Sale of Copper Concentrates to a BOI-registered Producer/Exporter is Effectively Zero-rated

July 29, 1994 BIR RULING NO. 120-94 100 (A) (1) 008-92 120-94 King Capuchino Tan & Associates Belman II Building, Quezon Avenue Quezon City, Metro Manila Attention: Atty . Lincoln L . Tan, Jr . Gentlemen : This refers to your letter dated October 3, 1992, in effect, requesting for a ruling on the tax liabilities of the parties under an Operating Agreement entered into by and between Phimco Industries, Inc. (PHIMCO) and Maricalum Mining Corporation (MMC) wherein the former will undertake to produce copper concentrates for export out of the copper ores produced by and in the milling plant facilities of the latter. It appears that MMC used to be a government-owned and controlled corporation that used to quarry its own ores and converts these into copper concentrates for export; that due to its heavy indebtedness and inability to handle cash flow problem it was forced to discontinue its operations and for some time after that its plant and mining facilities were left idle; that in this state of inactivity, MMC was acquired by a consortium of private firms; that because of insufficient capital to restore all the milling plant facilities, MMC entered into an Operating Agreement with PHIMCO under which it agreed to allow the latter to rehabilitate the milling plant and thereafter to operate and produce copper concentrates; that under said Operating Agreement, PHIMCO virtually became a producer and exporter of the copper concentrates to Marubeni of Japan, a regular purchaser of its product with whom MMC had previously entered into a long-term purchasing agreement; that MMC's role under the Operating Agreement is limited merely to quarrying and producing the copper ores and supplying these to PHIMCO for conversion by the latter into concentrates which are exported; and that the resulting export proceeds are then divided two ways 45% to PHIMCO and 55% to MMC. In reply, please be informed that based on the foregoing facts, MMC is the producer and supplier of copper ores. PHIMCO, on the other hand, is the manufacturer and the true exporter of the copper concentrates notwithstanding the fact that the exportation is carried out in accordance with the subsisting long-term agreement between MMC and Marubeni of Japan. Under Section 100 (a)(1) of the Tax Code, PHIMCO's export of copper concentrates is zero-rated. The division of the export proceeds whereby PHIMCO receives 45% while MMC receives 55% is merely a mode of payment. It does not affect the fact that under the Operating Agreement MMC is merely a supplier of raw materials to PHIMCO. Pursuant to Revenue Regulations No. 2-88, the sale of raw materials to a BOI-registered manufacturer exporting at least 70% of its finished products is effectively zero-rated provided there is a prior approval of the supplier's application for effective zero-rating. In the instant case, since it is represented that PHIMCO is already registered with the Board of Investments as a producer of copper concentrates, its purchases of copper ores from MMC will qualify for effective zero-rating provided MMC will first secure prior approval of its application for effective zero-rating in accordance with Section 8(d) of Revenue Regulations No. 5-87 in relation to Revenue Regulations No. 2-88. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue