BIR Ruling [DA-251-06]

April 12, 2006 BIR RULING [DA-251-06] Section 106 (A) (2) (a) (3); VAT Ruling No. 017-98 & 031-01 Isla Lipana & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: George J . Lavadia Principal, Tax Services Gentlemen : This refers to your letter dated February 3, 2006 requesting on behalf of your client, FMC Marine Colloids (Philippines) Inc . ("FMC Marine" or "the Company") for confirmation of your opinion that the Company's purchases of raw materials and packaging materials are subject to 0% value-added tax (VAT) pursuant to Section 106 of the Tax Code. As represented, FMC Marine is a wholly owned subsidiary of FMC Corporation, a company organized and incorporated in the United States of America. It was incorporated on January 11, 1966 to primarily acquire, manufacture, process, store, sell at wholesale, export, distribute, and generally handle in every manner, either as principal or agent, (i) seaweeds of every type or species, their products and by-products; and (ii) agricultural fertilizers and pesticides. FMC Marine is not registered with the Board of Investments (BOI), and is not a PEZA-registered company either. As such, it is subject to the regular income tax rate of thirty-five percent (35%). About ninety percent (90%) of its sales are exported, which are subjected to zero-rated VAT. On the other hand, most of its purchases of goods and materials (e.g. raw materials, supplies, chemicals, etc.) which form part of the finished products, are being subjected to VAT by its suppliers. TaISEH In reply, please be informed that Section 4.100-2 of Revenue Regulations No. 7-95 (now Section 106(A)(2)(a)(3) of the Tax Code of 1997) as clarified under Revenue Memorandum Circular (RMC) No. 17-96 provides as follows: "SEC. 4.100-2. Zero-rated sales . A zero-rated sales by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. The following sales by VAT-registered persons shall be subject to 0%: (a) Export sales. "Export Sales" shall mean: xxx xxx xxx The sale of raw materials or packaging material to an export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; Any enterprise whose export sale exceed 70% of the total annual production of the preceding taxable year shall be considered an export-oriented enterprise upon accreditation as such under the provisions of the Export Development Act (R.A. 7844) and its implementing rules and regulations." AHcCDI In undated VAT Ruling No. 017-98, this Office had occasion to rule that ". . . the sale by a VAT-registered person of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production is considered an export sale and subject to value-added tax at zero percent (0%) rate pursuant to Section 106(A)(2)(a)(3) of the National Internal Revenue Code of 1997. Such being the case, the sale by GMC of soybean oil, a component raw material for the production of canned tuna for export, to CCC, is considered an export sale, and therefore, subject to VAT at zero percent (0%) rate provided that CCC exports more than seventy percent (70%) of its annual production." In view of the foregoing, if FMC is accredited as an export-oriented enterprise under the provisions of the Export Development Act and its implementing rules and regulations, then its purchases of raw materials and packaging materials are subject to 0% VAT pursuant to Section 106(A)(2)(a)(3) of the Tax Code of 1997. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service