VAT Ruling No. 030-03

June 23, 2003 VAT RULING NO. 030-03 Sec. 109 000-00 Balmeo Bautista & Peasales Law Offices 3rd Floor, Margarita Building J.P. Rizal corner Cardona Streets Makati City Attention: Atty. Leonides F. Balmeo Gentlemen : This refers to your letter dated May 3, 2002, the pertinent portion of which is quoted as follows: "Victorias Milling Corp. (VMC) is a domestic corporation engaged in the business of milling of sugar cane into raw sugar or brown sugar and/or the refining of raw sugar into white or refined sugar. "In its usual course of business VMC receives sugar cane from sugar cane planters for the purpose of milling the same into raw sugar. The planters are issued raw sugar quedans usually before the lapse of one week from delivery of sugar cane to VMC. The raw sugar produced from the sugar cane is, by agreement of the parties involved, shared by the planters and VMC at rates which historically ranges from 65% to 69.5% for the planters and 30.5% to 35% for VMC. The various planters are members of various planters agricultural cooperatives. "Once the raw sugar quedan is issued to the planter or to the cooperative of which he is a member, the planter or cooperative has the sole option to sell the raw sugar covered by the quedan to the sugar traders to have it refined into white or refined sugar or withdraw his raw sugar from the mill. The mill cannot interfere with the choice of the planter or cooperative. If the planter or cooperative opts to have the raw sugar refined into white or refined sugar he has to surrender to VMC his raw sugar quedan and VMC issues in its stead a refined sugar quedan. The raw sugar quedan which the planter or cooperative surrendered is cancelled. If he chooses to withdraw the raw sugar he must likewise surrender the raw sugar quedan. "VMC by practice also issues raw sugar quedan to cover its 30.5% to 35% mill share of raw sugar produced. Said raw sugar quedan is issued in favor of VMC itself or order. VMC usually sells its raw sugar covered by the quedan or occasionally refines it into white or refined sugar and selling it as refined. Due to cash flow requirement however, VMC most of the time sells as raw sugar almost all of its share of the raw sugar production. Such sale of raw sugar is done through a bidding among sugar traders. The raw sugar quedan in the name of VMC is endorsed to the winning bidder-trader and in addition VMC issues to the bidder-trader the corresponding raw sugar invoice as proof of payment of the purchase price. In some rare instances, however, VMC refines into white or refined sugar the portion of its share of raw sugar which it was not able to dispose and VMC sells the same as refined sugar. VMC pays VAT for its sale of refined sugar to traders. "In most instances, the owners of the raw sugar who are the traders and the sugar planters cooperatives choose to have their raw sugar refined by VMC into white or refined sugar. They are, therefore, issued refined sugar quedans in place of the raw sugar quedans which they surrender to VMC. For the process of refining raw sugar into white or refined sugar, the owner of the raw sugar, be it a trader or a sugar planter cooperative, has to pay refinery charge which is called tolling fee. This is payable in cash not in kind. "Before refined sugar can be withdrawn from VMC's warehouse by its owner who is the holder of the quedan, the latter must first pay advance VAT to the BIR and show proof of such payment before the release of the sugar is authorized by VMC through the issuance of a refined sugar delivery order. "However, if the owner of the refined sugar happens to be a planters cooperative, since the latter is exempt from VAT, in lieu of proof of payment of advance VAT, the cooperative must present to VMC a certificate of exemption from payment of VAT issued by the BIR before the release of refined sugar is authorized by VMC. "VMC as a sugar refinery also refines raw sugar which are milled in other sugar centrals in the island of Negros. The planter, trader or planters cooperative who owns such raw sugar are [ sic ] charged by VMC with refinery fees called "tolling fees". Such owner of raw sugar are [ sic ] likewise issued refined sugar quedan by VMC as evidence of their ownership of the refined sugar indicated in the quedan." In your letter dated February 19, 2003, you further represented that: "We wish to inform you that more than 98% to 100% of VMC's total sales of raw sugar (coming from VMC's 30% to 35% percent share in the brown or raw sugar milled by VMC which is its only source of raw sugar) are made through public bidding always and, in almost all instances, the winners are sugar traders. "In some very rare instances, however, the sugar cooperatives win the bidding of a portion of the raw sugar which VMC sells through public bidding (maybe the cooperatives have sold more sugar than what they have, that is why, they are in need of additional sugar). These instances are very very rare because the sugar cooperatives are sugar sellers, and not sugar bidders or buyers. In these exceptional cases, the winning cooperatives are not those whose members are the planters with whom VMC has sugar cane milling agreements. "VMC's sugar cane milling contracts wherein it obtains 30% to 35% share are always entered into with the sugar planters