VAT Ruling No. 104-99

October 6, 1999 VAT RULING NO. 104-99 Sec. 110 (A) (3)-464-88-104-99 General Milling Corporation Corinthian Plaza Paseo de Roxas Makati City Attention: Ms . Lilia S . Mendoza Director, Corporate Planning Gentlemen : This refers to your letter dated September 29, 1999 requesting confirmation of your opinion that all input VAT that you incur and accumulate in connection with your purchase of materials and equipment used and directly attributable to your VATable products are fully chargeable as input VAT on these products without need of ratable allocation. It is represented that General Milling Corporation (GMC) is engaged principally in the business of soybean oil production which is extracted from soybeans and processed into refined, bleached and deodorized soybean oil (RBDSO); that the extraction process likewise yields a waste material and a by-product called soybean meal which is then sold and disposed of as feed ingredient; that the sale of RBDSO is subject to value-added tax, while soybean meal and a portion of crude soybean oil processed but not converted to RBDSO, are VAT-exempt for being feed ingredients; that for this purpose, your company operates a soybean milling plant consisting of (a) an extraction plant which extracts crude vegetable oil from soybeans, and in the process, also produces soybean meal as a by-product, and (b) a refinery which processes the crude soybean oil into RBDSO; that after extraction, the crude soybean oil then goes to the refinery section of the mill, there to be degummed, refined, bleached and deodorized into RBDSO which is marketed under your brand name of "Home Pride" Accordingly, RBDSO is the principal and high value product of the soybean milling process whereas soybean meal and a portion of crude soybean oil not converted to RBDSO are merely the waste or by-products of the extraction process and being disposed of as VAT-exempt livestock and poultry feed; that in the said extraction process, your company has purchased goods and services that are subject to VAT and, therefore, allowable as input tax credit against the 10% VAT paid on the sale of RBDSO; that it is your belief that these materials and equipment purchases for the processing of soybean oil and its refinement into RBDSO, which are all subject to VAT, are directly attributable to the RBDSO sales and nothing is attributable to the VAT-exempt soybean meal and to the crude soybean oil sold as feed ingredients; that such being the case, Section 110(A)(3) of the Tax Code of 1997 [then Section 104(a)(2)(B), NIRC] which provides that " A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows : (a) Total input tax which can be directly attributed to transactions subject to value-added tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity " would not be applicable. In reply, we hereby confirm that the said provision of the Tax Code mandating the allocation of input taxes into a " ratable portion of any input tax which cannot be directly attributed to either activity " does not apply under the situation above described. Said provision contemplates a situation where a VAT registered person is engaged in two activities, one subject to VAT and the other exempt from VAT and he purchased goods or services from a VAT registered person which goods or services are used in both activities and there is an inherent difficulty in attributing the input tax to either activity. Under such circumstances, he has to prorate the input tax to his VAT taxable activity and to his exempt activity. (Vat Ruling No. 464-88 dated October 6, 1988). Obviously, the purpose of your extraction plant is to extract and produce soybean oil for refinement to RBDSO. As used here, the extraction process means 'to separate the oil from the soybeans', so that, for the VAT issue under discussion, the foremost consideration is the business or activity of extracting the crude oil and its refinement to RBDSO which consequently give rise to the VATable activity of selling RBDSO. The yield of soybean meal and the crude soybean oil not converted to RBDSO are, however, only incidents of the extraction process, being the intrinsically produced waste by-products which happen to be suitable to be disposed of as VAT-exempt products. Under this scenario, this Office is of the opinion, and so holds, that all of your extraction costs can be directly attributed to your RBDSO sales, this being the object of such extraction process, and none to your soybean meal sales and sales of crude soybean oil not converted to RBDSO, these VAT-exempt products being only subordinate to and an incidental consequence of the said process. This ruling is being issued on the basis of the foregoing facts. 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group