Tax Exempt BOI-Registered Supplier is Not Subject to Corporate Income Tax

July 27, 1989 BIR RULING NO. 157-89 28-000 000-00 157-89 Gentlemen : This refers to your letter dated April 18, 1989 requesting confirmatory ruling that the approved tax credit of P5,281,031.80 for sales tax deemed paid on raw materials purchased from a tax exempt BOI-registered supplier is not subject to corporate income tax on the year of receipt. cd In reply, please be informed that the basis of said tax credit is the provision under then Section 166(b) of the Tax Code stating: "Whenever a tax-exempt product of a pioneer enterprise registered with the Board of Investment is used in the manufacture or production of any article sold domestically the sales or excise taxes otherwise due on such tax-exempt product shall be credited against the sales tax due on the manufactured article." Said provision, however was deleted by Executive Order No. 36 effective August 1, 1986 (RMC 25-86; BIR Ruling No. 003-87), the effect of which is that beginning said date the tax credit due thereon may no longer be claimed as tax credit by the purchaser- manufacturer. Be that as it may, the fact that you have the tax credit indicates that the legal basis for its issuance had been resolved. Revenue Memorandum Circular No. 13-80 provides that special tax credits granted under R.A. 5186, R.A. 6135 and P.D. 535 for sales, compensating and specific taxes paid on supplies and raw materials imported by a registered exporter producer are declarable as gross income in the year of receipt because said taxes are considered allowable deductions for income tax purposes. The pertinent portion of said circular reads: "2. Special Tax Credits granted under R.A. 5186; R.A. 6135 and P.D. 535 These tax credits and their consequences are as follows: "A. Sales, compensating and specific taxes are paid on supplies and raw materials imported by a registered export producer. Said taxes are given as tax credit to be used in the payment of taxes, duties, charges and fees due to the national government in connection with its operations. (Sec. 7(a), R.A. 6153) "The tax credits granted should form part of the gross income to the enterprise in the year of receipt of tax credit as said taxes paid are considered allowable deductions for income taxes purposes." Conversely, if the taxes are not considered allowable deductions, as in the instant case of deemed paid taxes, which do not represent actual necessary and ordinary expenses incurred by you, the conclusion is justified that the tax credit given for deemed paid tax is not declarable as gross income for income tax purposes. Article 22 of the Omnibus Investment Code is clear in stating that the tax credits issued under the Code shall not form part of the gross income of the grantee/transferee for income tax purposes under then Section 29 (now Sec. 28) of the National Internal Revenue Code and are, therefore not taxable. Apparently, the reason behind it is that tax credit is not one of the items of gross income under then Section 29 (now Sec. 28) of the Tax Code. It cannot be also placed in the class of other income because the economic benefit one derives from a tax credit is limited to the payment of taxes. It is of value to the recipient only insofar as its obligation to the giver is concerned. Taxing it would render nugatory the grant of incentives and issuances of tax credit. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner