BIR Ruling [DA-373-06]

June 15, 2006 BIR RULING [DA-373-06] DA 320-2004; VAT Ruling No. 30-2003; RA 9337; RR 16-05 GMA Network Incorporated EDSA cor. Timog Avenue Quezon City Attention: Agatha Guidaben Research Assistant Gentlemen : Thus refers to your letter dated December 19, 2005 requesting this Office to confirm your opinion on the VAT consequences of certain products and services. It is represented that GMA Network Inc . ("GMA" for brevity) is preparing a VAT reference guide for its reporters and researchers; that based on the network's perusal of Republic Act (RA) No. 9337 and Revenue Regulations (RR) No. 16-2005, it has come up with a list of common goods and services; that the list is divided into three (3) major categories: Grocery Items (further divided into VATable and VAT-exempt), Power and Transport Fares and Others, and that GMA is requesting that this Office checks the accuracy of this list (attached here as Annex "A") as regards the classification of the enumerated products and services. In reply, please be informed that Section 106 (A) of the Tax Code of 1997, as amended by RA 9337, provides that: "SEC 106. Value-added Tax on Sale of Goods or Properties (A) Rate and Base of Tax These shall be levied, assessed and collected on every sale barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall effective January 1, 2006, raise the rate of value added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifths percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and a half percent (1 1/2%)" HSDaTC As can be concluded from the foregoing provision, sales, barters or exchanges of goods and properties not otherwise treated as zero-rated transactions or VAT-exempt under Sections 108 (B) and 109 of the Tax Code, respectively, are subject to 10% VAT (now 12% under Revenue Memorandum Circular No. 7-2006). Thus, all the products enumerated under Annex "A" as VATable grocery items: instant noodles, canned goods, refined sugar, flour, bread (pan de sal, tasty loaves, etc.), milk, coffee, cooking oil, vinegar, soy sauce, catsup, medicines and soap (bath soap, laundry soap, detergent), as well as items 1, 2, 4 and 5 listed under the "Others" category: construction materials, clothes, tobacco products and alcoholic beverages, are all subject to 12% VAT. As regards your question concerning sugar, pursuant to BIR VAT Ruling No. 30-2003, white sugar is considered as refined sugar and as such, is also subject to 12% VAT. To address your questions on the enumeration of VAT-exempt products listed under Grocery Items, it is necessary to consider Section 4 109-1 (B) of RR 16-2005 which provides that: "(B) Exempt Transactions Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: (a) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing food's for human consumption; and breeding stock and genetic materials therefor xxx xxx xxx Meat, fruit, fish, vegetables and other marine and agricultural food products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack and other similar packing methods. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural products in their original state." xxx xxx xxx From the foregoing, it is clear that the sale of polished / husked rice, fruits, vegetables and raw cane (brown) sugar in their original form or have undergone simple processes of preparation or preservation for the market are VAT-exempt. The same applies to boneless bangus and dried mangoes which, pursuant to BIR Ruling No. DA 320-2004 and VAT Ruling 038-98 respectively, are considered as VAT-exempt. In addition, sales of lechon manok and lechon baboy are also considered as VAT-exempt under the abovementioned Section as these two food products undergo simple roasting processes and as such, are considered in their original form. However, this Office is of the opinion that the above provision cannot be applied to meat products such as tapa, tocino and longganisa as well as pickled vegetables as their preparation involve preservation processes which are outside of the scope of the term "simple processes". These are physical or chemical processes which would alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for use to which it could not have been put in its original form or condition. aCATSI As regards the second category (Power and Transport Fares) under Annex "A", Section 109 of the Tax Code no longer treats sales of electricity and petroleum products as VAT zero-rated or VAT-exempt, respectively, and as such, these sales are now subject to 12% VAT. However, sales of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels are regarded as VAT zero-rated transactions in accordance with Section 108 (B) (7) of the Tax Code. With respect to item 3 under the "Others" category, leases of residential units with monthly rentals not exceeding ten thousand pesos (P10,000) are regarded as exempt from VAT under Section 109 (q) of the Tax Code. Concerning your queries on transportation, jeepney, bus and taxi owners and operators are not subject to VAT but are liable for percentage tax of three percent (3%) in accordance with Section 117 of the same Tax Code. Domestic common carriers of passengers by air and sea meanwhile, are liable for 12% VAT on their gross receipts from their transport of passengers, goods or cargo from one place in the Philippines to another pursuant to Section 4.108-3 (e) of RR 16-2005. Section 4.108-5 of the same Regulation provides that domestic air carriers engaged in transporting passengers and cargo to a foreign country are subject to zero-rated VAT. However, VAT does not apply to international air carriers doing business in the Philippines as they remain subject to a percentage tax of three percent (3%) under Section 117 of the Tax Code. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service