BIR Ruling [DA-148-99]

March 11, 1999 BIR RULING [DA-148-99] Mr. Rudy N. Lantano Inventor RL Alco-Diesel Enterprises DOST Compound, Bicutan Taguig, Metro Manila S i r : This refers to your letter dated January 25, 1999 stating that you are a Filipino inventor and holder of certain patents under Republic Act No. 7459 (Filipino Inventors Act); that you aim to develop the market for three (3) of your patented products, ALCO DIESEL, LAN-GAS, and SUPERBUNKER FORMULA-L and to manufacture and distribute the same on a commercial scale; that toward this end, Pilipinas Shell Petroleum Corporation (PSPC) and/or any other Oil Company intends to sell crude oil to you, and for a fee, process the crude oil into petroleum products at its/Oil Company's refinery in Tabangao, Batangas; that you will then use some of the products refined from said crude oil, e.g., diesel, naphtha, and gasoline, as raw materials for the manufacture of ALCO DIESEL, LAN-GAS and SUPERBUNKER FORMULA-L; that the other petroleum products which will not be used by you shall be sold back to PSPC and/or to any Oil Company from which you bought the crude oil; that in this regard, you forwarded to PSPC (and/or any Oil Company) a copy of BIR Ruling No. 155-98 dated October 21, 1998 which states, among others, that: 1. You are not liable to pay any tax (except the 3% import tax which could be properly passed on to you as part of the cost of the crude oil) on your purchases of crude oil. 2. The sale of crude oil is not, however, subject to excise tax. 3. The yield from the crude oil which will be used exclusively as raw materials in the manufacture of ALCO DIESEL, LAN-GAS and SUPERBUNKER FORMULA-L shall not be subject to excise tax. LLpr 4. Other yields from said processing which you will not use as raw materials, upon sale of the same, shall be subject to excise tax/es. 5. The sale of services (processing) by PSPC (or any Oil Company) shall be subject to VAT and can be passed on to you, the Inventor. Based on the above-mentioned ruling, you are now requesting to be clarified on the following: 1. Processing Deal between PSPC (and/or any Oil Company) and Mr . R . Lantano . As mentioned above, you will be buying your crude oil requirements from PSPC and/or from any other Oil Company to be processed in the PSPC's and/or Oil Company's refinery/ies under a processing arrangement whereby all products to be refined therefrom will belong to you as the Inventor. Considering that you, as the inventor, do not have storage facilities inside PSPC's (or any other Oil Company's) refinery, your crude oil and finished products inventory will be co-mingled with those of PSPC and/or Oil Company. In connection therewith, you would appreciate the advise of this Office on the type of BIR Permit(s) which PSPC and/or the oil company will secure for this arrangement specifically: 1.1 What supporting documents PSPC and/or any Oil Company should submit to the Bureau in order that the permit may be granted? 1.2 With which BIR Office should PSPC (or the Oil Company concerned) file the request for a permit? Will it be with the Large Taxpayers Division (LTD)? or with the Revenue District Office (RDO) in Makati? 1.3 What procedures/reports (if any) will the BIR require for the monitoring of the balance of crude oil and product volumes to identify at any time which volume is owned by PSPC or by the Oil Company and by you? It is to be noted that there will be instances when you will sell back to PSPC or to the Oil Company those products which will not be used as raw materials for ALCO DIESEL, LAN-GAS and SUPERBUNKER FORMULA-L. 2. No Double Taxation As stated in the said ruling, " as regards the other yields (outside of those which Mr . R . Lantano will use as raw materials) from said processing, the same shall be subject to the corresponding excise tax . . . upon your sale of the same . . ." that the above-quoted portion of the said ruling, in your understanding means that when you, the Inventor, sell those other products back to PSPC or Oil Company concerned, you shall be liable to remit to the BIR the excise taxes corresponding to the volume sold to PSPC (and/or Oil Company). However, since an excise tax is an indirect tax, you believe that you can pass on the excise tax as part of your billing to PSPC or Oil Company concerned. In this regard, you would like to raise the following queries: 2.1 Since the product which will be sold back to PSPC and/or any other Oil Company will remain in the bonded tanks of PSPC and/or Oil Company concerned, would it be possible to pay the excise taxes thereon in the same manner as PSPC's (Oil Company's) own petroleum products i.e. when such products leave the refinery? 2.2 Under existing regulations, will PSPC (or Oil Company concerned) be required to file for a BIR permit (e.g., co-mingling permit) in order to implement the aforementioned arrangement with you, as the Inventor? 2.3 What documents are required from PSPC and/or Oil Company to enable the BIR to grant the permit/s mentioned above? In reply, please be informed as follows: In the Processing Agreement entered into by and between you, as the Inventor, and PSPC (or the concerned Oil Company), whereby the latter utilizing its refinery will process the crude oil which you shall acquire from PSPC ( or Oil Company concerned) you, as the said inventor, shall use some of the yields thereof, i.e., diesel, gasoline, naphtha, and other petroleum products as raw materials in the processing of your patented inventions (ALCO DIESEL, LAN-GAS and SUPERBUNKER FORMULA-L). Any product yields which you shall not use, shall be sold or acquired by PSPC. In implementing the above, compliance with the following procedures is required: 1. PSPC (or the Oil Company) shall secure from the BIR a commingling permit which will cover crude oil purchases and finished products that will be produced by virtue of the said Processing Agreement between PSPC (or Oil Comply involved) and you. A copy of the Processing Agreement as well is BIR Ruling No. 155-98 and this Ruling must be submitted to the BIR as basis for granting the above-mentioned commingling permit. 2. Your purchase of crude oil shall be covered by a Non-VAT invoice as required under the Televised Bookkeeping Regulations. The crude oil volume acquired shall be billed at per liter at air which will be registered in your separate Official Registry Book (ORB) which is separate from PSPC (or concerned Oil Company) books. This means that the volume of crude oil sold to you shall be reported as reduction in the crude oil inventory of PSPC (or Oil Company concerned) at any given period. 3. Product withdrawals shall be posted on a daily basis in the ORB, and shall be covered by Withdrawal Certificates (WC) to be approved by the BIR examiner assigned in the PSPC (or Oil Company concerned) refinery. Said BIR examiner shall ensure that separate sets WC's shall be used for all withdrawals made by you, as the Inventor. 4. Withdrawals of ADO, Mogas and other petroleum products that will be used as raw materials for further processing by you, is the inventor shall be exempt from specific tax. Your sale of other products which you will not use as raw materials, so long as the sale is made to the same oil company, shall not be subject to specific tax since the same shall be subject to specific tax when they are removed from the refinery. 5. PSPC or the Oil Company concerned shall submit a listing of product tanks where the crude oil and your finished products are stored within the refinery premises as a condition in granting the commingling permit. 6. In cases where the BIR conducts a stock inventory taking, it is understood that in determining the physical stocks of PSPC (or Oil Company concerned), the examiners should always deduct from the physical stock your remaining stocks as can be verified from your Official Registry Book, to be attested by the assigned BIR examiners. 7. The processing fee realized by PSPC or Oil Company concerned shall be subject to VAT. This ruling is being issued on the basis of the foregoing facts as represented and for the purpose of clarifying the tax exemption privileges being enjoyed by you, as the Inventor. It should be stressed that this exemption is personal to the inventor only and shall in no case extend to PSPC or any Oil Company involved. Finally, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)