KPMG Laya Mananghaya & Co.

January 14, 2009 BIR RULING [DA-(VAT-005) 013-09] PD 87; RA 9337; #036-2001; VAT Ruling No. 007-2006 KPMG Laya Mananghaya & Co. 22F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Roberto L. Tan Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated November 19, 2008 stating that your client, Forum Energy Philippines Corporation (FEPC) (formerly Basic Petroleum & Minerals, Inc.), is a domestic corporation, registered with the Securities and Exchange Commission (SEC) to engage in oil and petroleum explorations under the Foreign Investment Act of 1991 and pursuant to Presidential Decree (PD) No. 87. ScCEIA On 1 September 1998, FEPC has entered a still existing contract with the Philippine government through the Department of Energy (DOE) under Service Contract No. (SC) 41. SC 41 provides that FEPC should furnish services, technology and financing for the conduct of petroleum operations. SC 41 further provides that the proceeds of the sale of the petroleum produced under the contract shall be the source of funds for the payment of a stipulated service fee and the operating expenses and other costs due to FEPC. Furthermore, based on Section 6.2 of SC 41, FEPC shall also have the right to be exempted from all taxes except Philippine Income Tax under the provisions of the National Internal Revenue Code and the Oil Exploration and Development Act of 1972 (Presidential Decree No. 87). Based on the foregoing representations, you now request confirmation of your opinion that FEPC is and continues to be exempt from all taxes including Value Added Tax except Income Tax. In reply thereto, please be informed that this Office has previously confirmed in BIR Ruling No. 036-01 dated August 20, 2001 and most recently in VAT Ruling No. 007-06 dated June 7, 2006 that, except for income tax, a service contractor under SC 41 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 41. 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 The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal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." TDcEaH 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 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 exclusio 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. aSTAcH 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 repealed 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--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 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." AEIcTD The tax exemption privilege of FEPC as a service Contractor under SC 41 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 41 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 41 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 41 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. 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 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 FEPC arises not out of legislative franchises but out of SC 41, a contract lawfully entered into between FEPC and the Government of the Philippine represented by then President Corazon C. Aquino. Inasmuch as the tax exemption privilege of FEPC 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. In view of the foregoing, this Office holds that the FEPC is exempt from VAT and other taxes except income tax pursuant to Section 12 (a) of PD No. 87 in relation to Section 6.2. of SC 41. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service