Determination of Basis for Royalty Tax in Mineral Products

September 10, 1987 BIR RULING NO. 281-87 219 (a) (c) 000-00 281-87 Gentlemen : This refers to your letter dated June 22, 1987 stating that Alamag Processing Corporation, Rio Chica Mining Corporation and Pacific Shore Mining Corporation, all lessees of mineral lands, entered into a Service Contract whereby Alamag will extract lateritic soil from the land covered by the mining lease; that the extracted lateritic soil undergoes the complex process of manufacturing before 100% chemical grade chromite is processed; that the resulting manufactured or processed chemical grade chromite is exported abroad; and that Alamag has been granted by the BOI Certificate of Registration No. 80-852 with a preferred pioneer status as manufacturer. On the basis of the foregoing, you now request a ruling as to whether your client, Alamag Processing Corporation (which assumed the sole responsibility of paying the royalty tax pursuant to BIR Ruling No. 160-80 can deduct the cost of manufacturing 100% chemical grade chromite in arriving at the taxable base of the royalty tax payable under Section 216(b)(3) of the Tax Code. Pursuant to Section 217 of the Tax Code, royalty taxes shall be collected on all minerals or mineral products or quarry resources extracted or produced from all mineral lands not covered by leases. Pursuant to Section 218 of the same Code, the royalty taxes shall be due and payable upon the removal of said articles from the locality where mined. Section 219 (a) and (c) of the Tax Code provides as follows: "SEC. 219. . . . (a) The term " gross output " shall be interpreted as the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a separate entity without any deduction from mining, milling, refining, (including all expenses incurred to prepare the said minerals or mineral products in a marketable state) as well as transporting, handling, marketing, or any other expenses: Provided, however , that if the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.F.I. terms, the actual cost of ocean freight and insurance shall be deducted. Provided, finally , that in the case of mineral concentrate not traded in commodities exchanges in the Philippines or abroad such as copper concentrate, the actual market value shall be the world price quotations of the refined mineral products content thereof prevailing in the said commodities exchanges, after deducting the smelting, refining and other charges incurred in the process of converting the mineral concentrate into refined metal traded in those commodities exchanges. "b) . . . "(c) The term 'mineral products' shall mean things produced and prepared in a marketable state by simple treatment such as washing or drying, but without undergoing any chemical change or process or manufacturing, by the lessee, concessionaire or owner of mineral lands" Accordingly, since under the aforecited section of the Tax Code, the "mineral products" which are subject to royalty tax are those that do not undergo manufacturing and inasmuch as the cost of manufacturing was incurred after extraction and removal from the mineral land, it follows that said cost can be deducted from the export price to arrive at the value of the "mineral products" prior to manufacturing and which should be the basis of the royalty tax under Section 216(b)(3) of the Tax Code. This conclusion finds support in the decision of the Court of Tax Appeals in the case of Atlas Consolidated Mining and Development Corporation (CTA Case No. 2842 dated January 23, 1981 which ruled that manufacturing and processing cost incurred after the removal of the copper concentrate from the mine site up to its manufacture into wire bar is deductible from the price quotation of the latter for the purpose of determining the royalty tax due from the copper concentrate. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner