Taxability of a Chemical Known as "Isopar G"

November 20, 1990 BIR RULING NO. 211-90 145 (b) 000-00 211-90 Gentlemen : This refers to your letter dated March 22, 1989 in behalf of your client Exxon Chemical Eastern (Phils.), Inc. requesting a ruling on the taxability of a chemical known as "Isopar G". The records show that "Isopar G" is Exxon's brand name for the kind of chemical known as isoparaffinic solvent is a substance capable of dissolving another substance (solute) to form a uniformly dispersed mixture (solution) at the molecular or ionic size level. Its chief uses are in the coating fields (paint, varnishes and lacquers), industrial cleaners, printing ink, extractive processes and pharmaceuticals. (Hawley's Condensed Chemical Dictionary 1080; Letter of the Chief, NSTL, Industrial Technology Development Institute). It is observed that before the issuance of Executive Order No. 273, effective January 1, 1988, the applicable provision prescribing an ad valorem tax on the solvents is indicated under then Section 128 (b) of the Tax Code reading: "(b) For products subject to both specific and ad valorem taxes; Specific Ad Valorem (1) Naphtha, regular gasoline and similar products of distillation 2.604/liter 25% (2) Premium and aviation 2.489/liter 25% gasoline xxx xxx xxx (5) Thinners and solvents 2.472/liter 25% tax should refer only to products of distillation similar to or falling under the same class as naphtha and gasoline. "Isopar G" cannot be similar to naphtha or gasoline because the latter two are generally used as fuel while "Isopar G" is used as solvent . An investigation report dated March 27, 1990 submitted to the Chief, Oil and Miscellaneous Taxes Division, confirming that " Isopar G" is used as dispersant of toner did not disprove the conclusion that the same is used as solvent. It is obvious that one of the principal properties of solvent is that it disperses or dissolves substance to its component substances at the molecular level. Based on the foregoing, we believe, and so hold that "Isopar G" should be classified as solvent for tax purposes and, as such, subject only to the 10% VAT. However, if the same is used both as solvent and thinner, it shall be subject to 24% ad valorem tax under Section 145 (b)(2) of the Tax Code, as amended by Executive Order No. 273 in accordance with BIR Ruling No. 041-89; if it results in the collection of a higher tax. Otherwise, if the imposition of 24% ad valorem tax will result in a lower tax collection, the 10% VAT shall be imposed. This is so because for the same volume of solvent used as thinner, the imposition of the 24% ad valorem tax will not necessarily result in higher tax collection that the 10% VAT. The first is computed based on the rate prescribed by the Energy Regulatory Board Resolution No. 03-90 which is P1.2001 per liter for thinner. On the other hand, the 10% VAT is based on landed cost plus 10% mark-up pursuant to Section 101 (a) of the Tax Code; thus, if a given quantity of thinner is expensive, the tax base on which the 10% VAT is applied is necessarily higher resulting in higher tax collection; whereas, if the same quantity of thinner is subjected to 24% ad valorem tax, the tax base is constant at P1.2001 per liter (pursuant to ERB Resolution No. 03-90) regardless whether the thinner is very expensive or very cheap. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner