Proper Tax Rates for Petron's Sale of Aviation Fuel and Kerosene

October 14, 1999 BIR RULING NO. 160-99 Sec. 148 (g) & (h), RR 8-96-000-00-160-99 Belo Gozon Parel Asuncion & Lucila Attorneys-at-Law 15th Floor, Sagittarius Condominium H.V. dela Costa Street, Salcedo Village Makati City 1227 Attention: Atty . Felipe L . Gozon Gentlemen : This refers to your letter dated July 23, 1999 requesting on behalf of your client, PETRON CORPORATION, for a ruling to the effect that the excise tax that should be assessed and collected for its sale of kerosene taken from its kerosene tanks is the rate imposed by law on kerosene, i.e., P0.60/liter. LexLib It is represented that PETRON CORPORATION (hereinafter known as "PETRON") is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that is the manufacturer/seller of finished petroleum products which include kerosene and aviation fuel (Jet A-l); that at its refinery in Limay, Bataan, PETRON maintains several storage tanks designated for various petroleum products, among others, storage tanks for kerosene and storage tanks for aviation fuel; that due to the technical advancement in the refinery process, PETRON was able to produce dual kerosene (or DPK) which is being kept in storage tanks designated for kerosene; that in view of the high demand for aviation fuel, there were times when PETRON was constrained to sell aviation fuel to customers/airlines sourced from storage tanks designated for kerosene; that in such cases, PETRON pays to the Bureau of Internal Revenue (BIR) the excise tax imposed on aviation fuel at the rate of P3.67/liter and correspondingly bills its customers/airlines for the sale of aviation fuel; that PETRON sells kerosene as kerosene only to non-aircraft or non-airline customers and correspondingly pays the specific taxes being imposed on kerosene, i.e., P0.60/liter; that on the other hand, it sells aviation fuel only to aircraft or airline customers, that such transactions are clearly reflected in Petron's invoices for kerosene and aviation fuel; that you are of the opinion that the excise taxes to be imposed on kerosene and aviation turbo jet fuel is clearly defined under Section 148(g) and (h), respectively, with the proviso that once a kerosene is being used as aviation fuel, it shall be taxed at the rate imposed on aviation fuel, i.e., P3.67/liter but which tax to be assessed on the user thereof; that a "user", as defined under Revenue Regulations No. 8-96, can either be the importer who resells the kerosene as dual purpose kerosene or aviation jet fuel, or the purchaser who uses the kerosene as aviation jet fuel; that you categorically posited that PETRON does not fall within the definition of "user" based on the following facts, viz: "a) Firstly, PETRON does not resell the kerosene as dual purpose kerosene or as aviation fuel for aircraft or private planes. This can be shown through the invoices it issues to purchasers, either in the item description or selling price or both (see Annex A-1 and A-2). "b) PETRON does not sell kerosene as kerosene to airlines or aircraft customers, thus, indicating the clear intent of PETRON to sell kerosene only as kerosene. "c) Thirdly, there is no " upgrading " process undergone by the kerosene from the time of its importation or production to the time of its sale to the purchaser. "d) Fourthly, it would be highly unjust for PETRON to be made to pay the excise tax imposed on aviation jet fuel for the kerosene it sells only because the non-airline or non-aircraft customer decides to use the kerosene as jet fuel . and that the foregoing circumstances support the position that PETRON should not be taxed using the rate of jet fuel on the kerosene it sells, but rather, it is the purchaser who should be taxed at the rate of P3 . 67/liter if such purchaser uses the kerosene as jet fuel as provided for under Section 148(h) of the 1997 Tax Code and Rev. Regs. 8-96. LibLex In reply, please be informed that pursuant to Section 148 (g) and (h) of the 1997 Tax Code, which provides that "SEC. 148. Manufactured Oils and Other Fuels . There shall be collected on refined and manufactured mineral oils and motor fuels, the following excise taxes which shall attach to the goods hereunder enumerated as soon as they are in existence as such: "xxx xxx xxx "(g) Aviation turbo jet fuel, per liter of volume capacity, Three pesos and sixty-seven centavos (P3.67); "(h) Kerosene, per liter of volume capacity, Sixty centavos (P0.60): Provided, That kerosene, when used as aviation fuel, shall be subject to the same tax on aviation turbo jet under the preceding paragraph (g), such tax to be assessed on the user thereof ; "xxx xxx xxx (Emphasis supplied) an excise tax at the rate of P0.60 per liter shall be imposed on kerosene. However, if it is being used as aviation fuel, it shall be subject to the same tax rate of P3.67 per liter of volume capacity imposed on aviation turbo jet fuel provided under item (h) of the same Section 148. In such case, the tax shall be assessed on the user of such kerosene product used as aviation jet fuel. In the instant case, PETRON manufactures and sells both kerosene and aviation jet fuel and for which it maintains storage tanks designated for the products thus mentioned. Likewise, because of technical advancement in the refinery process, it produces dual purpose kerosene (DPK). DPK is being stored in PETRON's storage tanks for kerosene. According to the Excise Tax Service, this Bureau, DPK is a special type of kerosene purposely for aviation use. Somehow, this conclusion was deducted from the very definition of "Aviation Turbo Jet Fuel", which is defined as kerosene-type fuels or blends of gasoline, distillates and residual oils which are