BusinessWorld | For human or not for human

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For human or not for human

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PRICE hikes are always controversial. With the current

situation of commodity prices, Filipinos feel every additional
centavo they have to pay to meet their basic needs. This is
because Filipinos belonging to the lower bracket income
cannot keep up with the ballooning prices of goods, especially
those which are staple in every household. In their
perception, the governments inaction is to be blamed for
rising commodity prices.

Lets Talk
Tax
Eliezer P.
Ambatali

A probable issue of price hike on livestock and poultry products arose just
recently. The Bureau of Internal Revenue (BIR) issued Revenue
Memorandum Circular No. (RMC) 66-2014, amending RMC 55-2014. The
circular provides a list of feed ingredients that may be subjected to
value-added tax (VAT). Unless the taxpayer shows that the ingredients are
unfit for human consumption or that the ingredient cannot be used for the production of food
for human consumption, the ingredient/raw material should be subjected to VAT.
The lists of ingredients under the circular are as follows: 1. whey powder 2. skimmed milk
powder 3. lactose 4. buttermilk powder 5. whole milk powder 6. palm olein. The circular also
provides for a catch-all phrase, and such other feed ingredients and additives used in the
manufacture of finished feed which may hereinafter be determined by competent authority to
have possible utilization for human consumption. To avail of the VAT exemption, the circular
further requires certification from the Food and Drug Administration that the ingredients are
unfit for human consumption.
Under Revenue Regulations No. (RR) 16-2005, the sale or importation of fish, prawn,
livestock and poultry feeds are exempt from VAT. This exemption covers ingredients, whether
locally produced or imported, used in the manufacture of these animal feeds.
Republic Act No. (RA) 1556 also known as Livestock and Poultry Feeds Act, as amended by
Presidential Decree No. (PD) 7, ingredients or feed ingredients is defined as any single
article of feed or feeding stuff which enters into the composition of a ration, concentrate or
supplement. The law does not distinguish the ingredient as to its fitness for human
consumption. Previously, the VAT exemption only requires that the Bureau of Animal Industry
(BAI) ascertain the classification of the importations as ingredients for animal feed. With the
new rule, there is the additional requirement of a certification from the FDA for identification
of whether a specific ingredient is fit for human consumption or not. In the end, we would
expect that some of the ingredients will now be subject to VAT since many of these
ingredients are also used in the manufacture of food for human consumption.
Tax exemptions are allowed to certain transactions by reason of public policy. The rationale
for the VAT exemption of feed ingredients has been discussed in the case of Tolentino vs.
Secretary of Finance and Commissioner, G.R. No. 115455. The High Court declared that in
specific transactions, exemptions, such as purchase of ingredients used in the manufacture of
feeds, are granted, in some cases, to encourage agricultural production and, in other cases,
for the personal benefit of the end-user rather than for profit. Relative to this, the Court also
held that exempt from the tax are sales of farm and marine products, so that the costs of
basic food and other necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public.
Additionally, under VAT Ruling No. 12-01, the bureau opined that if the law declared the end
product to be exempt, it is but logical that all the inputs needed to produce the end product
must necessarily be exempt. The ruling also said that the exemption accorded by law to feed
and feed ingredients is closely intertwined to the public policy of exempting basic food from
the coverage of VAT, related as they are to the exemption of livestock and poultry of a kind
generally used as, or yielding or producing foods for human consumption.
The Philippine populace has a higher concentration on the lower and middle income families.
The impact of a little jump in the prices of basic commodities is magnified on these brackets
because with very little extra funds (or none at all), there is little room for a rearrangement
of their daily budget. Hence, the issue on price increase arises. The rationale for the
exemption of inputs of feeds for animals, save the specialty feeds for animals considered as
pets, is to prevent increase in the price of inputs to agricultural and marine food products,
which are consumed more by low and middle income groups. If any of the inputs will be
subjected to VAT, necessarily, it will be added to the cost of manufacturing, hence an increase
in input price. There are two possible outcomes if this is to be the case: either the producer
sector (meaning the livestock and poultry farmers) would squeeze their margins, or the
end-consumer would carry the burden of such increase in price. As end-consumers, we just
hope that the effect of the imposition of VAT on such ingredients will not greatly affect the
prices of livestock and poultry products.
We could understand the reason of the BIR in passing the circular to avoid abuses of availing
VAT exemptions such as diversion of ingredients for other purposes not related to the
manufacture of animal feeds. We cannot argue on the good intentions of the circular.
However, by imposing the circular, the BIR also sanctioned the ones diligently following the
law. The BIR has other ways to meet the objectives of compliance. Say for instance, this
should be included in the regular audit of the manufacturers. The BIR may also impose a
threshold amount on ingredients which are susceptible from being used for purposes not in
relation to the manufacture of animal feeds.
In this particular issue what we simply say is that, there is a need to revisit the practice of
regulators of plugging the leakages by closing the whole pipeline. The BIR is not out of
options yet and I submit that their choice in this case may not be the best one.
P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine
member of Grant Thornton International Ltd.

1 of 2

Eliezer P. Ambatali is a tax associate with the Tax Advisory and Compliance division of
Punongbayan & Araullo.

10/19/2015 1:16 PM

BusinessWorld | For human or not for human

http://www.bworldonline.com/content.php?section=Economy&title=for...

P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine
member of Grant Thornton International Ltd.
Eliezer P. Ambatali is a tax associate with the Tax Advisory and Compliance division of
Punongbayan & Araullo.

2 of 2

10/19/2015 1:16 PM