Taxability of Purchases of Crude Oil for Use as Raw Materials for Inventions

October 21, 1998 BIR RULING NO. 155-98 24 (A) (1), 108, 148-000-00-155-98 Mr. Rudy N. Lantano DOST Compound Taguig, Bicutan, Metro Manila S i r: This refers to your letter dated September 21, 1998 stating that you are an inventor duly certified by the Filipino Inventor's Society and a patent holder of various petroleum products invention for which this Office has issued the corresponding tax exemption certificate under BIR Ruling Nos. DA-037-98 dated February 4, 1998, DA-280-98 and DA-281-98 both dated July 1, 1998; that you would like to buy crude oil from Pilipinas Shell Petroleum Corporation's Refinery Plant in Tabangao, Batangas City for the commercialization of two of your inventions, the ALCO-DIESEL covered by Patent No. 13424, a fuel composition and the process of producing thereof issued by the Philippine Patents Office on August 31, 1994 and LAN-GAS covered by Patent No. 13594 likewise, a fuel composition and the process of producing thereof issued by the Philippine Patents Office on July 30, 1980 and to develop new products; that before removing the said crude oil from the Shell Refinery, for expediency and for practical/economical reasons, you will have it process at the said Refinery into petroleum products and other yields where the diesel, naphtha, gasoline and other yields shall be used as a direct raw material for the manufacture of ALCO DIESEL, LAN-GAS and other inventions; and that Pilipinas Shell Petroleum Corporation has already paid the corresponding duties on importation of the crude oil. Based on the foregoing representations, you are now requesting for a ruling on the following: "1. Is there a tax due on my purchase of crude oil from Shell inside their refinery? "2. Will the diesel and gasoline products which I will use as raw material for my ALCO DIESEL and LAN-GAS inventions be subject to any tax? "3. How about the other yields from the said processing?" In reply, please be informed that the above queries are answered as follows: 1. Since your primary purpose for buying crude oil (raw or in its natural and unprocessed state) is practically to procure the raw materials for your inventions at a lesser cost, as purchaser therefore, you are not liable to pay any tax on your said purchases of crude oil. Furthermore, the sale of crude oil not being among those enumerated under Section 148 of the Tax Code of 1997 as excisable petroleum product, is not subject to excise tax. However, Pilipinas Shell Petroleum Corporation, as seller of the said crude oil, shall be subject to income tax on whatever gain it may derive on said sale of crude oil. 2. Your second query is answered in the negative. Considering that you are now the owner of the crude oil which will be processed by Pilipinas Shell Petroleum Corporation for a fee, the removal of the said yields i . e . naphtha , diesel , gasoline , LPGas , and bunker C , from the Shell Refinery in Tabangao, Batangas City, which you will exclusively use as raw materials for your inventions, i . e ., ALCO DIESEL with the following raw materials as its components : methanol , ethanol , naphtha and diesel , and LAN-GAS with the following raw materials as its components : ethanol , methanol , naphtha and mogas (gasoline) , and SUPERBUNKER FORMULA L with the following raw materials as its components : kerosene , naphtha , Bunker C , LPG and water , are not subject to excise tax imposed under Section 148 of the Tax Code of 1997 and the income tax imposed under Section 24(A)(1) of the same Code. However, in case you decide to sell such yields, you shall be assessed with the corresponding excise tax under Section 148 of the Tax Code of 1997 and the gains therefrom will be subject to income tax under Section 24(A)(1) of the same Code notwithstanding your exemption under R.A. No. 7459. On the other hand, the sale or exchange of services by Pilipinas Shell Petroleum Corporation's Refinery Plant shall be subject to value-added tax equivalent to ten percent (10%) of gross receipts pursuant to Section 108 of the Tax Code of 1997. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. The value-added tax is payable by the seller and not by the purchaser of goods or services. However, the value-added tax which is by nature an indirect tax, the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Section 105, Tax Code of 1997) Once shifted, it is no longer a tax but an additional cost which the purchaser has to pay to obtain the goods or services. (Philippine Acetylene Co. vs. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967) Hence, you cannot invoke your exemption privileges as an inventor to avoid the passing on or shifting of the value-added tax billed by Pilipinas Shell Petroleum Corporation's Refinery Plant for their services rendered. 3. As regards the other yields, such as kerosene and LPG which you have the option not to utilize as raw materials, you shall be subject to the corresponding excise tax imposed under Section 148 of the Tax Code of 1997 upon your sale of the same, and the gains derived therefrom shall likewise be subject to the income tax imposed under Section 24(A)(c) of the Tax Code of 1997 notwithstanding your exemption as an inventor under Section 5 of R.A. No. 7459. However, as an inventor, the possibility of developing other inventions similar to your existing inventions is not remote. Such being the case, when such other yields from the said processing are used entirely in the development of other possible inventions, the same are not subject to internal revenue tax imposed under the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue