Privilege of Purchasing Naphtha and Liquefied Petroleum Gas Free of Specific and Ad Valorem Taxes

June 13, 1988 BIR RULING NO. 258-88 127 000-00 258-88 Gentlemen : This refers to your letter dated September 4, 1987 requesting a ruling as regards your privilege of purchasing naphtha and liquefied petroleum gas free of specific and ad valorem taxes granted under Republic Act No. 2278 in relation to LOI No. 1468. It appears that under Republic Act No. 2278, you were granted a franchise for the construction, maintenance and operation of gas system for heat, lighting and power in the City of Manila and the province of Rizal; that under said Act, you are subject to franchise taxes which shall be "in lieu of all taxes" such as the specific tax; and that there is a need to effectuate and give meaning to R.A. No. 2278 to preserve and maintain your financial stability; for these reasons, LOI No. 1468 was issued stating as follows: "1. All oil companies and refineries are hereby allowed to deliver naphtha and liquefied petroleum gas to the Manila Gas Corporation for use in the latter's city gas corporations, free of specific and ad valorem taxes: Provided, that Manila Gas Corporation is already the owner or possessor of such products prior to or at the time of their removal from the place of production or bonded warehouse of the local refineries . "2. Ownership of oil products purchased by the Manila Gas Corporation from local oil companies and refineries shall be transferred to the Manila Gas Corporation upon approval of the purchase order by the oil companies and refineries , even before the oil products are actually withdrawn from the place of production or bonded warehouse of the oil companies and refineries." (Emphasis supplied) In effect, the foregoing provision of LOI No. 1468 amended the exemption provisions of R.A. No. 2278 in the sense that deliveries to you of naphtha and liquefied petroleum gas shall be exempt from specific and ad valorem taxes only when you are already the owner or possessor of said products "prior to or at the time of their removal from the place of production or bonded warehouse." Apparently, this tax exemption privilege is based on the then provisions of Section 135 of the Tax Code as follows: "Sec. 135. Payment of Specific Tax on Domestic Products . Specific taxes on domestic products shall be paid by the manufacturer/producer, owner, or person having possession of the same; and except as otherwise especially allowed, such taxes shall be paid immediately before removal from the place of production; Provided, however , That specific taxes on locally manufactured petroleum products levied under Sections 153, 155 and 156 of this Title except lubricating oil and grease shall be paid within fifteen (15) days from the date of removal thereof from the place of production; . . ." Under this provision, the person becoming owner of the articles subject to specific tax prior to its removal from its place of production is a party liable for the payment of such tax. Such being the case, in view of LOI No. 1468, you were exempt from the specific tax because you became the owner of the article at the time of removal from the place of production. Thereafter, said Section 135 was re-numbered as Section 110 and amended by P.D. No. 1994, effective January 1, 1986, to read as follows: "Sec. 110. Payment of Excise Taxes on Domestic Products . (a) Persons liable; time for payment. Unless otherwise especially allowed, excise taxes on domestic products shall be paid by the manufacturer or producer before removal from the place of production: Provided, however, That excise tax on locally manufactured petroleum products levied under Section 128 of this Title shall be paid within (15) days from the date of removal thereof from the place of production. Should domestic products be removed from the place of production without the payment of the tax, the owner or person having possession thereof shall be liable for the tax due thereon; xxx xxx xxx Under this amendment, the word, "owner" was deleted from the enumeration of persons subject to excise tax; hence, said owner is no longer a party liable for the payment of the tax before removal from the place of production. In other words, your exemption from the payment of excise taxes on naphtha and liquefied petroleum gas before removal from the place of production under LOI NO. 1468 is already repealed by Section 110 of the Tax Code, as amended by P.D. No. 1994, effective January 1, 1986. Consequently, said articles became subject to the excise taxes to be paid by the parties remaining to be liable thereof, i.e., the manufacturer or producer thereof. In this connection, based on purchase orders approved by this Office, quantities of naphtha and LPG were delivered to you during the year 1986 by local oil companies and refineries and obviously removed from the place of production without payment of the specific tax. It should be noted that as heretofore stated your exemption from payment of specific tax on naphtha and LPG before removal from the place of production has been repealed by P.D. No. 1994. Consequently, your tax exemption under the "in lieu of all taxes" provision of Republic Act No. 2278 still subsists. Such exemption under RA 2278, applies only to such taxes for which you would, otherwise, be directly liable. Under the above-quoted provision of Section 110 of the Tax Code, as amended by P.D. No. 1994, should domestic products be removed from the place of production without payment of the tax, the owner or person in possession thereof shall be liable on the tax due thereon. Such being the case, since the aforesaid quantities of naphtha and LPG were removed tax-free from the place of production, and inasmuch as you were the owner thereof, after such removal and, therefore, the party directly liable for the payment of the specific and ad valorem taxes due thereon, you became exempt from the payment of said taxes beginning January 1, 1986, the effective dated of PD No. 1994. aisadc However, under Executive Order No. 93, effective March 10, 1987, your aforesaid exemption under Republic Act No. 2278 is already withdrawn. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner