BIR Ruling No. 006-07

March 7, 2007 BIR RULING NO. 006-07 DA-002-2006; P.D. 972, as amended 000-00 006-2007 Semirara Mining Corporation 2nd Floor DMCI Plaza 2281 Chino Roces Ave. Makati City Attention: Mr. Victor A. Consunji President Gentlemen : This refers to your letter dated May 11, 2006, requesting confirmation that your sale of coal is exempt from the value-added tax (VAT) imposed under the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337. Background Semirara Mining Corporation (SMC) formerly Semirara Coal Corporation (SCC) is presently the operator of a coal mine in the Island of Semirara, Municipality of Caluya, Province of Antique. On July 28, 1976, in order to reduce the country's dependence on imported crude oil and to encourage investment in the exploitation, development and production of local coal resource, then President Ferdinand Marcos issued Presidential Decree (PD) No. 972, otherwise known as the "Coal Development Act of 1971." PD No. 972 was subsequently amended by P.D. No. 1174. The decree provided, inter alia , incentives in the form of exemption from taxes , the pertinent provisions of which read in part: "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. xxx xxx xxx." On July 11, 1977, pursuant to PD 972, the predecessors in interest of SMC, namely, Vulcan Industrial and Mineral Exploration Corporation (VIMEC) and Sulu Sea Oil Development Corporation (SSODC), entered into a Coal Operating Contract (COC) with then Energy Development Board (EDB). The COC mirrored the incentives provided in PD 972, as amended, to wit: "Section V. Rights and obligations of the Parties. xxx xxx xxx 5.2 The Operator shall have the following rights: a) Exemption from all taxes except income tax. xxx xxx xxx." In a Deed of Assignment executed on April 7, 1980, the predecessors in interest assigned all their rights, interests and participation to SCC with the approval of then EDB. The COC was subsequently amended on January 16, 1981, which effectively included the recovery level of operating expenses from seventy percent (70%) to ninety percent (90%). TAIEcS Prior to the enactment of R.A. 9337, the sale or importation of coal, in general was exempt from value-added tax as provided for under Section 109 of the Tax Code of 1997, as amended, viz: "Section 109. Exempt Transactions . The following shall be exempt from value added tax: xxx xxx xxx (e) Sale or importation of coal, natural gas, in whatever form or state, and petroleum products (except lubrication oil, processed gas, grease, wax and petroleum) subject to excise tax under Title IV; xxx xxx xxx (q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590;" R.A. 9337, however, deleted paragraph (e) of the above section, and renumbered paragraph (q) to paragraph (k) and deleted P.D. Nos. 66 and 1590 therefrom. Thus, effective November 2005, the National Power Corporation (NPC) started to withhold a tax of five percent (5%) or the final withholding VAT on coal billings of SMC. In its letter dated January 10, 2006, SMC protested the withholding tax. NPC however, has not acted on SMC's protest; hence, this request for a confirmatory ruling. In support of this request, SMC has submitted to this Office the following: 1) a photocopy of the COC between SMC's predecessors in interest and EDB; the Deed of Assignment executed between SCC (now SMC) and its predecessors in interest dated April 7, 1980; and 3) First Amendment to COC dated January 16, 1981. Taxpayer's Position SMC now posits that the sale of coal produced under PD 971, as amended, remains exempt from value-added tax despite R.A. No. 9337, on the following grounds: 1) The exemption has not been repealed by R.A. No. 9337 . The repealing clause of R.A. 9337 provides: "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 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." This section contains two types of repeal, a specific and general repeal. The specific repeal covers Section 13 of R.A. 6395 with respect to the exemption from VAT of NPC; and Section 6, paragraph 5 of R.A. 9136 as regards the zero rated VAT on sales of generated power. Hence, the specific repeal does not extend and may not be extended to tax exemptions or incentives granted under PD 972, as amended. On the other hand, the general repeal covers "laws, acts, decrees or executive orders, issuances and rules and regulations," which are contrary to and inconsistent with any provision of R.A. 9337. The general repeal in its broad language may not cover the exemptions or incentives granted under PD 972, as amended. The impact of general repeal on the exemptions or incentives granted under PD 972, as amended, must be taken in the light of the nature of R.A. 9337 and PD 972, as amended. R.A. 9337 is an amendment to the VAT Law which is a general law since it applies to all sales of goods and services. 1 P.D. 972, as amended, however, is a special law since it relates to a particular subject matter: the exploration, development, utilization and sale of indigenous coal. Citing the rule in statutory construction that in case of apparent conflict between a general law and a special law, the latter prevails and constitutes as an exception to the former. 