Esguerra & Blanco Law Offices

December 20, 2007 BIR RULING [DA-675-07] 109; 33; RR 16-2005; RR 3-98 #094-97; VAT Ruling Nos. 064-88; 007-2001; DA-073-2004 Esguerra & Blanco Law Offices 4th Floor, S&L Building, Dela Rosa cor. Esteban Sts. Legaspi Village, Makati City Attention: Atty. Magilyn T. Loja For the Firm Gentlemen : This refers to your letter dated December 11, 2007 requesting on behalf of your client, GenOsi, Inc. , for confirmation of your opinion on the following: 1. Its sale of raw frozen pure beef patties, which are considered agricultural products in their original state, is exempt from value-added tax (VAT). 2. Its sale of raw frozen formulated beef patties is subject to VAT. 3. The applicable final withholding tax rate on its dividend payments to a foreign corporation registered in the United States of America is 20%. 4. Its expenses incurred for the relocation costs and airfare expenses of its foreign consultants are not subject to fringe benefits tax. GenOsi, Inc. is a domestic corporation engaged in the business of manufacturing and distributing food products for quick service restaurants, food service distributors, supermarkets, grocery stores and other food retailers. It also supplies raw frozen pure beef patties to various food chains and restaurants. For the raw frozen pure beef patties, GenOsi, Inc. imports frozen blocks of raw boneless beef and forms it into patties through the process off grinding, combining and blending the fat and lean meat, freezing, and packing the patties into shipping cartons. No preservatives, additives and extenders are added to the raw frozen pure beef patties. However, GenOsi, Inc. also engages in the sale of raw frozen formulated beef patties. DHTECc In the course of GenOsi, Inc.'s business, there are cash dividends which are being remitted to Leges Corporation, a company organized and existing under the laws of the State of Illinois, United States of America, and that it withholds a 20% final withholding tax on said dividends based on Article 11 of the US-RP Treaty. Due to the nature of the business of GenOsi, Inc., it sometimes engages the services of foreign consultants. These foreign consultants are not and do not become employees of GenOsi, Inc. Following industry practice, GenOsi, Inc. shoulders the foreign consultants' relocation costs from their home country to the Philippines, which include airfare costs (incoming and outgoing) and shipping costs (incoming and outgoing) of certain personal effects of the foreign consultants. Likewise, GenOsi, Inc. shoulders the airfare expenses every time the foreign consultants go on vacation leave in their home country. We reply, as follows: 1. Section 109 (c) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, and being implemented by Revenue Regulations (RR) No. 16-2005, provides: "Sec. 109. Exempt Transactions. The following shall be exempt from the value-added tax: xxx xxx xxx 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 for human consumption ; and breeding stock and genetic materials therefor; Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have undergone the simple process of preparation or preservation for the market , such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary salt shall be considered in their original state;" (Emphasis supplied) In addition, Section 4.109-1 (B) (1) (a) of RR No. 16-2005 provides that the 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 foods for human consumption 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-pak and other similar packaging methods. Thus, considering that the 100% beef has only been grounded, the fat and the lean meat combined, frozen, and the patties are packed into shipping cartons without further processing nor any preservatives added, and therefore undergone the simple process of preparation or preservation for the market, the same remains food product in its original state; hence, the sale of raw frozen pure beef patties (without any additives) is exempt from VAT pursuant to said Section 109 of the Tax Code of 1997, as amended. ( BIR Ruling No. 094-97 dated August 26, 1997 ) ACTEHI 2. With regard to the sale of raw frozen formulated beef patties, we confirm that based on the above provisions of the Tax Code and regulations, GenOsi, Inc.'s sale of raw frozen formulated beef patties, wherein other ingredients have been added or combined with the beef following a certain proportion specified in a product formula/recipe is subject to VAT, not being in its original state. 3. With respect to the cash dividends which GenOsi, Inc. remits to Leges Corporation, a company organized and existing under the laws of the State of Illinois, United States of America, Article 11 of the US-RP Treaty, provides to wit: "DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed: a) 25 percent of the gross amount of the dividend; or b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation." Accordingly, GenOsi, Inc. should remit to Leges Corporation cash dividends net of the final withholding tax of 20% provided that recipient corporation owns at least 10% of the outstanding shares of the voting stock of the paying corporation during the part of the latter's taxable year which precedes the date of payment of the dividend during the whole of its prior taxable year. 4. We confirm that the relocation costs and airfare expenses during vacation leaves which GenOsi, Inc. incurs relating to foreign consultants which are not employees of the company do not fall under the definition of "fringe benefits" under Section 33 (B) of the Tax Code of 1997, as amended. Thus, expenses incurred for the relocation costs and airfare expenses of its foreign consultants are not subject to fringe benefits tax. This ruling is 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. SIcEHC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service