Legal but improvident

A tax credit refers to an amount that is subtracted directly from one’s total tax liability, a deduction from what is owed by the taxpayer to the government. Under Section 4 (a) of RA 7432 or the Senior Citizens Law, the 20 percent discount granted to senior citizens on their purchase of medicine from any private establishment may be claimed as tax credit by the establishment granting said discount. But if the establishment operates at a loss and therefore has no tax liability, can it still claim said tax credit? This is the issue raised in the case of CLD, a corporation primarily engaged in retailing of medicines and other pharmaceutical products.

From January to December 1996, CLD granted 20 percent sales discount to qualified senior citizens on their purchase of medicines totaling P904, 769. On April 15, 1997, CLD filed its Annual Income Tax Return for the taxable year 1996 declaring therein that it incurred net losses from its operation.

Despite such reported net losses, CLD filed with the Commissioner, Bureau of Internal Revenue (BIR), a claim for tax credit in the amount of P904,769 allegedly arising from the 20 percent sales discount it granted to qualified senior citizens in compliance with R.A. 7432. The BIR however denied this application. According to the BIR, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the taxpayer, tax credit is unavailing. Was the BIR correct?

No. The existence of a tax credit or its grant by law is not the same as the availment or use of such credit. If a net loss is reported and no other taxes are currently due from a business establishment, there will obviously be no tax liability against which any tax credit can be used. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless the irrefutable fact remains that, under R.A. 7432, Congress has granted without condition a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future, not a present tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes. A tax liability is certainly important in the availment or use, not the existence or grant of a tax credit. A private establishment reporting a net loss in its financial statements is no different from another that presents a net income. Both are entitled to the tax credit provided for under R.A. 7432, since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such credit, where no tax is due, will be an improvident usage (Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, G.R. 159647, April 15, 2005. 456 SCRA 414).

* * *

E-mail at: [email protected]