Commingled Gasoline Sold as Leaded Gasoline Subject to Excise Tax

January 4, 2000 BIR RULING NO. 002-00 Department of Energy Energy Center, Merritt Road Fort Bonifacio, Taguig Metro Manila Attention: Ms . Cyril C . Del Callar Acting Secretary Gentlemen : This refers to your letter dated October 9, 1999 which was referred to this Office by the Office of the Secretary of Finance by way of 1st Indorsement dated October 27, 1999, requesting for a ruling as to whether or not the commingling of unleaded gasoline (ULG) with a maximum lead content of 0.013 grams per liter with leaded gasoline, in some storage tanks in Pandacan, and to which the resulting gasoline will be sold as leaded gasoline for as long as the lead content is higher than the allowable 0.013g/l, in connection with R.A. No. 8749, otherwise known as the Clean Air Act, falls within the contemplation of manufactured fuels and therefore subject to excise tax of P5.35 per liter of volume capacity pursuant to Section 148 of the Tax Code of 1997. It is represented that lead has been established to be the most cost effective and efficient octane booster of gasoline; that, however, it is also a neurotoxin and its removal from gasoline has become a global thrust; that the Government and the petroleum industry have voluntarily agreed to a systematic reduction of lead in gasoline and accordingly entered into a "Clean Air Pact" in 1993 signed in the presence of then President Fidel V. Ramos; that the accord aimed to eradicate totally the use of lead and to introduce unleaded gasoline; that on February 14, 1994, ULG was introduced, initially in 30 stations in Metro Manila; that on September 26, 1997, then President Ramos signed Executive Order No. 446 "Mandating the Phase-out of Leaded Gasoline as one of the Means of Solving Air Pollution" starting on January 1, 2000 in Metro Manila and on January 1, 2001 for all other areas in the country; that in June 1999, the Clean Air Act was signed which prohibits the manufacture, importation and sale of leaded gasoline not later than eighteen (18) months after its enactment of January 2001; that the early removal of lead could prevent more serious implications, especially on the health of the populace; that, moreover, at this time of drastic and continuing increases in the prices of crude oil (for which we are 100% dependent for our oil requirements), the acceleration of the phase-out is perceived as among the options to cushion the impact on the domestic oil prices; that an information campaign to highlight the benefits of ULG is being put in place by the oil industry players through the Philippine Institute of Petroleum (PIP) and the New Petroleum Players Association of the Philippines (NPPAP); that the Department of Energy has also requested from the car manufacturers a certification as regards brand models/year of vehicles suitable for ULG; and that EO 446 tasks the Department of Environment and Natural Resources, Department of Energy, Department of Trade and Industry and Department of Finance to mandate the phase-out of leaded gasoline. In reply, please be informed that Section 148 of the Tax Code of 1997 provides in part as follows: "Sec. 148. Manufactured Oils and Other Fuels . There shall be collected on refined and manufactured mineral oils and motor fuels, the following excise taxes which shall attach to the goods hereunder enumerated as soon as they are in existence as such: "xxx xxx xxx "(f) Leaded premium gasoline, per liter of volume capacity, Five pesos and thirty-five centavos (P5.35); unleaded premium gasoline, per liter of volume capacity, Four pesos and thirty-five centavos (P4.35): "xxx xxx xxx" In relation thereto, Section 2 of Revenue Regulations No. 8-96 defines the term "Reprocessing" as follows "(o) Reprocessing synonymous to "manufacturing" as contemplated under Section 187 (x) or the Tax Code of 1977. Manufacturing refers to the physical or chemical process which alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or any such process which alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable share or prepare it for any of the uses of industry, or by any such process which combines or blends any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured product, in their original condition could not have been put, and which in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption." It is evident from the above-quoted provisions that locally manufactured petroleum products, like leaded and unleaded premium gasoline, are respectively subject to excise tax at P5.35 and P4.35 per liter of volume capacity and shall be paid before removal from the place of production from January 1, 1999 and thereafter as prescribed under Section 130(A)(2) of the Tax Code of 1997. Considering that the commingling of tax-paid unleaded gasoline with leaded gasoline in some storage tanks in Pandacan and the resulting gasoline to be sold as leaded gasoline, for as long as the lead content is higher than the allowable 0.013 g/l, in compliance with the mandate under E.O. 446 falls within the contemplation of the term "reprocessing" or "manufacturing" as defined in Section 2 of Revenue Regulations No. 8-96, since the same altered the exterior texture or form or inner substance or quality of the manufactured products into leaded gasoline with lead content more than 0.013 gram per liter. Moreover, inasmuch as the excise tax of P4.35 had already been paid for the unleaded portion, only the difference of P1.00 per liter should now be paid by the oil company so that only the correct tax of P5.35 per liter will be indirectly passed on to the consumers as part of their purchase price. Such being the case, it is the opinion of this Office that the commingling of tax-paid unleaded gasoline with leaded gasoline and the resulting gasoline sold as leaded gasoline is subject to the excise tax of P5.35 per liter of volume capacity pursuant to Section 148 of the Tax Code of 1997, subject to the procedures by this Bureau in order to monitor the deliveries and removals of the stocks in the designated storage tanks. 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue