BIR Ruling

December 9, 1971 MEMORANDUM FOR: The Honorable The Secretary of Finance Manila This refers to the letter of Mr. Mariano V. del Rosario to that Office, dated May 29, 1971, relative to the alleged disallowance of the deductibility of locally manufactured components of electronic products under Section 185-B of the Tax Code in the computation of sales tax on the locally manufactured products. The latter, states, among other, that in the meeting of the electronics group, Philippine Chamber of Industries, the following was discussed: "That it is unbelievable and inconsistent on the part of the government to allow the deductions of components which are imported in its complete form, by integrated local manufacturers whereas if the same manufacturer buys the same components which are actually manufactured in the Philippines, the Bureau of Internal Revenue would not allow their deductions for computing the final sales tax. cdta "Should this be the correct thinking and interpretation of your Department, it was pointed out that no new entrepreneur would even think of going into a new venture as it would be more profitable for the manufacturer of radios, televisions, etc. to import its components. I am specifically referring to Section 185-B of the Tax Code." Because of its belief that the cost of locally manufactured components is not allowed to be deducted from the gross sales of locally manufactured articles mentioned in Section 185-B the Philippine Chamber of Industries is seeking a ruling from that Office allowing the deduction of such components from the aforementioned articles. At the outset we wish to emphasize that contrary to the belief of Mr. del Rosario, radio and its component parts, whether imported or locally manufactured, are subject only to the 7% sales tax under Section 186 of the Tax Code. With respect to the alleged disallowance by this Office of the deduction of the cost of locally manufactured components in the assembly of electronic products taxed under Section 185-B of the Tax Code, it is informed that the allegation is without factual basis. In fact, this office has always allowed the deduction of the cost of raw materials, parts and components from the gross sales of the finished products provided the said raw materials, parts and components are taxed under the same Section under which the finished products are taxed. For such is the proviso in Sections 184, 185 and 186. In this connection, attention is invited to the fact that Section 185-B prescribes two rates of tax 40% if the articles therein mentioned are imported or are merely assembled; and 7% if the finished products are "locally manufactured articles" as defined therein. However, under paragraph 2(e), Features of the Amendment, Revenue Memorandum Circular No. 4-65, as amended by Revenue Memorandum Circular No. 34-65 which implements the provisions of Republic Act No. 4122 (Section 185-B of the Tax Code), parts and accessories locally manufactured are subject to the 7% sales tax. Consequently, considering that the locally manufactured parts are subject only to the 7% sales tax, and considering that the finished products enumerated in Section 185-B are subject to the 40% or 7% sales tax, the cost of the locally manufactured parts used by a manufacturer subject to 40% or 7% sales tax is deductible from the gross selling price of the finished articles. (BIR Ruling No. 71-022, dated October 12, 1971). aisa dc Respectfully submitted: MISAEL P. VERA Commissioner of Internal Revenue