Tuesday, September 03, 2013

Senior Citizens Discount 5: Supreme Court Flip-Flopping on the Law

A fried from Mercury Drugstore, Atty. Edsel Manuel, gave a long reply to the complaint of Mr. James Auste, head of the Cancer Warriors Foundation, why his demand to get a 3-months supply of his medicines from Mercury was denied. The email exchange was posted in our DOH Advisory Council for RA 9502 (Cheaper Medicines Law of 2008) email loop. Atty. Manuel's long reply covered several topics, from the law on mandatory discounts to persons with disabilities (PWDs) or RA 9442, to the expanded mandatory discounts to senior citizens or RA 9527 (enacted February 2004) and RA 9994 (enacted January 2010), to pricing by big drugstore chains.

Below, I am posting portions of his reply related only to RA 9994. I will reserve my further comments about this law in my next blog post on the subject. I thank Atty. Manuel for giving me permission to blog his long reply. Photos here, I got from the web.

(S)ince the enactment of senior citizen and PWD discounts, drugstores have been crying afoul and have been literally crying a river in Congress and Senate.  If this 20% discount is viable and reasonable to drugstores why on earth will drugstores complain? And with the burden shared to manufacturers and suppliers, why are they complaining also? This means that there is something wrong with the law.

The first giver of 20% discount is RA 7432 or the original senior citizen law. This law is the most fair that even without the implementing rules being issued, Mercury Drug has initiated the giving of 20% discount believing in the just and fairness of the law as the cost of the discount was treated as tax credit. 

However, the anticipated fairness of the law was saddened by the issuance by the Bureau of Internal Revenue of Revenue Regulation No. 2 series of 1994, by treating the grant of the 20% discount as tax deduction instead of tax credit; and the expected propriety of the elderly was frustrated by the abuses made by unscrupulous persons. We were able to convict in Valenzuela court a person who used fake senior IDs and the discounted medicines he illegally acquired were sold to other establishments.

Appeal to the Executive branch of the government turned to be futile thus, the company sought the intervention of the Judiciary.  

From 1994 until the company won the case with the Supreme Court in 2005, the company had suffered substantial reduction in sales,  profit, and drain in the company’s cash flow, not to mention the litigation costs  incurred . 

It has been decided in numerous decisions of the Supreme Court that tax deduction is not fair- is not a just compensation for the loss revenues brought about by the discount. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation G.R. No. 159647, April 15, 2005, 456 SCRA 414; Bicolandia Drug Corporation  v. Commissioner of Internal Revenue, G.R. No. 142299, June 22, 2006, 492 SCRA 159; Commissioner of Internal Revenue v. Bicolandia Drug Corporation, G.R. No. 148083, July 21, 2006, 496 SCRA 176; Commissioner of Internal Revenue v. Central Luzon Drug Corporation , G.R. No. 159610,(June 12, 2008] 

To quote the Supreme Court, thru Justice Panganiban, 

“Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned.  Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.” (Commissioner of Internal Revenue v. Central Luzon Drug Corporation G.R. No. 159647, April 15, 2005, 456 SCRA 414)

That light we saw from the Supreme Court in redeeming the company from injustice did not continue to flame-up because the Legislature enacted RA 9527 or the Expanded Senior Citizen Act of 2004, which changed the original tax treatment of the discount from tax credit to tax deduction.

With the enactment of the Expanded Senior Citizen Act of 2004, the small drugstores filed a Petition with the Supreme Court questioning the constitutionality of the tax deduction provision of the law.

Surprisingly, the Petition by the small drugstores was dismissed by the Supreme Court, in deviation from their previous ruling by upholding the  tax deduction scheme, but questioning the business decision of drugstores in pegging a small mark-up. 

The Supreme Court enunciated thru Justice Azcuna

“it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this decision. In as much as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of losing their customers to competition.” (Carlos Super Drug vs. DSWD, G.R. No. 166494, June 29, 2007)

As evident from the above ruling, the Supreme Court teaches drugstores to increase their prices to counter the effect of tax deduction, but this has been rendered inutile by the enactment of RA 9502 or the Cheaper Medicine Law in June 6, 2008, where prices of medicines have been limited to the dictated price of the government. 

Where now will the drugstores put themselves? Again, woe to drugstores! Additional salt to wound is that the drugstores are being punished if they will not give discounts and the aggressive complaints of seniors and pwds as if drugstores are the dictator of prices….

See also:
Senior Citizens Discount, Part 2, November 03, 2010 
Drug price control 5: Mandatory discounts and acronym politics, March 21, 2011 
Senior Citizens Discount 3: Sharing of Mandatory Discounts on Medicines of Senior Citizens, December 14, 2012 

Senior Citizens Discount 4: Distortion in Consumers' Perception of Drug Prices, February 04, 2013 

Drug price control 5: Mandatory discounts and acronym politics, March 21, 2011 
Welfarism 25: Centenarians and Populist Legislators, May 30, 2013


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Anonymous said...

When the law was amended, the original tax treatment of the discount was changed from tax credit to tax deduction, thereby effectively transferring the burden of the law to the private establishments concerned. To counter the effect of this “tax deduction amendment”, the supreme court indirectly recommend to the drugstores to practice the “cross subsidy” pricing scheme (a strategy where support for a “senior product” comes from the profits generated by a non-senior product).

The amended law also introduced the “sharing the burden” provision (to be crafted by DOH) where the other players of the pharma industry would give additional discount to retail drugstores as their “share” to the “mandatory expense”. Unfortunately, this support from suppliers/distributors is not reaching the independent small retail drugstores as of this writing.

Currently, even the bigger chain drugstores is now being sold to giant retail companies, example, South Star Drug is now Gokongwei-controlled while ThreeSixty Pharmacy of Cebu has been acquired by Puregold.

I am not sure if the Franchise Retail Pharmacies ( like The Generics Pharmacy and Generica) are still growing, but from my vantage point of view, I can clearly declare that it is the independent pharmacies that are fatally affected by this law (or “political tool”).

Bienvenido Oplas Jr said...

Yes, the less financially capable to shoulder the burden will be adversely affected. Being sold out to larger firms or chain drugstores is one option; another option is to consolidate among themselves to become drugstore chain themselves to have economies of scale.

Re sharing of burden, only private players were forced by the government to have burden sharing. Government never lift a finger to share, like treating the loss as a tax credit. Government hypocrisy is always highlighted everytime it forces price regulation and mandatory, forcible discounts.

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