2 Thus, P.D. 972, as amended, being a special law constitutes as an exception to the VAT law, as amended by R.A. 9337, which is a general law. In short, R.A. 9337 being an amendment to a general law has not repealed the exemptions on incentives granted under P.D. 972, as amended. Further, using as basis another rule in statutory construction that repeals by implication are not favored and will not be so declared unless it is shown that the statutes or statutory provisions deal with the same subject matter and there is an irreconcilable repugnancy between them, 3 SMC argues that there is no irreconcilable conflict between the lifting of the exemption of the sale of coal from the value-added tax under R.A. 9337 and the exemption of the sale of coal produced under P.D. 972, as amended. Prior to the lifting of the exemption of coal from the value-added tax, Section 109 of the Tax Code, as amended, reads: "Section 109. Exempt transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (e) Sale or importation of coal and natural gas, in whatever form or state, and petroleum products (except lubricating oil, processed gas, grease, wax, and petrolatum) subject to excise tax imposed under Title VI." SMC concludes that the exemption granted under Section 109 (e) of the Tax Code refers to coal in general. The exemption did not distinguish between the imported coal and local coal, or between coal produced under PD 972, as amended or coal produced not covered under PD 972, as amended. The lifting of the exemption through the deletion of paragraph (e) of Section 109 of the Tax Code must refer to local coal in general. It cannot refer to coal specifically produced under PD 972, as amended. Since the exemption of coal under PD 972 is specific, it constitutes as an exception to the lifting of the exemption of coal under R.A. 9337 which is general in character. It further argues that had Congress intended to repeal the exemption of the sale of coal produced under PD 972, as amended, it would have so expressly stated in the repealing clause of R.A. 9337. However, Congress did not do so, thus evincing its intent to keep the exemptions or incentives under P.D. 972, as amended, as exception to R.A. 9337. Both R.A. 9337 and P.D. 972, as amended can stand together and can be harmonized. The lifting of the exemption of the sale of coal under R.A. 9337 refers to importation or sale of coal in general. By way of exception however, the exemption of the sale of coal produced under P.D. 972, as amended continues to be in force and effect. 2) Exemption continues to be covered by Section 109 (k) of the NIRC, as amended by R.A. 9337 . The deletion of Section 109 (e) of the NIRC, as amended, under R.A. 9337 should be taken in the context of Section 109 (k) of the same Tax Code, which reads: "(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." SMC opines that under this section, transactions exempt under special laws are not subject to the value added tax unless specifically repealed or withdrawn by R.A. 9337. The provision is a clear manifestation of the intent of the Congress to insulate the exemptions granted under special laws from the reach of the value-added tax. Whenever Congress intends to remove the exemptions under special laws, it does so by specific repeal of the special law. Since no such provision is found in R.A. 9337, which specifically repeals PD 972, as amended, the exemption from VAT on the sale of coal produced under PD 972 which is a special law remains in force and effect. The deletion of Section 109 (e) of the Tax Code by reason of its amendment by R.A. 9337 purportedly lifting the exemption of the sale of coal from VAT should be read together with Section 109 (k) of the same Tax Code, as amended by R.A. 9337. The impact of the deletion of Section 109 (e) of the Tax Code, as amended by R.A. 9337 is limited and circumscribed by the retention of Section 109 (k) which continues to protect and preserve the exemptions under special laws, among which is PD 972, as amended. Finally, the deletion of Section 109 (e) of the Tax Code may not be extended by implication to include the repeal or withdrawal of exemptions granted under special laws, such as PD 972, as amended. 3) The exemption is protected by the non-impairment of the obligation contracts clause of the Constitution . The lifting of the exemption of coal in general through the deletion of paragraph (e) of Section 109 paraphrased in R.A. 9337 poses no constitutional question. However, the lifting of the exemption if applied to the sale of coal produced under P.D. 972, as amended, poses a constitutional issue of impairment of the obligation of contracts. The objective of P.D. 972 is to accelerate the exploration, development, exploitation and production of coal to lessen the country's dependence on imported oil which exacts heavy demand on the country's internal reserves. Thus, in order to achieve this purpose, the government sought the participation of the private sector with sufficient capital, technical and managerial resources. It authorized the participation of the private sector through COCs under which the operator shall provide the services, technology, and financing in consideration for which it shall be entitled to a stipulated fee, reimbursement of expenses, and incentives among which are the exemption from all taxes except income tax and exemption from payment of tariff duties and compensating tax (now VAT) on importation of machinery and equipment, and accelerated depreciation. These terms and conditions, as well as incentives provided in PD 972, as amended, are embodied in the COC executed between the government through then EDB and SMC. The execution of COC is sanctioned by P.D. 972. The exemption of SMC from all taxes including VAT, except income tax, under its COC is in the nature of a "contractual exemption." Such exemption is an obligation protected from impairment under Article III of the Constitution, to wit: "Section 10. No law impairing the obligation of contracts shall be passed. " Cooley, an eminent author in taxation in his treatise on the Law of Taxation writes: "If an exemption is based on a contract, for which there is consideration, it cannot be repealed or altered without violating the Federal Constitution prohibiting impairment of contracts. [2 Cooley, The Law of Taxation, Section 715 pp. 1503] "On the other hand, if the exemption constitutes a binding contract it is not revocable subject to certain exceptions hereinafter noticed. The contract derives its character of inviolability from the clause of the Constitution of the United States inhibiting the states from passing any law impairing the obligation of contracts." [2 Cooley, The Law of Taxation, Section 701 pp. 1472-1473] Prominent scholars in Constitutional Law likewise share the same view, to wit: "Among the earliest case on the subject was Casanovas v. Hord [8 Phil. 125] This decision extended the constitutional protection to a tax exemption embodied in a Spanish royal decree of May 14, 1867, granting a mining concession. The decree was considered a contract between plaintiff and the Spanish government and the law abolishing the tax exemption was declared an unconstitutional impairment of the contract. As to the effect of the change in sovereignty on the contract, the Court simply said: The fact that this concession was made by the government of Spain, and not by the government of the United States is not important." [1987 Constitution of the Republic of the Philippines, A Commentary, 1996 edition pp 393 by Fr. Joaquin G. Bernas.] "On the other hand, where a law grants a tax exemption in exchange for a valuable consideration such exemption is considered a contract and cannot be repealed because of the impairment clause." [Constitutional Law, pp. 260-261 by Former Justice of the Supreme Court Isagani Cruz] The Supreme Court likewise adopts a similar view that contractual exemptions are protected by the non-impairment clause of the Constitution: "In truth, the contract clause has never been thought as a limitation on the exercise of the state's power of taxation save only where a tax exemption has been granted for a valid consideration." [ Tolentino v. Secretary of Finance , 235 SCRA 630, 686] "Contractual tax exemptions, in real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts." [ Manila Electric Co. vs. Province of Laguna , 306 SCRA 750] SMC now reckons that the tax exemption granted to SMC was in exchange for valuable consideration in the form of royalties paid to the government needed to pursue its policy to accelerate the exploration, development and production of the country's coal resources. 4 Specifically, Section 11 of P.D. 972 obligated every operator to spend a minimum amount in coal exploration. The grant of exemption was in consideration of the "necessary services, technology and financing to be provided by SMC for the coal operations." Reiterating its position, SMC argues that there is no doubt that the lifting of the exemption of the sale of coal from value added tax, in general, if applied to the sale of coal produced by SMC under P.D. 972 constitutes an impairment by the government of its obligation under the COC, viz. : "a law which changes the terms of a legal contract between parties, either in the time or mode of performance, or imposes new conditions, or dispenses with those expresses, or authorizes for its satisfaction something different from that provided in its terms, is law which impairs the obligation of a contract and is therefore null and void." [ Clemons vs. Nolting , 42 Phil. 702, 711] The lifting of the exemption of coal from the value added tax under R.A. 9337, if applied , to the sale of coal produced pursuant to the COC under P.D. 972, revokes the obligation of the government to refrain from imposing a value added tax on such coal and imposes a new obligation on SMC to carry the burden of the VAT. Thus, the lifting of the exemption of coal if applied to the sale of coal produced by SMC under the COC will change the terms of the contract and the intention of parties thereto. Finally, it is not fair for government to entice investors in helping the development of the coal industry with a promise of incentives and treacherously renege on its promise after the investors have responded and risked their capital, technical and managerial resources. As the Supreme Court warned in Roxas vs. Court of Appeals , 23 SCRA 276, "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And in order to maintain the general public's trust and confidence in the Government, this power must be used justly and not treacherously. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend a helping hand and later on to penalize him for duly answering the urgent call." BIR Reply We reply as follows 1. 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. 5 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 Ruling DA 409-2005 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. 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 PD 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 interpretation, 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 to by the government under the COC in pursuance thereto still subsist. 2) Exemption continues to be covered by Section 109 (k) of the Tax Code, as amended by R.A. 9337, 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 contention is triggered by the fact that Section 109 (e) of the Tax Code was deleted by R.A. 9337. Then Section 109 (e) so provides "Section 109. Exempt Transactions . The following shall be exempt from the value-added tax: "xxx xxx xxx "(e) Sale or importation of coal and natural gas, in whatever form or state, and petroleum products (except lubricating oil, processed gas, grease, wax and petroleum) subject to excise tax imposed under Title VI." Truly, with the deletion of this provision in R.A. 9337, the sale or importation of the foregoing articles/products are now subject to the value-added tax. In the instant case, SMC asserts exemption from VAT on its sale of coal pursuant to Section 109 (k) of the Tax Code, as amended by R.A. 9337. Thus, we have to determine the tax status of SMC in accordance with P.D. No. 972. We have noted that SMC's coal mining operation as successor-in-interest of VIMEC and SSODC 6 is by virtue of a COC entered into with EDB on July 11, 1977, and duly sanctioned by PD 972, as amended. The said COC mirrored the incentives granted under said P.D. 972, supra , to wit: "Section V. Rights and Obligations of the Parties . xxx xxx xxx 5.3 The Operator shall have the following rights: b) Exemption from all taxes except income tax. xxx xxx xxx. Likewise, we have to validate the existence of P.D. 972, as amended. As first discussed in Item #1 of our reply, this Office has come into conclusion that said P.D. 972, as amended, has not been repealed by Sec. 24 of R.A. 9337, therefore, the tax incentives granted thereunder subsist. 3) The exemption is protected by the non-impairment of the obligation of contracts clause of the Constitution. The principle of non-impairment of contracts is enshrined under Section 10, Article III of the 1987 Philippine Constitution. SMC believes that the foregoing principle applies to them. 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). Further, this Office does not completely agree with SMC's argument that the imposition of VAT on coal produced pursuant to the COC will be a burden to it. The very nature of VAT will negate this argument. VAT is an indirect tax which may be passed on or shifted to the buyer of goods or services; thus, the person ultimately liable to pay the VAT is the buyer of the goods or services although the seller is the one primarily liable to pay it. 7 In short, the deletion of VAT exemption under a general law cannot be supported by an argument that if such exemption will be repeated, the VAT that will be imposed on coal product is a burden that SMC will assume as seller thereof. To reiterate, the VAT as an indirect tax may be passed on or shifted to the buyer of goods or services. Thus, at the discretion of the seller, it may free itself of that burden. Be that as it may, 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 SMC pursuant to the COC. In short, the imposition of VAT on the transaction which burden may be passed on the seller of the product/services to its buyer is not the same with exempting the transaction itself from VAT, as contemplated under P.D. 972. 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 exploration, development and production of coal resources, SMC's sales of coal produced by virtue of a COC with EDB remain exempt from VAT pursuant to Section 109 (k) of the Tax Code, as amended by R.A. 9337, in relation to PD 972, as amended. Moreover, the exemption granted to SMC does not apply to any importation that SMC 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 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, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue Footnotes 1. Valera v. Tuason , 80 Phil. 823; Villegas v. Subido (4 SCRA 190). 2. Citing State v. Stoll, 17 Wall. [U.S.], 425 Lichauco & Co. v. Apostol and Corpus , 44 Phil. 144; Manila Railroad Co. v. Rafferty , 40 Phil. 224; Butuan Sawmill, Inc. v. City of Butuan , 16 SCRA 755. 3. Lichauco & Co v. Apostol and Corpus , 44 Phil. 144; Villegas v. Enrile , 50 SCRA 10; Velunta v. Chief of Philippine Constabulary , 157 SCRA 147; Lechoco v. CAB , 43 SCRA 670. 4. As defined under PD 972, as embodied under the COC, supra . 5. Petroleum Exploration and Development Act. 6. In a Deed of Assignment executed on April 7, 1980, the predecessors in interest assigned all their rights, interests and participation to SCC with the approval of then EDB. The COC was subsequently amended on January 16, 1981, which effectively included the recovery level of operating expenses from seventy percent (70%) to ninety percent (90%). 7. Sec. 105 of the Tax Code, as amended by R.A. 9337.