Comments and Recommendations on House Bill No. 3367 Entitled "An Act Extending a Special Tax Credit to Agricultural Processors, Further Amending for the Purpose the National Internal Revenue Code, as Amended"

February 28, 1996 BIR RULING [DA-095-96] MEMORANDUM FOR : Secretary Roberto F. De Ocampo Department of Finance FROM : Commissioner Liwayway Vinzons-Chato Bureau of Internal Revenue SUBJECT : Comments and Recommendations on House Bill No. 3367 Entitled "An Act Extending a Special Tax Credit to Agricultural Processors, Further Amending for the Purpose the National Internal Revenue Code, as Amended" In connection with the letter-request of Assistant Executive Secretary Frumencio A. Lagustan dated October 5, 1995, we are sending herewith our comments and recommendations on the above-captioned H.B. No. 3367. HIGHLIGHTS: H.B. 3367 proposes to amend Section 99 of the National Internal Revenue Code, as amended, by adding new paragraphs to read as follows: "SEC. 99. Persons liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, ANY PERSON ENGAGED IN AGRO-PROCESSING, and any person who imports goods shall be liable to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. "xxx xxx xxx "THE TERM 'AGRO-PROCESSING' COVERS THE PROCESSING OF NON-FOOD AGRICULTURAL, MARINE AND FOREST PRODUCTS; AGRICULTURAL, MARINE AND AQUATIC FOOD PRODUCTS, INCLUDING GROUND AND TREE CROPS, LIVESTOCK AND POULTRY IN THEIR ORIGINAL STATE, AND OF PRODUCTS DEEMED TO BE IN THEIR ORIGINAL STATE UNDER SECTION 103 PARAGRAPHS (A) AND (b) OF THE NATIONAL INTERNAL REVENUE CODE. "PROCESSING INCLUDES SUCH ACTIVITIES AS CLEANING AND GRADING; GINNING, MILLING, CUTTING, AND MIXING, COOKING, PASTEURIZATION, CANNING DEHYDRATION, FREEZING, WEAVING, EXTRACTION, AND ASSEMBLY; AND CHEMICAL ALTERATION AND TEXTURIZATION." Section 104 of the same Code is hereby further proposed to be amended by adding a new paragraph to be denominated as paragraph (b) to read as follows: "SEC. 104. Tax credits . (a) . . . "(b) AGRO-PROCESSING VAT CREDIT. ANY PERSON OR FIRM ENGAGED IN AGRO-PROCESSING CAN CREDIT THE AGRO-PROCESSING VAT CREDIT AGAINST THE OUTPUT TAX. "AGRO-PROCESSING VAT CREDIT IS FOUR PERCENT OF GROSS VALUE IN MONEY OF THE PRODUCTS OF AGRO-PROCESSING ACTIVITIES WHICH ARE SOLD, BARTERED, OR EXCHANGED CREDITABLE AGAINST THE OUTPUT TAX OF PERSONS OR FIRMS ENGAGED IN AGRO-PROCESSING." "Paragraphs (b) and (c) of the same Section are proposed to be re-numbered as paragraphs (c) and (d), respectively. COMMENTS: Although we sympathize with the plight of the agricultural processors as represented by Congressman Leonardo O. Montemayor, the proposal to subject agro-processing services to Value-Added Tax (VAT) and consequently entitling them to tax credits would actually create a NEGATIVE COLLECTION on the part of the Bureau. The said products which will undergo "agro-processing" services as proposed are those nonfood agricultural, marine and aquatic food products, which are EXEMPT from VAT under Section 103 (a) and (b) of the National Internal Revenue Code, as amended. Thus, while the said products are EXEMPT from VAT, the "agro-processors" will be ENTITLED to INPUT TAXES because their SERVICES are SUBJECT to VAT. Hence, the effect is that they will not incur any OUTPUT TAXES. In view of the foregoing, we hereby interpose our objection on the passage of this Bill. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue