Whether Fees Paid for Services Consisting of Toll Hatching and Toll Processing are Exempt from VAT

August 25, 1995 BIR RULING NO. 127-95 103 (k) 000-00 127-95 San Miguel Foods, Inc. PCPD Building Nichols Interchange Taguig, Metro Manila Attention: Atty . Amado A . Colon Counsel Gentlemen : This refers to your letter dated March 3, 1995, in effect, requesting confirmation of your opinion that fees paid for services consisting of toll hatching and toll processing are exempt from VAT. casia It is represented that you are a domestic corporation engaged among others, in the production of poultry and livestock; that under your integrated operation, you have a breeder farm that produce eggs for hatching into day-old broilers; that the day-old broilers are then delivered to the contract growers for growing into marketable chicken and then hauled to the processing plant for dressing into Magnolia chicken; that you are contemplating to contract to third parties your hatching and processing operations including receiving the eggs from the breeder farms, sorting, fumigating, setting, hatching, sexing of day-old broilers, sorting and packaging for delivery to the contract growers; that toll processing of broiler chicken starts from the receiving of live broilers from the contract growers, weighing, killing, dressing, chilling and packaging ready for sale; that under the contract growing agreement the contractor will supply the labor and services needed, i.e., land, building, equipment and materials, electricity, water, etc., while you will provide the inputs such as eggs and live broilers; and that the contractor will be paid on a per egg set basis for toll hatching, while for toll processing it will be on a per broiler dressed basis. In reply, please be informed that pursuant to Section 9(11) of Revenue Regulations No. 5-87, implementing Section 103(k) of the Tax Code, as amended, agricultural contract growers, referring to those producing for others poultry, livestock or other agricultural and marine food product in their original state, are exempt from VAT. Toll hatching which is described as a package of services such as receiving eggs from the breeder farm, sorting, fumigating, setting, hatching, sexing of day-old broilers, sorting and delivery to other contract growers; and toll processing which is described as a package of services including receiving of live broilers from contract growers, weighing, killing, dressing, delivery and packing for sale come within the purview of services of agricultural contract growers which are exempt from VAT pursuant to Section 103(k) of the Tax Code, as amended, and as amplified by Section 9(11) of Revenue Regulations No. 5-87, as amended. In view of the foregoing, we hereby confirm your opinion that toll hatching and toll processing by agricultural contract growers are exempt from VAT. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue