BIR Ruling [DA-002-06]

January 5, 2006 BIR RULING [DA-002-06] P.D. 972; RR 16-2005; Memo 41-2004 Semirara Mining Corporation (formerly Semirara Coal Corporation) 4th Floor, DACON Building 2281 Pasong Tamo Extension Makati City Attention: Mr. Jaime B. Garcia Purchasing Manager Gentlemen : This refers to your letter dated October 28, 2005 requesting for confirmation to the effect that diesel fuel oil is considered an essential "material" in the coal mining operation and can be imported duty and tax free by Semirara Mining Corporation (SMC) pursuant to Presidential Decree (PD) No. 972, as amended by P.D. No. 1174, otherwise known as the "Coal Development Act of 1976." It is represented that SMC is a holder of a Coal Operating Contract with the government of the Philippines executed through the Department of Energy dated July 11, 1977, as amended on January 16, 1981. SMC is primarily engaged in the exploration, development, exploitation and production of coal. Pursuant to Section 16 of P.D. No. 972, operators are given the following incentives, to wit: "Section 16. Incentives to Operators . The provisions of any law to the contrary notwithstanding, a contract executed under this Decree may provide that the operator shall have the following incentives: a) Exemption from all taxes except income tax; b) Exemption from payment of tariff duties and compensating tax on importation of machinery and equipment and spare parts and materials required for the coal operations subject to the following conditions: 1) that machinery, equipment, spare parts and materials of comparable price and quality are not manufactured in the Philippines; 2) that the same are directly and actually needed and will be used exclusively by the operators in its operation or in operation for it by a contractor; IEHaSc 3) that they are covered by shipping documents in the name of the operator to whom the shipment will be delivered by the customs authorities; and 4) that prior approval of the Energy Development Board was obtained by the operator before the importation of such machinery, equipment, spare parts and materials, which approval shall not be unreasonably withheld. . . ." In reply, please be informed that in Memorandum No. 041-2004 dated September 13, 2004, this Office, in answer to the request for a clarificatory ruling of the Officer-in-Charge, Large Taxpayers Service regarding the scope of term "materials" as used in PD 972, opined in the following manner: "The term 'materials' as used in PD 972 embraces all necessary element that may be used in furtherance of SCC's operation. Consequently, it includes fuel oils used directly in its mining operation as well as those that are being used or consumed for administrative purposes. Fuel oil is a necessary ingredient in the exploration, development and exploitation of coal lands. In the conduct of the same, necessarily it includes mobilization of some personnel which requires the use of cars and other transport facilities that eventually requires the use of fuel oils. Had the framers of the law intended to exempt those fuel oils that are being used directly in mining operation only and not to include those consumed for administration purposes, it should have clearly provided the same in PD 972." The importation by SMC of diesel fuels can be given exemption because it abides with the conditions set forth in Sec. 16(b)(1) of P.D. No. 972. This is evident in the letter dated November 28, 2002 of Mr. Ranilo P. Abando, OIC-Director, Energy Resource Development Bureau of the Department of Energy, when he stated that: "(D)iesel fuels are by-products of crude oil which our local oil companies import as well. They in turn process the crude oil and transport and sell the by-product, including diesel fuels in the Philippines at a higher price as the cost of processing and importation are inputted in the selling price for the local market." Evidently, imported diesel fuel is less expensive than local diesel fuel. Notwithstanding the provisions of Republic Act No. 9337 subjecting the sale or importation of petroleum products, including raw materials for their production to the value-added tax, the importation of SMC of the petroleum product which is considered a necessary ingredient in the exploration, development and exploitation of coal lands, is exempt from the value-added tax pursuant to the provisions of Section 16 of P.D. No. 972. Moreover, such exemption provided in P.D. No. 972 is recognized in Section 4.109-1(B)(k) of Revenue Regulations No. 16-2005 which provides: "Sec. 4.109-1. VAT Exempt Transactions . xxx xxx xxx (B) Exempt Transactions . xxx xxx xxx (k) Transactions which are exempt under international agreements to which the Philippine is a signatory or under special laws except those granted under P.D. No. 529 Petroleum Exploration Concessionaires Under the Petroleum Act of 1949." (Emphasis supplied) CacISA In view of all the foregoing, this Office hereby confirms your opinion that diesel fuel oils can be imported duty and tax free by Semirara Mining Corporation (SMC). 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