Bureau of Local Government Finance Opinion

April 22, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Mary A. S. Bautista-Villareal Principal Tax Service Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Madam : This refers to your letter dated September 27, 2002 requesting confirmation, for and in behalf of your client, California Manufacturing Company, Inc. (CMCI), that locally manufactured Lipton Tea products fall under the classification of " essential commodities " and therefore subject to local business tax at the rate of only one-half (1/2) of the rates imposed on non-essential commodities as provided for in Section 143 (c) (2) of R.A. No. 7160, otherwise known as the Local Government Code of 1991. CacTSI Representations are made that CMCI, a domestic corporation duly organized and existing under the laws of the Philippines as per Certificate of Registration issued by the Securities and Exchange Commission (SEC), is engaged in the manufacture of various processed foods one of which is tea product under the brand name Lipton Tea which is collectively called "Lipton Tea products". Such tea products are as follows: 1. Lipton Ice Tea Lemon 2. Lipton Ice Tea Honeymansi 3. Lipton Ice Tea Four Seasons 4. Lipton Ice Tea Mango 5. Lipton Yellow Label Tea 6. Lipton TJ Label Tea It is represented further that CMCI is paying local business taxes on its manufactured Lipton Tea products at the regular rates prescribed for non-essential commodities under paragraph (a) of Section 143 of the Local Government Code (LGC) of 1991. However, it is your opinion that Lipton Tea products should qualify as essential commodities based on the following: 1. Section 143 (c) (2) of the LGC provides as follows: " SEC. 143. Tax on Business . The municipality may impose taxes on the following businesses: "(a) . . . . "(c) On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (1/2) of the rates prescribed under subsections (a), (b), and (d) of this Section: "(1) . . . . "(2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar , salt and other agricultural , marine, and fresh water products, whether in their original state or not ;" (Underscoring ours) ACcaET "xxx xxx xxx." 2. Section 131 of the LGC defines "Agricultural Product" to include "the yield of the soil, such as corn, rice, wheat, hay, coconuts, sugarcane, tobacco, root crops, vegetables, fruits, flowers, and their by-products; ordinary salt; all kinds of fish; poultry; and livestock and animal products, whether in their original form or not." 3. The phrase "whether in their original form or not" further "refers to the transformation of said products by the farmer, fisherman, producer or owner through the application of processes to preserve or otherwise to prepare said products for the market such as freezing, drying, salting, smoking, or stripping for purposes of preserving or otherwise preparing said products for the market." 4. BLGF's opinion dated September 2, 1997 which opined that "the mixture of various essential commodities into a single product will not negate the classification of said product into an essential commodity as well". In relation thereto, it was emphasized that Lipton tea products of CMCI are manufactured using the following ingredients: a) Refined Sugar approximately 92% of the formulation and is considered as essential product under Section 143 (c) (2) of the LGC; b) Citric Acid 3%; c) Instant Tea Powder 3% of the formulation and by nature an agricultural product for the very reason that it is made from plant leaves, a yield of the soil; d) Natural & Nature Identical Flavors 1%; and e) Vitamin C 1% of the formulation. In this connection, enclosed is a copy of the letter dated October 18, 1993 of the Department of Finance, treating on a similar subject matter, the dispositive portion of which is quoted hereunder: "Thus, where coffee is "a drink made from the seeds of a tropical shrub" (Webster Handy Dictionary), it is clear that being a yield of the soil, it is an agricultural product and, therefore, should be considered as an "essential commodity" subject to pay only 50% of the tax imposed on ordinary commodities pursuant to Sec. 143(c)(2) of the Code." STcDIE Considering therefore, that the main ingredients (95%) in the manufacture of Lipton Tea products are from the yield of the soil or from its by-products, as in the case of sugar which constitutes 92% of the whole formulation aforementioned, this Bureau is of the opinion that Lipton Tea products, as contemplated in the definition of the term "Agricultural products" in Section 131 of the Code, should be classified as " essential commodities " and therefore subject to local business tax at the rate of only one-half (1/2) of the rates in Section 143 of R.A. No. 7160, otherwise known as the Local Government Code of 1991. It is hoped that this clarifies matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director