Discounting abuse
I am very much looking forward to reaching the “discounted” age, which is 60 years old under Philippine law. Although, I still have some ways to go. Aging, obviously, is never easy. Other than health issues, there are also concerns over loss of income and productivity. But the Philippines, compared to other countries, is relatively generous to its “senior” population.
The 20% discount (and value-added tax exemption that goes with it) enjoyed by local senior citizens and persons with disabilities (PWDs) on their purchases of food and other necessities is a significant benefit. However, the same is also prone to abuse — much like any other exemption given exclusively to a select or predetermined group of people.
And given the nature and significance of this “exclusive” privilege — a 20% is a big deal — every so often controversies arise regarding its use. Take the case of the recent order by the National Commission of Senior Citizens (NCSC) and the National Council on Disability Affairs (NCDA) to investigate Starbucks Philippines for allegedly limiting the use of Senior Citizen and PWD Cards in their establishments.
The local franchisee of the global coffee chain was reported to have limited seniors and PWDs availing themselves of the 20% discount to a single drink and a single pastry in every visit. As such, a senior citizen or PWD ordering one drink and two pastries for himself or herself will have to pay in full (without price discount) for the additional pastry.
This may have been simply a case of misunderstanding between Starbucks Philippines and its customers, but the backlash was immediate for the global coffee chain. To prompt an official government investigation on store operations is never a good thing for business reputation. I can only wonder how Starbucks head office feels about the situation, considering that Philippines was among the first forays (in the late 1990s) of Starbucks outside the US.
According to the NCDA, the law does not impose any limitations or restrictions on the amount of food or drink that can be ordered by a person legally entitled to the 20% discount and VAT exemption. Provided, however, that only that person will be consuming the ordered items. Of course, this is in consideration of the fact that a person’s consumption varies — some eat or drink more than others. And when it comes to consumption, there are no specific standards.
Almost immediately, Starbucks Philippines was reported to have apologized for the misunderstanding and assured the public that discounts would be given as the law required. I am sure, however, that given a choice, many food establishments will prefer that volume limits be set by law. Again, the use of the discount privilege — now a matter of right under the law — is prone to abuse.
I recall an incident many years back, when the discount was first implemented. I was at a restaurant in Power Plant Mall in Makati City and sat beside a table already occupied by two elderly gentlemen. The pair ordered a lot of food, and when they finished, promptly paid their bill — presumably with senior citizen discount applied to the entire meal.
After paying the bill, and since they had plenty of leftovers, the senior pair then called in their service people waiting outside — one appeared to be a driver and another a valet. The two people came into the restaurant and helped themselves to the remaining food. Instead of just taking home the leftovers, people other than the senior pair were called in to finish the job, so to speak.
Offhand, one cannot impute ill-motive on the part of the seniors. Perhaps they thought it best to have their companions finish the leftovers instead of letting them go to waste — or risk the food getting spoiled by bagging them. On the other hand, one cannot help but wonder if the ploy was intended, in a deliberate attempt to abuse the discount privilege.
And I think this is where any investigation or inquiry should focus — on the rate of abuse, and how to prevent it. After all, those abusing the privilege are also evading taxes, in this case the 12% VAT on the purchase. And I reckon at this point, the abuse of the senior citizen and PWD discounts also leads to a substantial tax leakage.
In the end, the “loser” is the government. Under Bureau of Internal Revenue (BIR) Revenue Memorandum Circular-38-2012, in the case of promotional discounts higher the 20%, the senior citizen discount no longer applies. For instance, in the case of 50% off promotions, seniors can avail themselves of the bigger discount. And the purchase is still VAT exempt.
As for the 20% senior discount, merchants can recover in some way since also under the same memorandum circular, the 20% discount given by business establishments is deductible from their gross income during the same taxable year when the said discounts were given, and the input tax attributable to the VAT exempt sale is considered as cost or an expense account by business establishments.
The 20% senior citizen discount is treated as a “necessary and ordinary expense duly deductible from the gross income, provided that the seller does not opt for the Optional Standard Deduction during the taxable quarter/year,” according to the BIR. Simply put, the discount and input VAT are treated as “cost” of doing business that are tax deductible.
In this line, the loss of revenue is really to the government after establishments claim tax deductions arising from the discounts and VAT-exempt sales to senior citizens. And this is why I contend that the abuse of the privilege results in tax leakages, and thus the need to consider ways to address the abuse.
This needs to be reviewed and assessed by legislators with the help of subject matter experts. Will setting volume limits help? What standards should be used relative to average food and drink consumption for people aged 60 years and over, and those with disabilities? Should the discount law be made specific to what and how much people can buy at discounted prices?
Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council
