Request of San Miguel Corporation for the suspension of the imposition of the Minimum Corporate Income Tax (MCIT)

April 16, 1999 BIR RULING [DA-243-99] MEMORANDUM: FOR : Edgardo B. Espiritu Secretary of Finance SUBJECT : Request of San Miguel Corporation for the suspension of the imposition of the Minimum Corporate Income Tax (MCIT) DATE : April 14, 1999 This refers to the letter dated March 30, 1999 of the abovenamed taxpayer, in behalf of its subsidiary, San Miguel Foods, Inc. requesting for the suspension of the imposition of the Minimum Corporate Income Tax (MCIT) pursuant to Section 27(E)(3) of the Tax Code of 1997. It is represented that San Miguel Corporation's domestic subsidiary, San Miguel Foods, Inc. (SMFI), incorporated before 1994 is engaged in the production and distribution of chicken, animal and shrimp feeds; that SMFI's operations were greatly affected by the Asian financial crisis beginning sometime July 1997 and the El Nio weather phenomenon; that these two factors resulted in increased cost of doing business; that SMFI incurred a net operating loss of P35,480,359.96 in 1996, P186,777,982.82 in 1997 and a projected net loss of P87,153,913.80 in 1998; that the effects of the Asian financial crisis and El Nio phenomenon on SMFI are as follows: 1. The interest rates increased from around 12.6% just before the crisis to a high of 25.89% in 1998. These translated to SMFI's interest expense amounting to P356 million in 1998 which is 61% and 26% higher than 1996 and 1997, respectively. The escalation of the currency rate from an average of about P26 $1.00 to as high as P44.00 per dollar compelled SMFI to pre-terminate all its existing foreign denominated loans to protect itself from further losses. The pre-termination resulted in actual exchange losses of P206 million; 2. The price of local raw materials particularly corn, on the other hand, also increased significantly. Corn supply starting mid-1998 up to the third quarter was very tight causing an increase of about 23% in the market price. The commercial feed market experience major contraction because of the impact of El Nio and La Nia phenomena. The latter brought in to the country two strong typhoons that caused major inventory losses for the company in September and October of last year. and that Revenue Examiner Mr. Ruperto R. Iledan of Revenue District No. 44, Revenue Region No. 8, Taguig, Metro Manila, has favorably recommended the granting of the request of subject taxpayer for the suspension of the imposition of MCIT. Section 27(E)(3) of the Tax Code of 1997, as implemented by Revenue Regulations No. 9-98, provides that the Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers on account of prolonged labor dispute or because of force majeure , or because of legitimate business reverses. THCSAE The term "legitimate business reverses" shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance. (Sec. 2.27(E)(4)(d), Revenue Regulations No. 9-98) In view of the foregoing, it is respectfully recommended that request of San Miguel Corporation in behalf of its subsidiary San Miguel Foods, Inc., for the suspension of the imposition of the MCIT on account of continuing losses be granted for 1998. (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue APPROVED: EDGARDO B. ESPIRITU Secretary of Finance