FOSECO Philippines, Inc.

August 14, 2002 VAT RULING NO. 049-02 Sec. 106 (A) (2) (a) (3) 000-00 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Mr. Romeo H. Duran, Tax Director SUBJECT : FOSECO Philippines, Inc . Gentlemen : This refers to your letter, dated January 31, 2002, requesting in behalf of your client, FOSECO PHILIPPINES, INC., for a reconsideration of VAT RULING No. 039-89, dated February 2, 1989, the pertinent portion of which reads: ". . . your sale of industrial gases to semi-conductor companies is considered a sale of supply and not a sale of a raw material because it does not form part of the exportable product. Such being the case, it is not qualified for effective zero-rating which under Revenue Regulation No. 2-88 is limited only to the sale of raw materials to a BOI-registered export producer exporting at least 70% of its annual production." It is represented that FOSECO is a VAT-registered entity; that, it supplies "raw materials" to BOI-registered enterprises whose export sales track record during the year 2000 exceeded seventy percent (70%) of their respective annual production; that, the said raw materials are exclusively used by the said Buyers in the manufacture and processing of their respective export products; that, under Section 106(A)(2)(a)(3), NIRC, as amended by R.A. No. 7716, as renumbered by R.A. No. 8424, "export sales" made by a VAT-registered entity are entitled to the benefit of the zero percent (0%) VAT; that, under the said Section of the NIRC, the term "export sales" embraces "Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;" that, on August 28, 2001, FOSECO filed its application with the BIR for the VAT zero-rating of its sales of raw materials to the aforementioned BOI-registered manufacturer-exporters; that, however, it was informed "informally" that, the term "raw materials" embraced under the above quoted Section of the NIRC is limited only to "raw materials that form part of the export product;" that, FOSECO's sales of raw materials which, however, do not form part of the said Buyers' export products, shall not be treated as raw materials, hence, such sales shall not be entitled to the benefit of the zero percent VAT under the aforesaid Section of the NIRC of 1997, because of the above quoted VAT RULING No. 039-89; that, however, there is no existing provision in the VAT law and its implementing revenue regulations that restricts the term "raw materials" only to raw materials that form part of the manufactured export products; that, "raw materials" may or may not form part of the finished product (i.e., direct materials form part of the finished product, while indirect materials do not actually form part of the finished product). In reply, please be informed that Section 106(A)(2)(a)(3), NIRC, as amended by R.A. No. 7716, and as renumbered by R.A. No. 8424, provides: "(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: "(a) Export sales. The term 'export sales' means: "xxx xxx xxx "(3) "Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;" It is implemented by Section 4.100-2(a)(3), Revenue Regulations No. 7-95, which provides: "(3) The sale of raw materials or packaging material to an export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; "Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an export-oriented enterprise upon accreditation as such under the provisions of the Export Development Act (R.A. 7844) and its implementing rules and regulations." The maxim is "It is well recognized rule that where the law does not distinguish, courts should not distinguish. `Ubi lex non distinguit nec nos distinguere debemos.' The rule, founded on logic, is a corollary of the principle that general words and phrases in a statute should ordinarily be accorded their natural and general significance. The rule requires that a general term or phrase should not be reduced into parts and one part distinguished from the other so as to justify its exclusion from the operation of the law. "A corollary of the principle is the rule that where the law does not make any exception, courts may not except something therefrom, unless there is compelling reason apparent in the law to justify it. Thus where a statute grants a person against whom possession of `any land' is unlawfully withheld the right to bring an action for unlawful detainer, this Court held that the phrase `any land' includes all kinds of land, whether agricultural, residential, or mineral. Since the law in this case does not make any distinction nor intended to make any exception, when it speaks of `any judgment' which may be charged against the counterbond, it should be interpreted to refer not only to a final and executory judgment in the case but also a judgment pending appeal." 1 Since there is no existing law or regulation that can possibly justify the conclusion under the aforementioned VAT RULING No. 039-89, dated February 2, 1989, your aforesaid request for reconsideration is hereby granted. Accordingly, the term "raw materials" under the aforementioned Section 106(A)(2)(a)(3), NIRC of 1997, reading "Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production" includes all kinds of raw materials, i.e., whether or not the same may form part of the manufactured export products of the aforementioned BOI-registered manufacturer-exporters. Hence, VAT RULING No. 039-89 is hereby considered revoked for lack of legal basis. 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.) REN G. BAEZ Commissioner of Internal Revenue Footnotes 1. Statutory Construction by Rufus B. Rodriguez, citing the case of Philippine British Assurance Co., Inc. v. Intermediate Appellate Court, 150 SCRA 520, May 29, 1987, pp. 21-23.