Amending Revenue Regulations No. 2-86

April 17, 1986 REVENUE REGULATIONS NO. 05-86 SUBJECT : Amending Revenue Regulations No. 2-86 TO : All Internal Revenue Officers and Others Concerned Pursuant to the provisions of Section 277 (326) in relation to Section 4, both of the National Internal Revenue Code, as amended, these regulations are hereby promulgated. SECTION 1 . Scope . These regulations shall govern the implementation of certain provisions of the Tax Code and Revenue Regulations No. 2-86 d ue to the amendments introduced by PD No. 2031. SECTION 2 . Section 4 of Revenue Regulations No. 2-86 is hereby amended to read as follows: acd "Sec. 4. Sales tax on imported articles . (a) Advance sales tax. - The advance sales tax is imposed on the importation of goods, wares, or merchandise for sale, barter or exchange or to be used as inputs in the preparation or manufacture of articles for sale, barter or exchange at the rates prescribed under Sections 163, 164 and 165(A) of the Tax Code. It shall be paid in advance by the importer prior to the release of such articles from customs custody. The tax shall be based on the total value used by the Bureau of Customs in determining tariff and customs duties, including customs duties and other charges. "When the importer himself sells, barters, exchanges or transfers such as imported articles, a sales tax on the original sale at the same rate imposed on importation shall be levied, assessed and collected based on the gross selling price or the gross value in money of the articles so sold, bartered, exchanged or transferred. However, the sales tax due shall be reduced by the amount of advance sales tax paid on importation in the manner prescribed in Revenue Regulations No. 2-86, as amended. "The advance sales tax does not apply to the articles to be used by the importer himself in the manufacture or preparation of articles subject to excise tax under Title IV of the Tax Code. Where the National Economic and Development Authority certifies to the availability of local raw materials of sufficient quantity, comparable quality and price to meet the needs of manufacturers subject to excise tax, the importation of such raw materials shall be subject to advance sales tax. "Any advance sales tax paid on any article imported prior to January 1, 1986 shall be considered as a final tax. Any imported article unsold as of December 31, 1985 which are subsequently sold by the importer himself without such article having undergone processing or manufacturing shall be considered as an original sale of a tax-paid article and therefore the corresponding sales tax on original sale shall no longer be imposed. All articles imported on or after January 1, 1986 when sold "as is" by the importer himself shall be subject to the sales tax on original sale. "(b) Compensating tax . (1) The compensating tax is imposed upon the importation of commodities, goods, wares or merchandise that are neither for sale nor for use of inputs of manufactured products at the rates prescribed in Sections 163, 164 and 165(A) of the Tax Code. It shall be based on the total value used by the Bureau of Customs in determining tariff and customs duties including customs duty and all other charges. The tax due shall be paid before the withdrawal of the said articles from customs custody. "(2) Non-exempt persons or entities who are recipients of purchasers of tax free articles imported into the Philippines by persons, entities or agencies or exempt from tax shall be considered the importer thereof and shall be liable for the duty and internal revenue tax due on such importation. The tax due on such articles shall constitute a lien on the article itself, superior to all other charges or liens. "(3) If, at any time after importation of articles on which the compensating tax has been paid, such articles are sold, bartered or exchanged 'as is' without having been used by the importer for personal purposes he shall be considered as original seller subject to sales tax under Sections 163, 164 and 165(A) of the Tax-Code depending on the classification of the articles sold. The compensating tax paid by him may be credited to the extent of the sales tax due on the original sale only and in no case shall it result in a refund or an excess tax credit. If the articles are used as inputs by the importer in the manufacture of articles subject to sales tax, the compensating tax paid on the imported articles shall be credited to the manufacturer's sales tax due on the finished articles in the same manner as provided in the Section 5(c) of Revenue Regulations No. 2-86, as amended. "(c) Applicability of new rates of advance sales or compensating tax . The rates prescribed under the Tax Code, as amended, shall be applicable to all importations entered or withdrawn on or after January 1, 1986 as determined by the Bureau of Customs in accordance with the Tariff and Customs Code of the Philippines and its implementing regulations." SECTION 3 . Section 5(c) of Revenue Regulations No. 2-86 is hereby amended to read as follows: "(c) Tax credit . (1) On original Sale of manufactured products . - Any excise, sales or miller's tax paid under Titles IV and V of the Tax Code on imported or domestically manufactured, processed or produced raw material, part, accessory or other article purchased during the taxable quarter and intended by the manufacturer for conversion into and to form part of a finished article for sale shall be credited against the sales tax due in the same taxable quarter: Provided , That the amount of the tax on the raw material, part, accessory, or other article is indicated as a separate item in the sales invoice. "In case the raw material are purchased from a pioneer enterprise registered with the Board of Investments, enjoying full or partial exemption from the payment of sales taxes, the sales or excise tax which the pioneer enterprise would have paid had it been taxable may be credited against the sales tax due in the same taxable quarter: Provided , That the percentage of exemption from sales tax is indicated in the invoice of the pioneer enterprise. cd "Any unused tax credits as of December 31, 1985 may be carried over to the succeeding taxable quarter or quarters. In case the allowable tax credits during the taxable quarter exceeds the amount of the sales tax due on the finished products sold during the same taxable quarter, the excess may be carried over to the succeeding taxable quarter or quarters. "If there are still excess tax credits not applied for the taxable year ending December 31, 1986 and all taxable years thereafter (such as Feb. 28, 1986, March 31, 1986 etc.), a taxpayer may avail of any of the following options or any combination thereof: "(i) Carry over such excess or a portion thereof to be credited against his sales tax liability in the succeeding taxable quarter or quarters; or "(ii) File an application for the issuance of a tax credit certificate for such excess or a portion thereof which can be used in payment of his advance sales tax liability only; or "(iii) Deduct such excess or a portion thereof from gross income for income tax purposes. For this purpose, the deduction should be captioned "Excess Tax Credits." "Option 'i' may be availed of at the end of any quarter. However, options 'ii' and 'iii' can only be availed of at the end of the taxpayer's taxable year. In the case of option 'iii' the deduction can be availed of for the taxable year just ended. "The deferred tax credit account shall be reduced by any of the following: "(a) The amount of tax credit certificate applied for to be used in payment of his advance sales tax; "(b) The amount of excess tax credits used as a deduction from gross income for income tax purposes; "(c) The amount of tax credit corresponding to the raw materials , parts or accessories which are subsequently sold, transferred, disposed of, or for any other reason, can no longer be used for the manufacture of the finished product for sale; "(d) The amount of tax on the raw material, parts, accessories, or other articles used in the manufacture of articles which are not for sale, such as samples and promotional give-always; and cd "(e) The amount of tax credit certificate issued to a manufacturer-exporter in accordance with paragraph (d) of Section 167 (202) of the Tax Code. "If the amount of the tax credits hereinabove required to be deducted exceeds the amount of total available tax credits during the current quarter, the excess shall be paid by the manufacturer in addition to the sales tax due for the same taxable quarters." "(2) On original sale of imported articles . Any advance sales tax paid by the importer shall be credited against the sales tax due on the sale of articles taxable under the same rate. If, for example, he imported various articles for which advance sales taxes were paid at the rates of 10%, 20%, 30% and 50%, the advance sales tax paid may be credited only against the sales tax due on the sale of articles subject to the same rates, i.e., 10% to 10%, 20%, to 20%, 30% to 30% and 50% to 50%. cd i "For this purpose the importer should maintain separate deferred accounts for advance sales tax payments according to the tax rates. If, in any quarter, the advance sales tax payment exceeds the sales tax due on the original sale of the imported articles, the excess shall be credited against the sales tax liability of the importer in the succeeding taxable quarter or quarters. "(3) Pioneer enterprise . In case the manufacturer is a pioneer enterprise registered with the Board of Investments enjoying full or partial exemption from the payment of sales tax on original sale, the available tax credits during a taxable quarter shall first be applied to the gross sales tax due. The exemption is then deducted from the net sales tax due to arrive at the amount payable. Example 2 hereunder illustrates the method of computing the sales tax due on the manufacturer who is 20% exempt from the payment of sales taxes." SECTION 4 . The following illustrative examples are hereby added to the examples given under Sec. 5 of RR 2-86. Example 4 At the end of his taxable year, manufacturer "A" has a deferred tax credit balance of P2,500,000. Situation 1 He opted to carry over the entire amount to the succeeding quarter. In this case manufacturer "A" will have a beginning balance in his deferred tax credit account in the amount of P2,500,000 which he can use as a credit against his sales tax liability for the first quarter. Any excess may be carried over to the succeeding quarter or quarters until the end of his taxable year when he may again avail of his options if there are still unused tax credits as of the end of such taxable year. Situation 2 He opted to apply for the issuance of a tax credit certificate for use in payment of his advance sales tax in the amount of P1,500,000 and the balance of P1,000,000 to be carried over to the succeeding quarter. In this case at the time of option he will reduce the P2,500,000 balance by P1,500,000. The remaining balance of P1,000,000 shall be carried over as the beginning balance of his "deferred tax credit" account under the same procedure as Situation 1. Situation 3 He opted to file for the issuance of a tax credit certificate in the amount of P2,000,000 and use the balance of P500,000 as a deduction from gross income for income tax purposes. In this case, he will reduce his deferred tax credit balance by P2,500,000 thereby leaving no balance of the first quarter of the succeeding taxable year. If the amount of tax credit certificate approved and issued to him is less than the amount applied for, the difference shall be debited back to the "deferred tax credit" account at the time of the receipt of the tax credit certificate. For example, if only P1,600,000 is approved on his application of P2,000,000, the difference of P400,000 shall be debited to the deferred tax credit account. SECTION 5 . Section 6, Paragraph IV is hereby amended to read as follows: "IV. Articles classified as essential articles, taxable at the rate of 10%, (Section 165(A)(3) of the National Internal Revenue Code): cdt "A. 1. Processed meat; 2. Processed fruits; 3. Processed vegetables; 4. Processed fish; and 5. Processed other sea foods. "B. 1. Beverages; and 2. Concentrates of beverages, whether in liquid, powder or granulated form; intended for consumption as a drink including but not limited to processed coffee, cocoa, tea or ginger. "C. 1. Processed milk; 2. Processed dairy products; 3. Butter; and 4. Butter substitutes like margarine. "For purposes of A and B and C above, processed meat, milk, fish etc., include such food products which have undergone the process of curing, canning, bottling or other manufacturing process, but excludes such food products which have undergone only simple preserving processes of freezing, refrigerating, drying, salting or smoking. "D. Cooking oil, except those subject to miller's tax "E. Wheat flour. "F. 1. Bread; and 2. Ordinary bakery products. "G. Medicine "H. 1. Laundry soap; and 2. Detergents. "I. 1. Writing pads; 2. Notebooks; and 3. Ordinary lead pencils "J. 1. Cement, such as portland cement, white cement and waterproofing cement; casia 2. Hollow blocks; 3. Logs; 4. Lumber; 5. Plywood; 6. Plyboard; 7. Fiberboard; 8. Glass; 9. Roofing materials, such as plain or corrugated G.I. sheets of gauge 24 or over and other roofing materials; 10. Steel bars, such as hot rolled concrete or reinforcing bars; 11. Nails; 12. Sand; and 13. Gravel "K. 1. Fish feeds; 2. Poultry feeds; 3. Swine feeds; 4. Cattle feeds "L. Fertilizers SECTION 6 . Tax rates applicable to materials, parts (and) accessories, and breeding stocks . In general, materials, parts and accessories of articles subject to sales tax on original sale shall be subject to tax at the same rate of finished article: Provided , that materials, parts or accessories which are of common or general use such as copper tubes, metal sheets, screws, bolts, nuts, and wires shall be taxed as ordinary articles under Section 165(A)(2) of the Tax Code: Provided, further , that materials, parts and accessories of articles classified as essential articles which are taxable at 10% under Section 165(A)(3) and agricultural products, including breeding stocks which are taxable at 0% under Section 165(A)(4), both of the Tax Code, shall be taxed at the same rate as the finished product, only if such materials, parts (and) accessories and breeding stocks can only be used in the manufacture or production of an article taxable at 10% or 0%, as the case may be. SECTION 7 . Transitory Provision . A ny overpayment of sales or advance sales tax as a result of Presidential Decree No. 2031 may be applied against other internal revenue tax liabilities. For this purpose, an application for the issuance of a tax credit certificate should be filed with the Appellate Division of the Bureau of Internal Revenue within two years from date of overpayment. SECTION 8 . Repealing Provision . All regulations, rulings or orders, or portions thereof issued in connection with the implementation of Title V of the Tax Code which are inconsistent with the provisions of these regulations are hereby revoked. SECTION 9 . Effectivity . This regulation shall take effect on January 1, 1986. (SGD.) JAIME V. ONGPIN Minister of Finance Recommending Approval: (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue