Non-Transferability of Tax Credit Granted to MERALCO

March 20, 1987 BIR RULING NO. 084-87 246 000-00 084-87 Gentlemen : This refers to your letter dated October 23, 1986 requesting in effect, a ruling as to whether electricity is a raw material in the production of semiconductors and, therefore, the Manila Electric Company (MERALCO) can be treated as a raw material supplier. It appears that Dynetics, Inc., a BOI-registered firm contemplates to transfer its Tax Credit Certificates Nos. 0241 and 0242 in favor of MERALCO for the payment of outstanding electric bills under the premise that MERALCO is a raw material supplier and therefore covered by the provision of Article 22 of the Omnibus Investment Code, that tax credit on net value earned or of net local content are transferable only to domestic raw material or component suppliers of the registered enterprise; and that being necessary for the production of semiconductors, electricity is in fact a raw material and therefore, MERALCO shall be treated as a raw material supplier. In reply, I have the honor to inform you that the term "materials", means any article, which when used in the manufacture of another article, becomes a homogenous part thereof, such that it can no longer be identified in its original state nor may it be removed therefrom without destroying or rendering useless the finished articles to which it has been merged, mixed or dissolved. [Sec. 2(a), Revenue Regulations No. 11-86] Accordingly, although electricity is necessary in the production of semiconductors, it is not considered raw material because the same does not form part of the finished product. Such being the case, MERALCO cannot be considered a raw material supplier of Dynetics, Inc. and therefore, the tax credit granted to the latter cannot be transferred to the former within the purview of Section 22 of the Omnibus Investment Code. As regards your request that in case of adverse ruling, Dynetics, Inc., be allowed to waive its tax credits in favor of this Office on condition that this Office waives its tax claims against MERALCO, the same cannot be granted for lack of legal basis. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner