Tax Exemption Privilege Granted to Oil Companies under LOI 1352 Has Not Been Withdrawn by EO 22

July 23, 1986 BIR RULING NO. 122-86 109 110 000-00 122-86 Gentlemen : This refers to your letters both dated July 7, 1986 requesting confirmation of your opinion that Executive Order No. 22 which amended Sections 109 and 110 of the Tax Code does not modify or repeal Letter of Instruction (LOI) No. 1352 on the following grounds: (1) Executive Order No. 22 infringes on contractual rights of parties to export processing contracts which entered thereto in reliance of LOI No. 1352 and (2) the amendment might have been made with a possible oversight of LOI No. 1352 which has been an essential export incentive feature to earn more foreign exchange and to utilize excess refinery capacity. It appears that LOI No. 1352 grants exemption from the payment of excise taxes (specific and ad valorem taxes) to any foreign entity/third party offshore that may bring into the Philippines crude oil, over which it shall retain ownership to be processed by local oil company under a processing agreement, in consideration for a processing fee payable in foreign currency, into refined petroleum products which the foreign entity/affiliate shall ship out of the Philippines, and to local oil companies that may process additional volumes of their own imported crude to exploit export opportunities for petroleum products as they occur; that the processing fee to be paid by the foreign crude oil owner shall be subjected to the payment of the 4% contractor's tax imposed by Section 170 of the Tax Code, as amended; that the law provides all the aforementioned incentives in order to encourage export processing in the Philippines, earn foreign exchange from processing fees, and utilize excess refining capacity; that only with tax and duty exemptions could export processing in the Philippines be competitive with that of neighboring countries; that the requirement to pay first the excise tax on said exports and be credited or refunded only upon submission of proof of actual exportation and upon receipt of the corresponding foreign exchange will result in substantial unrecoverable costs of money to the oil companies; and that you are committed to give a thirty day (30) credit to your foreign buyers, in accordance with international practice and if tax credit/refund shall be given only upon your receipt of corresponding foreign exchange, you would incur a substantial loss of about P11.2 million a year. cdtech In reply, please be informed that the tax exemption privilege granted to oil companies under LOI 1352 has not been withdrawn by Executive Order No. 22 which took effect on July 1, 1986. Sections 109 and 110 of the Tax Code, as amended by Executive Order No. 22 apply only to articles, such as crude oil, to be manufactured or produced and/or imported into the Philippines for domestic sale or consumption or for any other disposition. Letter of Instruction No. 1352 contemplates of a foreign entity shipping its crude oil into the Philippines for processing by the local oil company under a processing agreement, and thereafter have it shipped out of the Philippines. In this case, the local oil company never acquired ownership of the crude oil but receives only processing fees for processing services rendered which are subject to the 4% contractor's tax imposed under Section 170 of the Tax Code, as amended. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner