7/24/2019 BusinessWorld | Marinated meat and fish products no longer VAT-exempt

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July 24, 2019 | MANILA, PHILIPPINES

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Marinated meat and fish products no MORE STORIES

longer VAT-exempt
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The price hike for consumables might become particularly true with respect to certain meat
and fish products sold in supermarkets (think about the chorizo for your favorite paella or the
barbecue meat for the pulutan), in light of a recent development in the interpretation of the
rules on the sale of agricultural and marine food products which, subject to a certain
condition, are exempt from the 12% value-added tax (VAT).

Under Section 109(1)(A) of the National Internal Revenue Code (Tax Code) of 1997, as
amended, the sale or importation of agricultural and marine food products in their original
state is exempt from VAT.

Relative to this, Section 4.109-1(B)(1)(a) of Revenue Regulations No. (RR) 16-2005 states
that meats, fruits, vegetables and other agricultural and marine products shall be considered
in their original state even if they have undergone the simple processes of preparation or
preservation for the market such as freezing, drying, salting, broiling, roasting, smoking, or
stripping, including those using advanced technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack, and other similar methods.

In two tax rulings that involved the sale of deboned milkfish or bangus, the Bureau of
Internal Revenue (BIR) clarified that the term, “simple process”, excludes physical or
chemical process that would alter the exterior texture or form or inner substance of a product
in such a manner as to prepare it for special use to which it could not have been put in its
original form or condition.

According to the BIR, deboning is a simple process that does not alter the substance of the
fish, much less transform the meat into another distinct product altogether.

Hence, in BIR Ruling No. DA-320-04 (June 11, 2004), the bureau confirmed that the sale of
plain, smoked or marinated deboned milkfish or bangus, boneless bangus fillet, whole gutted
milkfish, bangus longganiza and bangus spring roll are VAT-exempt, being agricultural
products in their original state.

In BIR Ruling No. DA-513-07 (September 26, 2007), marinated deboned bangus was
considered a product in its original state, hence, VAT-exempt, since it was prepared and
preserved using a combination of simple processes of marinating, freezing and vacuum-
sealing without the use of heat and other state-altering process.

However, the Commissioner of Internal Revenue (CIR) deviated from this interpretation in a
very recent ruling, which similarly involved the sale of milkfish products by a canning
corporation.

In the said BIR ruling, the CIR ruled that milkfish which has been marinated and/or mixed
with other ingredients can no longer be considered in its original state, hence, subject to VAT.

This is because laws granting exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power.

Citing the case of Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue (G.R.
1117359, dated July 12, 1998), the Commissioner stated, “any exemption from payment of a
tax must be clearly stated in the language of the law; it cannot merely be implied therefrom.”

It is worthy to note that although the process of marinating milkfish in spices is simple, the
same is not mentioned in the revenue regulations as among the processes of preparation and
preservation which do not alter meat, fruits, vegetables and other agricultural and marine
products from their original state.

Hence, while smoking and deboning fish does not alter its original state, adding or mixing
flavors and other ingredients does.

The strict interpretation discussed above may be applied to other agricultural or marine food
products, in so far as their VAT treatment is concerned, and this may prove to be an
unwelcome development to the food manufacturing industry.

However, BIR’s interpretation as to what constitutes products sold in their original state is not
new. In a ruling in 1988, the bureau disagreed with one manufacturer which treated fresh
meat products cured in a solution of salt, sugar, nitrite, nitrates and water (prior to smoking)
and which are thereafter sold as bacon, tenderized raw hams and Chinese-style raw hams,
smoked pork loin and smoked pig knuckles as products sold in their original state, thus VAT-
exempt.

According to BIR, processes undergone by the food products do not appear to be simple
processes of preparation or preservation; to be considered simple process of preparation or
preservation, the meat products must undergo only smoking without being treated or cured
by solutions.

Of course, being an indirect tax, VAT on these food products can be shifted to the buyer and
passed further down the production and distribution line until it reaches the end consumer,
who shall shoulder the same as part of his cost.

As for affected enterprises, it would be wise to take precautions by running a tax compliance
review and/or securing a confirmatory ruling with the BIR to avoid possible issues during tax
investigations.

It must be noted that the recent interpretation shall apply unless changed by the BIR in a
subsequent ruling, or passed upon as an issue in a case filed with the courts.

The author is a tax associate with Punongbayan & Araullo’s Tax Advisory & Compliance
Division.

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7/24/2019 BusinessWorld | Marinated meat and fish products no longer VAT-exempt

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