used as oil for gas turbine powerful aircraft. Further, and as represented, whenever PETRON is constrained to sell aviation fuel to airline customers sourced from the storage tanks designated for kerosene, it pays the tax corresponding to the specific tax on aviation fuel, i.e., P3.67/liter. It sells, however, kerosene only to non-aircraft or non-airline customers and for which it pays the specific tax of P0.60/liter imposed on kerosene. In all its sale of aviation jet fuel to airline or aircraft customers, it pays the specific tax of P3.67/liter on aviation fuel. This fact is duly substantiated by evidence. (see letter of ACIR Leonardo B. Albar, Excise Tax Service dated August 24, 1999, addressed to HREA, Legal Service) For purposes of determining the specific tax liabilities of PETRON relative to its sale of kerosene, specifically, the DPK, this Office is constrained to determine the business activity aspect of the company, as alleged. The best evidence available at hand are the invoices supporting the transaction/s which openly indicate that, first, aviation fuel are being sold to airline or aircraft customers only and kerosene (or DPK) to non airline/aircraft customers, and second, whenever PETRON sells DPK to these airline or aircraft customers, it imposes and pays a specific tax at the rate equivalent to that of aviation fuel. Thus, for purposes of assessment and collection of specific taxes, the sale of DPK to the airline/aircraft customers has been equally complied with. However, the foregoing do not fully resolve the issue. This Office also take notice of the fact that circumstances tend to show that there are related sales of DPK by PETRON, which are ultimately used by airline/aircraft customers but which specific taxes assessed and paid to the government, were that of kerosene, i.e., P0.60/liter. On the hand, the sale of DPK by PETRON to non-airline/aircraft customers tends to show that somehow, the product is being resold to the airline/aircraft customers which use the same as jet fuel. Indicatively, when used as jet fuel after DPK was resold, no further excise tax which necessarily corresponds to aviation fuel was paid and remitted to the government. LibLex After due consideration of the foregoing, this Office hereby holds that PETRON is paying the correct specific taxes for every transaction thus entered, such that it pays the rate of P3.67 per liter for its sale of aviation fuel and kerosene (DPK) to airline/aircraft customers, and P0.60/liter for its sale of kerosene to non airline/aircraft customers. On the matter of who shall be liable for the specific tax on aviation fuel for the kerosene (DPK) sold as such by PETRON but thereafter is found out to be ultimately used as jet fuel by the airline/aircraft companies, this Office cannot hold PETRON further liable considering that its sales invoices properly include the correct specific tax corresponding to aviation fuel whenever it sells DPK to airline/aircraft companies. Likewise, assuming that it was the non airline/aircraft customers who sell the DPK to these airline/aircraft customers, still PETRON cannot be held liable for the deficiency excise taxes considering that PETRON does not exercise full control on how the DPK should be used by non aircraft/airlines customers. Under this circumstances, the proviso of Section 148(h) of the 1997 Tax Code, thus "(h) Kerosene, per liter of volume capacity, Sixty centavos (P0.60): Provided , That kerosene , when used as aviation fuel , shall be subject to the same tax on aviation turbo jet fuel under the preceding paragraph (g) , such tax to be assessed on the user thereof ; makes the user of kerosene (DPK) liable to pay for the specific tax corresponding to aviation fuel at the rate of P3.67 per liter whenever the product is use as aviation fuel, unless the correct specific tax has been previously declared to have been paid, i.e., P3.67/liter. Such being the case, the user of DPK shall pay the full amount of the specific tax corresponding to the aviation jet fuel without crediting the tax that have been paid on kerosene. In this connection, the term "user" shall be understood to be "an importer or purchaser who resells or uses the same as dual purpose kerosene (no matter how described) or as aviation fuel for aircraft or private plane on which only the specific tax on kerosene was previously paid by the said importer or purchaser. (Revenue Regulation No. 8-96) Accordingly, it shall be the user of kerosene (DPK) who shall pay the specific tax of P3.67/liter corresponding to aviation jet fuel whenever the product is used as aviation fuel. Moreover, the above-cited proviso of Sec. 148(h) of the 1997 Tax Code will not apply in the case of sale of DPK by PETRON eventhough the ultimate usage of the product is for aviation fuel since PETRON is the manufacturer/seller of the product and not the user thereof. Finally, as aptly recommended by the Excise Tax Service, PETRON is hereby required to set up and establish storage tanks designated as follows: 1. DPK tanks for storage of kerosene exclusively for use as aviation jet fuel for aircraft or private plane. All sales and withdrawals thereof for this purpose and use shall be from this DPK tanks only. 2. Kerosene tanks for storage exclusively for kerosene. Sales to other non-airline/aircraft customers be withdrawn only from these kerosene tanks. 3. All withdrawals from the DPK and kerosene tanks shall be made in the presence and witnessed by the BIR inspector assigned in the establishment, properly confirmed and attested in the corresponding Official Invoice and Withdrawal Certificate. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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