Applicability of Presidential Decree No. 1354

August 12, 2002 BIR RULING NO. 031-02 DA-698-99-24-00 Foster Wheeler (Phils.) Corporation 7/F, PDCP Bank Centre Herrera corner L.P. Leviste St. Salcedo Village, Makati City Attention: Mr. Rodolfo Y. Eusebio President Gentlemen : This refers to your letter dated January 10, 2001, which was referred to this Office on May 24, 2001 by the Chief of the Legal Division, Revenue Region No. 8, Makati, wherein you stated that "Under PD 1354, FWP which is a subcontractor for SPEX, will be subject to final income tax equivalent to 8% of its gross income derived from contract. The 8% tax shall be in lieu of any and all taxes, whether national or local. "Gross income" means all income earned or received as a result of the contract entered into by the subcontractor with service contractor engaged in petroleum operations in the Philippines under PD 87. "However, any income received by FWP from all other sources within and without the Philippines shall be subject to regular income tax of 33% in 1999 (and 32% in year 2000 and thereafter) as well as to other national and local taxes. "We also noted that SPEX, as the petroleum service contractor, is required to deduct, withhold and pay the 8% final income tax from the amounts paid its subcontractor, FWP under their contract. If foreign subcontractors with no Philippine branch are involved, the petroleum service contractor is further responsible to deduct, withhold and pay the 15% final income tax imposed on the salaries, wages, annuities, compensations, remuneration and emoluments paid to its alien employees. "And finally, all contracts between petroleum service contractor and its subcontractors are required to be registered with the Department of Energy (formerly Bureau of Energy Development).This registration and the withholding of proper taxes are indispensable requisites in order for the cost of the subcontractors to be considered as part of the reimbursable operating expenses of the service contractor. You now pose the following questions: Q: Whether Presidential Decree (P.D.) No. 1354 is still applicable. A: PD No. 87 which adopted the provisions of Senate Bill No. 531 (An Act to Promote the Discovery, Production of Indigenous Petroleum and Appropriate Funds Therefor) was enacted to promote the discovery and development of the country's indigenous petroleum resources by providing meaningful incentives to service contractors. PD No. 1354 which took effect on April 21, 1978 was issued to provide an additional incentive for petroleum service contractors by subjecting subcontractors thereof to a preferential eight percent (8%) final tax on its gross income derived from such contracts entered into under PD No. 87, in lieu of any and all taxes, whether national or local. Executive Order No. 93 which took effect on March 10, 1987 withdrew all tax and duty incentives granted to government and private entities subject to certain exceptions. However; under EO No. 93, the Fiscal Incentives Review Board (FIRB) created under PD 776, as amended, is authorized to restore tax and/or duty exemption withdrawn in whole or in part under the said E.O. No. 93. FIRB Resolution No. 19-87 issued on June 24, 1987 restored the tax and duty exemptions and preferential tax treatment privileges granted to petroleum service contractors under the terms and conditions of P.D. No. 87, as amended and P.D. No. 1354. Q: Whether the Foster Wheeler (Phils.) Corporation (FWP),as subcontractor, is exempt from the following: 1) 2% Minimum Corporate Income Tax (MCIT) A: Section 2.27(E) of Revenue Regulations No. 9-98 provides "(1) Imposition of the Tax A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation. "For purposes of these Regulations the term, "normal income tax" means income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998, 33% effective January 1, 1999; and at 32% effective January 1, 2000 and thereafter. "In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system . " (emphasis supplied) In view of the foregoing, MCIT shall apply only on FWP's operations which are covered by the regular income tax system. 2) value-added tax and other local business taxes relative to any payments received from Shell Philippines Exploration, Inc . (SPEX) A: Petroleum subcontractors' gross receipts for services paid by the petroleum service contractors are exempt from the payment of value-added tax (VAT) based on FIRB Resolution No. 19-87 subject to the terms and conditions of PD 1354. It shall be understood, however, that any other income earned by FWP from all other sources within the Philippines shall be subject to the regular income tax imposed under the Tax Code of 1997 ( i.e. ,the normal corporate income tax or the MCIT). Pursuant to PD 1354, any subcontractor, whether domestic or foreign, entering into a contract with a service contractor engaged in petroleum operations in the Philippines, shall be subject to a final tax of 8% of its gross income derived from such contract, such tax to be in lieu of all tax, whether national or local. FWP, being a subcontractor of SPEX, is subject to the preferential rate of 8% final tax on gross income, in lieu of all taxes, national and local ,for services performed that are directly related and necessary to SPEX's petroleum operations. Such being the case, the gross receipts derived by FWP, as petroleum subcontractor shall be exempt from payment of any VAT. (BIR Ruling No. DA-698-99 dated December 21, 1999, citing BIR VAT Ruling No. 516-88 dated November 16, 1988 and the Industrial Inspection (Int'l.) Incorporated vs . Liwayway Vinzons-Chato ,CTA Case No. 5152 dated May 19, 1997) SPEX must withhold the 8% final tax based on the amount invoiced by and actually paid to FWP pursuant Section 57 of the Tax Code of 1997 as further clarified by Section 2.57 (A) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. (BIR Ruling No. DA-24-2000 dated May 24, 2000) Q: Whether FWP has the option to register as VAT and non-VAT taxpayer at the same time should it decide to pursue activities in the future other than that of a petroleum service subcontractor. A: Title IV of the Tax Code of 1997 as implemented by Revenue Regulations (Rev. Regs.) No. 7-95, has amended, provides that every person who sells, barters, exchanges, leases goods of properties and readers services subject to VAT imposed in Sections 100 and 102 of the Tax Code of 1997 shall register with the appropriate Revenue District Officer. The requirement of registration shall be mandatory if the aggregate amount of his actual or expected gross sales and/or gross receipts exceeds P550,000:00 for any 12-month period. The following VAT-exempt persons may, at their option, apply for VAT registration: 1. Seller of goods, properties or services whose taxable sale or gross receipts do not exceed P550,000.00 for any 12-month period; 2. Export seller of agricultural and marine food products in their original state; 3. Export seller of fertilizers, seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds; 4. Export seller, of non-food agricultural products, marine and forest products in a their original state by the primary producer or owner of the land where the same are produced; and 5. Export seller of cotton and cotton seeds in their original state and copra. [Sec. 4.107-1(c), Rev. Regs. 7-95, as amended] On the other hand, the following are required to register as non-VAT persons: 1. VAT-exempt persons under Section 103 [now 109] (a), (b), (c), (d) and (t) of the Tax Code of 1997 who did not opt to register as VAT taxpayers; 2. Persons engaged in trade or business, or exercise of profession, other than those subject to VAT and other percentage taxes under Title V of the same Code; 3. Individuals engaged in business where the gross sales or receipts do not exceed 100,000.00 during any 12-month period. They are required to register but will not be made to pay the registration fee of P1,000.00; and 4. Non-stock, non-profit organizations and associations engaged in trade or business whose gross sales or receipts do not exceed P500,000.00 (now 550,000.00 beginning January 1, 1997 pursuant to Republic Act No. 8241) for any 12-month period. [Sec 4.107-2, Rev. Regs. 7-95, as amended] FWP is VAT-exempt on the basis of Section 109(q) of the Tax Code of 1997, which states: "(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" Even if for the sake of argument, FWP's gross receipts do not exceed P550,000 for any 12-month period, this does not mean that it is given the option to register as a VAT taxpayer. The option applies only where a taxpayer is otherwise subject to VAT if not for the fact that it does not meet the P550,000 threshold under Section 109(z) of the Tax Code of 1997, in which case, it becomes subject to the 3% percentage tax under Section 116 of the Tax Code of 1997. This is not the case of FWP where VAT-exemption is based on a special law under Section 109(q) of the Tax Code of 1997. In view of the foregoing, FWP does not have the option to register either as VAT or non-VAT taxpayer with respect to its gross receipts as sub-contractor. It, however, has the option to register either as VAT or non-VAT taxpayer with respect to its other activities, provided they fall under the above-mentioned instances in the regulation where such an option is indeed given. 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 as null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue