Vat Ruling 06-07

June June 7, 2006 2006

VAT RULING RULING NO. 007-06 Baniqued & Baniqued Suite 803, 8/F Jollibee Centre San Miguel Avenue Ortigas Center Pasig City

Attention: Atty. Carlos G. Baniqued and Atty. Terence Conrad H. Bello B ello 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 Joint Declaration of Commerciality with the Government of the Republic of the Philippines establishing production areas under the Service Contract covering these reservoirs (the Joint Declaration): (1) (1)

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On the the basi basiss of (i) (i) the the Join Jointt Decl Declara aratio tion, n, (ii) (ii) the gas sale sale and and purc purcha hase se 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 Copyright 2013

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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 t he 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 Copyright 2013



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R.A. No. 9136. It is a principle in statutory construction that the express mention of one person, thing, act, or consequence excludes all others, as expressed in the familiar maxim expressio 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, in BIR 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-à-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 Copyright 2013



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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 t ax: "(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 Copyright 2013



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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. BUÑAG Commissioner of Internal Revenue

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Vat Ruling 06-07

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