JP Capanas Law Office

October 4, 2007 BIR RULING [DA-522-07] VAT 036-03 JP Capanas Law Office Cebu Grand Hotel Arcade Capitol Site, Escario Street Cebu City Attention: Atty. Jonathan P. Capanas Gentlemen : This refers to your letter dated September 7, 2007 stating that your client, Agumil Philippines, Inc. (AGPI), is a corporation duly organized and existing under the laws of the Philippines with Securities and Exchange Commission (SEC) Registration No. ASO940011572 dated December 21, 1994; that AGPI's primary purpose is to engage in, operate, conduct and maintain the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale such goods as palm oil and all kinds of vegetable oils, palm oil fruits and vegetable oil crops and other goods of like nature, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products; that AGPI has no oil palm plantation of its own but it has successfully pioneered the outgrowership program with landholders under the support of other parties; that the anchor plantations of the "Company" are those owned, managed and/or maintained by another company; and that it also buys the other agricultural products as raw materials from various sources. cITaCS The Production Process: Palm Oil Milling Process The palm oil mill processes the fresh fruits bunches (FFB) into crude palm oil (CPO) and palm kernel (PK). The mill produces sufficient solid waste (fiber and shell) as fuel for the steam boiler to generate the electric power needed to operate the mill and fill the domestic requirement of its personnel. Fruit Reception Trucks hauling FFB from the farm are weighed on a scale upon arrival at the mill. The FFB are then unloaded to the storage hoppers. From there, the FFB are gravity-fed into a feed conveyor to the sterilizer. Grading of FFB is conducted during unloading. The Quality of the FFB is important in the production of palm oil in terms of Oil Extraction Rate and the quality of oil produced. ISTECA Sterilization The FFB are conveyed into the spherical sterilizers in which they are subjected to steam under pressure to loosen the individual fruitlets from the bunches, inactivate the enzymes that convert oil into free fatty acids (FFA) in coagulation of albuminous matters and facilitate further processing. In this process, the fruit bunch will lose about ten percent (10%) of its weight in the form of moisture in the fruit bunch. The kernel in the nut will also dehydrate and detach itself from the shell of the nut. Threshing After sterilization, the sterilized bunches are then unloaded and conveyed in the Threshing Machine which separates the fruits from the bunch stalk. The bunch stalks are then collected and disposed to the plantation as organic fertilizer and soil conditioner. The loose fruitlets are then transported to the digester. acHTIC Pressing The digester breaks up the oil bearing cells in the pericarp of the fruit, releasing the oil. The pericarp is also separated from the nut in the fruit. The oily fibrous mash is then introduced into the screw press which expels the oil under high pressure. The residue, pressed-caked (a non-oily composition of fiber and nuts) is conveyed to the depericarping station. Oil Clarification and Refining The crude oil expelled by the press is pumped to the clarification station where the crude palm oil is subjected to centrifugation to separate oil from the sludge and solids and the oil recovered is further purified and vacuum dried. The oil produced has very low impurities and moisture content and is ready for the markets. This process reduces the production of sludge effluent by about forty percent (40%) from the conventional decanting system thereby reducing the potential pollution level. Depericarping The pressed cake extruded from the presses is broken up in the cake breaker conveyor and introduced into a depericarper where the fiber is airborne and deposited in the fuel conveying system to be used as a fuel in the steam boilers. The nuts are deposited at the depericarper and transported to the nut hopper. DScTaC Kernel Recovery The nuts are cracked in a ripple mill or centrifugal nut cracker with the resultant kernel/shell mixture being separated in a pneumatic separation process, then to the secondary recovery of palm kernel from the shell via a hydrocyclone. The kernels are then dried in a silo prior to packing. The shell augments the fiber in providing fuel for the steam boilers. Oil Storage The processed oil is stored in the storage tanks. The oil is unloaded from the tanks by pumping into the oil tank trucks. Accounting Procedures: The financial statements of AGPI have been prepared under the historical cost basis and in conformity with the generally accepted accounting principles in the Philippines. Revenue Revenue is recognized on the books based on actual quantity delivered to the customers at the agreed price per MT of Crude Palm Oil (CPO) or Palm Kernel (PK) duly supported with the customer's Purchase Order and the Company's Sales Invoice. The Company issues the Official Receipt once collection of sales is made. aSAHCE Cost of Sales The cost of sales is computed as follows: Beginning Inventory: Crude Palm Oil (CPO) Phpxxx Palm Kernel (PK) xxx Phpxxxx Add: Cost of goods manufactured Crude Palm Oil (CPO) Phpxxx Palm Kernel (PK) xxx xxxx Total cost of goods available for sale Less: Ending Inventory Crude Palm Oil (CPO) Phpxxx Palm Kernel (PK) xxx xxxx Cost of sales Phpxxxx Cost of Goods Manufactured A process cost accounting method is used to determine the Cost of Goods Manufactured. The composition and its corresponding percentage are as follows: IaESCH Raw materials Fresh Fruit Bunches (FFB) 91.30% Processing costs: Salaries and wages 0.70% Plant Operating Costs 1.70% Hauling/Loading/Unloading FFB 3.30% Utilities and Others 3.00% Total 100.00% Raw Materials Fresh Fruit Bunches A. Sources: The raw materials or primary agricultural products are the fresh fruit bunches supplied by the anchor plantations owned by another company, the farmers and cooperatives who availed the outgrowership program of AGPI and independent palm oil farmers. B. Supply: The farmers and cooperatives who availed the outgrowership program who are the substantial suppliers of raw materials fresh fruit bunches have existing contracts with AGPI wherein the latter guarantees to accept all the fresh fruits bunches produced by the farmers and cooperatives. C. Pricing: The buying price per ton of fresh fruit bunches is benchmarked against the prevailing market price of Crude Palm Oil (CPO) and Palm Kernel (PK) at the time the fresh fruit bunches are delivered. Based on the foregoing representations, you now request confirmation of your opinion that AGPI is entitled to the 4% presumptive input tax pursuant to Section 4.111-1 (b) of Revenue Regulations No. 16-2005, implementing Republic Act (R.A.) No. 9337, as a manufacturer of palm cooking oil. AHDcCT In reply thereto, please be informed that Section 4.111-1 (b) of Revenue Regulations No. 16-2005, as amended, provides that "(b) Presumptive Input Tax Credits Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this paragraph, the term 'processing' shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition." It is undisputed that the purchases of fresh fruit bunches by AGPI from the farmers are not subject to VAT under Section 4.109-1 (B) (1) (a) of Revenue Regulations No. 16-2005. Since these primary agricultural food products are purchased by AGPI, a VAT-registered manufacturer, from the farmers that are generally not registered under the VAT system and do not issue VAT sales invoices, it is but just that AGPI is granted presumptive input tax of 4%, as a manufacturer of palm cooking oil, in order to avoid having to raise prices of primary goods due to lack of supporting invoices issued by the seller-farmers. Consequently, while there is no input tax to be recognized by AGPI on its purchase of fresh fruit bunches, the Crude Palm Oil and Palm Kernel are nevertheless subject to the 12% VAT. Considering that the input tax credit is very minimal which represents 91.30% of the total cost of goods manufactured or cost of sales, AGPI is entitled to the 4% presumptive input tax credit as a manufacturer of palm cooking oil. 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. TaCIDS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service