Whether Shell Phil. Exploration, B.V. Is Exempt from All Taxes

August 20, 2001 BIR RULING NO. 036-01 000-00 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty . J . A . Osana Tax Division Gentlemen : This refers to your letter dated May 18, 2001 requesting confirmation of your opinion that your client, SHELL PHILIPPINES EXPLORATION, B . V . (SPEX for brevity) is exempt from all taxes such as the excise tax, except income tax, pursuant to Section 12(a) of Presidential Decree (P.D.) No. 87, as amended. The following facts as represented are as follows: SPEX is a corporation formed and organized under the laws of the Netherlands. It operates in the Philippines through a branch that is duly licensed by the Securities and Exchange Commission. SPEX is a petroleum service contractor of the Government of the Republic of the Philippines under Service Contract No. 38 (SC No. 38 for brevity) dated December 11, 1990, which covers an area in offshore Northwest Palawan. SC No. 38 was executed pursuant to Presidential Decree No. 87 (P.D. No. 87 for brevity), as amended, otherwise known as " The Oil Exploration and Development Act of 1972 ." Under SC No. 38, SPEX shall furnish services, technology, and financing, and the proceeds of sale of the petroleum produced under the contract shall be the source of funds for payment of a stipulated service fee and the operating expenses due the contractor (Secs. 6 and 7, P.D. No. 87). Thus, pursuant to SC No. 38, SPEX shall undertake and execute petroleum handling and sale, whether for export or domestic consumption, of petroleum so obtained from the contract area. (Sec. 2.22 of SC No. 38 and Sec. 3(d), P.D. No. 87) Thus, SPEX's obligations include selling, on behalf of the Government, the petroleum obtained/whether for export or domestic consumption. You anchor your claim for exemption from all taxes except income tax on Section 12 of PD 87 and Paragraph 6.2 of SC 38. In reply, please be informed that under Section 151 (A)(4) of the 1997 Tax Code, an excise tax of 3% is generally imposed on the first taxable sale, barter, exchange, or such similar transaction of indigenous petroleum. However, Section 151(A)(2) of the same Code provides that locally extracted natural gas and liquefied natural gas shall be taxed at the rate of 2%. In case of domestic or local sale, barter or transfer of indigenous petroleum, natural gas or liquefied natural gas, the excise tax is paid by the first buyer, purchaser or transferee. On the other hand, in case of export sale, the excise tax is paid by the owner, lessee, concessionaire or operator of the mining claim. This is pursuant to Section 130(A)(1) of the 1997 Tax Code , which specifically provides that: "(1) Persons Liable to File a Return . Every person liable to pay excise tax imposed under this Title shall file a separate return for each place of production setting forth, among others, the description and quantity or volume of products to be removed, the applicable tax base and the amount of tax due thereon: Provided, however, That in the case of indigenous petroleum. natural gas or liquefied natural gas, the excise tax shall be paid by the first buyer, purchaser or transferee for local sale, barter or transfer, while the excise tax on exported products shall be paid by the owner, lessee, concessionaire or operator of the mining claim ." (Emphasis supplied) CASIEa Notwithstanding the foregoing, Section 12 of P.D. No. 87 , as amended, clearly states that: "SEC. 12. Privileges of contractor . The provisions of any law to the contrary notwithstanding, a contract executed under this Act may provide that the contractor shall have the following privileges: (a) Exemption from all taxes except income tax." The above-mentioned exemption granted to service contractors is consistent with the Government's objective " to promote the discovery and development of the country's indigenous petroleum resources ". Thus, while this privilege was repealed by Executive Order No. 93 that took effect on March 10, 1987, the same was subsequently restored retroactively effective March 10, 1987 under Fiscal Incentives Review Board Resolution No. 19-87. In conformity with PD No. 87, as amended, Paragraph 6.2 of SC No. 38 provides: "6.2 CONTRACTOR shall have the following rights: (a) Exemption from all taxes except income tax; xxx xxx xxx" In this connection, this Office has previously interpreted on several occasions that service contractors are " exempt from all taxes except income tax ", such as the 10% overseas tax on outgoing telecommunications services ( BIR Ruling Nos. 039-80 dated May 7, 1980, 078-80 dated June 17, 1980, and 021-81 dated January 21, 1981); Documentary Stamp Tax pursuant to Section 12(a) of P.D. No. 87 ( BIR Ruling No. 106-81 dated July 10, 1981; Value-Added Tax pursuant to a special law (P.D. No. 87) as well as other taxes for which they are directly liable ( VAT Ruling Nos. 055-91 dated June 17, 1991 and 005-92 dated January 15, 1992). Accordingly, the exemption provided under Section 12(a) of P.D. No. 87 and Paragraph 6.2 of SC No. 38 necessarily covers the exemption of the service contractors from excise tax on the export of indigenous petroleum, such as natural gas and liquefied natural gas, in consonance with P.D. No. 87, Paragraph 6.2 of SC No. 38 and the aforementioned rulings. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue