amendment is advised for clarity and to prevent misinterpretations.

END