It may surprise you to know tax assessments worth millions have been issued by the BIR simply because taxpayers failed to properly invoice discounts. Even now, many big companies underestimate and neglect the importance of good invoicing. Businessmen and accounting officers still tend to overlook the value of properly filling out such a small piece of paper, which could later on make or break their case.
Universally, discounts are given as a marketing strategy to promote sales or to encourage prompt payments. Discounts may be cash/purchase discounts, quantity/volume discounts, or trade discounts. Cash discounts are granted for early payment, volume discounts are reductions in price for purchases made in large quantities, while trade discounts pertain to percentage reductions from the list price. Since these discounts reduce the selling price, corporations treat them as deductions from gross sales in computing income tax and VAT. However, the proper treatment of discounts is not as straightforward as that.
Section 27 (A) of the Tax Code defines “gross income” as “gross sales less sales returns, discounts and allowances and cost of goods sold.” Discounts are treated as reductions from gross receipts or gross sales to arrive at gross income, which in turn is reduced by operating expenses to compute taxable income. For income tax purposes, it appears there is no invoicing requirement. As long as a discount is given, it is treated as a deduction.
However, the same does not apply for VAT purposes. The Tax Code and BIR issuances provide more specific and rigid invoicing requirements. Expressly, the Tax Code states that, to be deductible, sales discounts: (a) must be granted and indicated in the invoice at the time of sale; and (b) should not depend upon the happening of a future event (Section 106 [D]). Also, sales discounts should be excluded from gross sales within the same quarter it was given.
In various rulings, the BIR has strictly implemented these invoicing requirements.
If the discount is not granted and indicated in the invoice at the time of sale, the sales discount is automatically disallowed. When the discount is indicated in the invoice, but depends on a contingency (e.g., a cash discount which depends on early payment by the customer), the sales discount is also disallowed. The BIR has a stringent unwavering position on nothing less than religious compliance with the requirements of the Tax Code.
The law requires deductible discounts must be granted and indicated in the invoice only (and not in both invoice and official receipt). Invoice, as provided in law, is given a technical meaning in the law on VAT, and is issued for sale of goods or properties. While an official receipt is issued for sale of service or lease. Sales discounts must be unconditional. It should be indicated from the issuance of the invoice. At this time, the taxpayer’s VAT liability is already fixed, and the customer may already claim the input VAT. This avoids situations where a discount is subsequently withdrawn without payment of the corresponding output VAT, or where input VAT on the undiscounted price is claimed but a discount is subsequently granted. This ensures the VATable amount upon issuance of the invoice will be the same amount upon payment. The rules on the issuance of an official receipt are different since it is issued upon payment, and the VATable amount will already reflect the actual discount granted.
Interestingly, the CTA, in one case, allowed sales discounts given to senior citizens even if supported merely by cash slips. Although this may be used as an argument against failing to issue VAT invoice, it still does not dispense with the requirement that the discount is separately indicated, and the same is not conditional on a future event.
It pays for taxpayer to be well-versed with the invoicing requirements for discounts provided by the Tax Code and BIR issuances to prevent future tax assessments. Taxpayers should never discount the value of proper invoicing.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.
Mhealler T. Ycong is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
830-8000
mtycong@accralaw.com
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