Tax Exemption Privileges of Coal Operating Contract Holders Under Section 16(a) of PD 972

March 30, 1999 BIR RULING NO. 043-99 151 (a)-000-00-043-99 Department of Energy Energy Center, Meritt Rd. Fort Bonifacio, Metro Manila Attention: Hon . Ben-Hur C . Salcedo Undersecretary Gentlemen : This refers to your letter dated February 10, 1997 requesting for a ruling reaffirming the tax exemption privileges of Coal Operating Contract (COC) holder as mandated under Section 16(a) of Presidential Decree No. 972. LibLex You stated in your letter that it is your consistent position, then and now, that existing COC holders are exempt from the payment of all taxes, including excise tax, except income tax as mandated under the aforementioned Section 16(a) of P.D. No. 972; that your position relative to the tax exemption privileges of COC holders has been consistently sustained by the Department of Finance (DOF) as confirmed by the Fiscal Incentives Review Board (FIRB) in FIRB Resolution No. 19-87 restoring the tax and duty exemption and preferential tax treatment privileges of coal operating contractors effective March 10, 1987; that this office had likewise sustained your position by exempting coal operators from VAT in BIR Ruling No. 557-88 dated December 3, 1988; that from the time of the inception of the coal operating contract system in the Philippines in 1976 and the promulgation of the National Internal Revenue Code in 1977 up to the present, COC holders are already exempt from the payment of all taxes except income tax; that to impose an excise tax on existing COC holder is violative of the non-impairment clause provision of the 1987 Philippine Constitution since contractual rights and obligations were already vested to the parties in the agreement at the time of the passage of R.A. No. 7160, otherwise known as the "Local Government Code of 1991" on January 1, 1992; that you further alleged that provisions relating to the withdrawal of tax exemption privileges had altered/amended the terms of the original contract without the consent of the parties; that it is likewise your opinion that the subsequent express repeal of Section 16(a) of PD 972 by Section 534(e) of R.A. 7160 operates for local taxation purposes only; and that the withdrawal of tax exemption or incentives granted or being enjoyed by all persons, including coal operators which were expressly withdrawn upon the effectivity of the aforesaid Act would not affect existing coal operating contracts since Section 5(d) of R.A. No. 7160 expressly recognizes such rights and obligations as already existing on the date of the effectivity of the aforesaid Act and therefore, shall continue to be governed by their original terms and conditions or the law in force at the time such rights were vested. In reply, please be informed that pursuant to Section 151 (a) of the Tax Code, as amended (also Section 151 of the Tax Code of 1997), there shall be levied, assessed and collected an excise tax on coal and coke, a tax of Ten pesos (P10.00) per metric tons. It must be noted that the preferential tax treatment privilege granted or being enjoyed by COC holders under Section 16(a) of P.D. No. 972 was first repealed by E.O. No. 93 which encompassingly withdrew the tax and duty incentives enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations. The aforesaid incentives enjoyed by, among others, coal operating contractors, were, however, effectively restored on March 10, 1987 by FIRB Resolution No. 19-87. Granting without conceding, that the status quo of COC existing as of the time R.A. No. 7160 took effect on January 1, 1992 was maintained by express provision of Section 5(d) of the aforesaid Act, Section 193 thereof, however, withdrew these preferential tax exemption privileges granted to, or enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts cooperatives duly registered under R.A. No. 6938, and non-stock and non-profit hospitals and educational institutions upon its effectivity. Furthermore, conceding that the aforesaid Section 193 operates and limits its application to the withdrawal of tax exemption privileges for local taxes purposes only, thus, insofar as national taxes, the claim of tax exemption privileges by COC holders still holds true, the intention to withdraw all the privileges, including those enjoyed by them, was, however, bolstered by Section 534 of the same Act which expressly repealed Section 16 of P.D. No. 972, as amended. You posited further, that with the passage of R.A. No. 7160, the original terms of the contract had been altered or amended without the consent of the parties thereto, which resulted in the impairment of the obligations of the contract and therefore unconstitutional. This Office, however, believes otherwise. It must be noted that the Local Government Code was enacted pursuant to Section 3, Article X of the Constitution which provides for the exercise by the Local Government Units of their power to tax, the scope thereof or its limitations, and the exemptions from taxation. The provision of Section 193 of the Local Government Code, likewise, is a general provision withdrawing all tax exemption privileges and which limits its application to those provisions inconsistent with the aforesaid Code. But since, its enactment is pursuant to the police power of the State, any contractual privileges cannot prevail over it, specifically these exemptions invoked by the COC holders. Hence, your contention that Section 193 is violative of non-impairment of contract clause of the Constitution is without legal basis. On the other hand, while the same Code is exclusive to local government, and therefore the tax provisions thereto is limited to local taxation only, it, however, provides an all encompassing repealing clause under Section 534. The very provision of Section 534, in effect, merely shows that the State, in exercising its inherent power to enact laws cannot be limited by any contractual obligation. The expressed repeal of Section 16 of P.D. No. 972 by said Section 534 of the Local Government Code which resulted in the imposition of tax merely complements the purpose of the law. The power to tax, which include the power to grant exemption, is within the inherent powers of the state, be it the police power or the power to tax. If the State had intended that withdrawal of tax exemption privileges should affect local taxes only, Section 193 could have served the purpose. But, the State, in all its intents, had unilaterally withdrawn by expressed repeal those existing provisions of various laws granting exemption privileges. The State, through its legislative branch had once again exercised the all-encompassing and most pervading of its inherent powers, that is, the police power. Thus, this Office hereby holds that whatever contractual privileges COC holders may have had under its existing contract, the same cannot prevail over the police power of the State. Furthermore, since tax exemption is a mere privilege, and not a right, it can be withdrawn unilaterally by the State. Finally, the intention to withdraw all existing tax exemption privileges, including those being enjoyed by COC holders was expressly provided for in Section 534 of the same Code, which repealed Section 16 of P.D. No. 972, as amended. Thus, the express repeal of the aforesaid Section 16 had ultimately put into oblivion the legal basis of the privileges being invoked by the COC holders. Considering that there is no more basis for COC holders to claim any preferential tax exemption privilege on their exploration ,development, exploitation , production and utilization of coal, the provisions of Section 151 of the Tax Code, as amended, shall again apply as of the time the Local Government Code took effect. Accordingly, this Office hereby holds that under the aforesaid Section 151 of the Tax Code, as amended (also Section 151 of the Tax Code of 1997), COC holders are subject to excise tax of Ten pesos (P10.00) per metric ton of coal produced/explored and removed from the locality where mined. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue