BIR Ruling No. 006-11

January 19, 2011 BIR RULING NO. 006-11 Section 109 (F) of the Tax Code, as amended; Section 4.109-1 (B) (1) (f) of RR No. 16-05; VAT Ruling No. 061-97; BIR Ruling No. 127-95 Monterey Foods Corporation 17/F, JMT Building ADB Avenue, Pasig City Attention : Evangeline H. Zarate AVP & Finance Manager Gentlemen : This refers to your letter dated February 4, 2010 requesting for the confirmation of your opinion that service fees charged by agricultural contract growers for toll processing services are exempt from VAT under Section 109 of the Tax Code, as amended. It is represented that Monterey Foods Corporation (MFC), a corporation duly organized and existing in the Philippines, is engaged, among others, in the production of hogs for which MFC maintains breeder farms. The produce of these farms are delivered to contract partners for growing into marketable hogs which are slaughtered and dressed in company-owned slaughtering plant and through local independent contractors. These contractors are agricultural contract growers which also possess the technology, expertise, and facilities for toll processing services. The toll processing services being provided by contractors follow the standard procedures being set by MFC as well as government mandated procedures, which include: 1) Stunning this is the process of which to render the animal unconscious using the Midas Stunner or equivalent stunning equipment 2) Sticking and bleeding use of knife, allowing the blood to drip manually or by using the blood suction equipment 3) Scalding softening of the animal skin and removal of hairs 4) Evisceration manual removal of entrails aIcETS 5) Splitting partially breaking up the carcass into two by use of hog saw splitter 6) Inspection and labelling quality check and hog classification determination 7) Pre-formatting further trimming 8) Weighing measurement and recording 9) Final washing stage of the process where the carcasses are thoroughly washed 10) Chilling staging process prior to dispatch as whole carcass or for fabrication 11) Packing packing for sale It is further represented that for the toll processing services rendered, MFC pays the contractor for good quality carcass output by way of tolling fees per head or volume basis. Based on the foregoing representations, you now request for the confirmation of your opinion that since the toll processing services are rendered by agricultural contract growers, their services are exempt from VAT pursuant to Section 109 of the Tax Code of 1997, as amended, as implemented by Revenue Regulations (RR) No. 16-2005. In reply, please be informed that pursuant to Section 4.109-1 (B) (1) (f) of Revenue Regulations (RR) No. 16-2005, implementing Section 109 (F) of the Tax Code of 1997, as amended, "Agricultural contract growers" refers to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state. Its services involve growing of poultry, livestock or other agricultural and marine food products into marketable poultry, livestock or other agricultural and marine food products. There are agricultural contract growers which offer toll processing/toll dressing/toll manufacturing as a packaged service to its contract growing. Toll processing/toll dressing/toll manufacturing involves procedures such as weighing, killing, dressing, scalding, cut-ups and packaging. In this case, the contract growing and toll processing/toll dressing/toll manufacturing services by agricultural contract growers are exempt from VAT. ATEHDc This Office had the occasion to rule on the matter when it held in VAT Ruling No. 061-97 dated October 10, 1997, reiterating BIR Ruling No. 127-95 dated August 25, 1995 that: "agricultural contract growers, referring to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state, are exempt from VAT. In this case, contract growing described as receiving day-old chicken/broilers, sorting, fumigating, sexing of day-old broilers and growing into marketable chicken, and toll dressing described as a package of services including receiving of live broilers from contract growers, weighing, killing, dressing, delivery, cut-ups and packing come within the purview of services of agricultural contract growers which are exempt from VAT pursuant to Section 103 (k) of the Tax Code, as amended." It is worthy to note that Section 103 (k) stated in the abovementioned ruling has been renumbered to Section 109 (k) pursuant to the Tax Code of 1997 and further renumbered as Section 109 (F) with the enactment of Republic Act No. 9337. Notwithstanding all the amendments, the provision that the "services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar" has always been maintained. However, the toll processing services confirmed as VAT exempt pertain only services to clients from which growing of animals were contracted. As such, preparing and packaging hogs/chicken ready for delivery to MFC after producing or growing them can be said to be within the purview of agricultural contract growing. However, if such an activity is done independently of growing poultry, livestock, or other agricultural and marine food products, the same can be considered as Vatable services not covered by agricultural contract growing. Accordingly, toll processing/toll dressing/toll manufacturing services performed independently from growing poultry, livestock or other agricultural and marine food products is subject to VAT pursuant to Section 108 of the Tax Code of 1997, as amended. Section 108 of the Tax Code of 1997, as amended, provides the following: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. SEcAIC "(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) (now 12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by . . . persons engaged in milling, processing, manufacturing or repacking goods for others; . . . and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. . . ." (emphasis and italics supplied) In view of the foregoing, this Office is of the opinion that the contract growing and toll dressing services by agricultural contract growers rendered only to Monterey Foods Corporation from which contract growing of animals were received are exempt from VAT. However, the toll processing/toll dressing/toll manufacturing services performed by other local independent contractors shall be subject to VAT pursuant to Section 108 of the Tax Code of 1997, as amended. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue