It was recently headlined that Pilipinas Shell is liable to pay more than 1 Billion pesos worth of excise tax because of its importation of Alkylates. These Alkylates were marked as a raw material that is why it is exempted from excise tax. But a tax collector found out that these alkylates have 94 Octane rating and concluded it as fuel. Therefore, it is subject to excise tax.

Okay, as a person that has exposure in both chemicals and law, I will make a commentary on this issue.

The smart questions to ask:
-Why did the Tax Collector think that Alkylates are fuel?
-Is it really a raw material?

First let us check why the Alkylates being a raw material was not subjected to excise tax upon importation. This is explicitly stated in the Tax Reform Act of 1997. Section 109.

The following shall be exempt from the value-added tax:
F) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax, except lubricating oil, processed gas, grease, wax and petrolatum;

Since Pilipinas Shell declared the Alkylates as raw materials, it is clear that it should not be subject to excise tax because of the provision above. Actually, the government will still receive its excise tax after the end product is produced. Examine the words ...in the manufacture of petroleum products subject to excise tax... So, after the use of the Alkylates in the manufacturing process of gasoline, it will then be subject to tax.

Now let us answer the question, Why did they think that this is a fuel?

According to the news, the tax collector found out that Alkylates have 94 Octane Rating and had considered it as fuel afterwards.

First, let me just define what Alkylates are. Alkylates are organic compounds that are rich in isooctane. Isooctane, in general, is a significant factor in identifying a fuel's Octane Rating or Anti-Knock Index (AKI). The AKI as defined in the Clean Air Act of 1999:

...means the rating of the anti-knock characteristics of a grade or type of automotive gasoline as determined by dividing by two (2) the sum of Research Octane number (RON), plus the motor Octane Number (MON); the octane requirement, with respect to automotive gasoline for the use in a motor vehicle or a class tehreof, whether imported, manufactured, or assembled by a manufacturer, shall refer to the minimum octane rating of such automotive gasoline which the manufacturer recommends for the efficient operation of such motor vehicle, or substantial portion of such class, without knocking.

In other words, Octane Rating is the point system that rates the tendency of a gasoline to induce knocking in an engine. A lower Octane Rating will yield a higher probability of knocking. Knocking, in the general sense, is the literal knocking sound that you hear in an engine. This happens because of the pre-mature self-ignition of the fuel in piston before the optimum position in the piston cycle.

There are two parts in the piston cycle: compression and expansion. Compresison is when the piston starts to go up, thereby compressing the fuel injected in the engine. Expansion is when the piston goes down, giving space for the gases to expand. The time for ignition of the fuel is after the compression but preceding the expansion. Knocking occurs when the ignition of the fuel happens during the compression cycle.

Now, we will finally answer the question, Is it really a raw material?

Answer: Yes.

For a product to be considered as an end product or consumer product, it should be useful it its current form without the need for anymore process. In other words, after you buy a product and immediately use it for its intended purpose then it is an end product. On the other hand, raw materials are the one's that need to undergo processes first before it can be used by the consumer.

Alkylates is used as a blending component of gasoline because it provides the anti-knocking properties that will make the gasoline blend saleable. By law, there is a minimum amount of octane rating before gasoline can be sold as stated in Section 26-a of The Clean Air Act of 1999 that declares:

...no person shall manufacture, import, sell, supply, offer of sale, dispense, transport or introduce into commerce unleaded premium gasoline fuel which has an anti-knock index (AKI) of not less that 87.5...

Since Alkylates is full of isoocatane; And isooctane is identified to posses a high anti-knock property; it is thus used as a blending component in gasoline. Before, they use Tetraethyl lead as additive for its anti-knock property. But since the identification of the hazardous effect of lead in humans, it has been phased out. Hence, we now use UNLEADED gasoline.

We don't actually need to get technical on this. If it is an end product, they should be selling it to the market without further processing. Let me ask you, have you ever seen a Shell Station with ALKYLATES with its price displayed in the price signage?

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In my point of view, Pilipinas Shell did not do anything wrong. Alkylates are really used as a raw material in gasoline blending which will be later be subject to excise tax.

The most logical reason that I can think of that led to the misconception of Alkyaltes as end product fuel is the hastiness to conclude that it is a petrochemical fuel because of having the high AKI of 94 as said so in the report. I would suggest that we educate our tax collectors of such technical facts or even asking sister government agencies such as the DOE and the DOST before making decisions on this matter. It's like the scandal in both the engineering field and the commercial sector for accusing a very large corporation of not paying the proper taxes. If this happens again, I'm sure it will have a detrimental effect in our economy.