and never in any instance with the sugar planters cooperatives. VMC has not in any occasion in the past directly sold VMC's 30% to 35% share of said raw sugar to any of the planters nor to the planters cooperative. VMC's dealings with the sugar planters cooperatives are solely those relating to refining the raw sugar owned by such cooperatives into refined sugar. "At present, VMC does not intend and does not find any business reason to enter into such kind of direct sales agreement with the planters nor with the planters cooperative because VMC's raw sugar are always sold through public bidding and in almost all instances the successful bidders are sugar traders. This is because they get a better price for its brown sugar by this type of bidding and also they get paid soon which is very important for VMC due to cash flow requirements. The income on sale of raw sugar is recognized from the moment sugar traders, or in exceptional cases, sugar cooperatives, win the bidding. An indorsement of quedan to the winner shall thereafter be made in favor of the latter and a sales invoice shall be issued for the sale of raw sugar. The corresponding debit account to be entered in its accounting books is a CUSTOMER'S DEPOSIT ACCOUNT. The transaction calls for this accounting treatment because the winning bidder usually deposits cash in anticipation of the sale to him of the raw sugar. To illustrate, the accounting entries for the aforesaid transaction would be as follows: "Upon issuance of sale invoice for the sale of raw sugar: Dr. Customer's Deposit 1,677,414.30 Cr. Revenue 1,677,414.30 "Upon issuance of the Official Receipt: Dr. Cash 1,677,414.30 Cr. Customer's Deposit 1,677,414.30 "The title to and ownership over the goods shall be vested on the vendee upon payment in full of the purchase price which is usually made, at the most, within a week's time. xxx xxx xxx "VMC is not in the business of selling refined sugar: First, because it does not have the marketing organization to do so; Second, it needs to convert immediately the brown sugar to cash to finance its operations; and Third, it is not a good business practice to compete with its customers which are sugar traders and planters cooperatives. EcTCAD "Our request in item No. 7 is merely [ sic ] seek clarification of VMC's duties in assuring that proper VAT is paid or collected before the release of the refined sugar to its owners. This is necessary in order to forestall any financial liability on the part of VMC as a refinery [ sic ] of white sugar whether as a withholding agent or as an arm of the BIR in assuring collection of VAT from refined sugar owners. VMC, a corporation under rehabilitation by the SEC and which at this point in time is in a state of "financial embarrassment", cannot afford to be financially liable to the government for failure to collect or assist in collecting VAT from the owners of refined sugar. This is the reason why it is requesting in item No. 7 for a ruling on the parameters of its duties prior to releasing refined sugar to the following owners: 1. sugar traders 2. sugar planters and/or cooperatives". In support of your request, you submitted to this Office, the following documents, viz : Official (Raw) Sugar Warehouse Receipt; Raw Sugar Sales Invoice; Official Warehouse Receipt (Quedan) for Refined Sugar; Refined Sugar Tolling Invoice; Refined Sugar Delivery Order; Raw Sugar Sales Invoice; and, Official Receipt. Based on the foregoing representation, you are requesting for a confirmation of your opinion, that: "1. VMC is not liable for Value Added Tax on its 30.5% to 35% share of raw sugar that it mills or produces in its central. "2. VMC is not liable for VAT on the sale or disposition of such raw sugar either through bidding or negotiated sale to sugar traders or authorized third persons through the endorsement of the quedans in the name of VMC or order. "3. VMC is liable for Value Added Tax on its charges for the refinery of raw sugar into white or refined sugar which charges are called "tolling fees" and which VAT can be passed-on by VMC to the owners of the refined sugar. "4. VMC is liable for Value Added Tax upon its sale of the refined sugar, which are originally part of its 30.5% to 35% share in the milling or production of raw sugar. "5. Prior to the refinery of its own raw sugar into white sugar and the sale thereof to traders or third parties VMC is not yet liable for VAT. "6. VMC is not liable for VAT for the refining of its own raw sugar into white or refined sugar. "7. The owner of the refined sugar like traders, sugar planters cooperatives, or sugar planters who are the holders of the quedans covering the refined sugar they own are the ones liable to pay advance VAT before withdrawal of the refined sugar from VMC's warehouse and the obligation of VMC is just to make sure that such advance VAT is paid prior to the issuance of the refined sugar release order and the release of the refined sugar from VMC warehouse." In reply, please be informed as follows: 1. VMC's compensation for services rendered, in the form of its 30.5% to 35% share in the raw sugar it milled or produced from the planter's sugar canes, is exempt from VAT, pursuant to Section 109(k), NIRC of 1997, which provides that the following shall be VAT exempt: " Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar ; " 1 2. Section 109, NIRC, provides that, sale of agricultural food product in its original state is exempt from the VAT; and, that Raw Sugar is treated as agricultural food product in its original state. The pertinent proviso of this law reads: ". . . raw cane sugar and molasses, and ordinary salt shall be considered in their original state . . ." Thus, in general, VMC is not liable for VAT on its sale or disposition of Raw Sugar, either through bidding or negotiated sale, to sugar traders or authorized third persons through the endorsement of the quedans in the name of VMC or order. "Raw cane sugar" refers to crystallized or solidified juice of sugarcane, distinctly brown in color resulting from the simple and primary milling process such as treating the juice with lime to remove impurities, boiling and spinning the syrup to force out the molasses. [( Revenue Regulations No. 7-95, i.e. Section 4.103-1(B)(c) implementing then Section 103(b) of the Tax Code, as amended), (VAT Ruling No. 021-91 dated April 2,1991 )] 3. VMC's "Tolling Fees" for milling of raw sugar into refined sugar , for others, is subject to VAT. It is not embraced by the VAT exemption under the aforequoted Section 109 of the Code since the said VAT exemption is limited only to "milling for others of sugar cane into raw sugar ; it does not extend to milling for others of raw sugar into refined sugar . ( See also Section 4.102-1(g), Revenue Regulations No. 7-95, a.k.a. Consolidated VAT Regulations ) 4. Your opinion that VMC is liable for Value Added Tax upon its sale of the refined sugar, which is originally part of its 30.5% to 35% share in the milling or production, for others, of raw sugar, is hereby confirmed. "Refined sugar" includes cane sugar commonly known as "washed sugar," "direct consumption sugar," "plantation white sugar," "blanco directo sugar," "standard sugar," "improved raw sugar," "premium improved raw sugar" and "premium sugar ." ( Revenue Regulations No. 29-2002 ) 5. The sale of its own raw sugar to traders or third parties, before milling thereof into refined sugar, is exempt from the VAT. ( See item No. 2, above ). 6. VMC's milling of its own raw sugar into refined sugar is not a taxable event for VAT purposes since it is not a sale, barter or exchange. Under Section 105 of the Code, VAT is imposed only on " Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods . . . " The VAT shall apply only when VMC sells its refined sugar. ( See also Section 4.102-1(g), Revenue Regulations No. 7-95 ) 7. The sugar traders are required to pay Advance VAT before the withdrawal from the premises of VMC of the refined sugar owned by such trader. The 30% to 35% share of VMC of raw sugar, that it milled into refined sugar, which are sold to the traders are likewise subject to the payment of Advance VAT prior to release. This is in accordance with Sections 4 and 5 of Revenue Regulations No. 7-89, as amended by Revenue Regulations No. 29-2002 which reads: "SEC. 4. Prohibition of withdrawal . The proprietor or operator of a sugar mill/refinery shall not allow any withdrawal of refined sugar from its premises without the advance payment of the VAT made by the owners/sellers and submission of proof thereof as described in Section 5 of these Regulations, unless the said owner or seller presents proof to the sugar mill/refinery that it is exempt from the VAT, as in the case of agricultural cooperatives which are exempt from the VAT on their sale of agricultural products pursuant to Republic Act No. 6938 (Cooperative Code of the Philippines) and Section 109(r) of the Code, as implemented through Revenue Regulations No. 20-2001. xxx xxx xxx." The sugar planters and/or sugar planters cooperatives which entered into refinery contracts with VMC are subject to the payment of Advance VAT unless they submit to VMC a certificate of exemption from VAT issued in accordance with Revenue Regulations No. 29-2002. In a situation where VMC would enter into a sugar cane milling agreement with sugar planters cooperatives whereby it would directly sell to the said sugar planters cooperatives its 30% to 35% share; and, where subsequently, a sugar refinery agreement would be executed between VMC and the said cooperatives, then the refined sugar that will be derived from the said 30% to 35% share will be subject to the payment of Advance VAT prior to release from VMC's premises. This is based on the doctrine that substance prevails over form such that in a conflict between form and substance, the former must necessarily yield to the latter. 2 Tax laws concern itself more on the substance rather than the form. 3 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.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes 1. See also VAT Ruling No. 292-88, dated July 13, 1988. 2. BPI Leasing Corporation, (formerly Makati Leasing Finance Corp.), petitioner, vs. Commissioner of Internal Revenue, respondent. [C.T.A. CASE NO. 4328, June 22, 1995. Entry of Judgment on September 18, 1995] 3. Finley J. Gibbs, as Trustee for Johnson Kelley Gibbs, Allison De France Gibbs, Candace Gibbs, Douglas Fletcher Gibbs, and Reginal Kelly Gibbs, plaintiff, Allison J. Gibbs and Ester K. Gibbs plaintiffs-intervernirs, vs. Collector of Internal Revenue, defendant. [Manila Civil Case No. 19541. February 28, 1958.]