Graduated Fixed Tax Imposed on the Purchase Price of Copra

April 10, 1958 BIR RULING NO. 220-58 The Provincial Revenue Officer Ozamiz City Thru the Regional Director B.I.R. Regional District No. 9 Cagayan de Oro City S i r : Reference is made to your letter dated September 10, 1957 stating the following: LibLex CASE I "'X' is a branch located in Ozamiz City of Company 'Y' located in Cebu City. Their business is buying and selling copra. 'Z' is another company with offices in Cebu City. It buys all the copra of Company 'Y' and sells it to a foreign firm. The foreign firm picks up the copra in branch 'X', Ozamiz City, loads it in a foreign boat. The foreign boat then proceeds direct to port of destination abroad. "Remittances on the sale of the copra from Company 'Y' to 'Z' is made, not to 'Y' the parent Company but to 'X' the branch in Ozamiz City. "'X' does not pay any internal revenue taxes because it alleged no sale is consummated thereat. QUESTIONS: "1. Is 'X' liable to any internal revenue tax, if so, under what particular section in the National Internal Revenue Code? "2. What books of accounts should be kept by 'X"? CASE II "'X' the branch mentioned in Case I sells sight drafts to the public payable in Cebu City not by the parent company 'Y' but by their customer Company 'Z', the companies mentioned in Case I above. 'X' alleges there is no amount charge for the sale of the draft, that it is only for the accommodation of their customers. Official receipts covering the amounts received are issued to the buyers of the eight drafts and these tally with the amounts appearing on the corresponding sight drafts. LLphil "Verification of the alleged customers were found to be a conglomeration of business establishments many of whom have nothing to do with the business of 'X' like: Goodyear Rubber & Tire Co., Goodrich Rubber Co., Firestone Tire Co., and several dry goods merchants and copra dealers. Only a few are copra producers. In this particular case, 'customers' should connote sale and since branch 'X' does not engage in the sale of copra nor any other commodity except the 'sight drafts' the alibi of 'accommodation of customers' will not stand the acid test. "Stubs of the sight drafts sold prior to August 20, 1957 have allegedly been sent already to their main office 'Y' in Cebu City. But from August 20 to September 6, 1957 a total of 32 sight drafts were sold involving the total amount of P61,383.23. QUESTIONS: "1. Is 'X' liable to any internal revenue taxes on this kind of transactions, if so, under what particular section in the National Internal Revenue Code? "2. What books of accounts if any, should be kept? CASE III "'X', again the branch mentioned in Case I lends money or advance money to copra dealers and copra producers dealing with it. It is alleged that there is no interest charged but for and in considerations of such loans or cash advances which are sometimes covered by real mortgates, 'X' reduces the purchase price of copra by 2 or more centavos per kilo on all purchases until the amount of the loans or advances are fully paid. It is alleged further the loans or advances are for the 'convenience of customers'. The reason given being partly legitimate and true would have ended the investigation but it has been discovered that whatever extra profit realized by this reduction in the cost of copra purchased is offset by a manipulation of the shrinkage account. Since there is no hard and fast rule established by the Bureau about the percentage of shrinkage to be allowed cases which are protested by taxpayers on the question of the rate of shrinkage have been decided in their favor. Thus the Bureau does not benefit on this extraneous income of copra buyers because the manipulation of the shrinkage account offset the net profit realized. LLjur QUESTIONS: "1. What internal revenue tax, if any, should 'X' pay for this kind of business transaction" "2. What policy or standard should be set up regarding the rate of shrinkage to be allowed to correct this weakness, a loophole used for tax evasion?" In reply thereto, you are informed as follows: In Case I, "X" is subject to the graduated fixed tax because the circumstance that "Z" remits to "X", and not to "Y", the purchase price of copra removed from "X" is indicative of the fact that while sale is negotiated by "Y", it is actually a sale by "X".s "X" should keep the regular books of accounts. Case II cannot be answered for insufficiently of the facts. In this connection, you are requested to furnish this Office with information as to the purpose and motive of "X" in selling "sight drafts" drawn against "Z", and whether or not "X" receives fees therefor. In Case III, "X" is not subject to any tax on business. It cannot be considered a lending investor in this instance because the alleged loans given may be considered as mere advances. Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue