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Impact of the expanded senior citizens law

Impact of the expanded senior citizens law by: Pamela P. Palad

The Bureau of Internal  Revenue (BIR) has just issued the much-anticipated Revenue Regulations No.(RR)  7-2010 implementing the tax privileges granted under Republic Act (RA) No. 9994 or the “Expanded Senior Citizens Act of 2010.”

The regulations cover not only the tax privileges granted to senior citizens, but also the tax implications on the VAT-registered sellers, benefactors and other private entities who engage senior citizens as their employees.

The public has been made aware of the benefits given to senior citizens under RA 9994.  Particularly, they are entitled to: (a) 20% discount and exemption from VAT on their purchase of specified goods and services; (b) P500 monthly social pension, for indigent senior citizens; (c) death benefit assistance; (d) 5% discount on utilities; and (e) income tax exemption for minimum wage earners or for senior citizens whose annual gross income do not exceed their personal exemptions.

Looking now at the other side of the picture, what would be the impact of RA 9994 and its implementing rules and regulations to all establishments supplying any of the discounted goods and services to senior citizens? 

Significantly, RR 7-2010 discusses, among others, the invoicing procedures, reportorial requirements and the system for claiming the cost of the discount as tax deduction for compliance by VAT-registered sellers.

According to Section 7 of RR 7-2010, the cost of the discount incurred by these establishments shall only be allowed as a deduction from gross income for the same taxable year that the discount is granted, provided that the amount of sales reported for tax purposes is the undiscounted selling price and not the amount of sales net of the discount.  In effect, the discounts granted shall be treated as ordinary and necessary expenses deductible from the gross income of the seller falling under the category of itemized deductions.  Since it is not covered by any of the specific line items in the list of itemized deductions, it may have to be included under the classification of “miscellaneous” or “others.” 

The treatment of the discount as a deductible ordinary and necessary expense may not matter for purposes of computing the liability of the establishment for the regular corporate income tax. 

Whether it is treated as a discount or an expense, the income tax due will not be affected.  However, the prescribed treatment will definitely matter when computing the 2% minimum corporate income tax (MCIT).  Since the MCIT is based on gross income, the discount will still form part of the MCIT base.

Furthermore, the discount can only be claimed as a deduction if the seller opts to avail of the itemized deductions.  The establishment granting the discount will not benefit if it opts for the Optional Standard Deduction during the taxable quarter/year. 

As a safety net, it was also provided that only business establishments selling any of the qualified goods and services to senior citizens where an actual discount was granted may claim the deduction, and only that portion of the gross sales exclusively used, consumed or enjoyed by the senior citizen shall be eligible for the deductible sales discount.  Thus, the seller is required to keep a separate and accurate record of sales, which shall include the name of the senior citizen, OSCA ID, gross sales/receipts, sales discount granted, dates of transactions, and invoice number for every sale transaction to senior citizen.

However, in issuing the official receipt or sales invoice, the regulations recognize the senior citizen discount as a discount from selling price.  Hence, it requires that the gross selling price and the sales discount must be separately indicated, and all exempt sales must be properly segregated from the taxable sales for every transaction.

If the establishment is offering a promo for a higher discount rate, the actual amount of the discount granted -- either the senior citizens discount or the promotional sales discount -- whichever is higher, may be availed of.  It is probably safe to assume that if the promotional discount is granted based on the gross selling price, then this will be allowed as a deduction from gross sales and shall not be limited to being deducted from the gross income, for income tax purposes.

For VAT and other percentage taxes, the discount shall be allowed as deduction from gross sales or gross receipts of the concerned business enterprise. This rule will potentially result in discrepancies in the amount of sales reported in the financial statement and income tax declaration versus the amount reported in the VAT return.  Judging from the efficiency of the BIR RELIEF system, the situation will trigger the issuance of letter notices for establishments granting senior citizen discounts.  The discrepancy may also be raised in a tax audit investigation if proper computation is not made.

Finally, since sales of qualified goods and services to senior citizens are exempt from VAT, the input tax attributable to the exempt sale shall not be allowed as an input tax credit and must be closed to cost or expense account by the seller.  To comply with this requirement, the establishment has to determine the amount of input VAT attributable to sales to senior citizens using the ratio of sales to senior citizens to total sales as the allocation factor.  For establishments selling other goods or services not covered by the discount privileges, the computation of the allocation factor will not be as simple.

The tax treatment for local business tax (LBT) was not tackled as the RR covers only national taxes.  However, we take the position that the discounts granted to senior citizens, which are determinable at the time of sale, shall be excluded in computing for the total gross sales or receipts as the tax base for LBT.

All business establishments supplying any of the qualified goods and services to senior citizens should carefully take note of the proper tax treatment and compliance requirements provided under the implementing rules.  Ultimately, the objective is to give our elders the maximum benefits provided under the law.  It is hoped, however, that this is accomplished without putting any unjust burden on the selling establishments who cater to their needs. 

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Pamela.Palad@ph.gt.com.  For other tax concerns, please check out our other tax services.