BOI-Registered Garment/Embroidery Firms as Export Producers Not Entitled to Tax Credit

August 22, 1985 BIR RULING NO. 128-85 199 000-00 128-85 Gentlemen : This refers to your letter dated August 25, 1982 requesting confirmation of your opinion that BOI-registered garments firms qualify for tax credit incentives for local purchases, which may include 10% sales taxes, even if their principals reimbursed them for the entire amount inclusive of the sales taxes. Your opinion is based on the following considerations: cdta 1. All manufacturers in quoting their selling prices, technically consider reimbursements for all their purchases. Firms with principals abroad differ only in the manner of getting paid back for their purchase. 2. With the tax credit, Philippine made products are competitive vis-a-vis imported ones which the principals can send to the firms on consignment basis thus resulting in additional foreign exchange earnings to the country. 3. Taken in a different light, the principals may also simply stop reimbursements of the purchases in order for the firms to qualify for incentives. 4. Although such transactions are not reflected in the Income Statements of the firms, the gains arising from the reimbursements equivalent to the tax credits are considered as taxable income. It appears that these garment/embroidery firms are registered with the Board of Investments as export producers engaged in the manufacture or processing and direct exportation of its export products. Their contracts with their principals abroad disclosed that these firms are paid an amount equivalent to the labor plus mark-up to cover overhead and profit. The raw materials are furnished by their principals abroad on consignment basis. However, some accessories and supplies such as packing materials, threads and buttons are locally purchased directly by the BOI-registered firms. These purchases may include the 10% sales tax. Their principals later on reimburse them for the entire amount of the local purchases inclusive of the sales taxes. In reply, please be informed that under Section 1, Rule XVII of the Rules and Regulations implementing Presidential Decree No. 1789, otherwise known as the Omnibus Investments Code pertinent portion of which is quoted hereunder as follows: "Sec. 1. Tax Credit . The tax credit that may be enjoyed by a registered export producer under Article 48(a) of the Code refers to the sales, compensating and specific taxes and duties actually paid by it on the supplies, raw materials, and semi-manufactured products used in the manufacture, processing or production of its registered export products and forming part thereof; . . ." the registered export producers must actually pay the sales, compensating and specific taxes and duties in order that it can avail of the privilege of tax credit. It is explicit in the contract executed between the garment/embroidery firms and their principals abroad that the former shall be paid in an amount equivalent to the labor plus mark-up to cover overhead and profit with the raw materials furnished by the latter on consignment basis and local purchases like packaging materials, threads and buttons on the account of the principals. In other words, it is not the garment/embroidery firms that will actually purchase and pay the local packaging materials, threads and buttons as required under the said law. cdti In view thereof, this Office is of the opinion and hereby holds that garment/embroidery firms registered with the Board of Investments as export producers in accordance with P.D. No. 1789 are not entitled to a tax credit of sales, compensating and specific taxes paid on raw materials used in the manufacture of their export products, where such taxes are actually reimbursed by and paid to them by its principals. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner