BIR Ruling [UN-053-94]

February 11, 1994 BIR RULING [UN-053-94] Honorable Romeo L. Bernardo Undersecretary of Finance Manila S i r : This refers to your letter dated January 31, 1994 requesting this Office to submit comments/action program cited in the Philexport/PTO-O study entitled, Enhancing the Investment Climate, relative to the following issuances: 1. The 1993 withdrawal of income tax holiday privileges of industrial estates, which was subsequently restored; 2. The VAT on packaging materials, removed in 1992 then restored in April 1993 and removed again in late 1993; 3. The VAT exemption for mining firms, which was revoked in 1992 but was reversed seven months later. In reply thereto, I have the honor to submit the following clarifications: 1. By way of explaining the contradicting issuances relative to the taxability of industrial estates, the pertinent BIR rulings and the respective rationale thereof are hereunder enumerated: cdtech 1. BIR Ruling No. 206-91 dated October 4, 1991 states that since Laguna Technopark, Inc. is registered with the Board of Investments as a preferred non-pioneer industrial estate developer, it is entitled to a 4-year income tax holiday effective February 28, 1991 which is date of commencement of its commercial operations. Accordingly, it is held not subject to the creditable withholding tax. 2. BIR Ruling No. 48-93 dated January 22, 1993 states that since Laguna Technopark, Inc. is neither a producer nor manufacturer of specific products and commodities under Articles 16 and 18, in relation to Article 28 of the Omnibus Investment Code (Executive Order No. 226), the listing of its activity in the Investment Priorities Plan is doubtful because it is not related to the production of specific products and commodities; thus, since the Department of Justice declined to render an opinion whether or not industrial estates are eligible for registration, this Office ruled that its registration with the Board of Investments was doubtful; hence Laguna Technopark, Inc., an industrial estate developer, was held subject to the creditable withholding tax of 2.5%. 3. BIR Ruling No. 85-93 dated March 8, 1993 in effect held that industrial estates, after all, are entitled to income tax holiday and understandably exempt from the creditable withholding tax of 2.5% revoking BIR Ruling No. 048-93. 2. In the initial implementation of the VAT law, the term raw materials was liberally construed so as to include packaging materials (VAT Ruling No. 103(b)-019-88-092-88 dated March 10, 1988). On the basis thereof, the packaging materials used in the packaging of finished or processed goods for export were zero-rated. When then Commissioner Jose U. Ong took over, he adopted a more restrictive interpretation of the term "raw materials" limiting it only to articles that are converted into or which forms part of the finished product. On the basis of these criteria, packaging materials were excluded from the term "raw materials". Consequently, packaging materials were held to be taxable when sold by the supplier to an export-oriented producer of finished goods which are actually exported (VAT Ruling No. 101-92). However, upon a request for reconsideration by the industry, packaging materials are considered raw materials when the same are sold by the supplier to an export-producer as contemplated under Revenue Regulations No. 2-88 (RMO No. 22-92). 3. This issue relates to the sale of gold by the mining companies to the Central Bank. Again, during the initial implementation of the VAT, several rulings were issued to the effect that sale of gold to the Central Bank is zero-rated because under Section 2, of Executive Order No. 581, as amended by Executive Order No. 587, such sale is considered export sale. One of such rulings is VAT Ruling No. 74-88 dated March 24, 1988. The underlying considerations for these rulings are: the mining companies are, by law, prohibited from actually exporting their gold; and per declaration of the Central Bank; gold purchased from the mining companies even without exporting abroad forms part of our international reserve and therefore, it has the same benefit as foreign currency generated from actual export. However, then Commissioner Jose U. Ong reversed said rulings and held that sale of gold to the Central Bank is a local sale; hence, subject to VAT. This issue is now pending with the Court of Tax Appeals. cdi Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue