Tax Imposed on the Importations of Flavoring Extracts and Essences Used in the Manufacture of Wines and Liquors

April 24, 1987 BIR RULING NO. 113-87 121 000-00 113-87 Gentlemen : This refers to your letter dated March 30, 1987 requesting reconsideration of BIR Ruling No. 085-87 dated March 23, 1987 holding that your importations of flavoring extracts and essences used in the manufacture of wines and liquors are subject to specific tax, if said preparations, excluding water contain more than 50% alcohol by volume, payable upon release from customs custody. You have represented that your above importations of flavoring extracts and essences are to supply the vital raw materials and ingredients of your finished products, namely: whiskey, brandy, rum, gin and other similar products. Section 121 of the Tax Code, as amended, by P.D. No. 1994, reads as follows: "Sec. 121. Distilled spirits . On distilled spirits there shall be collected, subject to the provisions of Section 114 of this Code, specific taxes as follows: (a) If produced from sap of nipa, coconut, cassava, camote or buri palm or from the juice, syrup or sugar of the cane, provided such materials are produced commercially in the country where they are processed into distilled spirits, per proof liter, four pesos: Provided, that if produced in a pot still or other similar primary distilling apparatus, by a distiller producing not more than one hundred liters a day, containing not more than fifty per centum of alcohol by volume, per proof liter, one peso and fifty six centavos; (b) If produced from raw materials other than those enumerated in the preceding paragraph, per proof liter, thirty five pesos, and (c) Medicinal preparations, flavoring extracts, and all other preparations, except toilet preparations, of which, excluding water, distilled spirits form the chief ingredient, shall be subject to the same tax as such chief ingredient. This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits, and the tax shall attach to this substance as soon as it is in existence as such , whether it be subsequently separated as pure or impure spirits or transformed into any other substance either in the process of original production or by any subsequent process. 'Spirits or distilled spirits' is the substance known as ethyl alcohol, ethanol or spirits of wine, including all dilutions, purifications and mixtures thereof, from whatever source by whatever process produced and shall include whiskey, brandy, rum, gin and vodka , and other similar products or mixtures, except compounded liquors taxed under Section 122 of this Code. 'Proof spirits' is liquor containing one-half of its volume of alcohol of a specific gravity of seven thousand nine hundred and thirty nine ten thousandths (0.7939) at fifteen degrees centigrade. A proof liter means a liter of proof spirits. (As amended by BP Blg. 4 and 82, EO 792, PD 1959 and PD 1994); (emphasis ours) In reply, I have the honor to inform you that, after a re-study of your request, this Office finds the same meritorious and hereby grants the same. Under the abovequoted provision of law, your finished products namely: whiskey, brandy, rum, gin and other similar products are included within the term "spirits or distilled spirits"; hence, they are subject to specific tax. In the case of the flavoring extracts and essences, if the chief ingredient of said preparations is not distilled spirit, i.e., they contain 50% or less alcohol, excluding water, then such imported preparations are subject to either compensating or advance sales tax, as provided under Title V of the Tax Code. However, if said imported preparations are used in the manufacture of your abovementioned finished products which are subject to the specific tax, they are not subject to advance sales tax or the compensating tax. (Sec. 162(c) and Sec. 169(b)(2), Tax Code). On the other hand, if the chief ingredient of flavoring extracts and essences is distilled spirit, i.e., they contain more than 50% alcohol by volume, excluding water, said importations are subject to specific tax on distilled spirits. In this connection, as heretofore stated, your finished products are included within the term "distilled spirits". Under the abovequoted provision, the specific tax on said products attaches "as soon as it is in existence as such. . . . This is considered as the accrual of the specific tax due thereon which tax must necessarily be paid immediately before removal from the place of production. [Sec. 110(a), Tax Code] "Section 133 (now Sec. 121) was amended so as to restore definitely "the time when the specific tax shall be attached to the distilled spirits" and the "purpose (of the amendment) is to erase all doubts as to the accrual of the specific tax on distilled spirits" (Congressional Record, supra ). The insertion of the amendatory provision fixed the time when the specific tax attaches to alcohol or distilled spirits, that is, " as soon as it is in existence as such , whether it be subsequently separated as pure or impure spirits, or be immediately or at any subsequent time transformed into any other substance either in process of original production or by any subsequent process". And pursuant to the general provision, the specific tax which attached to the distilled spirits must necessarily be paid immediately before removal from the place of production unless otherwise specially allowed . (Section 124 (now Section 110) Revenue Code). (La Tondea, Inc. vs. Collector, CTA Case No. 167, March 23, 1959). Accordingly, the specific tax due on the imported flavoring extracts and essences which are used as raw materials in the manufacture of your abovenamed finished products, need not be paid upon withdrawal thereof from customs custody, inasmuch as said tax which shall be increased proportionally by whatever spirits added thereto shall attach as soon as the finished products come into existence as such and paid before removal from your place of production. This will authorize the Commissioner of Customs to release your importations of flavoring extracts and essences to be used as raw materials in the manufacture of whiskey, brandy, rum, gin and similar products free from the payment of the advance sales tax, compensating tax or the specific tax. This revokes BIR Ruling No. 085-87. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner