VAT Ruling No. 079-91

September 9, 1991 VAT RULING NO. 079-91 Joaquin Cunanan & Co. 8th Floor, BA Lepanto Building 8747 Paseo de Roxas Makati, Metro Manila Attention: Mr . Rene G . Baez Principal, Tax Dept . Gentlemen : This refers to your letter dated November 29, 1990 for and in behalf of your client, RIZAL CEMENT CO.,INC. cdtech It is represented that your client is a cement manufacturer; that, it is a VAT-registered corporation as of January 1, 1988; that, it uses coal for heating purposes in its cement plant; that, during the year 1987 the PNOC Coal Corporation supplied your client with coal; that, the sale to your client by the said coal supplier was subjected to the old 1.5% subsequent sales tax hence, tax-paid in the hands of your client; that, as of December 31, 1987, your client had an inventory of coal valued at P5,042,537.02; that, pursuant to Section 26(b) of Revenue Regulations No. 5-87 your client filed as of January 31, 1988 the required inventory statement for the said coal for purposes of the transitory presumptive 8% input tax credit prescribed under Section 25(a), E.O. No. 273, viz., the transitory input taxes for VAT-registered persons upon the effectivity of the VAT law on January 1, 1988; that, pursuant to the said law and regulations, your client recognized, as its transitory presumptive input tax beginning January 1, 1988 an input tax of P403,402.96, representing 8% of the value of your client's coal inventory as of December 31, 1987. The question is whether your client did right in recognizing the said 8% transitory input tax credit on its coal inventory as of December 31, 1987. Consistent with the basic doctrine of the VAT law that, in general, the 10% VAT shall be only on the value-added upon every VAT taxable sale transaction rather than a tax-on-tax, Section 25, E.O. 273, prescribed for recognition of transitory input tax credits for tax-paid inventory of VAT-registered persons beginning January 1, 1988 (i.e., effectivity date of the VAT law), as follows: "1) The balance of the deferred sales tax credit account as of December 31, 1987 which are accounted for in accordance with regulations prescribed therefor; 2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit; and 3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale ,the tax on which was not taken up or claimed as deferred sales tax credit." Immediately before effectivity of the VAT law on January 1, 1988 businesses subject to business taxes were taxed on their sales of goods and services under different tax procedures (e.g., manufacturers of goods were taxed based on gross sales but with a benefit of sales tax credits for tax-paid raw materials, part, accessory or other article locally purchased or imported by the manufacturer for conversion into or intended to form part of any finished product for sale. Some businesses were, however, taxed based on gross receipts/gross sales but without the benefit of credit for tax-paid materials purchased and used vis-a-vis their taxable sale transactions, like those engaged in the sale of services such as the contractors theretofore subject to 4% contractor's tax; or those engaged in trading of goods, subject to 1.5% subsequent sales tax, etc.) The VAT law, effective January 1, 1988 placed most of the said businesses under the 10% VAT (except only those which remained subject to percentage taxes, now taxable under Title V, NIRC, as amended by E.O. 273). All of these VAT-taxable businesses were accordingly granted input tax credits against their output taxes. For this reason, all businesses absorbed by the VAT law beginning January 1, 1988 were given the benefit of transitory input tax credits with respect to their tax-paid inventories. 1. Those businesses theretofore subject to sales taxes with sales tax credit benefit (e.g.,manufacturers) were, theretofore, entitled to accumulate under a "deferred sales tax credit account" all the excise taxes, sales and millers taxes component of raw materials, part, accessory or other article locally purchased or imported for use in the manufacture and sale of finished goods. Section 25(a)(1), E.O. 273, pertains to this class of taxpayers, i.e. these taxpayers were entitled to maintain a deferred sales tax credit account for the said taxes. The balance of their respective deferred sales tax credit account as of December 31, 1987 had been allowed as their transitory input tax credit effective January 1, 1988, for use in payment of their respective output taxes on sales made subject to 10% VAT. 2. The old sales tax credit law was, however, limited only to tax-paid "raw materials, part, accessory or other articles purchased or imported by a manufacturer for conversion into or intended to form part of finished goods for sale".Thus, no sales tax credit was allowable vis-a-vis materials and supplies purchased but which were not for use as raw materials in the manufacture of finished goods and which will not form part of such finished goods (e.g.,indirect materials and supplies),even if the same have excise, sales or millers tax component. These tax components were not accordingly recognized as part of a taxpayer's deferred sales tax credits. Section 25(a)(2), E.O. 273, pertains to this class, i.e., taxpayers have "materials and supplies" which have the said tax component/s; which were not for sale but rather for use in the business; but, the said tax component/s were not recognizable as part of the taxpayer's deferred sales tax credit because the said materials were not intended to form part in the manufacture of finished goods. VAT persons have been allowed by Section 25(a)(2), E.O. 273, a transitory presumptive input tax credit thereon equivalent to 8% of the value of said inventory as of December 31, 1987. 3. The old "deferred sales tax credit" law did not also apply to other businesses subject to other kinds of business taxes like traders who were rather subjected to 1.5% subsequent sales tax based on gross sales; manufacturers of goods subject to excise taxes; contractors who were subject to the old contractor's taxes, etc. These classes of businesses also maintained inventories of goods for sale with excise, sales and/or millers taxes components indirectly passed-on to them by their suppliers of goods but which taxes were not allowed to them for purposes of the deferred sales tax credit system. It is with respect to this class of business that Section 25(a)(2) and (3), E.O. 273, extended a statutory transitory presumptive input tax credit equivalent to 8% of the value inventory as of December 31, 1987. Applying the foregoing rules on transitory input tax credits to your client, Rizal Cement Co., Inc., please be informed that your client, as a manufacturer of cement, was theretofore subject to the old sales tax law. Effective January 1, 1988 your client became absorbed by the current 10% VAT law. Your client was, therefore, entitled to transitory input tax credits under Section 25(a)(1) and (2), E.O. 273, as follows: llcd 1. On the balance of its accumulated deferred sales tax credits as of December 31, 1987 vis-a-vis raw materials, parts, accessory or other articles purchased for conversion into or intended to form part of its cement manufacture, i.e., direct materials to manufacture cement, pursuant to Section 25(a)(1), E.O. 273; and 2. A statutory presumptive transitory input tax credit equivalent to 8% of the value of its coal inventory as of December 31, 1987, i.e.,indirect materials in the manufacture of cement, the tax components of which were not claimed as part of your client's deferred sales tax credits. However, coal purchased from service contractors who entered into a contract with the government and who are exempted from all taxes except income pursuant to PDs 87, 972 and 1442, should not form part of the inventory of coal of your client to be entitled to the 8% presumptive transitional input tax. The tax components of your client's coal inventory may be traced as follows: The mining entity which extracted these coal from the mine was subjected to "mining taxes" pursuant to Title VII, old NIRC. When the said mining entity sold the same to PNOC Coal Corporation, it further paid 20% sales tax on its sales. When the PNOC Coal Corporation further sold the same to your client, PNOC Coal Corporation still, further, paid 1.5% subsequent sales tax on its sales. Thus, in the hands of your client, said coal inventory already have tax components consisting of the mining taxes and 20% sales tax paid by the mining entity and the 1.5% subsequent sales tax paid by the PNOC Coal Corporation, which taxes have been indirectly passed-on to your client. Since these coal inventory were merely indirect materials in the manufacture of cement, i.e., not raw materials in the manufacture of cement, your client did not enjoy deferred sales tax credits for the sales taxes component of these coal inventory since the deferred sales tax credit law was only limited to sales, excise and millers taxes on raw materials, parts, accessory or other articles for use as direct materials in the manufacture of finished goods for sale. Hence, your client's coal inventory, being indirect materials, are embraced by the transitory presumptive input tax credit equivalent to 8% of the value of its coal inventory as of December 31, 1987, pursuant to Section 25(a)(2), E.O. 273. cdt Very truly yours, JOSE U. ONG Commissioner of Internal Revenue By: EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge