Far East Seafood, Inc.

August 24, 2009 BIR RULING [DA-(VAT-075) 472-09] BIR Ruling No. 174-98, DA-539-06 & VAT Ruling No. 75-99 Far East Seafood, Inc. Davao Fish Port Complex Toril, Davao City Attention: Mr. Marcos O. Felipe General Manager Gentlemen : This refers to your letter dated June 19, 2008 requesting for confirmation of your opinion that Far East Seafood, Inc. ("FESI" for brevity) may be registered as VAT taxpayer for its export sale of vacuum packed frozen fish choice cuts, while at the same time it may be registered as non-VAT taxpayer for its local sale of fresh fish scraps and non-exportable fresh fish packs. TcIHDa As represented, FESI is a domestic corporation engaged in the export and sale of fresh fish and other marine food products. Its operations consist of purchasing of fresh fish ( i.e., tuna and other marine food products) and packaging the same into vacuum packs for immediate export abroad. Specifically, the simple process involves washing or rinsing the fresh fish with water; chilling; butchering or loining ( i.e., removing the fish head, jaws and tail), initial packing; smoking (to maintain fresh raw color); vacuum packaging; chilling storage (refrigeration); and blast freezing. The resulting export products are vacuum-packed frozen fish choice cuts ( i.e., loins, steaks, saku and cubes). From the said production process, certain parts of the fresh fish which are not exportable ( e.g., the belly portion, fish jaw or "panga", fish tail or "buntot") are sold by FESI to the local market. Also sold to the local market are fresh fish products, which do not pass the export quality standard ( i.e., non exportable fresh fish packs). In reply, please be informed that Section 109 (A) of the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act (R.A.) No. 9337 provides, viz. : ITSacC "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: (A) 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; and breeding stock and genetic materials therefore. 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. Polished and/or husked, rice, corn grits, raw can sugar and molasses, ordinary salt, and copra shall be considered in their original state; xxx xxx xxx" Although the sale of fresh fish and other marine food products in their original state is a VAT exempt transaction, FESI may be registered as VAT taxpayer for its sale of the aforesaid products pursuant to Section 236 (H) of the NIRC. Section 9.236-1 (c) of Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007, implementing Section 236 (H) of the NIRC provides for the optional registration of exempt persons, as follows: "(c) Optional VAT Registration. (1) Any person who is VAT-exempt under Sec. 4.109-1 (B)(1)(V) not required to register for VAT may, in relation to Section 4.109-2, elect to be VAT-registered by registering with the RDO that has jurisdiction over the head office of that person, and pay the annual registration fee of P500.00 for every separate and distinct establishment. (2) Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Section 109(1) of the Tax Code, as amended. [Sec. 109(2)] xxx xxx xxx" However, Section 109-2 of RR No. 16-2005 states that once the election is made, it shall be irrevocable for a period of three (3) years counted from the quarter when the election was made. FESI may, therefore, apply for VAT registration not later than ten (10) days before the beginning of the taxable quarter and shall pay the registration fee unless it has already paid at the beginning of the year (Section 24, RR No. 4-2007). cDHAaT Once registered as VAT person, FESI shall be subject to VAT at zero percent (0%) rate with respect to its export sales pursuant to Section 106 (A) (2) (a) of the NIRC, as amended by E.O. No. 273. It shall be liable to VAT at zero percent (0%) and be entitled to claim a tax refund/input tax credit of the VAT passed on by its VAT-registered suppliers on purchases of goods and services directly attributable to its zero-rated transactions beginning on the first day of the month following registration in accordance with Section 112 of the NIRC. At the same time, FESI may remain exempt from VAT on its local sales under Section 109 (A) of the NIRC. Should FESI opt to remain exempt from VAT on its local sales, input taxes attributable to its local sales, however, cannot be claimed as input tax credits as provided under Section 110 of the same Code nor can these be claimed for refund or tax credits under Section 112 as these shall remain as part of the cost of purchases, deductible as such (included as part of cost of sales) and, therefore, cannot be an expense for income tax purposes, provided that input taxes which cannot be directly and entirely attributable to the export sales or exempt sales of FESI shall be allocated proportionately on the basis of volume of sales. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service