Request for Exemption from the 1% Expanded Withholding Tax on Sales of Packaging Materials

July 22, 1986 BIR RULING NO. 121-86 51 000-00 121-86 Gentlemen : This refers to your letter dated February 26, 1986 requesting exemption from the 1% expanded withholding tax on your sales of packaging materials to Mattel Philippines, Inc. It is represented that as of May 22, 1980 you were registered with the Board of Investments (BOI) under Registration Certificate No. 80-1099 with later expansions approved under Certificate of Registration No. 82-206 dated January 5, 1982 and No. 85-985 dated September 25, 1985 as a non-pioneer enterprise for the production/manufacture and export of packaging materials; that as a registered "indirect exporter" of packaging materials, which are eventually exported by your customer, Mattel Philippines, Inc., you were granted certain incentives by BOI including: tax rebates and duty-draw down on imported raw materials as well as exemption form the percentage sales tax on your sales to Mattel Philippines in your capacity as a "producer" (not as a "contractor") and the "reduced income tax" scheme on your annual income; that you have advised Mattel Philippines that you are in fact a "manufacturer" and not a "contractor" insofar as your sales to them are concerned and that therefore, it should desist from subjecting to the 1% withholding tax its gross payments to you. In reply, please be informed that as a BOI registered export producer engaged in an industrial activity for the production, manufacturer or processing of export packaging products directly selling them (a) to an export trader that subsequently exports the said products, or (b) to other export producers who utilize said products as direct input in products subsequently manufactured or processed and thereafter exported, like that of Mattel Philippines, Inc.; and duly registered as such by the Board, you are considered a manufacturer for your registered operations as such and not as contractor. (see Art. 18, P.D. No. 1789, otherwise known as the Omnibus Investments Code; Sec. 6. E.O. 1045) Under Revenue Regulations No. 6-85 otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 51(f) of the Tax Code, only income payments to persons enumerated therein are subject to the expanded withholding tax. Accordingly, since a manufacturer of packaging material is not among those enumerated in said regulations, the gross payments made to you by your customer, Mattel Philippines, Inc., on your sales of said packaging materials are not subject to the expanded withholding tax. However, since the aforesaid income payments are not subject to withholding, you shall render an information return on such payments pursuant to Section 71 (formerly Sec. 77) of the Tax Code, as amended by B.P. Blg. 135 and as implemented by Section 21 of Revenue Regulations No. 1-82 dated March 18, 1982. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner