VAT Ruling No. 036-03

August 29, 2003 VAT RULING NO. 036-03 R.A. 7884 000-00 National Dairy Authority NDA Building, BAI Compound, Visayas Avenue 1100 Diliman, Quezon City Attention: Ms. Salvacion M. Bulatao Administrator Gentlemen : This refers to your letter dated May 14, 2003 acknowledging receipt of BIR Ruling DA-036-2003 dated February 6, 2003 and further requesting for legal opinion on whether or not the following tax credits, allowed under Sections 17 and 18 of Republic Act No. 7884 (RA 7884), are valid and in harmony with the Tax Code of 1997: (i) tax credit of ten percent (10%) of the value of the volume of locally produced milk purchased by processors from dairy cooperatives, in excess of the volume prescribed by the NDA; and (ii) presumptive input tax credit of four percent (4%) of the value of milk producers' gross purchases from small farmers and small farmers' dairy cooperatives. Records show that on February 20, 1995, Congress approved Republic Act No. 7884 (R.A. 7884), entitled "An Act Creating the National Dairy Authority To Accelerate The Development Of The Dairy Industry In The Philippines, Providing For A Dairy Development Fund, And For Other Purposes." It is the avowed policy under the said law that the Philippines shall strive for national self-sufficiency in milk and dairy products as a vital feature in the attainment of a self-reliant and independent Philippine economy in the provision of proper nutrition and the generation of more employment opportunities. One of the objectives of the law is to encourage and promote the active participation of farm families, rural cooperatives and the private sector, recognizing them as principal agents in the development of the Philippine dairy economy. To achieve the objectives of the law, the NDA was created as an attached agency to the Department of Agriculture (to be the central policy and directing body tasked to ensure the accelerated development of the Philippine dairy industry) and tax incentives were provided for under Sections 17 (tax credits) and 18 (full deductibility of donations, etc.). Thereafter, the NDA embarked on its "Milk Feeding Program", which was certified by the NEDA on August 2002 as a priority project included in the Philippine Government's National Priority Plan. The milk feeding programs assisted by the NDA procure milk from dairy farmers. These programs not only address malnutrition but also boost the market and generate income for dairy farmers. The NDA extends services to the dairy farmers, not for profit, but in accord with its mandate to strive for national self-sufficiency in milk and dairy products as a vital feature in the attainment of a self reliant and independent Philippine economy. We reply as follows: It is well-settled rule in statutory construction and interpretation that a special law prevails over a general one. ( BIR Ruling No. 045-70, October 19, 1970 ) Thus, with respect to the tax credits, the provisions found under Sections 17 and 18 of R.A. 7884 prevail over the provisions of the Tax Code of 1997. Section 17 of RA 7884 reads: SEC. 17. Supply and Distribution . The Authority shall monitor the importation, manufacture, supply and distribution of dairy products and raw materials for the manufacture or processing of milk and dairy products, as well as the importation and exportation of dairy animals, if the needs of the industry require, it shall, after public hearing and after consultations with the National Economic and Development Authority, the Department of Trade and Industry, the Department of Finance, and the representatives of the dairy cooperatives and the commercial sector, set guidelines for the importation, exportation and pricing of dairy animals, raw materials and other products necessary for the manufacture or processing of milk and dairy products. Provided, That within a period of three (3) years from the effectivity of this Act, the dairy cooperatives and the commercial sector shall, subject to quality and price considerations, mutually agree upon a volume of local milk production to be absorbed by the commercial sector. If at the end of the three-year period, the parties mentioned above have not come to a mutual agreement, the commercial sector shall absorb a fixed portion of the local milk supply to be determined by the Authority. Processors who purchase locally produced milk from dairy cooperatives in excess of the volume prescribed by the Authority shall be accorded tax credits equivalent to ten (10%) percent of the value of the excess volume purchased . (emphasis supplied) While the Tax Code of 1997 speaks only of crediting of taxes erroneously or illegally received, processors who purchase locally produced milk from dairy cooperatives in excess of the volume prescribed by the Authority shall, in accordance with the foregoing special law provision, be accorded tax credits equivalent to ten (10%) percent of the value of the excess volume purchased. DCcHAa In addition, Section 18 of RA 7884 provides: SEC. 18. Exemption from Taxes and Duties . The Authority shall be exempt from the payment of customs duties and taxes on the importation of dairy animals, veterinary and other supplies, other farm inputs, dairy equipment and machineries, including its spare parts, for distribution to dairy cooperatives subject to the following conditions: (1) That said equipment and machineries, including its spare parts are not manufactured domestically in sufficient quantity, of comparable quality and reasonable prices; (2) That it shall be actually, directly and exclusively used by the dairy cooperatives in the manufacture of its products; (3) That it shall not be disposed within three (3) years from acquisition, without prior approval of the Authority; (4) If it will be subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers or recipients shall be considered the importers thereof, and shall be liable for the customs duties and internal revenue taxes due on such importations. The customs duties and internal revenue taxes due on such articles shall constitute a lien on the articles itself, superior to all other charges or liens, irrespective of the possessors thereof. Any donation, contribution, bequest, subsidy or financial aid which may be made to the Authority shall constitute as allowable deduction from the income of the donor for income tax purposes and shall be exempt from donor's tax, subject to such conditions as provided under the National Internal Revenue Code, as amended. Small farmers and small farmers' dairy cooperatives shall be exempt from all taxes on proceeds from sale of raw milk and milk products. Milk processors shall enjoy a presumptive input tax credit of four percent (4%) of the value of their gross purchases from small farmers and small farmers' dairy cooperatives . (emphasis supplied) While in the case of persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, the Tax Code of 1997 allows only a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production, Section 18 of RA 7884 allows a presumptive input tax credit of 4%, of the value of the gross purchases of milk processors, provided they buy their dairy needs from small farmers and small farmers' cooperatives. As explained in the Bicameral Conference Committee Report on the disagreeing provisions of House Bill No. 12821 and Senate Bill No. 532 (now RA 7884), ". . . Cooperatives are under present laws, exempt from the payment of taxes. As there is not VAT deductible if the products are purchased by big processors, the latter would hesitate to buy milk from the small farmers' dairy cooperatives since the purchasers cannot claim any input VAT as deduction. To cushion this negative consequence, the Committee proposed a 4 percent tax credit to such milk processors." This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue