BIR Ruling

June 25, 1968 2nd Indorsement Respectfully returned to the Honorable, the Secretary of Finance, Manila, the letter-inquiry of Messrs. Jalandoni and Jamir, dated June 1, 1968, in behalf of their client, the Marinduque Mining and Industrial Corporation, as to whether or not income taxes are included in the five-year tax exemption benefit granted under Section 6 paragraph 1, Republic Act No. 1828, as amended by Republic Acts Nos. 2077 and 4167, which is reproduced, viz: "Sec. 6. Should the President of the Philippines decide to have the operations or any part thereof authorized in this Act done through the services of an independent contractor or contractors, the same shall be, among others, under the following terms and conditions: "(1) The operator shall be paid for services rendered and expenditures incurred beginning with the end of the first year after the effective date of the contract the sum of one peso (P1.00) per year, and the operator shall receive by way of additional compensation, an amount equivalent to a portion of the gross annual receipts from all minerals, mineral and metal products, and by-products resulting from the operation, proceeding and disposition thereof computed such that the Government shall retain not less than three and one-half per centum of the gross annual receipts, f.o.b. point of exports: Provided, That the operator shall, from the effective date of the contract of operation up to end including the fifth year after commencement of actual production, be exempt from all taxes, duties and charges, both national and local, directly payable by it for any work or activity, equipment, machinery, materials, instruments, supplies, accessories, structures, buildings, lands, improvements, and/or other properties directly connected with or needed and to be used or being used exclusively in the operation, other than those provided in this Act and except those fees and charges that are imposed for work or services actually rendered to the operator: Provided, however, That the operator shall put the area or areas covered by the contract into actual production within five years from the effective date of the contract, Thereafter, penalties may be applied against the operator for failure to effect such production, and/or reach certain levels of production within specific time period, as may be agreed upon: and Provided, further, That exemptions from taxes shall not extend to taxes due from contractor's personnel in their personal capacities ." (Emphasis supplied) Before section 6(1) of Republic Act 1828 was amended by Republic Act 4167, the proviso in said section was as follows: ". . . Provided, That, the operator may be exempt from all taxes , duties, fees and charges, both national and local, directly payable by it, until recovery of seventy-five per centum of the capital invested; . . ." The present proviso of the said section as amended now reads: ". . . Provided, That the operator shall, from the effective date of the contract of operation up to and including the fifth year after commencement of actual production, be exempt from all taxes, duties and charges, both national and local, directly payable by it for any work or activity , equipment, machinery, materials, instruments, supplies accessories, structures, buildings, lands, improvements, and/or other properties directly connected with or needed and to be used or being used exclusively in the operation, other than those provided in this Act and except those fees and charges that are imposed for work or services actually rendered to the operator: Provided, however, That the operator shall put the area or areas covered by the contract into actual production within five years from the effective date of the contract; . . ." The underlined portion of the proviso as amended by Republic Act 4167 refers to a complete exemption from all taxes, both national and local, directly payable by the operator for any work or activity. Undoubtedly, the term "all taxes" includes income tax which is the only tax assessable for any work or activity of the operator which gives rise to income. The operator referred to in the law is the Marinduque Mining & Industrial Corporation. This company will render the service to the Surigao Mineral Reservation Board. It is the performance of this work or activity by the Marinduque Mining & Industrial Corporation which considers it as engaged in trade or business as defined in Section 84 (r) of the Tax Code. As the law used the word "shall" it undoubtedly grants exemption from income tax the income derived from work or activity of the Marinduque Mining & Industrial Corporation for the period of five years from the effective date of the contract of operation up to and including the fifth year after commencement of actual production, subject to the condition that penalties may be applied against the operator for failure to put the area or areas covered by the contract into actual production within five years from the effective date of the contract or failure to reach certain levels of production within specific time period as may be agreed upon. The same proviso grants exemption from duties and charges, both national and local, the equipment, machinery, materials instruments, supplies, accessories, structures, buildings, lands, improvements, and/or other properties directly connected with or needed and to be used or being used exclusively in the operation. The equipments, etc. mentioned in the law are the once which are exempt from duties and charges, provided that these are directly connected with or needed and to be used or being used exclusively in the operation, for the period of five years from the effective date of the contract of operation up to and including the fifth year after commencement of actual production. These duties and charges are, of course, different from the income tax which is assessable on the income derived from the work or activity of the contractor. The first is an excise tax, whereas the latter is a direct tax on the income. The conclusion that the Marinduque Mining & Industrial Corporation, as contractor, is also exempt from income tax on income derived by it on any work or activity as contractor is further supported by the last proviso of Section 1 of Republic Act 1828 as amended by Republic Act 4167 which reads as follows: ". . . And, provided further, that exemption from taxes shall not extend to taxes due from contractor's personnel in their personal capacities." This proviso emphasizes the exemption of the contractor from income tax on its income and emphatically denies that exemption from income tax to contractor's personnel in their personal capacities. In view thereof, this Office is of the opinion and so holds that the tax exemption under Section 6 (I) of Republic Act 1828, as amended, includes exemption from the payment of income tax from the effective date of the contract of operation up to and including the fifth year after commencement of actual production, provided, however, that the operator shall put the area or areas into actual production within five years from the effective date of the contract; other wise, penalties may be applied against the operator for failure to effect such production, and/or reach certain levels of production within specific time period, as may be agreed upon. cdta (SGD.) MISAEL P. VERA Commissioner of Internal Revenue