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Philippine Taxation Encyclopedia First Release 2013 1

June 7, 2006
VAT RULING NO. 007-06
Baniqued & Baniqued
Suite 803, 8/F J ollibee Centre
San Miguel Avenue
Ortigas Center
Pasig City
Attention: Atty. Carlos G. Baniqued
and
Atty. Terence Conrad H. Bello
Gentlemen :
This refers to your letter dated December 20, 2005 stating that your clients,
SHELL PHILIPPINES EXPLORATION B.V. (SPEX), SHELL PHILIPPINES LLC
(SPL), CHEVRON MALAMPAYA LLC (CHEVRON) and PNOC EXPLORATION
CORPORATION (PNOC-EC) (collectively referred to as the Service Contractor or
Consortium) are service contractors of the Government of the Republic of the
Philippines, through the Department of Energy (DOE) under Service Contract 38 (SC
38) for the exploration, development and utilization of petroleum in the
Camago-Malampaya field located in offshore Northwest Palawan (the Malampaya
Project) executed by the parties on December 11, 1990, where SC 38 was signed by
then President Corazon C. Aquino for and on behalf of the Republic of the
Philippines; that on April 30, 1998 following the discovery and appraisal of natural
gas reserves in the San Martin and Malampaya reservoirs, the Service Contractor
entered into a J oint Declaration of Commerciality with the Government of the
Republic of the Philippines establishing production areas under the Service Contract
covering these reservoirs (the J oint Declaration):
(1) On the basis of (i) the J oint Declaration, (ii) the gas sale and purchase
agreements entered into with various buyers, i.e., First Gas Power
Corporation (FGPC), FGP Corp. (FGP) and National Power
Corporation (NPC), in the course of 1997 and 1998, and (iii) certain
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other agreements with the Government of the Republic of the
Philippines, such buyers and other third parties relating to such
agreements, the Service Contractor undertook to develop the
Malampaya reservoir for the supply of natural gas to the Santa Rita
power project (for FGPC), the San Lorenzo power project (for FGP)
and the Iligan power project (for NPC), all located on the island of
Luzon.
(2) Currently, the natural gas produced by the Service Contractor under SC
38 supplies approximately greater than 40 percent of the energy
requirement of the Luzon power grid.
that SC 38 was entered into by the Service Contractor and the Republic of the
Philippines pursuant to Presidential Decree (PD) No. 87; that in accordance with the
terms of a PD 87 service contract, such as SC 38 the service contractor furnishes
services, technology, and financing for the conduct of petroleum operations; that the
proceeds of the sale of the petroleum produced under the contract shall then be the
source of funds for payment of a stipulated service fee and the operating expenses and
other costs due the service contractor; that pursuant to the terms and provisions of SC
38, the Service Contractor undertakes and executes petroleum operations under the
full control and supervision of the DOE; that as defined under SC 38, petroleum
operations include the handling and sale, whether for export or domestic
consumption, of petroleum so obtained from the contract area; that one of the rights of
the Service Contractor, as stipulated under Section 6.2. of SC 38, is exemption from
all taxes, except income tax; that the tax exemption under Section 6.2. of SC 38 is
based on Section 12 (a) of PD 87, which was, and continues to be, the governing law
when the parties entered into SC 38; that as expressly provided in Section 12 (a) of
PD 87, one of the rights granted to a petroleum service contractor is exemption from
all taxes except income tax; that on December 1, 2005, PNOC-EC received a letter
dated November 30, 2005 from the Revenue District Officer of Revenue District
Office (RDO) No. 44; that the following day, SPEX, SPL and Chevron received
identical letters dated December 2, 2005 from the Revenue District Officer of RDO
No. 53 (the December 1 and 2, 2005 letters are collectively referred to as the
Letter-Notices); that on the basis of a letter-opinion dated November 25, 2005 from
the Regional Director of Revenue Region No. 8, Makati, the Letter-Notices informed
the Consortium that their "sale of natural gas in whatever form or state from the
Malampaya Project is now subject to value-added tax pursuant to R.A. No. 9337, as
implemented by Revenue Regulations No. 16-2005; and thus, the Letter-Notices
advised the Consortium to commence filing and paying VAT on or before December
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20, 2005 to avoid the imposition of penalties and interests.
In connection therewith, you now respectfully submit that the Service
Contractor's sales of natural gas remain exempt from VAT pursuant to Section 12(a)
of PD No. 87 and Section 6.2 of SC 38.
In reply thereto, please be informed that this Office has previously confirmed
in BIR Ruling No. 036-01 dated August 20, 2001 that, except for income tax, a
service contractor under SC 38 is exempt from all taxes for which it is directly liable,
including exemption from VAT, pursuant to Section 2(a) of PD No. 87 and Section
6.2. of SC 38. CcaDHT
On the other hand, Section 24 of R.A. No. 9337 provides
"Sec. 24. Repealing Clause. The following laws or provisions of
laws are hereby repealed and the persons and/or transactions affected herein
are made subject to the value-added tax subject to the provisions of Title IV of
the National Internal Revenue Code of 1997, as amended:
"(a) Section 13 of R.A. No. 6395 on the exemption
from value-added tax of National Power Corporation (NPC);
"(b) Section 6, fifth paragraph of R.A. No. 9136 on the
zero VAT rate imposed on the sales of generated power by
generation companies; and
"(c) All other laws, acts, decrees, executive orders,
issuances and rules and regulations or parts thereof which are
contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly."
On the other hand, Section 12 of PD No. 87 provides
"Sec. 12. Privileges of Contractor. The provisions of any law to
the contrary notwithstanding, a contract executed under this Act may provide
that the contractor shall have the following privileges:
"(a) Exemption from all taxes except income tax.
xxx xxx xxx"
Prescinding from the above-cited provisions of laws, it is clear that R.A. No.
9337 explicitly identifies the laws which have been repealed, i.e., R.A. No. 6395 and
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R.A. No. 9136. It is a principle in statutory construction that the express mention of
oneperson, thing, act, or consequence excludes all others, as expressed in the familiar
maximexpressio unius est exclusion alterius. Thus, the absence of PD No. 87 in
Section 24 of R.A. No. 9337 clearly evinces the legislature's intent not to repeal PD
No. 87. This is so because, had it been the intent of Congress to repeal PD No. 87, it
would have simply included PD No. 87 in the specific enumeration of the laws
repealed by R.A. No. 9337.
Moreover, R.A. No. 9337 being a general repealing clause, it cannot operate to
repeal the provisions of PD No. 87 as it fails to designate the specific act or acts,
identified by number or title, that are intended to be repealed. In the case of City
Government of San Pablo, Laguna v. Reyes, the Supreme Court held that:
"We are mindful of the established rule that repeals by implication are
not favored as laws are presumed to be passed with deliberation and full
knowledge of all laws existing on the subject. A general law cannot be
construed to have repeated a special law by mere implication unless the intent
to repeal or alter is manifest and it must be convincingly demonstrated that the
two are so clearly repugnant and patently inconsistent that they cannot
co-exist."
Repeals by implication are not favored and will not be so declared unless it be
manifest that the legislature so intended. (Villegas v. Subido, 41 SCRA 190)
Thus, inBIR Ruling No. DA409-2005 dated October 4, 2005, this Office ruled
that
". . . upon a close examination of the above-cited Sections of the Tax
Code which is a general law vis--vis R.A. Nos. 7279 and 6657 which are
special laws, this Office holds that the former did not repeal the latter,
notwithstanding the Tax Code has a repealing clause as above-mentioned. This
is so because of the following: (1) were it the intention of the legislature to
repeal R.A. Nos. 7279 and 6657, it could have easily stated so in the repealing
clause of the Tax Code; and (2) it is settled that a general law cannot repeal a
special law by implication. The repeal must be express and specific (People vs.
Palma, 76 SCRA 243). Repeals by implication are not favored (Valdez vs.
Tuazon, 40 Phil. 943; Bocobo vs. Estanislao, 72 SCRA 520) for the legislature
is presumed to know all the existing laws on the subject. (US vs. Palacio, 33
Phil. 208)
That PD No. 87 is a special law and should be regarded as an exception to the
general provisions of R.A. No. 9337, and therefore petroleum service contractors
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remain exempt from all taxes including VAT, except income tax, is further
strengthened in Section 109(k) of the Tax Code of 1997, as amended by R.A. No.
9337, which provides that
"Sec. 109. Exempt Transactions. (1) Subject to the provisions of
Subsection (2) hereof, the following transactions shall be exempt from the
value-added tax:
"(k) Transactions which are exempt under international
agreements to which the Philippines is a signatory or under
special laws, except those under Presidential Decree No. 529.
It can readily be seen in the aforesaid section that it expressly identifies the
law, i.e., PD No. 529, which is excepted from the exemption privilege. Therefore,
petroleum operations under PD No. 87, which fall within the class of transactions
which are exempt under special laws, are exempt from VAT pursuant to Section
109(k), supra.
Finally, the principle of non-impairment of contracts is enshrined under
Section 10, Article III of the 1987 Philippine Constitution which states that
"No law impairing the obligation of contracts shall be passed."
The tax exemption privilege of the Service Contractor under SC 38 is a
contractual tax exemption granted by the government in exchange for a valid and
material consideration, the valid and material consideration obtained by the
government in exchange for granting the Service Contractor the right to be exempt
from all taxes (except income tax) under SC 38 consists of the Service Contractor's
obligation (i) to furnish services, technology, and financing for, and (ii) to assume all
risk relating to, the conduct of petroleum operations. Accordingly, said contractual tax
exemption is protected by the non-impairment clause of the 1987 Philippine
Constitution. In the instant case, the government expressly acknowledged that the tax
exemption privilege of the Service Contractor under SC 38 is a contractual tax
exemption granted by the government in exchange for a valid and material
consideration as when the parties stipulated in Section 6.2(g) of SC 38 that the rights
and obligations in the Contract shall be deemed an essential consideration for the
conclusion thereof and shall not be unilaterally changed or impaired. TSIDaH
In the case of Manila Electric Co. v. Province of Laguna, 306 SCRA 750, the
Supreme Court distinguished between tax exemptions agreed to by the government in
contracts and tax exemptions contained in special franchises. It was ruled that
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contractual tax exemptions, however, are not to be confused with tax exemptions
granted under franchises. A franchise partake the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution. Thus, contractual tax
exemptions are subject to the non-impairment clause of the Constitution while tax
exemptions granted under legislative franchises are not.
In fine, the tax exemption being enjoyed by the Service Contractor arises not
out of legislative franchises but out of SC 38, a contract lawfully entered into between
the Service Contractor and the Government of the Philippine represented by then
President Corazon C. Aquino. Inasmuch as the tax exemption privilege of the Service
Contractor is a contractual tax exemption granted by the government in exchange for
a valid and material consideration, said tax exemption may not be unilaterally
withdrawn without violating the non-impairment clause of the 1987 Philippine
Constitution.
WHEREFORE, in view of the foregoing, this Office holds that the Service
Contractor's sales of natural gas remain exempt from VAT pursuant to Section 12(a)
of PD No. 87 in relation to Section 6.2. of SC 38.
This ruling is being issued on the basis of the foregoing facts as represented.
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,
(SGD.) JOSE MARIO C. BUAG
Commissioner of Internal Revenue