BIR Ruling [DA-597-06]

October 6, 2006 BIR RULING [DA-597-06] 109 (c); VAT Ruling No. 024-2003 Upland Marketing Foundation, Inc . Warehouse 12 and 13, Cityland Saniware 20 Evangelista St., Santolan Pasig City Attention: Ms. Grace T. Tacuyog Office Manager Gentlemen : This refers to your letter dated February 18, 2006 requesting in effect, for an exemption from the value-added tax (VAT) on organic rice and muscovado raw sugar. It appears that Upland Marketing Foundation, Inc. (Upland for brevity) is a non-government organization which seeks to establish community-based enterprises and afterwards distribute their products to major supermarkets in Metro Manila and the Central Luzon area. Upland is currently working with the major supermarkets in Metro Manila like Supervalue, Inc. (SM Malls), The Landmark, Puregold, Shopwise, Waltermart, Rustans, Robinsons and other secondary and tertiary supermarkets. At present, Upland is one of the distributors of organic rice and muscovado raw sugar. It carries the banner of providing quality and "healthy" food products to its customers and it is for this reason that its commodities are only organic, where no chemicals and no harmful infusion of processing and preservatives have been made. Aside from helping the community-based small enterprises, Upland likewise aims at bringing its healthy food merchandise to the end-consumers. It takes pride of giving the guarantee that neither commercial fertilizer nor chemicals were used in the organic rice from its cultivation to its harvest and for the muscovado sugar, the consumers are assured that its products is considered raw, for it had not undergone washing nor was it placed into simple processing or sugar refining, as it has deemed to preserve the nutrients of the sugarcane within the sugar itself and no chemicals were added to reach its present form or condition. In reply, please be informed that Section 109 of the 1997 Tax Code, as amended by Sec. 4.109-1 of Revenue Regulations No. 16-2005, provides as follows: "SEC. 4.109-1. VAT-Exempt Transactions . (A) In general . "VAT-exempt transactions" refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. TSHEIc The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. xxx xxx xxx. Meat, fruit, fish, vegetables and other agricultural and marine 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 packaging methods. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural food products in their original state. Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5 degrees and above are presumed to be refined sugar. Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar: (1) product of a refining process, (2) products of a sugar refinery, or (3) product of a production line of a sugar mill accredited by the BIR to be producing and/or capable of producing sugar with polarimeter reading of 99.5 degrees and above, and for which the quedan issued therefore, and verified by the Sugar Regulatory Administration, identifies the same to be a polarimeter reading of 99.5 degrees and above." Moreover, SGS Philippines, Inc.-Laboratory Test Report No. 96728 dated June 9, 2006 should be given great weight and respect in this jurisdiction, whereby it shows that based on the Polarimetric Method that it used, Upland's muscovado raw sugar has a polarimeter reading of only 80.0 degrees and hence, way below the 99.5 degrees level to be considered as a cane sugar which is subject to VAT. In the light of the foregoing, this Office is of the opinion and so holds that organic rice and muscovado raw sugar are within the purview of the definition of food products in their original state which did not undergo further processing nor any kind related to processing, hence, exempt from the 12% VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service