BIR Ruling No. 105-83

June 16, 1983 BIR RULING NO. 105-83 Gentlemen : This refers to your letter dated October 13, 1982 requesting a ruling on whether the subsidy extended to you by the National Development Company (NDC), a government owned corporation, is subject to the royalty tax imposed by Section 255 of the Tax Code as amended by B.P. Blg. 84 and implemented by Revenue Regulations No. 13-80 dated November 7, 1980. It is represented that under an Agreement to purchase and sell copper concentrates and Supplemental Agreement (both hereinafter referred to as Agreement) executed by and between Marinduque Mining and Industrial Corporation (Marinduque) and NDC, the later shall purchase and Marinduque shall produce, sell, transfer and convey copper concentrates; that Marinduque shall comply with its obligations to NDC under the agreement by selling, transferring and conveying the said copper concentrates to whomsoever NDC shall direct; that NDC instructs and directs Marinduque to sell, transfer and convey the said copper concentrates to Marubeni Corporation (Marubeni), Tokyo Head Office in accordance with the terms and conditions of a Marketing Agreement, likewise executed by and between Marinduque and Marubeni by virtue of which Marinduque sells to Marubeni, in whole or in part, its production of copper concentrates at its Sipalay Mine located in the Province of Negros Occidental for the period covering calendar years 1981 and 1982; that in consideration of the undertakings of NDC under the Agreement in favor of Marinduque, the latter assigned, transferred and conveyed unto NDC, all the rights, title and interest of Marinduque in/to the sales proceeds under the said Marketing Agreement; that NDC shall deposit the proceeds thereof, as well as the proceeds of any direct remittance to NDC, in such funds to Marinduque's account at a Philippine commercial bank to be designated by Marinduque and NDC shall simultaneously deposit in such bank account of Marinduque, in US dollars, such additional amount to which Marinduque becomes entitled by reason of the copper metal contents being payable at U.S. $0.75 per pound of payable copper; that should the world market price (i.e., the price quoted at the London Metal Exchange) go higher than US $0.75 per pound of copper metal, NDC shall be entitled to the whole amount of such excess; and that NDC shall extend to Marinduque a subsidy if its selling price to Marubeni for copper is lower than US$0.75 per pound of copper metal. In reply, please be informed that Section 5 of Revenue Regulations No. 13-80, provides, in part as follows: "Section 5. Computation of Tax Base for Royalty Tax purposes Generally, the taxes herein imposed are based on the actual market value of the gross output of minerals, mineral products or quarry resources at the time of removal without the benefit of any deduction for mining, milling, refining transporting, handling, marketing or any other expenses, except as stated hereinbelow: 1. . . . 2. In the case of mineral concentrates not traded in commodity exchanges in the Philippines or abroad such as copper concentrate, the actual market value shall be the world price quotation of the refined mineral product content thereof prevailing in the said commodity exchange, after deducting the smelting, refining and other charges incurred in the process of converting the mineral concentrates into refined metal or mineral traded in those commodity exchanges . These deductions shall be in addition to those allowed in the preceding subsection if the mineral concentrates are sold or consigned abroad by the lessee, owner or operator of the mine under CFI terms. (Emphasis supplied) 3. . . . Since the subsidy being extended by NDC to Marinduque actually answers for the world market price (US $0.75 per pound of copper metal), should the selling price of copper concentrates to Marubeni be less than US$.75, said subsidy is not subject to the royalty tax imposed by Section 255 of the Tax Code, as amended. The amount representing the selling price, even if less than the world market price, is subject to the royalty tax. If the selling price exceeds the world market price, then such price shall be subject to the royalty tax, even if the excess goes to NDC. However, as to whether a bank account should be opened, to which the Theoretical Savings (TS) accruals due to NDC will have to be deposited, is a matter of internal agreement between Marinduque and NDC. cdtech Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner Bureau of Internal Revenue