April 28, 1992

VAT RULING NO. 059-92

Section 100 (a); 008-92

The Honorable
Secretary of Finance
Manila

Sir :

This refers to the letter of Senior Vice President, Catalino Macaraig, Jr.,
Lepanto Consolidated Mining Company, to Governor Jose Cuisia, Jr., Central
Bank of the Philippines, dated April 22, 1992, copy of which has been furnished
this Office, requesting the CB for a confirmation that mining companies may sell
gold to the CB at zero rate value added tax (vat) considering the OPINION NO.
47, s. 1992, dated April 14, 1992, issued by the Secretary of Justice, viz.: (1) That
sales of gold to the CB may be considered, for vat purposes, as export sales, hence,
may be subjected to zero rate vat; and (2) that, sales of copper concentrates and
other raw materials to the Philippine Smelting and Refining Corporation (PASAR)
may also be considered export sales, hence, likewise entitled to zero rate vat.

The said Opinion will result to the following, viz.: (1) the said sales
transactions shall not be levied with the 10% vat; and, in addition (2) the sellers
shall, further, be entitled to input tax refund. Its repercussion would be
far-reaching against our revenue generation efforts. The BIR will not only lose the
10% vat on the aforesaid sales transaction, which is very substantial in amount but,
in addition, the BIR will be forced to refund to mining companies, input taxes
involving billions of pesos. As of the month of January, 1992 alone, pending
claims from mining companies already aggregated to P2 billion pesos, more or
less.

Earlier, upon the instruction of the Secretary of Finance, the BIR sought the
opinion of the Secretary of Justice concerning this matter. In OPINION NO. 25, s.
1992, dated February 28, 1992, the Secretary of Justice decline to render an
opinion on the question whether sales of gold to the Central Bank may, under the
vat law, be considered export sales, for the following reasons:

". . . By established policy, this Department does not rule on matters

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 which fall within the primary jurisdiction of another Office (Secretary of
Justice Ops. 39, s. 1986; Nos. 1 and 72, s. 1983)."

"Moreover, the opinion of the Secretary of Justice, being advisory, is

not binding upon the party or parties whose substantive rights may be
affected thereby (id., No. 144, s. 1973) and who may, in all probability,
question the same in court in the event that they are not satisfied with said
opinion (id., No. 156, s. 1990; No. 134, s. 1988, and No. 4, s. 1991."

In view thereof, this Office reiterated its position that the term "export sale"
for purposes of zero rate vat under Section 100 (a) (1), NIRC, as amended by E.O.
No. 273, is only applicable to actual exportation that the said term does not
admit local sales of goods even if, by fiction of law, such local sales are
considered as constructive export sales. Hence, sales of gold to the CB may not
legally be considered export sales even if the same are considered constructive
exports under E.O. No. 581, promulgated on March 11, 1980. (Please see attached
copy of our letter to the Secretary of Finance, dated March 16, 1992)

On Sales of Gold to the Central Bank

With due respect to the Opinion No. 47, s. 1992, of the Secretary of Justice,
however, this Office strongly believes that local sales of gold to the CB may not
legally be considered export sales for purposes of Section 100 (a), NIRC. Such
transactions are accordingly subject to the 10% vat. The sellers are also
accordingly not entitled to input tax refund for the said sales transaction. Our legal
basis for the said conclusion follows:

1. "Export sales means the sale and shipment or exportation of goods

from the Philippines to a foreign country, irrespective of any shipping arrangement
that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported, or foreign currency denominated sales.
Foreign Currency denominated sales means sales to nonresidents of goods
assembled or manufactured in the Philippines for delivery to residents in the
Philippines and paid for in convertible foreign currency remitted through the
banking system in the Philippines." (Sec. 100(a), NIRC)

The above provisions of law is implemented by Section 8 (b) of the Vat

Revenue Regulations No. 5-87, as follows:

"(b) Zero-rated sales of goods. The following sales by

VAT-registered persons are zero-rated:

(1) Export sales made directly by a VAT-registered person.

. . ."

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 Section 29 of the Vat Law (i.e., E.O. No. 273) further provides: . . ."

"The provisions of any law, whether general or special, rules and

regulations and other issuances or parts thereof which are inconsistent with
this Order are hereby repealed, amended or modified accordingly."

The foregoing provisions of law and regulations are clear and without any
ambiguity, i.e., only actual exportation or goods qualify under the term, export
sales. If there is any law prior to the promulgation of the Vat Law which treats
certain local sales as constructive export, such prior law, being inconsistent with
the Vat law, shall be considered repealed, amended or modified accordingly. It
follows, the said laws and regulations do not admit any means of statutory
interpretation, hence, should be applied in the manner that the same have been
clearly worded.

2. Opinion No. 47, s. 1992, relies upon the provisions of Revenue

Regulations No. 2-88 in concluding that sales of gold to the CB may be considered
export sales for purposes of the Vat law. HTaIAC

With due respect, however, this Office is compelled to strongly disagree

with the said Opinion. Attached herewith is the complete copy of RR 2-88. Please
observe that there is no existing provision thereunder that can possibly support the
contention that sales of gold to the CB, which are local sales, can be legally
considered export sales subject to zero rate vat. On the contrary, it only provides
about sales of raw materials to BOI-registered exporters whose export sales, under
BOI rules and regulations, exceed 70% of the exporter's total annual production;
and, to sales of raw materials to a nonresident foreign buyer for delivery to a
resident local export-oriented BOI-registered enterprise to be used in
manufacturing, processing or repacking of the said buyer's goods and paid for in
foreign currency, inwardly remitted in accordance with the CB rules and
regulations.

3. It may be true that E.O. No. 581, promulgated on March 11, 1980,
provides that sales of gold to the CB is considered export sales. However, this law
was promulgated in order to impose export tax and premium duty on sales of gold
to the CB because, prior to the said law, the aforesaid export tax and premium duty
could not legally be levied upon sales of gold to the CB for the simple reason that
the said sales transactions are local rather than export sales. Thus, in order that
sales of gold to the CB can be legally imposed with export tax and premium duty,
E.O. No. 581 amended P.D. No. 230 and E.O. 425, as follows:

"SEC. 2. Gold sold to the Central Bank shall be considered export

and theretofore shall be subject to the export and premium duties. The
Central Bank and the Bureau of Customs are hereby directed to implement
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 this provisions."

It follows, E.O. No. 581 may not legally be relied upon for the purpose of
treating sales of gold to the CB as export sales subject to zero rate vat because
E.O. No. 581 is a tax-imposition law while, on the contrary, the zero rate vat under
Section 100 (a) (1), NIRC, is in the nature of a tax exemption law.

4. Opinion No. 47, s. 1992, also relies upon the provisions of CB

CIRCULAR NO. 960, January 30, 1984, which provides that "Gold producers
shall qualify as export-oriented firms even if their output is sold to the Central
Bank; and, upon CB CIRCULAR NO. 1301, August 7, 1991, which provides that
"all sales of gold to the Central Bank are considered constructive exports." The
said Opinion contends that the aforesaid CB Circulars have been promulgated,
pursuant to Section 72 of the CB Act (R.A. No. 265, as amended).

However, with due respect, a reading of the complete text of Section 72,
R.A. 265, as amended, does not support the contention that the aforesaid CB
Circulars, holding that sales of gold to the CB shall be considered constructive
exports, have been promulgated pursuant to the said Section 72 of the CB Act.
(Attached is the complete text of Section 72, R.A. 265, as amended.) On the
contrary, there is no provision thereunder that empowers the CB to promulgate a
rule that sales of gold to the CB shall be considered export sales or even
constructive export sales. Thus, the Opinion that the aforesaid CB Circulars is an
incentive law, hence, treating sales of gold to the CB as export sales subject to
zero rate vat may be allegedly considered allowable, has not been shown by the
said Opinion. Rather, it still remain that the said constructive export sales rule
under the said CB Circulars may only be reasonably supported by the
aforementioned E.O. No. 581 which, however, as earlier stated here, is a tax
imposition law rather than a tax exemption law and, therefore, may not be relied
upon for purposes of the zero rate vat.

More importantly, granting for the sake of argument, that the aforesaid
provisions of Section 72 of the CB Act justifies the promulgation of the aforesaid
"constructive export sales rule" however, the same remains insufficient to support
a conclusion that the sales of gold to the CB may legally be considered "export
sales" subject to zero rate vat for purposes of Section 100 (a) (1), NIRC, because
this law only applies to "actual exports" it does not embrace constructive
exports. Further, the CB Act is a prior law whereas the Vat law is a later law. It
follows, the CB Act may not legally override the provisions of the Vat Law. Being
inconsistent with the Vat Law, the said constructive exports sales rule under the
aforesaid CB Circulars remain inapplicable because of the repealing clause under
Section 29 of the Vat law (i.e., E.O. No. 273, supra).

5. It is also being contented in the said Opinion No. 47, s. 1992, that the
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 BIR ruled in Revenue Memorandum Circular No. 59-88 and Vat Ruling No.
00-378-88, that sales of gold to the CB are considered export sales, hence, subject
to zero rate vat, pursuant to Section 100 (a) (1), NIRC, in relation to E.O. No. 581
and Section 169 of CB Circular No. 960; that the sellers of gold to the CB relied
upon the said rulings, hence, may not be revoked by the BIR since such revocation
will be prejudicial to the private parties who, in good faith, relied upon the said
rulings, citing the doctrine enunciated in the case, ABS-CBN Broadcasting Corp.
vs. CTA, 109 SCRA 142.

This Office is also compelled to disagree with the aforesaid Opinion. The
law pertaining to revocation of BIR rulings is Section 246, NIRC. (Copy of
complete text thereof, attached). This law does not prohibit revocation of any BIR
rulings, if later determined to have been erroneously issued, may be revoked,
amended, or modified accordingly. What this law prohibits is the retroactive
application of the revocation, if such a retroactive application of the revocation
will be prejudicial to the taxpayer concerned. This is also the doctrine enunciated
in the said case of ABS-CBN.

Thus, the only issue concerning this matter are as follows:

(5.1) Will the concerned mining companies be unduly prejudiced by

the revocation of the said rulings if the BIR refuses to grant their claims for
input tax refunds pertaining to their sales of gold to the CB during the period
prior to revocation of the aforesaid rulings? ESTDcC

(5.2) Will the said mining companies be unduly prejudiced if the BIR
assess them for deficiency 10% vat on their sales of gold to the CB during
the period prior to revocation of the aforementioned rulings?

With due respect, this Office believes the said mining companies will not be
unduly prejudiced if this Office denies their claimed input tax refunds for sales of
gold to the CB made during the period prior to the revocation of the aforesaid
rulings. Under the vat law, 10% vat is imposed on each stage of every taxable
sales. This tax component is passed-on to the buyer, as the buyer's input tax,
provided, however, that the said buyer is a vat-taxable person. The said buyer, in
turn, uses this tax passed-on, as his input tax credit, in paying his own output taxes
(10% vat) on his taxable sales. Thus, cost of the tax passed-on accumulates upon
the turn-overs or stages of sales until this cost of the tax passed-on ultimately rests
upon the ultimate consumers. Also, under the Vat law, the seller has two options
with respect to his input taxes pertaining to purchases and sales, if such sales are
zero rated, viz., the seller may use and apply his input taxes in paying his 10%
output taxes on his other sales which are subject to 10% vat, or claim for input tax
refund vis-a-vis his input taxes attributable to his zero rated sales. (e.g., export
sales).
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 When the said mining companies, relying upon the aforementioned earlier
BIR rulings, sold their gold to the CB at zero rate vat, they did not fully pass-on to
the CB the cost of their respective input taxes. Said input taxes remained in their
possession. The only repercussion of the revocation of the said earlier rulings is
they will be prevented the option of claiming the said input taxes as refund. But,
they remain entitled to use the same in paying their output taxes in connection with
their other sales transaction which are subject to the 10% vat. It follows, there is
no prejudice that may ensue from the retroactive application of the said revocation
because what they only lose is the right to have their input taxes refunded which,
in the first place and under the law, they are, any way, clearly not entitled to.
Granting for the sake of argument, that they have no other sales transaction subject
to 10% vat against which their input taxes may be used in payment, then, it
follows, they are constituted as the final persons against which the costs of the tax
passed-on shall legally stop and rest, hence, in this connection, the said input taxes
may already be legally converted as cost available as deduction for income tax
purposes. On this score, they are also not prejudiced by the retroactive application
of the said ruling.

This Office does not also believe that the said mining companies may be
unduly prejudiced if the said revocation is retroactively applied and this Office
assesses the said companies for deficiency 10% vat. According to the Opinion No.
47, s. 1992, said mining companies did not pass-on to the CB any 10% vat because
they relied, in good faith, upon the said earlier ruling of the BIR.

Please be informed, however, that under Section 6 of the Vat Revenue

Regulations No. 5-87 in connection with the procedures in computing for the 10%
vat on sales (output tax), if the sale transaction is subject to the 10% vat, but the
cost of this tax is not shown in the sales invoice, the 10% vat or output tax there is
computed, based on 1/11th of the amount billed to the buyer (in this case, the
buyer is the CB). It follows, the deficiency 10% vat that may be assessable against
the said companies will only be equal to 1/11th of the actual amount billed to the
CB rather than 10% thereof. In short, said companies may only be charged based
on the tax amount actually and technically passed-on the CB as part of the
invoiced price. The said companies may also deduct, as input tax credit, their
aforementioned input taxes which, by virtue of the said revocation, are not
allowable as input tax refund. It follows, the said mining companies will not truly
be unduly prejudiced by the said retroactive application of the revocation.

In view of the foregoing, this Office believes that a retroactive application

of the said revocation is not prevented by Section 245, NIRC, and by the doctrine
enunciated by the Court in the case of ABS-CBN, which is merely an
implementation of the said Section of the Tax Code.

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 On Sales of Copper Concentrates and Other Raw Materials to PASAR

Please be informed that this issue has already been resolved in VAT
RULING NO. 008-92, dated January 23, 1992, viz.:

"3. In fairness, indirect or constructive exports sales arising under

Articles 23 and 77, if the sales of suppliers and substantially to exporters and
there are proofs of actual exportation and payment in foreign currency may
be submitted for processing and shall be acted upon by this Office on a case
to basis and for the same reasons justifying RR No. 2-88."

In a nutshell, since PASAR is a BOI-registered export producer and

embraced under Article 77 of the Omnibus Investments Code, as amended, its
suppliers of copper concentrates and other raw materials may be entitled to zero
rate vat, pursuant to RR No. 2-88, subject however, to the terms conditions
prescribed in the said VAT RULING NO. 008-92.

In view of the foregoing, and with reliance to the doctrine raised in the said
Opinion No. 47, s. 1992, that the said Opinion is only advisory and not binding
upon this Office, with due respect, this Office is compelled to reiterate its position
that sales of gold to the CB may not legally be considered export sales for
purposes of the Vat law. Rather, such sales transaction are subject to the 10% vat,
pursuant to Section 100 (a), NIRC. The aforementioned sellers/mining companies
are not also entitled to input tax refund, pursuant to Section 100 (a) (1), in relation
to Section 106 (a) of the said NIRC, since, in this connection input tax refund may
only be allowable provided the said mining companies actually exported the said
gold.

Although the undersigned signed this position paper as Acting

Commissioner, it is, however, assured that the same are also the views and
conclusions of Commissioner Jose U. Ong, who discussed this case lengthily and
instructed that the foregoing be communicated to that Department, before leaving
for his official trip abroad. TAcCDI

Very truly yours,

(SGD.) EUFRACIO D. SANTOS

Acting Commissioner

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