Transferability of Tax Credits on Net Value Earned or of Net Local Content

April 1, 1987 BIR RULING NO. 094-87 246 084-87 094-87 Gentlemen : This refers to your letter dated February 17, 1987 stating that your company is a BOI registered firm engaged in the assembly of integrated circuits; that one hundred percent of your production is exported to the U.S., Europe and Asia; that from April to September 1986, your tax credits for taxes and duties on raw materials amounted to P7 Million; that you contemplate to transfer your Tax Credit Certificate No. 0536 in the amount of P4.6 Million to Meralco as partial payment of your electric bills; that Meralco has expressed consent in accepting such Tax Credit Certificate as payment with the informal approval of the BOI. You now want this Office to express approval on the transfer of said tax credit certificate in favor of Meralco so that the latter may utilize the same. In reply, I regret to inform you that your request cannot be granted by this Office for lack of legal basis. Pursuant to Article 22 of the Omnibus Investments Code, the tax credits on net value earned or of net local content are transferable only to domestic raw materials of component suppliers of the registered enterprise. Although electricity is necessary in the production of integrated circuits, it is not considered raw material because the same does not form part of the finished product. 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 article to which it has been merged, mixed or dissolved. [Sec. 2(a), Revenue Regulations No. 11-86] adc Accordingly, Meralco cannot be considered your raw material supplier and, therefore, the tax credit granted to you cannot be transferred to the former within the purview of Section 22 of the Omnibus Investments Code. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner