VAT Ruling No. 006-03

January 9, 2003 VAT RULING NO. 006-03 106 (A) 076-91 Filplas Company, Inc. Room 7-A Marc 2000 Tower 1973 Taft Avenue corner San Andres St. Malate, Manila Attention: Mr. Enrique John Tan President Gentlemen : This refers to your letters dated June 10 and 17, 2002, inquiring whether you can document as a sale of goods what is intended to be a tolling agreement, and treat the transaction as a sale of goods for value-added tax (VAT) purposes; and, if in the affirmative, what shall be the basis of the VAT. It is represented that Filplas Company, Inc. (FILPLAS) is engaged in the trading of petrochemical products that include certain grades of "polypropylene", which is locally produced and supplied by Petrochemicals Corporation of Asia Pacific (PETROCORP); that, in the production of "polypropylene", PETROCORP uses "propylene" as its major raw material; that, unfortunately, PETROCORP is not able to import "propylene" due to its financial difficulties and lack of working capital; that, to ensure the regular supply of "polypropylene" by PETROCORP to FILPLAS, both entered into an agreement whereby: a. FILPLAS will import the needed "propylene" and shall pay all the costs including taxes and duties; b. FILPLAS will then sell the said imported "propylene" to PETROCORP at a price equivalent to the total importation costs and without any margin, which selling price shall be stated on the VAT invoice issued therefor; c. PETROCORP will then produce "polypropylene" out of the said "propylene" and sell it back to FILPLAS at a price inclusive of a margin, which selling price shall likewise be stated on the VAT invoice issued therefor; that the initial intention of the parties was a "tolling" agreement whereby FILPLAS will provide the raw materials and PETROCORP will convert them to finished products for a fee/toll; that, instead of entering into a "tolling" agreement, both parties agreed to execute the above-stated sales agreement because it is more convenient in terms of recording the transaction PETROCORP being truly a manufacturer/seller and FILPLAS, a buyer-distributor/seller; that anyway, based on your computation, your VAT liability will be the same whichever arrangement you choose sales agreement or "tolling" agreement; and that the foregoing are all at arms-length transactions and are not for the purpose of defrauding the government. In reply, please be informed that our system is a "credit-invoice VAT" patterned after the European-style VAT, which relies on invoices in calculating the VAT liability; hence, as a rule, the nature of the transaction as well as the amounts of both the output and the input taxes are determined based on the VAT-invoice. That is why under Section 113 of the Tax Code of 1997, a VAT-registered person is required to issue a VAT-invoice/receipt for every sale, indicating therein: (1) a statement that the seller is a VAT-registered person, followed by his taxpayer's identification number, and (2) the total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT. Thence, pursuant to Sec. 4.100-6 of Revenue Regulations No. 7-95, as amended, the output tax on the sale of goods or properties during the month or quarter shall be computed by multiplying the total amount indicated in the invoice by 1/11. However, such rule may not be absolute as in the following cases: where the actual amount of the gross selling price is not reflected on the VAT-invoice, where no VAT-invoice was issued, or where the gross selling price stated in the invoice is unreasonably lower than the actual market value. In the said cases, the tax due shall be determined based on the actual amount of consideration, or the gross value in money of the goods sold as may be proven by evidences showing the prices of similar products charged by taxpayers in the same line of business or the cost of the merchandise/product sold where such cost is lower than the selling price (Revenue Memorandum Order No. 13-88). ITESAc Based on your representation, FILPLAS issues a VAT-sales invoice for the sale of goods, and the contract executed by and between FILPLAS and PETROCORP is one for the sale of goods and not for "tolling". Accordingly, your said transaction with PETROCORP will be treated as a sale of goods for VAT purposes, and your output VAT shall be based on the gross sales price appearing on your invoice, in the absence of any evidence showing otherwise. This is notwithstanding the fact that the selling price is equivalent to the cost of the goods sold, and your allegation that your initial intention was a "tolling" agreement. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group