Tax Consequence of Importation of Raw Materials by Resins, Inc.

November 12, 1985 BIR RULING NO. 202-85 30 (c) (1) 197-83 202-85 Gentlemen : This refers to your letter dated October 2, 1985 requesting, in behalf of your client, RESINS, INC., a ruling on "1. Whether or not the advance sales tax on the imported raw materials is deductible from the gross income for income tax purposes in the year of importation; and "2. Whether or not said advance sales tax could be credited against the sales tax due on the finished products where the sale is made in the year or years subsequent to the importation of the raw materials." In reply, please be informed as follows: 1. For income tax purposes, taxes paid or accrued within the taxable year in connection with the taxpayer's profession, trade or business are deductible pursuant to Section 30(c)(1) of the Tax Code as amended. (see also Sec. 80, Rev. Regs. No. 2) Such being the case, your client can deduct from its quarterly gross income, such business taxes consisting of the advance sales tax paid on the imported raw materials used in the manufacture of its finished products as well as the sales tax paid on the said finished products which are sold by it during the taxable quarter. (Sec. 85, Tax Code). Taxes are deducted in accordance with taxpayer's accounting method. A cash basis taxpayer deducts taxes paid on his return for the taxable year in which he pays them. (34 Am. Jur. 2d, 1976 Ed. 512) Accordingly, a cash basis manufacturer can deduct the advance sales tax in the year of importation if the tax was paid during the year. On the other hand, an accrual basis taxpayer deducts a tax liability in the taxable year in which the amount of tax and his liability became fixed. (Ibid, p. 513) Liability to the advance sales tax on imported articles accrues and is payable upon removal thereof from customs custody. (Sec. 193(b), Tax Code; BIR Ruling No. 71, s. 1965) Accordingly, an accrual basis manufacturer can deduct the advance sales tax paid by him during the year when the raw materials were removed from customs custody. 2. While under Section 5(c) of Revenue Regulations No. 8-78 implementing the sales tax credit provision of the Tax Code (before amendment by Executive Order No. 990), the advance sales tax paid on the raw materials is creditable against the sales tax due upon the sale of the finished product if said raw materials are used in the manufacture of the finished product thus forming part thereof, under Revenue Regulations No. 20-84 amending Revenue Regulations No. 8-78, effective taxable quarters beginning after October 15, 1984, the advance sales tax paid on the raw materials is creditable against the sales tax due upon the sale of the finished product regardless of whether said raw materials are used in the manufacture thereof. cdtech Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner