Prescribing Guidelines in the Application of VAT Ruling No. 59-83 and VAT Ruling No. 33-89

1990 REVENUE MEMORANDUM ORDER NO. 49-90 SUBJECT : Prescribing Guidelines in the Application of VAT Ruling No. 59-83 and VAT Ruling No. 33-89 TO : All Internal Revenue Officers and Others Concerned I. Objective This order is being issued in view of the inconsistencies in VAT Ruling Nos. 59-88 and 33-89. Moreover, this order is also being promulgated so as to lay down the guidelines and policies relative to the application of each ruling which shall be made on a case to case basis. II. Background 1) VAT Ruling No. 59-88 (dated March 8, 1988), which was issued to Mr. Amelito Putong, does not allow mining companies to claim for transitional input tax credits against their output tax. This was made on the premise (by the previous VAT Review Committee, RSO 1-88) that at the time, LOI 1416, which suspended the payment of taxes on distressed mining companies, was not yet lifted. 2) VAT Ruling No. 33-89 (dated February 9, 1989) which was issued to Atlas Consolidated Mining ruled out that taxes pertaining to the imported portion of the materials and supply inventories as of December 31, 1987 can be included in the 8% presumptive input tax. This was decided in view of the lifting of the suspension of the payment of taxes by virtue of E.O. 340. Thus, the inclusion of said materials and supplies in the transitional input tax is subject to the following conditions: (a) the mining firm shall show evidence of payment of back taxes; (b) a list or report of such inventory had been filed with the BIR in accordance with the pertinent administrative issuances. 3) Under the old sales tax law, persons subject to the sales tax were entitled to tax credit (deferred sales tax credit) but said privilege was limited to purchased/imported raw materials, parts, accessory or other articles "for conversion into or intended to form part of any finished product" (Section 166 NIRC of 1977.) Since the above conditions are not applicable to the sale of copper mining firms, they did not maintain a deferred sales tax credit account. 4) Under LOI 1416, payments by copper mining firms of all direct and indirect taxes were suspended until such time that the firms have recovered. (i.e. they remained liable to tax although payment was deferred) When said suspension was lifted by E.O. 340, the said firms were required to pay back taxes but some requested for discount or staggered payment. 5) When the VAT system became effective on January 1, 1988, copper mining firms became subject to VAT but were not entitled to transitory input tax credit because of the absence of a DSTC credit balance as of December 31, 1987 (under VAT Ruling 059-88 in relation to Section 26(b)(c) of RR-5-87). cd i 6) After VAT Ruling No. 33-89 was issued, copper mining firms were allowed an 8% presumptive input tax on imported material and supply inventories as of December 31, 1987 on the basis of Section 26(b) (2) of E.O. 273 and subject to the applicability of RR No. 5-87. It is noteworthy, however, that taxes on locally purchased materials and supplies forming part of the inventory as of December 31, 1987 of copper mining firms may not have been paid for the sales tax payable by their suppliers as well as the taxes on their owned importations were also included in the tax suspension privilege under LOI 1416. Thus, in implementing E.O. 340, there is a problem of determining the amount of taxes that would have been passed on but not included by the sellers in voicing sale of materials and supplies to copper mining firms. In allowing therefore the 8% presumptive input tax, reference should be made to Section 25(a)(2) of E.O. 273 on the condition that material and supply inventories be tax paid. III. Guidelines and Policies On the basis, the following guidelines should be laid down in applying both rulings. 1. Determine if copper mining firms have been required to pay the direct/indirect taxes on their tax suspended purchase or importation of materials and supplies during the effectivity of LOI 1416. If not, VAT Ruling No. 59-88 should be upheld, hence the 8% presumptive tax shall not be granted. 2. If the suspended taxes on the purchase/importation of materials and supplies were accounted and paid back the mining firm in full (i.e. applying E.O. 340), then VAT Ruling No. 33-89 should be upheld, hence, the 8% presumptive input tax on material/supply inventory as of December 31, 1987 should be allowed. aisa dc 3. If back taxes have been paid at a discount, then the firm should not enjoy not the full 8% presumptive input tax. Rather the effect of such discount should be considered in computing the allowable amount of input tax. This order takes effect immediately. (SGD.) JOSE U. ONG Commissioner of Internal Revenue By: (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)