BIR Ruling [DA-427-04]

August 10, 2004 BIR RULING [DA-427-04] 135 (a); DA 038-98 Elamparo and Elamparo Law Office Unit 4A Greenrich Mansion 6 Lourdes Street corner 28 Pearl Drive Ortigas Center Pasig City Attention: Atty . Julio C. Elamparo Gentlemen : This refers to your letter dated July 12, 2004 requesting for confirmation of your opinion that the sale of petroleum products manufactured, distributed and marketed by Petron Corporation (Petron) through Petrotrade Philippines, Inc. (Petrotrade), an oil broker, in favor of international marine vessels is exempt from the payment of excise tax under Section 135(a) of the Tax Code of 1997. It is represented that Petron is a domestic corporation engaged in the production, manufacture, distribution and marketing of petroleum products, including bunker fuel; that currently, Petron is engaged in selling bunker fuel to international marine vessels for said vessels' own use and consumption outside of the Philippines, an activity that provides the Philippines with substantial cash revenue flows, including foreign exchange; that the current industry practice is for a petroleum producer/manufacturer such as Petron to initially transfer/convey petroleum products to an oil broker, such as Petrotrade, which in turn delivers said petroleum products to a particular international marine vessel; and that Petrotrade is not engaged in the production and manufacture of petroleum products, rather, it is merely involved in the brokering of these petroleum products to the concerned international carrier. In reply thereto, please be informed that Section 135(a) of the Tax Code of 1997 provides that "Sec. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies . Petroleum products sold to the following are exempt from excise tax: "(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner; "(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and "(c) Entities which are by law exempt from direct and indirect taxes." A careful scrutiny of the above-cited provisions disclosed that to be entitled to exemption from the excise tax imposed therein (1) the petroleum products are sold to an international carrier for its use and consumption outside the Philippines; and (2) that the country of said carrier exempts from tax petroleum products sold to Philippine carrier. There is nothing in the aforesaid provision of the Tax Code that requires that the sale, to be exempt from excise tax, be made directly by the petroleum products manufacturers/producers to the international carrier. Considering that under current industry practice the petroleum producer/manufacturer initially transfers/conveys the petroleum products to an oil broker which in turn delivers said petroleum products to a particular international carrier. Thus, to require the sale of petroleum products to be made directly to international carriers would render at naught the provisions of the Tax Code exempting the said sale from excise tax. cAHIST In BIR Ruling No. DA038-98 dated February 5, 1998, this Office ruled that "...Nowhere is there an explicit mention that only manufacturers or producers of petroleum products who sell their petroleum products to international carriers can avail of the tax privilege granted under the said provisions of law. Even a mere jobber like Mobil, can avail of the privilege granted under the said provision of law as long as it has complied with the aforesaid requirements. Otherwise, we would be giving a different construction to a clear and unambiguous provision of law thereby resulting in the imposition of tax to an otherwise exempt transaction. "xxx xxx xxx" IN VIEW OF THE FOREGOING, this Office holds that the sale of petroleum products manufactured, distributed and marketed by Petron through its oil broker, Petrotrade, in favor of international marine vessels is exempt from excise tax pursuant to Section 135(a) of the Tax Code of 1997, as implemented by Revenue Regulations No. 13-77, as amended by Revenue Regulations No. 5-78. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group