Proper Classification for Business Tax Purposes of Meralco Corporate Farm Management, Inc.

February 21, 1985 BIR RULING NO. 024-85 192-3-nn 000-00 024-85 Gentlemen : This refers to your letter dated August 20, 1984 requesting a ruling as to the proper classification for business tax purposes of your client, Meralco Corporate Farm Management, Inc. (Corfarm) regarding its activities which are undertaken to implement the provisions of General Order No. 47. cdti It is represented that Corfarm, together with other companies, entered into linkage contracts with other corporations and Samahang Nayon (Farmers' Groups) for the production of palay to meet the cereal requirements of their respective employees under the provisions of General Order No. 47; that Corfarm does not own land for the production of rice nor does it desire to lease/buy private or public agricultural land but because of its technical know-how in the production of palay, it gives assistance to other companies covered by G.O. No. 47 like, Development Bank of the Philippines, La Suerte Cigar and Cigarettes Factory, etc. by supplying rice to their employees; that as stipulated in the Agreements between Corfarm and the companies, the latter will provide thru corfarm certain advances to the Farmers' Groups consisting of pre-operating cost, production cost and management fee; that the pre-operating cost represents proportionate reimbursements for Corfarm's investment in the farmer's farmlands such as irrigation, permanent improvements, repair and maintenance; that the production cost represents expenses for material inputs such as seeds, fertilizer, etc.; that the management fees actually refer to contributions of the companies to cover expenses incurred by Corfarm in maintaining field offices near the production sites as well as salaries of technicians and other administrative staff stationed at such offices; that said management fees or contributions are reimbursed by Corfarm to the companies by way of liquidation on a yearly basis; that with the production inputs given by Corfarm to the various Samahang Nayon, the farmers will prepare the farmlands for planting, cultivation and harvesting of palay; that after harvesting the palay, the farmers sell their palay to Corfarm minus the advances given to them and that the palay are then milled by Corfarm in its various rice mills and stored and delivered to the employees in Metro Manila; that one of the purposes for which Corfarm was organized is the milling of rice; that in the delivery of the milled rice to the residence of the covered employees, Corfarm charges home delivery fees which are later on reimbursed by the employees and in case delivery is done at the warehouses of Meralco and the other corporations, no delivery fee is charged by Corfarm; and that in case of crop failure where the farmers cannot sell any palay, Corfarm buys palay/rice from other sources in order to fulfill its obligation. In reply, I have the honor to inform you as follows: 1. For engaging in the business of buying palay from farmers and milling them into rice for sale to the public, your client is considered an operator of rice mill subject to the annual graduated fixed tax based on the total capacity per milling machine prescribed by Section 192 (3)(nn) of the Tax Code, as amended. Your client is subject to a separate fixed tax for every rice mill it operates. (Sec. 188, Tax Code) 2. For selling palay to your client, the farmer, unless he is a marginal farmer, is subject to the annual fixed tax of P100.00 and to the 1% sales tax, pursuant to Section 192(1) and 198 of the Tax Code. A marginal farmer is an individual farmer engaged in small-scale, subsistence farming, whose sales, barters or exchanges of agricultural products produced by himself do not exceed a gross value of P20,000.00 per annum. (LOI No. 1055) In this connection, by undertaking said activities of a marginal farmer, a person is not considered as having been engaged in any economic activity. Hence, said tax exemption in favor of a marginal farmer is not withdrawn by P.D. No. 1955. 3. For buying palay/rice and selling the same "as is" to employees of certain companies, your client is subject to the annual graduated fixed tax imposed by Section 192(2) of the Tax Code, as amended. In this connection, your client is already liable for the payment of the full amount of annual graduated fixed tax. LOI No. 664 dated January 28, 1978 suspending the implementation of Section 192 of the Tax Code, as amended, increasing taxes on annual gross sales as far as rice and corn are concerned, which was extended by LOI Nos. 874, 1141 and 1369 until December 31, 1985, can no longer be applied to your client. It should be noted that the preferential treatment in the payment of the annual graduated fixed tax in favor of rice and corn dealers, as provided in said LOI No. 664 has been withdrawn by P.D. No. 1955 effective October 15, 1984. 4. The so-called "management fees" being actual contributions of companies participating in the implementation of General Order No. 47 to Corfarm's expenses incurred in maintaining field offices and staff and which are reimbursed by Corfarm to the companies by way of liquidation, are not subject to the contractor's tax. 5. The so-called "home delivery fees" are subject to the 3% common carrier's tax imposed by Section 207 of the Tax Code, as amended by P.D. No. 1959. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner