Tax Consequences of Producing Palm Oil and Palm Kernel

January 25, 1985 BIR RULING NO. 011-85 198 (b) 033-80 011-85 Gentlemen : This refers to your letter dated November 26, 1984, requesting reaffirmation of BIR Ruling No. 033-80 dated March 5, 1980 to the effect that your agricultural products, namely, palm oil and palm kernel are subject to the 1% sales tax under Section 198(b) of the Tax Code, as amended. cdta Investigation conducted in this case disclose that Kenram (Philippines), Inc. (Kenram for short), is the owner and concessionaire of agricultural lands devoted to growing palm oil trees; that its 1,800-hectare plantation is now in the fruiting stage; that smaller farms in the area which are also planted with palm oil trees are likewise in the fruiting stage; that harvesting of fresh fruit bunches are done manually; and that the oil extraction activity of Kenram to derive the marketable form of Crude Palm Oil (CPO) and palm kernels are done in the small plant inside the plantation and the procedure adopted are, more or less, in the following order: A. PALM OIL 1. As the fresh fruit bunches (FFB) are brought in from the field in trucks, they are weighed and the rendimant evaluated. They are then loaded into buggies and brought to two boilers. 2. These fresh fruit bunches in the buggies are steam heated in order to arrest the natural fermentation and enzymic action that could deteriorate the quality of the oil by the increase of free fatty acid contents. This procedure likewise softens the pericarp (outside covering of the fruits) and liquifies the solidified oil particles dispersed within the pericarp. 3. From the boilers, the fresh fruit bunches are carried by conveyor belts to a thresher to remove the fresh fruits from the stems. 4. The separated fruits are then placed in steam-jacketed vessels to loosen the pericarp from the nuts. 5. The fruits are then fed to a screw press and the pressing action of this device separates the crude palm oil from the pericarp. Solid impurities are removed in order to purify the Crude Palm Oil. 6. The now pure Crude Palm Oil is pumped into storage tanks to await shipment to customers. 7. The bunches and stems from which the fruits were removed and the other waste particles are fed into an incinerator and burned and the resulting ash which contain potash are then used as fertilizes for the palm oil trees. B. KERNELS 1. The nuts are dried then broken to derive the kernel (seed). 2. The kernels are cleaned, dried and put in bags for export. And that the process and/or procedures above-mentioned has been the same since its start some 2 decades ago and that in no instance during the extraction procedure has any chemical or any sophisticated manufacturing process been introduced. In reply, please be informed that since there is no change in the process of producing your palm oil and kernel products from your 1,800-hectare plantation of palm oil trees at Isulan, Sultan Kudarat, which come within the purview of agricultural non-food products and considering that the Secretary (now Minister) of Finance in his ruling dated October 22, 1975, also considered such products as agricultural products or products of the soil which have been processed in marketable form by extraction without the aid of chemical or any sophisticated manufacturing process, this Office is still of the opinion, as it hereby holds, that your aforesaid products are subject to the 1% sales tax pursuant to Section 198(b) of the Tax Code, as amended. cdti Should you, however, buy the fresh palm fruits produced by your neighboring farmer-growers of palm oil trees and process said fruits into palm oil and kernels by using the same procedure you apply with your own agricultural products, you are subject to the graduated fixed annual tax under Section 192(2) of the same Code. Moreover, if your palm oil and kernel are exported, you are exempt from the 1% sales tax but subject to the fixed annual tax of P100.00 pursuant to Sections 202(d) and 192(1) both of the Tax code, as amended. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner