BIR Ruling No. 008-07

April 3, 2007 BIR RULING NO. 008-07 109 (1) (K); R.A. 7942; DAO 96-40 000-00 Baniqued & Baniqued Attorneys at Law 8/F Jollibee Centre, San Miguel Avenue Ortigas Center, Pasig City Attention: Carlos G. Baniqued Terence Conrad H. Bello and Kathleen L. Saga Gentlemen : This refers to your letter dated January 5, 2007 requesting on behalf of your client, Australasian Philippines Mining Inc. ("APMI"), for confirmation of your opinion that APMI is exempt from the payment of value-added taxes ("VAT"), specifically on its purchase of imported equipment and goods, during the recovery period pursuant to the provisions of the Financial or Technical Assistance Agreement ("FTAA") between APMI and the Philippine Government, Section 81 of Republic Act No. ("R.A.") 7942, otherwise known as the Philippine Mining Act of 1995, and Section 236 of DENR Administrative Order No. 96-40 ("DAO 96-40") implementing R.A. 7942, in relation to Section 109 (1) (K) of the 1997 Tax Code, as amended. It is represented that APMI is a corporation organized and existing under Philippine laws and is engaged in the mining industry; that it is a wholly-owned subsidiary of Oceana Gold Limited ("Oceana"), a company listed in the Australian and New Zealand Stock Exchanges; that recently, Oceana merged with the previous parent company of APMI, Climax Mining Ltd; that APMI is registered with the Philippine Board of Investments ("BOI") as a "new export producer of gold and copper concentrates" on a pioneer status; that under APMI's original BOI certificate of registration, APMI was expected to start commercial operations in June 2007, which was, however, extended to December 2007; that APMI's initial commercial production is now expected to commence on the 4th quarter 2008; that in June 1994, APMI entered into an FTAA with the Philippine Government; that under the said FTAA, APMI is allowed to explore mining claims and areas in Nueva Vizcaya and Quirino provinces on the condition that the rewards for mining possible ores shall be shared with the Philippine government in accordance with the sharing scheme provided in the FTAA; that among the salient provisions of the FTAA is the grant to APMI (as contractor) of a 5-year recovery period within which to recover its pre-operating expenses as well as property expenses incurred during the period in which pre-operating expenses are recovered; that the FTAA further provides that if after the lapse of the 5-year recovery period, APMI has not yet fully recovered its pre-operating expenses and property expenses, it shall be allowed to recover the same as a depreciation allowance deductible against the distributable net revenues over the period of the succeeding three (3) contract years; that the FTAA also provides that it is only after the 5-year recovery period that the right of the government to share in the net revenues shall accrue; that in March 1995, the Philippine Mining Act of 1995 was enacted (R.A. 7942), and shortly thereafter, the Implementing Rules and Regulations of R.A. 7942 were promulgated in the form of DAO 95-23 and published in August 1995; that in December 1999, DENR Administrative Order No. 99-56 ("DAO 99-56") was promulgated establishing the fiscal regime of FTAAs and setting forth the guidelines for the implementation thereof; that among the features of R.A. 7942 is Section 81 which provides that: "[t]he Government share in financial or technical assistance agreement shall consist of, among other things, the contractor's income tax, excise tax, special allowance, withholding tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws;" that in addition, R.A. 7942 provides that: "[t]he collection of Government share in financial or technical assistance agreement shall commence after the financial or technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures, inclusive." In connection therewith, you now respectfully request confirmation of your opinion that APMI is exempt from the payment of VAT, specifically on its purchase of imported equipment and goods pursuant to the provisions of the FTAA between APMI and the Philippine Government, the Philippine Mining Act and its implementing rules and regulations and the 1997 Tax Code, as amended. In reply, please be informed that Section 109 of the 1997 Tax Code, as amended, provides that transactions considered exempt under special laws shall be exempt from VAT, thus: 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 under Presidential Decree No. 529. (Emphasis ours) In this connection, Section 81 of the Philippine Mining Act, which is a special law provides that: "SEC. 81. Government Share in Other Mineral Agreements . The share of the Government in co-production and joint-venture agreements shall be negotiated by the Government and the contractor taking into consideration the: (a) capital investment of the project, (b) risks involved, (c) contribution of the project to the economy, and (d) other factors that will provide for a fair and equitable sharing between the Government and the contractor. The Government shall also be entitled to compensations for its other contributions which shall be agreed upon by the parties, and shall consist, among other things, the contractor's income tax, excise tax, special allowance, withholding tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholders, in case of a foreign national, and all such other taxes, duties and fees as provided for under existing laws. EDSHcT The Government share in financial or technical assistance agreement shall consist of, among other things, the contractor's corporate income tax, excise tax, special allowance, withholding tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws . The collection of Government share in financial or technical assistance agreement shall commence after the financial or technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures, inclusive ." Furthermore, Section 214 of DENR Administrative Order (DAO) No. 96-40 provides: "Section 214. Government Share in FTAA. The Government share in an FTAA shall consist of, among other things, the Contractor's corporate income tax, excise tax, special allowance, withholding tax due from the Contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign owned corporation and all such other taxes, duties and fees as provided for under existing laws . The Government share in an FTAA shall be negotiated by the government and the Contractor taking into consideration: (a) capital investment of the project; (b) risks involved; (c) contribution of the project to the economy (d) technical complexity of the project; (e) contribution to community and local government; and (f) other factors that will provide for a fair and equitable sharing between the parties. The collection of Government share shall commence after the FTAA Contractor has fully recovered its pre-operating, exploration and development expenses, inclusive . The period of recovery which is reckoned from the date of commercial operation shall be for a period not exceeding five years or until the date of actual recovery, whichever comes earlier. Based on the foregoing provisions, it is clear that pursuant to the Philippine Mining Act: (1) the Government share in an FTAA shall consist of, among other things, the contractor's income tax, excise tax, withholding tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws; and (2) the government shall be entitled to its share only when the FTAA Contractor has fully recovered its pre-operating, exploration and development expenditures . Moreover, Section 3 (g) (1) (a) of DENR Administrative Order (DAO) No. 99-56 provides specifically what the government share consists of, namely: (a) excise tax on minerals; (b) contractor's income tax; (c) customs duties and fees on imported capital equipment; (d) value added tax on the purchase of imported equipment, goods and services; (e) withholding tax on interest payments on foreign loans; (f) withholding tax on dividends to foreign stockholders; (g) royalties due the government on mineral reservations; (h) documentary stamp taxes; (i) capital gains tax; (j) local business tax; (k) real property tax; (l) community tax; (m) occupation fees; (n) all other local government taxes, fees and imposts as of the effective date of the FTAA; (o) special allowance as defined in the Mining Act; (p) royalty payments to any indigenous people(s)/indigenous cultural community(ies). (Emphasis supplied.) DAO 99-56 states further that the foregoing taxes, fees and other such charges constituting the basic government share shall be paid by the contractor from the effective date (which is the date of signing of the FTAA), but it also expressly states in a proviso that items (a) to (g); shall not be collected from the contractor upon the date of approval of the mining project feasibility study up to the end of the recovery period. After the recovery period, a contractor shall be subject to all the normal taxes, duties and fees imposable on contractors under their FTAA. In the case of La Bugal-B'Laan Tribal Association, Inc. v. Ramos , 445 SCRA 1, the Supreme Court, in interpreting the provisions of the Philippine Mining Act, ruled that during the recovery period, the payment by the contractor of national taxes, is waived. Only local government taxes and fees would be paid during the period. The Supreme Court explained: Specifically, under the fiscal regime, the government's expectation is, inter alia , the receipt of its share from the taxes and fees normally paid by a mining enterprise. On the other hand, the FTAA contractor is granted by the government certain fiscal and non-fiscal incentives 1 to help support the former's cash flow during the most critical phase (cost recovery) and to make the Philippines competitive with other mineral producing countries. After the contractor has recovered its initial investment, it will pay all the normal taxes and fees comprising the basic share of the government, plus an additional share for the government based on the options and formulae set forth in DAO 99-56. aDACcH WHEREFORE, in view of the foregoing, this Office confirms your opinion that APMI is exempt from the payment of value-added taxes ("VAT"), specifically on its purchase of imported capital equipment and goods. VAT shall not be collected from APMI upon the date of approval of the Mining Project Feasibility Study up to the end of the recovery period. The recovery period shall be reckoned from the date of commercial operation and shall be for a maximum of five (5) years or until the date of actual recovery of its pre-operating, exploration and development expenses, whichever comes earlier, as provided under Section 81 of the Philippine Mining Act, its implementing rules and regulations particularly DAO 96-40; and the FTAA between the Philippine Government and APMI, in relation to Section 109 (1) (K) of the 1997 Tax Code, as amended. It is understood that after the expiration of the said recovery period or until the date of aforesaid actual recovery, whichever comes earlier, APMI shall become subject to VAT. 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. These incentives consist principally of the waiver of national taxes during the cost recovery period of the FTAA. During such period, the contractor pays only part of the basic government's share in taxes consisting of local government taxes and fees. These are the local business tax, real property tax, community tax, occupation fees, regulatory fees, all other local taxes and fees in force, and royalty payments to indigenous cultural communities, if any. These national taxes, however, are not to be paid by the contractor: (i) excise tax on minerals; (ii) contractor's income tax; (iii) customs duties and fees on imported capital equipment; (iv) value added tax on purchases of imported equipment, goods and services; (v) withholding tax on interest payments on foreign loans; (vi) withholding tax on dividends to foreign stockholders; and (vii) royalties due the government on mineral reservations. Other incentives to the contractor include those under the Omnibus Investments Code of 1997; those for the use of pollution control devices and facilities; income tax carry-forward of losses; and income tax accelerated depreciation."