BIR Ruling [DA-181-03]

June 5, 2003 BIR RULING [DA-181-03] 148 (e) 106-95 Philippine Prosperity Chemicals, Inc . Suite 914 Herrera Tower No. 98 Herrera corner Valero Street Salcedo Village Makati City Attention: Mr. Diosdado P. Cobin Chief, Operating Officer Gentlemen : This refers to your letter dated April 15, 2003 requesting for a ruling as to whether or not SBP 80/100 and Pegasol 3040 which are used as solvents and raw materials for products of different applications such as paints/coatings, adhesives, lacquer thinner, agro-chemicals and consumer products are subject to excise tax of P4.80/liter pursuant to Section 148(c) of the Tax Code of 1997. It appears that in a letter dated February 28, 2003 to Atty. Reynaldo S. Nicolas, District Collector of the Bureau of Customs, the BIR, through the Large Taxpayers Service, ruled that subject articles (SBP 80/100 and Pegasol 3040) belong to the chemical family of aliphatic, cycloparaffinic hydrocarbons which are mainly composed of naphtha, a petroleum-derived compound, are subject to excise tax of P4.80/liter under Section 148(e) of the Tax Code of 1997. Moreover, in a laboratory report dated May 12, 2003 by the Chief of the BIR Laboratory regarding the product composition of SBP 80/100 and Pegasol 3040, it was stated that naphthas recovered by the distillation of crude petroleum are used as solvents, dry cleaning agents, and charge stocks to reforming units to make high-octane gasoline. Thermally or catalytically cracked, reformed, or straight-run naphthas are blending components of gasoline while straight-run naphthas are used as solvents. Section 148(e) Tax Code of 1997 expressly states naphtha as one of the petroleum products subject to excise tax. It does not distinguish other types and grades of naphtha except that which is used as a raw material in the production of petrochemical products or as a replacement fuel for natural-gas-fired-combined-cycle power plant in lieu of locally extracted natural gas. Petrochemicals are basic raw materials to be further chemically converted into petrochemical products such as fertilizers ( e.g. , ammonia), plastics, rubber (in all its varieties), fibers ( e.g. , nylon, polyesters, and acrylics), paints, adhesives, etc. Petrochemical products are products derived or synthesized from petroleum. In reply thereto, please be informed that Section 148(e) of the Tax Code of 1997 provides "Sec. 148. Manufactured Oils and Other Fuels . There shall be collected on refined and manufactured mineral oils and motor fuels, the following excise taxes which shall attach to the goods hereunder enumerated as soon as they are in existence as such: xxx xxx xxx "(e) Naphtha, regular gasoline and other similar products of distillation, per liter of volume capacity, Four pesos and eighty centavos (P4.80): Provided, however , that naphtha, when used as a raw material in the production of petrochemical products or as replacement fuel for natural-gas-fired-combined-cycle power plant, in lieu of locally-extracted natural gas during the non-availability thereof, subject to the rules and regulations to be promulgated by the Secretary of Energy, in consultation with the Secretary of Finance, per liter of volume capacity, Zero (P0.00); Provided, further , That the by-product including fuel oil, diesel fuel, kerosene, pyrolysis gasoline, liquefied petroleum gases and similar oils having more or less the same generating power, which are produced in the processing; of naphtha into petrochemical products shall be subject to the applicable excise tax specified in this Section, except when such by-products are transferred to any of the local oil refineries through sale, barter or exchange, for the purpose of further processing or blending into finished products which are subject to excise tax under the aforesaid Section." EIDTAa It is clear that the aforesaid section refers only to products of distillation similar or falling under the same class as naphtha and regular gasoline. In this case, SBP 80/100 and Pegasol 3040 are respectively used as solvents and raw materials for general purpose adhesive construction, automotive, shoes and for architectural coatings like household paints (solvent based). Hence, these products are not similar to naphtha or regular gasoline because the latter are generally used as fuel while SBP 80/100 and Pegasol 3040 are used as solvents. The principal property of a solvent is its ability to disperse or dissolve substances to its component substances at the molecular level. Accordingly, its importation is not subject to excise tax under Section 148(e) of the Tax Code of 1997 but only to the 10% value-added tax under Section 107 of the said Code. Similarly situated is BIR Ruling No. 106-95 dated July 14, 1995, where this Office ruled that "In reply, please be informed that PKWF solvent (or solvent in its generic sense) is not included in the list of petroleum products which are subject to excise tax under Section 145 of the Tax Code, as amended. In view thereof, if is our opinion that its importation is subject only to 10% VAT pursuant to Section 101(a) of the Tax Code, as amended, but exempt from excise tax under Section 145 of the same Code." IN VIEW OF THE FOREGOING, this Office holds that since SBP 80/100 and Pegasol 3040 are not included in the list of petroleum products under Section 148 of the Tax Code of 1997, its importation is not subject to the P4.80/liter excise tax but only to the 10% VAT under Section 107 of the same Code. However, monitoring of the actual use/application of the subject articles is recommended. For this purpose, you are hereby advised to submit to the Large Taxpayers Field Operations Division a list of the buyers of the said articles, as well as such documentary and other related requirements as the Operations Group would require, so as to facilitate the monitoring of their actual use and application. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group