MG Mining and Energy Corporation

December 18, 2009 BIR RULING [DA-(VAT-115) 793-09] P.D. No. 972; BIR Ruling No. 36-93, 006-07, VAT-557-88, VAT-042-91, VAT-42-97 & DA-002-06 MG Mining and Energy Corporation Unit 101, G/F Westwood Condominium #23 Eisenhower St. Greenhills, San Juan Attention: Ms. Lani Umali VP-Finance Gentlemen : This refers to your letter dated April 13, 2009 requesting for a ruling (1) that the importation by MG Mining and Energy Corporation ("MGMEC") of fuel and raw materials for use in the exploration, development and exploitation of coal lands is exempt from value-added tax (VAT) and excise tax and (2) on whether the tax incentives available to a former operator of coal mining activity transferable. MGMEC, with Taxpayer Identification No. 233-791-244-000, is a corporation organized and existing under the laws of the Republic of the Philippines. It is duly registered with the Securities and Exchange Commission as being engaged in the operations of coal mining activity under the provisions of P.D. No. 972, otherwise known as the Coal Development Act of 1976. In reply, please be informed that the VAT is a tax on the seller/s of goods, property or services. (See Sec. 105, NIRC of 1997). On the other hand, excise tax is a tax on certain goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to certain things imported. (See Sec. 129, id. ). If locally manufactured or produced, the tax is assessed and collected from the manufacturer/producer. (See Sec. 130, id. ). If imported, the tax is assessed and collected from the importer of goods (See Section 131, id. ). These taxes are both consumption tax i.e., the consumer, end-user or buyer of goods or services ultimately pays the VAT and/or excise tax if the goods or articles are subject to excise tax. This being in the nature of "indirect taxes," the same are indirectly passed on by the supplier-seller, manufacturer-producer of goods in the case of excisable product or article, to the buyer. In the hands of the buyer, an indirect tax loses the character of a tax although for VAT purposes, the same may initially be credited as input tax, by VAT registered buyer of goods or services. Thus, in BIR Ruling No. 233-81, dated 18 November 1981, citing the Court's decision in the case of Phil. Acetylene Co., it was held: "Moreover, in the case of the Philippine Acetylene Co. vs. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967, the Supreme Court said: 'Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase 'pass the tax on.' Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States, he said: The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that is all . . . The price is the sum total paid for the goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore, it is part of the price. . . .' (Philippine Acetylene Co. vs. Commissioner, G.R. No. L-19707, August 17, 1967) Following the above pronouncement, it can be stated that the fee or consideration agreed upon between the contractor and his customers is the total amount paid for the services to be rendered by the former to the latter. The amount added because of the contractor's tax is part of said consideration. Consequently, in the final analysis, since the consideration is fixed by the parties, the tax is passed on by the contractor to the customer with the consent of the latter." cEaACD However, in ruling that BADECO is subject to excise tax of P10.00 per metric ton of coal pursuant to Section 151 (a) (1) of the Tax Code, as amended, the Commissioner explained in BIR Ruling 036-93 dated January 15, 1993 that "Section 29 of E.O. No. 273 which took effect on January 1, 1988 expressly provides that the provisions of any law, whether general or special, rules and regulations and other issuances or parts thereof which are inconsistent with this Order (E.O. 273) are hereby repealed, amended or modified accordingly. Section 16 of P.D. No. 972 exempting coal operators from all taxes except income tax runs counter to the provisions of Section 151 of the Tax Code, as amended, which imposes excise tax on mineral, mineral products and quarry resources at the rates therein specified. Such being the case, the provisions of P.D. No. 972 insofar as it exempts coal operators from the excise tax are therefore considered repealed. Contrary to your allegation, Section 16 of P.D. No. 972 was also expressly repealed by the Local Government Code when it provides in Section 534(e) thereof, viz.: 'Sec. 534. Repealing Clause. (e) The following provisions are hereby repealed or amended in so far as they are inconsistent with the provisions of this Code: . . . and Section 16 of P.D. No. 972, as amended, and xxx xxx xxx'" Applying the foregoing, MGMEC shall be exempt from payment of the following, to wit: 1. VAT on importation of goods and supplies; 2. Excise tax on importation of goods and supplies; 3. VAT on importation of petroleum product which is considered as a necessary ingredient in the exploration, development and exploitation of coal lands (Sec. 16, PD 972 and Sec. 4.109-1 (B) (k), RR No. 16-05); 4. VAT on the sale of coal products produced pursuant to its COC (PD 972 and Sec. 109 (k), Tax Code). The proper taxes shall be paid or withheld in the following cases: 1. VAT