Tax Credit Which Can Be Granted with Respect to Sales, Compensating and Specific Taxes and Duties Paid on "Indirect Exports"

August 22, 1985 BIR RULING NO. 129-85 187-aa 000-00 129-85 Gentlemen : This refers to your letter dated February 4, 1985 bearing on the question regarding the tax credit which can be granted with respect to the sales, compensating and specific taxes and duties paid on the so-called "indirect exports", i.e., supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of the export products. In your query, you presented the following illustrations: "A fiber producer sells his polyester fiber to the spinner. The spinner spins the fiber into spun yarn and sells the spun yarn to the weaver. The weaver converts the yarn into a fabric and sells the fabric to the garment maker who in turn converts the fabric into garments and export them." cdt You stated further that under the above illustration, the fiber producer, the spinner, the weaver and the garment maker are entitled to tax and duty credits on their imported raw materials that went into the manufacture of their respective products pursuant to Article 48-B of Presidential Decree No. 1789, as inserted by Batas Pambansa Blg. 391, quoted as follows: "ART. 48-B. Incentives to Registered Indirect Export Producers . Registered indirect export producers shall be granted the following incentives: (1) special tax credits for taxes and duties on supplies, raw materials and semi-manufactured products used in indirect export as provided in paragraph (c) of the immediately preceding Article; and (2) a tax credit of 5% of net value earned as defined in subparagraph (c), Article 45 but limited to that associated to the production of indirect exports: Provided, That the net value earned shall be based on the increment in real terms over the average export sales during the three-year period immediately preceding the availment of incentives: Provided, further, That a producer who sells to another producer who uses such product as input of his own product which is subsequently sold as an input of another export producer is entitled to the incentives hereunder . The underlined portion of the above-quoted provision allows tax credit with respect not only to the fiber producer but also to the spinner, the weaver and the garment maker. Your query, however, is whether tax credits can be allowed to the spinner, the weaver and the garment maker with respect to their imported raw materials that went into the manufacture of their respective products prior to the effectivity of Batas Pambansa Blg. 391 on April 29, 1983. In reply, I have the honor to inform you that your query is answered in the negative. This Office reiterates the view that prior to B.P. Blg. 391, tax credit may be availed of only to the fiber producer in accordance with Article 48(a) of P.D. No. 1789 which provides: "ART. 48. Incentives to Registered Export Producers . Registered export producers, whether pioneer, shall be entitled to additional incentives enumerated hereunder: (a) Tax Credit . Every registered export producer shall enjoy a tax credit equivalent to the sales, compensating and specific taxes and duties on the supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and constituting a substantial portion of the cost of production or forming part of the export product, whether exported directly by the registered export producer or sold to another export producer, which uses such sold products as a direct input in export products manufactured or processed by it and subsequently exported, or to an export trader: Provided, That the tax credit shall accrue to the registered export producer only after the other export producer or export trader has actually or constructively exported said products . The foregoing Article 48(a) which is the law in force prior to Batas Pambansa Blg. 391, clearly limits the availment of the tax credit to the fiber producer who, under the above illustration is the registered export producer. It is true that under Article 18 of P.D. No. 1789, the registered export producer may sell his export products to another export producer who utilizes said products as direct inputs in products manufactured and thereafter exported. However, under the above-quoted underlined portion of Article 48(a), the tax credit shall accrue to the registered export producer only after the other export producer has actually or constructively exported his products. In other words, only the registered export producer is entitled to tax credit prior to B.P. Blg. 391 . In this connection, the foregoing amendment effected by Batas Pambansa Blg. 391 i.e. insertion of Article 48-B, does not provide for a retroactive application; hence, the same took effect prospectively. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner