BIR Ruling [DA-161-05]

April 14, 2005 BIR RULING [DA-161-05] 27 (A) (E); 106 (A) (2) (b); 110; 112 (A) VAT 119-92 SGV & Co. 6760 Ayala Avenue Makati City Attention: Fabian K. Delos Santos Gentlemen : This refers to your letter dated November 26, 2004 stating that your client, SUMIFRU PHILIPPINES CORPORATION ("SFPC"),a company duly registered with the Securities and Exchange Commission ("SEC"),with business address at 3rd Floor Pacific Star Bldg.,Makati Avenue, Makati City, is engaged in business, among others, of buying wooden pallets from resident manufacturers and selling the same to non-resident foreign corporations such as SUMIFRU CORPORATION ("SFC") and other foreign buyers of bananas for delivery to resident banana growers; that these wooden pallets are used to stack the boxed bananas purchased by SFC and other foreign buyers for easy handling and protection from physical damage during their shipment abroad; that the wooden pallets are delivered by SFPC to various banana growers of SFC and other foreign buyers which ship the wooden pallets together with the bananas to the latter. Furthermore, you also represented in your letter that SFPC also imports plastic resins to be made into plastic sheets that are used as packaging materials to wrap bananas inside boxes for shipment abroad; that the production of plastic sheet materials is contracted out by SFPC to various toll manufacturers that process plastic resins of SFPC and produce the plastic sheets for SFPC; SFPC then sells the plastic sheets to SFC and other non-resident foreign buyers of bananas; that the plastic sheets are delivered by SFPC to various resident banana growers of SFC and other foreign buyers which ship the plastic sheets abroad same as packaging materials of the bananas exported to foreign buyers. For the above sale of wooden pallets and plastic sheets, SFPC will be paid in acceptable foreign currency, which will be remitted to the Philippines by the non-resident foreign buyer in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas ("BSP"). Based on the foregoing representations, you now request for an opinion on the tax implications of the sale of wooden pallets and plastic sheets by SFPC to SFC and other non-resident foreign buyers. In reply thereto, please be informed as follows: 1. Section 27(A) of the Tax Code of 1997 provides that an income tax of 32% is imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation organized and existing under the laws of the Philippines. Section 27(E) of the Tax Code of 1997, as amended by Revenue Regulations No. 9-98, as amplified in Revenue Memorandum Circular No. 4-2003, provides that a minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year is hereby imposed on a corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of the said Section for the taxable year. In view of the foregoing provisions, the income from the sale of wooden pallets and plastic sheets will be subject to either the 32% regular corporate income tax or to the 2% minimum corporate income tax, in case the latter is applicable under Section 27(E) of the Tax Code of 1997. 2. Section 106(A)(2)(b) of the Tax Code of 1997 provides that foreign currency denominated sales by VAT-registered persons shall be subject to zero percent (0%) rate. The phrase "foreign currency denominated sales" means sale to a non-resident of goods for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. In view of the fact that the sale of the wooden pallets and plastic sheets by SFPC to SFC and other non-resident foreign buyers for delivery to resident banana growers to be used in packing in the Philippines of the said buyer's goods paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, the sale of wooden pallets and plastic sheets by SFPC to SFC and other non resident foreign buyers, is considered subject to zero rating for VAT purposes as provided for in Section 106 A (2)(b) of the Tax Code of 1997. ICTacD In VAT Ruling No. 119-92 dated December 22, 1992, this Office ruled that the sale of pallets, if paid for in foreign currency inwardly remitted to the Philippines, qualifies as a foreign currency denominated sale, to wit: "In reply thereto, please be informed that your sale of pallets to Chiquita Hongkong qualifies as a foreign currency denominated sale under Section 100 of the Tax Code (now Section 106); and that the service you render to repair damaged pallets likewise qualifies as a sale of service to a foreign principal under Section 102(a)(2) of the Tax Code; thus, since both transactions are paid for with foreign currency inwardly remitted in accordance with Central Bank of the Philippines rule and regulations, we confirm your opinion that both transactions are zero-rated." Additionally, Section 110 and 112(A) of the Tax Code of 1997 provides that any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, to the extent that such input tax has not been applied against the output tax. Accordingly, SFPC is entitled to claim tax credit or refund the corresponding input tax that has not been applied against its output tax. TESDcA 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C BUAG Deputy Commissioner Legal & Inspection Group