indirectly passed on by MGMEC's domestic suppliers, with respect to its local purchases; 2. Excise tax indirectly passed on by MGMEC's domestic suppliers, with respect to its local purchases; and 3. Excise tax on mineral, mineral products and quarry resources (Sec. 151 (A) (1) of the Tax Code, Section 534 (e) of the Local Government Code and Section 29 of E.O. No. 273). Since the VAT and excise tax indirectly passed on by MGMEC's domestic suppliers is not a tax in the hands of MGMEC, MGMEC cannot legally invoke its tax exemption privilege under its Coal Operating Contract (COC). In BIR Ruling No. DA-002-06 dated January 5, 2006, this Office ruled that diesel fuel oils can be imported duty and tax free. Notwithstanding that RA 9337 subjects to VAT the sale or importation of petroleum products, including raw materials for their production, the importation of the petroleum product which is considered a necessary ingredient in the exploration, development and exploitation of coal lands, is exempt from the VAT pursuant to Section 16 of PD 972. This exemption is recognized in Section 4.109-1 (B) (k) of Revenue Regulations No. 16-2005 which reads: "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 Philippines is a signatory or under special laws except those granted under P.D. No. 529 Petroleum Exploration Concessionaires Under the Petroleum Act of 1949." Citing Memorandum No. 041-2004 dated September 13, 2004, this Office further clarified the scope of the term "materials" as used in PD 972 as follows: "The term 'materials' as used in PD 972 embraces all necessary elements 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. " On the issue of transferability of tax incentives, available to a former operator of coal mining activity, to a sub-contractor, this Office ruled in VAT Ruling No. VAT-042-91 dated May 29, 1991, that TAIDHa ". . . the tax exemption privileges that may be available to the 'Operator' depends upon the provisions of its duly approved coal operating contract with the Government. Further, since the said incentives are only available to the said "Operator" it follows that the same may not be extended to other persons with whom such operator may contract with even where such contract is incidental or in furtherance of his coal operating contract. Hence, granting that you have awarded some of your coal mining areas to sub-contractors/permittees with an agreement that you will buy all the coal mined by the latter, such sub-contracting of your coal operating contract may not make your sub-contractors also entitled to the tax exemption privileges availing under Section 16(a) of the said law since this exemption privilege may only be extended to the Operator. In short, the said operator's sub-contractors are not given the same exemption grant. In view thereof, your said sub-contractors are subject to the applicable national internal revenue taxes, including the 10% Value-Added Tax on their sales of coal to your company, pursuant to Sections 99 and 100, NIRC." Moreover, in BIR Ruling No. 006-07 dated March 7, 2007, involving the issue on whether the principle of non-impairment clause applies to the successor-in-interest, this Office had ruled as follows: "We believe otherwise. Contractual tax exemptions like those contained in government bonds or debentures are to be distinguished from tax exemptions granted under franchises. The latter is beyond the purview of the non-impairment clause given that franchise are granted under the condition that the same shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires (Manila Electric Co. vs. Province of Laguna and Benito R. Balazo, G.R. No. 131359, May 5, 1999)." The tax exemption privilege of the Operator under the COC is a contractual tax exemption granted by the government in exchange for a valid and material consideration. Accordingly, the tax incentives granted to MGMEC is personal and cannot be transferred to other entities. The tax incentives are not inherent in the license and will not automatically be transferred. However, this Office clarified in the same ruling that since the tax exemption on the sale of coal products is premised on PD 972 which is a special law, and which Section 109 (k) of the Tax Code so specifically provides to be the basis of the VAT exemption, the same shall apply to coal produced by the successor-in-interest pursuant to the COC. Since the main object of the COC for which the tax exemption was granted is the active exploration, development and production of coal resources, the successor-in-interest's sales of coal produced by virtue of a COC with the predecessors-in-interest remain exempt from VAT pursuant to Section 109 (k) of the Tax Code, as amended by RA 9337, in relation to PD 972, as amended. Nevertheless, the exemption granted to the successor-in-interest does not apply to any importation of coal products that the successor-in-interest may pursue. Thus, with regard to such importation, the same should be subject to VAT since the previous VAT exemption pertaining to importation of coal granted under Section 109 (c) and (e) of RA 8424 was already removed by RA 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. CDcaSA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service