VAT Ruling No. 057-00

December 8, 2000 VAT RULING NO. 057-00 Sec. 109 (c), NIRC 052-90 233-90 McGeorge Food Industries, Inc. 17th Floor, Citibank Centre Building 8741 Paseo de Roxas, Makati City Attention: Nora D . Miguel Gentlemen : This refers to your letter dated July 24, 2000 requesting a ruling on the exemption from payment of the value-added tax (VAT) of McGeorge Food Industries, Inc. (McGeorge) on its importation of frozen sliced potatoes. It is represented that McGeorge is a licensee of McDonald's Corporation; that the said frozen sliced potatoes, popularly known as French Fries, are in their original state, cut to size and had undergone the simple process of preparing and processing to preserve its raw freshness longer shelf life and original color ; that these French fries (with the brand name "Lamb Weston" and "McCain") are used in all McDonald's stores; and that an evaluation and a certification were issued by the Bureau of Plant Industry (BPI) dated July 18, 2000 to the effect the said potatoes are free from sulfur dioxide as per sample received. In reply, please be informed that Section 109 of the National Internal Revenue Code (Tax Code) of 1997 provides as follows, viz: "SEC. 109. Exempt transactions . The following shall be exempt from the value-added tax: "(a) . . . "(b) . . . "(c) Sale or importation of agricultural and marine food products in their original state livestock and poultry of a kind generally used as or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor; "Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have undergone the simple processes of preparation or presentation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary salt shall be considered in their original state. acCTSE "xxx xxx xxx" In view of this provision, the sale or importation of agricultural products is exempt from VAT. The term "agricultural products" includes vegetable substances directly resulting from the tillage of the soil (Molina v. Rafferty, 38 Phil. 167). Thus, potatoes are included thereunder. However, we regret to inform you that your request cannot be granted for lack of legal basis. As admitted in your letter, it was stated that the aforesaid products have already undergone more than simple processing; hence, these are not considered in their original state anymore. It is of no consequence that said products have to undergo processing in order to preserve them since, under Section 103 (b) [ now Section 109 (c) ] of the Tax Code, as amended, only agricultural and marine food products in their original state can be exempted from 10% VAT. Moreover, there is no showing that the processing done can be considered as a simple process of preparation or preservation for the market such as freezing, drying, salting, smoking or stripping which according to law still considers the products to be in their original state. Such being the case, said importation is already subject to the 10% VAT pursuant to Section 101 ( now Section 107 ) of the same Code. ( VAT Ruling Nos. 233-90 & 052-90 ) Furthermore, the certification issued by the BPI establishes nothing as this states only that the said frozen potatoes are free from sulfur dioxide. In addition, it bears stress that claims for tax exemption are regarded as a derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Please be guided accordingly. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group