BIR Ruling No. 095-83

June 1, 1983 BIR RULING NO. 095-83 Gentlemen : This refers to the letter dated February 13, 1980 of your client, Ensite Limited (Philippine Branch) requesting a ruling as to whether it is subject to the manufacturer's sales tax on automotive parts sold by it to Ford Philippines, Inc. It appears that your client, a corporation duly organized and existing under and by virtue of the laws of Canada, is duly registered and authorized to operate a car stamping plant in the Export Processing Zone in Bataan; that as a zone enterprise, your client brings into the zone imported automotive materials which it manufactures into automotive products; and that about 90% of said manufactured products will be exported while 10% will be sold in the Philippines for domestic consumption. It appears also that the purchaser of the manufactured products sold for domestic consumption is Ford Philippines, Inc. which had been paying the advance sales tax based on the value thereof. In your letter dated September 15, 1980, you justified the stand taken by your client that the manufactured products in question should be treated as imported machineries and, therefore, subject to the advance sales tax. In reply, I have the honor to inform you that after a thorough study of the pertinent provisions of Presidential Decree No. 66, particularly Section 17 thereof governing the "Tax Treatment of Merchandise in the Zone", and the Rules and Regulations implementing said Decree, this Office believes, and so holds, that the stand taken by your client is correct. Paragraph (4) of said section provides: "(4) Merchandise sent from the zone to the customs territory shall, whether or not combined with or made part of other articles while in the zone, be subject to laws and regulations governing imported merchandise. The duties and taxes shall be assessed on the value of imported materials (except when the final product is exempt) and the internal revenue taxes on the value added." Section 4 of Rule IV of the implementing regulations provides: "SECTION 4. Merchandise of foreign origin brought to the Zone which have not undergone any processing, manufacturing or manipulation while in the Zone, shall, when sent therefrom to the customs territory, be subject to the laws and regulations governing imported merchandise: Provided, That where said foreign merchandise is combined with or made part of any domestic article, the duties and taxes to be assessed on the final product shall be based on the value of such imported merchandise (except when the product is exempt) and internal revenue taxes on the value added." From the foregoing provisions of the law and regulations, it can be concluded that foreign merchandise brought into the Zone which have not undergone any processing, manufacturing or manipulation shall, when sent therefrom to the customs territory, be subject to the laws and regulations governing imported merchandise. This means that the said foreign merchandise shall be subject to the advance sales tax, payable by the purchaser in the customs territory, it being considered the importer thereof. On the other hand, foreign merchandise brought into the Zone which have been combined with or made part of any domestic article shall be subject to taxes and duties to be assessed on the final product based on the value of the foreign merchandise and internal revenue taxes on the value added. In other words, the foreign merchandise is subject to the advance sales tax based on the value thereof to be paid by the purchaser in the customs territory. As regards the internal revenue tax on the value added, i.e. difference between the selling price of the manufactured products and the value of the raw materials imported by the zone enterprise and used in the manufacture of said product (Sec. 1(u), Rule I, Rules and Regulations), it is believed that the same consists of the advance sales tax and not the manufacturer's sales tax. It should be noted that under the above-cited Section 17(4) of P.D. No. 66, products of the Zone manufactured out of foreign merchandise is subject to laws and regulations governing imported merchandise. Likewise, Section 9, Rules IX of the Rules and Regulations provides that "consistent with the objectives of the Decree, a Zone enterprise, engaged in the production, processing, packaging or manipulation of export products shall export its entire output or production. However, in meritorious cases, the Authority may allow a portion of the production or output of a Zone enterprise to enter the customs territory: Provided, That the corresponding taxes and duties shall be paid therefor ." (Italization ours) The fact that corresponding taxes and duties shall be imposed connotes the idea that the product manufactured in the Zone is regarded as an imported article upon entering customs territory. Moreover, "duties" are taxes imposed on goods upon importation into the country. (13A Words & Phrases, perm. Ed., p. 543) Such being the case, the applicable tax is advance sales tax which is always being imposed together with customs duties . In fact, one of the items included in the landed cost for purposes of computing the advance sales tax is the customs duty. [Sec. 193(b), Tax Code] cdtech Finally, in the Registration Agreement executed by and between the Export Processing Zone Authority and your client on April 5, 1973, your client was allowed to sell approximately 10% of its products in the Philippines for domestic consumption and "that a buyer would not pay any more duties and internal revenue taxes on the product withdrawn from the Zone than he would have, had he originally imported a similar product from abroad". (Par. 4.3 and 4.9,5) these provisions of the agreement confirms that the products manufactured by your client and sold to Ford Philippines are subject to the advance sales and customs duties and that the party liable for the payment thereof is the buyer and not your client. Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner Bureau of Internal Revenue