Morning Star Milling Corporation

January 25, 2007 BIR RULING [DA-040-07] VAT 104-99 Morning Star Milling Corporation Penthouse, Morning Star Center 347 Sen. Gil Puyat Avenue Makati City Attention: Mr. Wellington S. Lim Vice President Gentlemen : This refers to your letter dated December 19, 2006 stating that your company is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is engaged primarily in the milling of wheat grain to flour; that in the process, it produces a by-product called bran or pollard; that pollard being an agricultural product is not subject to value-added tax (VAT); that there is no input VAT in the production of pollard except the container (plastic sacks); that on the other hand, importation of wheat and/or purchase of imported wheat from traders by the flour millers are subject to Advanced VAT; that withdrawal, either partial or full, of imported wheat to be used in the milling of flour from custom's custody shall not be allowed prior to the payment of the advanced VAT and submission of documentary proof of payment such as the Authority to Release Imported Goods (ATRIG) issued by the BIR and the payment Form No. 0605 together with the deposit slips issued by the authorized agent bank (AAB); that in the production of flour, the company likewise incurs administrative expenses like the services of the security guards and the purchase of additive to be used in the manufacture of flour which are likewise subject to input taxes; that since the production of pollard or bran is merely a by-product to its main product, whatever input taxes that it may have incurred will form part of its cost; and that conversely, whatever input taxes that it may have incurred in the production of its main product i.e., flour, will be attributed to its VATable transactions. In connection therewith, you now request for an opinion that whatever input taxes that it may have incurred in the production of its principal product, flour, shall be directly attributed to its transaction subject to VAT and consequently may be recognized for input tax credit without need of ratable allocation. In reply thereto, please be informed that this Office had already ruled on the matter when it said in BIR VAT Ruling No. 104-99 dated October 6, 1999 , as follows: ". . . we hereby confirm that the said provision of the Tax Code mandating the allocation of input taxes into a 'ratable portion of any input tax which cannot be directly attributed to either activity' does not apply under the situation above described. Said provision contemplates a situation where a VAT-registered person is engaged in two activities, one subject to VAT and the other exempt from VAT and he purchased goods or services from a VAT-registered person which goods or services are used in both activities and there is an inherent difficulty in attributing the input tax to either activity. Under such circumstances, he has to prorate the input tax to his VAT taxable activity and to his exempt activity. ( VAT Ruling No. 464-88 dated October 6, 1988 ) Obviously, the purpose of your extraction plant is to extract and produce soybean oil for refinement to RBDSO. As used here, the extraction process means to 'separate the oil from the soybeans', so that, for the VAT issued under discussion, the foremost consideration is the business or activity of extracting the crude oil and its refinement to RBDSO which consequently give rise to the VATable activity of selling RBDSO. The yield of soybean meal and the crude soybean oil not converted to RBDSO are, however, only incidents of the extraction process, being the intrinsically produced waste by-products which happen to be suitable to be disposed of as Vat-exempt products. Under this scenario, this Office is of the opinion, and so holds, that all of your extraction costs can be directly attributed to your RBDSO sales, this being the object of such extraction process, and none to your soybean meal sales and sales of crude soybean oil not converted to RBDSO, these VAT-exempt products being only subordinate to and an incidental consequence of the said process." In the instant case, since the input taxes incurred by your company can be directly attributed to its VATable transaction, i.e., in the manufacture of its principal product, flour, which is in all fours similar to the above-cited ruling, this Office holds that all input VAT incurred and accumulated in connection with the manufacture of its principal product, flour, can be fully chargeable as input VAT without need of ratable allocation. THaAEC This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service