BIR Ruling [UN-101-95]

March 10, 1995 BIR RULING [UN-101-95] MEMORANDUM FOR: The Commissioner of Internal Revenue Attention: Ms . Grace Evelyn A . Lacerna Executive Assistant III This refers to your Memorandum dated March 1, 1995 requesting for the proper interpretation/construction of Section 127(b) of the Tax Code, as amended, quoted below: cdt "(b) Determination of gross selling prices of goods subject to ad valorem tax . Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale in another establishment of which he is the owner or in the profits at which he has interest, the wholesale price in such establishment shall constitute the gross selling price. Should such price be less than the cost of manufacture plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than 10% of such manufacturing cost and expenses, shall be added to constitute the gross selling price . One feature of the excise tax system is that it is collected only once upon the sale by the manufacturer or producer of the articles subject to excise tax. Ad-valorem tax is one of the two methods of computing excise tax. The other is specific tax, which is based principally on a unit of measurement, such as weight, volume, length, or proof-liter. The advantage of the ad-valorem tax system is that the collection goes up automatically with the increase in price. On the other hand, the advantage of the specific tax is that the method of determination is objective. In computing ad-valorem tax, the rate is applied to the gross selling price of the article. However, the weakness in the ad-valorem tax system is that it is susceptible to manipulation by the manufacturer or producer. For example, a manufacturer or producer can deliberately depress the gross selling price of the article in order to reduce the tax base upon which the excise tax rates will be applied. This is particularly true when the manufacturer or producer sells to its own marketing outlet. Since the excise tax is imposable only once, upon the sale of the excisable articles by the manufacturer or producer, in order to reduce their excise tax liability, it can afford to lower its gross selling price below production cost and thereafter recover its loss surreptitiously from the corresponding gain of its marketing outlet whose subsequent sales are no longer subject to excise tax. In order to correct the inherent weakness in the ad-valorem tax system, the aforesaid provision was intended to prevent the manufacturer or producer from selling their products at below production cost; otherwise, their excise tax liability will be computed based on the manufacturing cost and expenses plus 10% mark-up representing their reasonable profit margin. If the manufacturer or producer will sell to its own marketing outlet or in the profit of which he has an interest, the gross selling price of the excisable articles will be computed on the gross selling price of the marketing outlet (instead of the manufacturer's/producer's gross selling price) plus 10% mark-up by way of penalty. Accordingly, pursuant to the aforequoted provision, if the gross selling price of the excisable articles is discovered to be less than the production cost of the articles, assessments could be issued to collect the deficiency resulting from the upward adjustment of the ad-valorem tax liability of the producer/manufacturer. ALICIA P. CLEMENO Assistant Commissioner (Legal Service)