Sale of Petroleum Products to International Marine Vessels Exempt from Excise Tax

January 12, 2004 BIR RULING NO. 001-04 135 (a) 000-00 Caltex (Philippines) Inc. 6F 6750 Ayala Avenue Makati City Attention: Mr. Josue C. Baez General Manager Fiscal Service s Gentlemen : This refers to your request for a legal interpretation of Section 135 (a) Code of 1997. It is represented that you are a domestic corporation engaged in the manufacture, distribution, and marketing of petroleum products, including the export of bunker fuel. Currently, you are looking at projects involving international bunkering that could potentially make the Philippines competitive against other countries so that as a consequence, you would be able to particularly secure contracts to sell petroleum products to international vessels. You further represent that you are urgently considering whether to service international marine vessels, ex-terminal, through the sale of petroleum products for their own use and consumption outside of the Philippines, an activity that could provide the Philippines, instead of other countries, with substantial cash revenue flows, including foreign exchange. It is, therefore, in this context that you are seeking confirmation of your opinion that your sale of petroleum products stored in bonded storage tanks to international marine vessels for their use or consumption outside the Philippines falls within the purview of Section 135 (a) of the Tax Code of 1997. This being so, any such sale shall be exempt from excise tax. You posit that the particular provision does not restrict its application to international airlines alone, but includes international marine vessels. We agree. The legal usage of the term "carrier" pertains to one who undertakes to transport persons or property from place to place. (13 Am Jur 2d, page 560; Windham v. Pace , 192 S.C. 271), "Carrier" is a person, group of persons, or corporation employed in, or engaged in the business of carrying goods for others for hire. (Words and Phrases, vol. 6, page 287). In common speech, the term "carriers" means transportation system as distinguished from corporations owning or operating them. ( Ibid ., p. 561) Carriers are classified (1) with respect to their nature or character and consequent rights, duties, and liabilities, as private carriers and common carriers, and (2) with respect to the subjects of carriage, as carriers of property and carriers of persons. The Civil Code of the Philippines, as amended, defines "Common Carriers" as persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air for compensation offering their services to the public (Art. 1732). HITAEC A common carrier engaged in international transportation or contract of carriage between places in different territorial jurisdiction is an international carrier. (Warsaw Convention, vol. 22; Words and Phrases, p. 371). "International" is defined as a person having relations with or obligations to more than one nation. (Webster Third New International Dictionary). The terms "vessel" and "ship" are used in a very broad sense to include all marine structures intended for transportation of goods and passengers. The term "vessel" extends to everything floating in and on the water, built in the form of a vessel, and used for navigation, regardless of form, rig, or motive power. The word "ship" includes a hopper barge used for receiving mud from a dredging machine and carrying it out to deep water, even though it had no means of locomotion of its own, but was towed by other vessels. A vessel is nonetheless within the category when lying at her wharf and temporarily made fast thereto. On the other hand, the fact that a given structure floats on the water does not constitute it a ship or vessel, if it is not used or intended for transportation. Accordingly, vessels transporting passengers or cargoes from the Philippines to other countries or vice versa is an international carrier within the purview of Section 135(a) of the Tax Code of 1997, which provides that " petroleum products sold to international carriers of Philippine or foreign registry on their use or consumption outside the Philippines shall be exempt from the payment of excise tax if (1) the petroleum products so sold are stored in bonded storage tanks, and (2) the disposition thereof shall be in accordance with duly promulgated Rules and Regulations of the Secretary of Finance. " Based on the foregoing, it is our opinion that the sale of petroleum products to international marine vessels shall be exempt from excise tax if and only if the following conditions laid down in the Petroleum Products Regulations (Revenue Regulations 13-77 as amended) are present: 1. The petroleum products are sold or to be sold directly international carrier, ( Section 135 of the Tax Code of 1997 ); 2. The international carrier shall utilize such petroleum products for their use or consumption outside the Philippines ( Section 135(A) of the Tax Code of 1997 ); 3. The country of the international carrier to whom, the petroleum products are sold, exempts from tax petroleum products sold to Philippine carriers (Section 135(B) of the Tax Code of 1997; Section 2 of Revenue Regulations No. 13-77 as amended by Revenue Regulations No. 5-78); 4. The petroleum products to be sold shall be entirely sourced from refinery, or from bonded tanks since the products from these places are not subject to tax unless removed and delivered to taxable entities; after which the products shall be exclusively stored in a bonded storage tank in the terminal or depot where the same shall be sold; 5. The surety bond shall be paid to secure the payment of excise tax due on the products in-transit and stored in the designated tank(s) ( Section 7 of Revenue Regulations No. 13-77 ); 6. Losses due to whatever cause sustained during storage in bonded terminals are subject to excise tax and, likewise all losses due to whatever cause sustained during the transfer of bonded petroleum products from the refinery or bonded terminal shall be subject to excise tax. Payment therefor shall be made in accordance with existing laws or regulations ( Section 10 of Revenue Regulations No. 13-77 ); 7. For purposes of monitoring, the Bureau of Internal Revenue shall be informed by the seller for a single transaction, or for a series of transactions involving a particularly identified international carrier-customer before any withdrawal ( i.e. , delivery to the carrier) of petroleum products, either from the refinery or from the terminal. In cases of emergency, however, notification shall be made within twenty-four hours from such delivery ( Section 31, Chapter VIII of Revenue Regulations No. 13-77 ); 8. For purposes of paragraph 7 above, the following documents shall be submitted and shall provide sufficient basis for notification and/or permit: a. Supply invoice and Nomination Letter/Purchase Order, the absence of the Supply Contract, either for a single or series of transactions; b. Certification by the Bureau of Customs, the agency that issues the bunkering permit for international vessels, that the purchaser is an international carrier or that the carrier does not ply the domestic waters. For this purpose, the carrier undertakes to transport the goods of the person(s) who choose(s) to employ him directly from the Philippines to abroad; 9. All transfers of such petroleum products shall be accounted for and recorded in the Official Register Book (ORB) with a separate subsidiary ledger therefor, and with all stocks on hand accounted for on a First-in-First-out basis ( Section 43(3)(b) of Revenue Regulations No. 13-77 ); 10. As required in the Withdrawal Certificates, the removals shall bear the inscription "EXEMPT SALE TO INTERNATIONAL CARRIERS UNDER SECTION 135"; 11. A duly executed Certificate by the Master or Captain of the international carrier or its local agent, shall immediately be issued to the seller upon completion of delivery, including an acknowledgment of the date of receipt; the volume and description of such petroleum products received and measured at air, and the immediate and final destination of the international carrier. A copy of the Manifest shall be attached to the Certification. This certification is required by the audit group of the Bureau of Internal Revenue as proof of delivery. This serves as your permit as well to engage in international bunkering pursuant to the above-stated conditions. 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. DIAcTE Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue