Prudence Development & Management Corporation

November 7, 2008 BIR RULING [DA-(EXT-T-001) 402-08] 144 Prudence Development & Management Corporation Unit 4D Philexcel Industrial Park, Manuel Roxas Highway 961st Area, Clark Special Economic Zone Angeles City, Pampanga Attention: Mr. Dominador P. Bautista President Gentlemen : This refers to your letter dated September 11, 2008 requesting clarification/confirmation of your opinion relative to your non-inclusion in the payment of excise tax on the following: a. cut rag tobacco which your company bring-in to the Clark Special Economic Zone as raw material in your production of cigarettes; b. cigarettes you produce and manufacture and subsequently 100% exported to other countries. It is represented that Prudence Development & Management Corporation (Prudence) is a locator in Clark Special Economic Zone with License to Operate No. PTO2007-641; that Prudence is engaged as toll packer in the manufacture of cigarettes exclusively for export; that you bring in your raw materials which includes cut rag tobacco into the economic zone and export 100% of the cigarettes you produce to other countries; that you do not produce any brand that is sold or distributed into local market; that you seek this clarification to avoid confusion in the applicability of the local excise tax on cigarettes to the cigarette products your company produces for export, which you encounter with the Bureau of Customs whenever you process your export documents with their Office. In reply, please be informed that Section 144 of the Tax Code of 1997 provides viz.: "SEC. 144. Tobacco Products. There shall be collected a tax of One peso (P1.00) on each kilogram of the following products of tobacco: HSEIAT xxx xxx xxx "(c) Fine-cut shorts and refuse, scarps clippings, cutting, stems and sweepings of tobacco except as otherwise provided hereunder. Stemmed leaf tobacco, tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened, fine-cut shorts and refuse, scraps, clippings, cuttings, stems, midribs; and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco shall be transferred, disposed of, or otherwise sold, without any prepayment of the excise tax herein provided for, if the same are to be exported or to be used in the manufacture of cigars, cigarettes, or other tobacco products on which the excise tax will eventually be paid on the finished product, under such conditions as may be prescribed in the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. xxx xxx xxx." Corollarily, Section 11 of Revenue Regulations No. 03-206 provides viz.: "Section 11. Tax Exempt Removal of Partially Manufactured Leaf Tobacco and Leaf Tobacco Wastes. Stemmed leaf tobacco, leaf tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened, fine cut shorts and refuse, scraps, clippings, cuttings, stems, midribs, and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco, shall be transferred, disposed of, or otherwise sold, without any prepayment of the excise tax: Provided, That the same are to be directly exported by the owner thereof or to be used by the transferee or buyer as raw materials in the manufacture of cigars, cigarettes or other excisable tobacco products on which the excise tax will eventually be paid on the finished product. For this purpose, the importation of the said partially manufactured leaf tobacco and leaf tobacco wastes to be used in the manufacture of excisable tobacco products shall, likewise, be exempt from the imposition of excise tax : Provided, however, That in case the partially manufactured leaf tobacco or leaf tobacco has been sold, transferred or disposed of without the prepayment of excise tax and subsequently used by the transferee or buyer in the manufacture of excisable tobacco products which was eventually exported, the partially manufactured leaf tobacco products shall be subject to excise tax to be paid by the manufacturer on or before removal from the place of production." (emphasis supplied) It is clear from the aforequoted provisions that tobacco prepared or partially prepared may be exempt from payment of excise tax provided that the same are (1) to be exported or (2) to be used in the manufacture of cigars, cigarettes, or other tobacco products on which the excise tax will eventually be paid on the finished product. Inasmuch as the National Tobacco Administration attested/confirmed that the cut rags or processed tobacco importations are raw materials only and are used in the manufacture/production of cigarettes for export, the local excise tax on cigarettes to the cigarette products your company produces for export will not apply. Hence no excise tax shall be imposed on the said importation. 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. CScaDH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service