Request of AFC Fertilizer and Chemicals, Inc. for the Suspension of the Imposition of the Minimum Corporate Income Tax (MCIT)

December 14, 2000 BIR RULING [DA-429-00] MEMORANDUM FOR : Jose T. Pardo Secretary of Finance FROM : Dakila B. Fonacier Commissioner of Internal Revenue SUBJECT : Request of AFC Fertilizer and Chemicals, Inc. for the Suspension of the Imposition of the Minimum Corporate Income Tax (MCIT) This refers to the letter of the Secretary of Finance dated December 14, 1998 which was referred to this Office by Revenue Region No. 8, Makati City by way of 1st Indorsement dated January 13, 2000 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, as implemented by Revenue Regulations No. 9-98. It is represented that AFC Fertilizer and Chemicals, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on May 17, 1995 and with the Bureau of Internal Revenue (BIR) on September 15, 1995; that it is engaged in the manufacture and sale of NPK Fertilizer and Industrial Chemicals; that since the start of its operation in 1995 i.e., from April to December 1995, the company has incurred a loss of P59.7 Million mainly due to the very high prevailing cost of raw materials (about 95% of which are imported) and operational difficulties in its pier; that in 1996, the Company again incurred a loss of P29.1 Million due to the high cost of raw materials and its inability to adjust its selling prices; that Philippine Phosphate Fertilizer Corporation (Philphos), its major competitor and the biggest player in the domestic fertilizer business has been keeping fertilizer prices at depressed levels despite the increasing manufacturing cost; that in 1997, the Company has registered a staggering loss of P678.9 Million due to the financial crises and the El Nio phenomenon; that as the bulk of its raw materials are imported and financed through dollar denominated loans, its production cost increased and it has incurred a foreign exchange loss of P553.7 Million in 1997 when the peso devalued against the dollar from P26.80 to P40.00; that at the end of 1997, the Company is practically bankrupt with a negative stockholders' equity of P266.6 Million; that the Company has implemented a restructuring plan that included, among other things, the reduction of manpower compliment and stringent cost control to reduce overhead costs; that the restructuring will also involve the additional equity infusion from its stockholders; that this has yet to materialize due to their concerns regarding the company's viability; that for the year 1998, with the peso stabilizing at around P40.00 per dollar, the Company expects to report a substantially lower net loss or break-even; that the Company could have recovered some of its previous losses if not for the La Nia phenomenon that is besetting the country today; that barring financial upheavals and natural calamities, the Company expects to gradually recover from its previous setbacks, as its ultimate customers are the Filipino farmers; and that the Company has to maintain its margins at a very low level. IEHScT 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. 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 AFC Fertilizer and Chemicals, Inc. for the suspension of the imposition of MCIT on account of continuing losses be granted for 1999. (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue APPROVED: (SGD.) JOSE T. PARDO Secretary of Finance