Whether a Corn Miller is Exempt from VAT on Its Sale of Milled Corn Starch to the Manufacturers of Other Consumer Products

April 13, 1992 BIR RULING NO. 123-92 103 (b) 170-91 123-92 Mr. Robert L. Lu LAMSAN TRADING, Inc. Elco Building 202 E. Rodriguez Sr. Blvd. Quezon City S i r : This refers to your letter dated March 26, 1992 requesting a ruling that a corn miller is exempt from VAT on its sale of milled corn starch to the manufacturers of other consumer products. LexLib It is represented that corn starch is an intermediate product used principally as a raw materials in the manufacture of bihon, other food products, glucose, glue, raisins, textile and paper products. It is produced from corn with 16% to 27% moisture content. The recovery of corn starch and other products based from dry corn with 16% moisture content are indicated below: 60% corn starch with 12% moisture content 24% gluten feed with 12% moisture content 7% corn germ with 6% moisture content 6% gluten meal with 2% moisture content 87% Net recovery 13% allowance due to moisture content 100% Total At present the millers are paying the 10% VAT on its sale of corn starch, and other by-products in the milling of corn, except the by-products used directly as animal feeds. However, with respect to corn starch, they are encountering a problem in pricing because the corn starch brought in from other countries and sold locally are cheaper than the corn starch produced locally. This is so because the cost of locally-produced corn grains is very much higher than the corn grains produced in foreign countries such as Thailand, China, USA, etc. Their comparative costs are shown below: Corn grain at 12% moisture content: USA US$ 130.00 per ton Thailand US$ 140.00 per ton China US$ 140.00 per ton Philippines P 5,500.00 per ton In reply, please be informed that under the "catching up" effect in the VAT system, when the VAT-exempt product is used as a raw material of a VAT taxable article, the VAT catches up with the exempt product when the finished article is sold. This is so because while the exempt product forms part of the cost of the finished article, no input tax credit can be claimed by the manufacturer thereof. In other words, since corn starch is essentially an intermediate product, even if the same were exempted from VAT when sold by the miller-producer upon being used as a raw material for VAT-taxable goods, like glucose, glue, raisins, textile and paper products, etc., the 10% VAT catches up with the corn starch when the finished article is finally sold. The collection of the VAT on the finished article adds up to the cost thereof resulting in the "forward shifting" of the VAT to the consumers which is an acceptable alternative to depressing the price of the corn grains by way of shifting the VAT to the producer-seller. This ruling is being issued not only because of the foregoing facts and considerations. It will not apply if the corn starch were sold to one who will not use it as ingredient in the manufacture of VAT taxable products but for direct consumption. All previous rulings inconsistent herewith are deemed modified. Very truly yours, VICTOR A. DEOFERIO, JR. Deputy Commissioner Officer-In-Charge