BIR Ruling No. 172-83

October 5, 1983 BIR RULING NO. 172-83 Gentlemen : This refers to your letter dated September 8, 1983 requesting confirmation of your opinion on the tax consequences to your clients, CALTEX (PHILIPPINES), INC. (CPI) and CALTEX OPERATIONS LIMITED (CALOPS) of their acquisition and use of certain processing rights resulting from the purchase by Philippine National Oil Company (PNOC) from Mobil Petroleum Corporation (MOBILPET) of the latter's shares of stock in Bataan Refining Company (BRC). It is represented that CPI is a domestic corporation engaged in the refining of crude oil and the marketing of other petroleum products, while CALOPS is a non-resident U.S. corporation not doing business in the Philippines; that MOBILPET, likewise a non-resident U.S. corporation not doing business in the Philippines, has entered into an agreement with PNOC and/or BRC whereby MOBILPET transferred to PNOC all of its shares of stock (40%) in BRC, without any cash outlay on the part of PNOC; that as consideration for such transfer of MOBILPET's BRC shares, PNOC and/or BRC granted MOBILPET to process 18.25 million barrels of crude over a period of five (5) years, or at the rate of 10,000 barrels per day (BPD); that MOBILPET could either use such processing right by processing its own crude at the BRC refinery or assign such right to CPI and/or other Caltex affiliates; that actually, the processing right that MOBILPET has acquired from PNOC to process 18.25 million barrels of crude at the BRC refinery for five (5) years would be assigned to CALOPS by MOBILPET, with CALOPS subsequently assigning to CPI the same processing right, as follows: "1. MOBILPET will assign to CALOPS to processing right for 10,000 BPD for five (5) years in consideration for CALOPS' paying MOBILPET $1.00 per barrel of crude for 5,000 BPD, and the peso equivalent of $1.00 per barrel for the other 5,000 BPD. "2. CALOPS will, in turn, assign to CPI the 10,000 BPD assignable processing right in the following manner: "(a) The 5,000 BPD processing right payable to MOBILPET in pesos shall be assigned to CPI in consideration for CPI undertaking that peso obligation to MOBILPET for the 5-year processing period. "(b) The balance of the processing right shall be assigned to CPI in consideration for CPI undertaking export processing for CALOPS at the CPI Batangas refinery, with CALOPS retaining the obligation for the 5-year period to pay the dollar obligation to MOBILPET. "3. CPI will thus acquire the entire MOBILPET processing right for 10,000 BPD in the BRC refinery for 5 years, in consideration for undertaking the obligation to process at the rate of 5,000 BPD for 5 years for export in favor of CALOPS at CPI's Batangas refinery, and to pay MOBILPET the peso equivalent of $1.00 per barrel on 5,000 BPD of processing at BRC for 5 years. "All the foregoing transactions were part and parcel of the entire transaction that enabled PNOC to acquire the BRC shares of MOBILPET without any cash outlay on the part of PNOC." In reply, please be informed that since the assignment by MOBILPET of its processing right to CALOPS and the latter's subsequent assignment of the same processing right to CPI or having CPI undertake export processing for CALOPS at CPI's Batangas refinery are incidental and integral parts of the whole transaction that enabled PNOC to acquire MOBILPET's BRC shares, CALOPS is not considered as engaged in trade or business, or as having a permanent establishment, or as taxable in the Philippines under Articles 1 and 14 (2) of the RP-US Tax Treaty. No gain or loss shall be recognized to CALOPS from the assignment of the processing right since its cost basis of $18.25 million for such right will be the same amount of consideration it will receive from CPI consisting of CPI's assumption of the peso obligation (equivalent to $1.00 per barrel of the 5,000 BPD for five years) plus the value of the Batangas processing rights which, as represented, is equal to the comparable processing right at the BRC refinery over the same number of barrels of crude and which has a cost basis to CALOPS of $1.00 per barrels of crude to be processed. CPI will neither realize a gain nor sustain a loss from the exchange of the export processing right at its Batangas refinery for the dollar half of the consideration for the BRC processing right or on its acquisition of the peso half of such consideration, since it will be assuming certain obligations the value of which are equal to the value of the BRC processing right, namely, to assume payment to MOBILPET of the peso equivalent of $1.00 per barrel of the 5,000 BPD for five years to be processed at the BRC refinery, and to undertake export processing for CALOPS at the Batangas refinery. cdtech Moreover, CALOPS is not subject to the 3% contractor's tax. However, for undertaking export processing for CALOPS at the CPI Batangas refinery, CPI shall be considered an independent contractor subject to the P100.00 annual fixed tax and to the 3% contractor's tax under Sections 192 (l) and 205 (16) both of the Tax Code, as amended. (LOI No. 1352 dated September 8, 1983) For this purpose, the 3% contractor's tax shall be based on an assumed processing fee equal to what CPI would have been paid by CALOPS for undertaking the obligation to process 5,000 BPD of crude for 5 years for export in favor of CALOPS at CPI's Batangas refinery, which in this case is at the rate of US $1.00 per barrel of crude. Finally, for income tax purposes, CPI may deduct from the income to be derived in availing of its assigned processing right at the BRC, the cost of refining at its Batangas refinery for CALOPS, as well as its peso payments to MOBILPET for the BRC processing right, such costs and payments being ordinary and necessary expenses in carrying on its trade or business pursuant to Section 30 (a)(1)(A) of the Tax Code, as amended. Likewise, CPI may deduct its payments of the aforesaid 3% contractor's tax pursuant to Section 30 (c)(1) of the same Code. cd Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue