Batancoal Resources Corporation

October 9, 2008 BIR RULING [DA-(VAT-013) 283-08] P.D. 972, as amended; # 006-2007 Batancoal Resources Corporation Barangay Liguan, Batan Island, Rapu-Rapu Albay Attention: Mona G. de Leon VP-Finance Gentlemen : This refers to your letter dated May 23, 2008 which was indorsed by Revenue Region No. 10, Legazpi City on May 27, 2008, requesting for a ruling that the sale of coal by Batancoal Resources Corporation ("Batancoal") is exempt from the value-added tax (VAT) pursuant to Section 16 (a) of Presidential Decree (P.D.) No. 792 and considering that Batancoal is a coal mining operator or developer and not coal user or trader. IEHDAT Background Batancoal Resources Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200513455 dated August 05, 2005. Its primary purpose is to engage in the exploration, mining, development, beneficiation and delivery of coal product and resources to coal-fired plants such as power stations, cement plants and other industrial coal users. On May 26, 2005, a Coal Operating Contract (COC) was executed by and between the Government of the Republic of the Philippines, as represented by the Department of Energy, and Rock Energy International Corporation, as the Operator. Pursuant thereto, the Government, through the Department of Energy, availed itself of the resources of the Operator wherein the latter shall furnish the necessary services, technology and financing for the Coal Operation. As such, Rock Energy International Corporation was granted COC Nos. 104 and 137 by the Department of Energy to engage in the coal operation in Batan Island, Municipality of Rapu-rapu in Albay. Rock Energy International Corporation ("Rock Energy") is likewise a domestic corporation engaged in the business of coal operation and distribution of coal and other mineral products. Batancoal is a wholly-owned subsidiary of Rock Energy owning over 90% of the subscribed and paid up capital of Batancoal. On April 1, 2008, a Deed of Absolute Assignment was executed by and between Rock Energy, as Assignor and Batancoal, as Assignee, wherein the former, after a review of its corporate direction, decided to simplify all financial transactions and tax incentives of the coal mine against its primary business of trading and distribution of coal and other mineral products and thereby assigned its entire interest as a registered coal operator under COC Nos. 104 and 137 in favor of Batancoal. The purpose of assigning said COCs is to enable Batancoal, as the subsidiary of Rock Energy, to focus primarily on coal exploration, development and mining. Thereafter, on August 5, 2008, the Department of Energy, through its Secretary Angelo T. Reyes, approved the Deed of Assignment dated April 1, 2008 over COC No. 137. Under the said approval, Batancoal, as the new Operator will continue to perform the work obligations as provided in COC No. 137. In reply, please be informed that Section 16 (a) of P.D. 972 provides, to wit: "SEC. 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: EHaCID a) Exemption from all taxes except income tax;" Furthermore, Section 109 (K) of the Tax Code, as amended by Republic Act (R.A.) No. 9337, also provides, to wit: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those granted under Presidential Decree No. 529." The repealing clause of R.A. 9337 specifically identifies the following laws which were repealed, to wit: "Section 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 the National Power Corporation (NPC); (B) Section 6, fifth paragraph of R.A. 9136 on the zero VAT rate imposed on the sales of generated power by generation companies; and (C) All other laws, acts, decrees, executive order, 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." In VAT Review Committee Ruling No. 7-2006 dated June 7, 2006, interpreting the foregoing repealing clause of R.A. 9337, the Commissioner ruled that "the absence of P.D. No. 87 in Section 24 of R.A. 9337 clearly evinces the legislature's intent not to repeal P.D. 87. This is so because, had it been the intent of Congress to repeal P.D. 87, it would have simply included P.D. 87 in the specific enumeration of the laws repealed by R.A. 9337." Likewise, in said VAT Review Committee Ruling No. 7-2006, citing BIR Ruling No. DA 409-2005 dated October 4, 2005, this Office ruled that SacDIE ". . . 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. 7279 and 6657, it could have easily stated so in the repealing clause of the Tax Code; and (2) it is settled that the 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 [ Valdes vs. Tuazon, 40 Phil. 943; Bacobo 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 P.D. 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 , . . . Following the foregoing interpretations, this Office hereby opines that since P.D. 972, as amended, is not among those laws specifically repealed by Section 24 of R.A. 9337, the tax incentives agreed upon by the Government under the COC in pursuance thereto still subsist. Premises being considered, the exemption of coal operators as provided in P.D. 972 continues to be covered by Section 109 (K) of the Tax Code, as amended by R.A. 9337. Therefore, since the tax exemption on the sale of coal products is premised on P.D. 972 which is a special law, and which Section 109 (K) of the Tax Code, as amended, so specifically provides to be the basis of the VAT exemption, the same shall apply to coal produced by Batancoal Resources Corporation pursuant to the COC. In view of the foregoing, this Office hereby rules that since the main object of the COC for which the tax exemption was granted is the active coal exploration, development and production of coal resources, Batancoal Resources Corporation's sale of coal produced by virtue of a COC with the Department of Energy remain exempt from VAT pursuant to Section 109 (K) of the Tax Code, as amended by R.A. 9337, in relation to P.D. 972, as amended. (BIR Ruling No. 006-2007 dated March 7, 2007) CcTHaD Moreover, the VAT exemption granted to Batancoal Resources Corporation does not apply to any importation that Batancoal Resources Corporation may pursue. Thus, with regard to any importation, the same should be subject to VAT since the previous VAT exemption pertaining to importation of coal granted under the Sec. 109 (c) and (e) of R.A. 8424 was already removed by R.A. 9337. 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