Tax Liabilities and Closure of Compounding Establishment

September 16, 1986 BIR RULING NO. 174-86 154 000-00 174-86 Gentlemen : This refers to your letter dated June 19, 1986, protesting in effect, the stand of the Alcohol Tax Division, this Office, that your products, i.e., Gin Sour, Rhum Cola, Whiskey Sour, Gin & Tonic (mild) and Gin & Tonic (double) are compounded liquors subject to ad valorem tax of 4%; that an internal revenue auxiliary and regular labels shall respectively be affixed to each and every bottle of said products; that your establishment is under the supervision of this Bureau; and that the specific tax paid on the ingredients used in the compounding cannot be credited against the ad valorem tax on your finished products. Records of this case show that on February 11, 1986, you were given a permit to operate compounding establishment to manufacture alcohol beverages such as Gin Tonic (mild), Gin Tonic (double), Gin Sour, Rhum Cola, Whiskey Sour, etc.; that you have distributed and sold said products in the open market without first submitting, among others, the manufacturer's sworn statement, the calibration of your tanks for storage and installation of official register books and other BIR Forms needed in your operations; that for the first quarter of 1986, you have filed a percentage tax return declaring therein a gross sale in the amount of P955,477.12, sales tax of P95,547.71 and a tax credit of P156,547.04 resulting to a balance available tax credit of P60,999.33, instead of paying the ad valorem tax. You are of the opinion your products are subject to sales tax and not to the ad valorem tax. cd In reply, I have the honor to inform you that the findings of this Office show that the ingredients of the above-named products consist, among others, of gin, tonic essence, 24 proof or 12% alcohol by volume (mild) or 48 proof or 24% proof alcohol by volume (double). Consequently, and since the said products, are intoxicating beverages on account of their alcohol content, the same are undoubtedly compounded liquors. Under Section 122 of the Tax Code, "compounded liquor" shall include any intoxicating beverage whatever concocted by or resulting from the mixture of or addition to distilled spirits, either before or after rectification, of any coloring matter, flavoring extract or essence or other kind of wine, liquor or other ingredient". Hence, under the same provision of the Tax Code, the above-named products manufactured by your are subject to an ad valorem tax of 4% of the manufacture's gross selling price or market value, being subject to the excise tax imposed under Title IV of the Tax Code, said products are not subject to the sales tax imposed under Title V of the same Code. [Sec. 167(a), Tax Code]. Your request that the specific tax paid on distilled spirits, wines and other ingredients used in compounding your products be credited against the ad valorem tax due thereon cannot be granted for lack of legal basis. Aside from the ad valorem tax, you are subject to the annual fixed tax of P2,000.00 as compounder, pursuant to Section 161(3)(c) of the Tax Code. As regards the affixture of internal revenue labels on the abovenamed products, the same is provided in Section 7 of Revenue Regulations No. 15-85 which provides: "Sec. 7. Affixture of Internal Revenue Labels . An Internal revenue auxiliary label shall first be firmly affixed to each and every primary container of bottles, flasks, kegs, jars or tins, by pasting it midway across the opening of the said container rendering it securely sealed thus preventing the removal of its contents without breaking the auxiliary label before domestic compounded liquors are packed in secondary containers such as cases, boxes, packages, cartons and the like. The internal revenue regular label shall be firmly affixed midway across the edge of the Cover flap and the side of the boxes used as secondary containers hindering the removal of its contents without breaking the said label. However, if barrels, kegs, drums, jars, demijohns or tin cans are used as primary containers of domestic compounded liquors, only the regular labels shall be affixed to each and every container." Said labels shall be broken only when the container is opened and destroyed when emptied. (Sec. 9, Ibid) As regards to closure of your compounding establishment, the same is justified in view of your failure to pay the ad valorem taxes due on your compounded liquors manufactured therein. This Office enjoys regulatory power over your compounding establishment in accordance with Section 136 of the Tax Code, which provides: "Sec. 136. Extent of Supervision Over Establishments Producing Taxable Output . The Bureau of Internal Revenue has authority to supervise establishments where articles subject to a specific tax are made or kept. The Minister of Finance shall prescribe regulations as to the mode in which the process of production shall be conducted in so far as may be necessary to secure a sanitary output and to safeguard the revenue." Therefore, your compounding establishment shall remain closed until after the ad valorem taxes due from your compounded liquors, to be ascertained after investigation, shall have been paid. In this connection, it is requested that the necessary cooperation be extended to our assigned internal revenue officers in order to facilitate the investigation. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner