BIR Ruling [DA-081-04]

February 24, 2004 BIR RULING [DA-081-04] P.D. 1354; 031-2002 Baniqued and Baniqued Suite 803, 8/F Jollibee Centre San Miguel Avenue, Ortigas Center Pasig City Attention: Attys. Carlos G. Baniqued and Terence Conrad H. Bello Gentlemen : This refers to your letter dated December 6, 2001 requesting on behalf of your client, Pilipinas Shell Petroleum Corporation (PSPC) for the issuance of a permit authorizing them to withdraw from the place of production petroleum products excise tax-free for delivery to Shell Philippines Exploration B.V. (SPEX) pursuant to BIR Ruling No. 024-2001 dated June 13, 2001. It appears that PSPC is a corporation organized and existing under the laws of the Philippines; that SPEX, on the other hand, is a corporation duly organized and existing under the laws of the Netherlands and is licensed by the Securities and Exchange Commission (SEC) to engage in business in the Philippines through a branch office; that SPEX is a petroleum service contractor of the Philippine Government pursuant to Presidential Decree (PD) No. 87, as amended, otherwise known as "The Oil Exploration and Development Act of 1972" and under Service Contract No. 38; that on June 13, 2001, the Commissioner of Internal Revenue issued BIR Ruling No. 024-2001 wherein it was ruled that persons or entities contracted by SPEX as a petroleum service contractor, to locally supply goods and materials that are required by and in, or that are inherently necessary or incidental to the service contractor's exploration and development of petroleum mineral resources, fall within the meaning of the term "subcontractors" under P.D. No. 1354 and, therefore, are entitled to the 8% preferential final withholding tax on their gross income derived from such supply contracts in lieu of all other taxes, national or local; that PSPC supplies marine gas oil to SPEX for the latter's use in the Malampaya natural gas field located at offshore Palawan; that SPEX utilizes the marine gas oil in its petroleum operations for: a) Vessel Propulsion where SPEX uses the marine gas oil as fuel for its supply vessels and said supply vessels normally consume about 5,000 liters of marine gas oil per day, transport cargo (machinery, supplies, etc.) to the drilling rig and the Malampaya platform; b) Drilling Rig Power Generation where the Rig Atwood Falcon machinery needs fuel for its generators to provide electricity to the installation and all equipment on board the rig; and c) Malampaya Platform Emergency Power Generation where emergency generators require fuel to provide sufficient power to the platform while maintenance is being performed on the main power generators; that it is your opinion that PSPC's supply of marine gas oil to SPEX is required by and in, or is inherently necessary or incidental to, SPEX's exploration and development of petroleum mineral resources and henceforth, PSPC can be considered a "subcontractor" within the meaning of P.D. No. 1354 pursuant to the aforesaid issued ruling, and is entitled to the 8% preferential final withholding tax on gross income derived from the supply of the marine gas oil to SPEX. In reply, please be informed that Sec. 1 of PD No. 1354 provides: xxx xxx xxx "SEC. 1. Tax on subcontractors . Every subcontractor, whether domestic or foreign, entering into a contract with a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to eight percent (8%) of its gross income derived from such contract, such tax to be in lieu of any and all taxes, whether national or local . . . . Moreover, pertinent portion of BIR Ruling No. 024-2001 dated June 13, 2001, states that: " PD No. 1354 is explicit that any person or entity, whether domestic or foreign, that enters into a contract with a service contractor engaged in petroleum operation in the Philippines is considered a subcontractor . The decree, however, clarifies that the gross income entitled to the 8% preferential tax rate refers to the income earned or received as a result of the contract entered into by the subcontractor with the service contractor . PD No. 1354, therefore, does not distinguish between a contract for supply of services and a contract for supply of goods or materials, or both. All that PD No. 1354 requires is that the contract be entered into with a service contractor engaged in petroleum operation in the Philippines. In other words, the contract, whether for supply of labor, or of goods and materials, or both, must provide the service contractor the means necessary to enable it to pursue its petroleum operations." Considering that PSPC's supply of marine gas oil to SPEX is required by and in, or is inherently necessary or incidental to SPEX's exploration and development of petroleum mineral resources, and pursuant to BIR Ruling No. 024-2001 dated June 13, 2001, PSPC is deemed a qualified "subcontractor" within the meaning of P.D. No. 1354 and therefore, entitled to the 8% preferential final withholding tax based on gross income derived from the supply of the marine gas oil to SPEX. ( BIR Ruling No. 031-2002 dated August 12, 2002 ) This will therefore, serve as PSPC's authority to withdraw marine gas oil from its place of production excise tax-free for delivery to SPEX. PSPC however, must submit the following documents: 1. A copy of the invoice issued to SPEX annotated with the phrase "Deliveries to SPEX. Subject to 8% final withholding tax in lieu of all taxes, national or local;" 2. A copy of the corresponding Withdrawal Certificate/s annotated with the same phrase "Deliveries to SPEX. Subject to 8% final withholding tax in lieu of all taxes, national or local;" 3. Confirmation from SPEX of the fact of receipt and volume of petroleum products delivered. TacADE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group