BIR Ruling No. 569-12

September 17, 2012 BIR RULING NO. 569-12 Palawan Sulu Sea Gas, Inc. 12/F Chatham House 116 Valero St., Salcedo Village Makati City 1227 Attention: Cristina Arellano Treasurer Gentlemen : This refers to your letter dated March 8, 2010 requesting confirmation of your opinion that PALAWAN SULU SEA GAS, INC. is exempt from all taxes, except income tax, pursuant to Section 12 (a) of Presidential Decree (P.D.) No. 87, as amended, otherwise known as "The Oil Exploration and Development Act of 1972". CaDEAT It is represented that PALAWAN SULU SEA GAS, INC., a wholly-owned subsidiary of Union Fenosa Gas, Infrastructure B.V., with Tax Identification Number 007-037-369, is a stock corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. CS200807614 dated May 15, 2008; and that the primary purpose for which the corporation is formed is "to hold rights and interests and assume duties and obligations in oil and gas service contracts with the government of the Republic of the Philippines, including the designation as operator thereof, and to explore for, drill for, move, transport, and/or refine petroleum, gas and hydrocarbon products, and to engage in other businesses within the oil and gas sector such as but not limited to transportation, liquefaction and commercialization of natural gas and liquefied natural gas." It is also represented that Service Contract dated July 7, 2006 was entered into by Burgundy Global Exploration Corporation, a company organized and existing under Philippine laws, and the Government of the Republic of the Philippines for oil and gas exploration over Offshore East Palawan under Service Contract (SC) No. 62 covering an area of one million three hundred two thousand (1,302,000) hectares, more or less. Under SC 62, Burgundy Global Exploration Corporation, as the Service Contractor, shall undertake to perform all Petroleum Operations as defined in PD No. 87, as amended, and shall be entitled to the exemption from all national taxes except income tax as well as exemption from value-added tax on the importation of all machinery, equipment, spare parts, and all materials required for and to be used exclusively by the Service Contractor under Section 7.02 of SC 62. Pursuant to Section 24.02 of SC 62 wherein the Service Contractor may assign part or all of its rights and/or obligations under SC 62, Burgundy Global Exploration Corporation and Palawan Sulu Sea Gas, Inc. entered into a Joint Operating Agreement on May 8, 2008 wherein PALAWAN SULU SEA GAS, INC. acquired from Burgundy Global Exploration Corporation a net undivided fifty five percent (55%) participating interest in SC 62 over the offshore Southeast Palawan Area; and that in a letter dated November 14, 2008, the Department of Energy approved the Assignment Agreement between Burgundy Global Exploration Corporation and PALAWAN SULU SEA GAS, INC. In support of your request, you have submitted the following documents: 1) Letter request for tax exemption; 2) Certified True Copy of Approval Letter dated November 14, 2008 issued by the Department of Energy; cSTHAC 3) Certified True Copy of Joint Operating Agreement dated May 8, 2008 between Burgundy Global Exploration Corporation and Palawan Sulu Sea Gas, Inc.; 4) Certified True Copy of Service Contract dated July 7, 2006 between Burgundy Global Exploration Corporation and the Government of the Republic of the Philippines; 5) Certified True Copy of Certificate of Incorporation; 6) Certified True Copy of Articles of Incorporation; 7) Certified True Copy of By-laws; 8) Certified True Copy of 2008 and 2009 Annual Financial Statements; 9) Certified True Copy of 2008 and 2009 General Information Sheet; and 10) BIR Certificate of Registration. In reply, please be informed that PD No. 87 was enacted to promote the discovery and development of the country's indigenous petroleum resources by providing meaningful incentives to service contractors. Section 12 of PD 87 provides: "SECTION 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. (b) Exemption from payment of tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations . . ." cIaCTS In conformity with PD No. 87, as amended, Section 7.02 of SC 62 provides for the contractual tax exemption rights granted to Burgundy Global Exploration Corporation: "7.02 The CONTRACTOR shall have the following rights: (a) Exemption from all national taxes, except Philippine Income Tax, subject to Section 21.04 hereof, under the provisions of the National Internal Revenue Code and the Act, as amended; (b) Exemption from all levies, tariffs, duties, compensating tax and value added tax subject to Section 21.04 hereof, on the importation into the Philippines of all machinery, equipment, spare parts, and all materials required for, and to be used exclusively by the CONTRACTOR or its Subcontractor(s) in the Petroleum Operations, . . ." The abovementioned tax exemption privilege is exclusively a legislative grant (Art. VI, sec. 28 (4) of the Constitution) which is strictly personal to the grantee and, necessarily, the same may not be transferred to another, without legislative approval. Thus, under Section 11 of PD 87, the law expressly allows the tax exemption privileges granted to a Service Contractor be transferred and assigned: "SECTION 11. Transfer and assignment. The rights and obligations under a contract executed under this Act shall not be assigned or transferred without the prior approval of the Petroleum Board: Provided, That with respect to the transfer or assignment of contractual rights and obligations under this Act to an affiliate of the transferor, the approval thereof by the Petroleum Board shall be automatic, if the transferee is as qualified as the transferor to enter into such contract with the Government: Provided, further, That the affiliate relationships between the original transferor or a company which holds at least fifty per cent of the contractor's outstanding shares entitled to vote and each transferee shall be maintained during the existence of the contract." aSIHcT Likewise, Section 24.02 of PD 87 expressly authorizes the assignment of part or all of the rights and obligations of the contractor to any third party: "24.02 The CONTRACTOR may assign part or all of its rights and/or obligations under the Contract to any Third Party, provided that such assignment, to be effective, shall be approved in writing by the DEPARTMENT pursuant to its guidelines, such approval not to be unreasonably withheld." Thus, adhering to Sections 11 and 24.02 of PD 87, Burgundy Global Exploration Corporation transferred to PALAWAN SULU SEA GAS, INC. 55% participating interest and operatorship of SC 62, which includes all the rights and obligations under the service contract. The Department of Energy approved the transfer in order to accelerate the exploration and development of the contract area. In VAT Ruling No. 007-06 dated June 7, 2006, this Office ruled therein that the tax exemption privilege being enjoyed by a Service Contractor under a service contract is a contractual tax exemption granted by the government in exchange for the Service Contractor's performance of petroleum operations: "The tax exemption privilege of the Service Contractor under SC 38 is a contractual tax exemption granted by the government in exchange for a valid and material consideration, the valid and material consideration obtained by the government in exchange for granting the Service Contractor the right to be exempt from all taxes (except income tax) under SC 38 consists of the Service Contractor's obligation (i) to furnish services, technology, and financing for, and (ii) to assume all risk relating to, the conduct of petroleum operations. Accordingly, said contractual tax exemption is protected by the non-impairment clause of the 1987 Philippine Constitution. In the instant case, the government expressly acknowledged that the tax exemption privilege of the Service Contractor under SC 38 is a contractual tax exemption granted by the government in exchange for a valid and material consideration as when the parties stipulated in Section 6.2(g) of SC 38 that the rights and obligations in the Contract shall be deemed an essential consideration for the conclusion thereof and shall not be unilaterally changed or impaired." DcSEHT Hence, from the above ruling, the tax exemptions granted under Section 7.02 of SC No. 62 are considered contractual tax exemptions which can be changed or modified by the contracting parties, in this case, the Government and the service contractor. Since no unilateral change was made by the execution of the Joint Operation Agreement of Burgundy Global Exploration Corporation and PALAWAN SULU SEA GAS, INC., as such transfer of rights and obligations under SC 62 was approved by the Government acting through the Department of Energy, in compliance with the requirements set forth under Section 24.02 of PD 87, this Office is of the opinion as hereby holds that the exemption from taxes enjoyed by Burgundy Global Exploration Corporation under SC 62 is effectively extended to PALAWAN SULU SEA GAS, INC. In view of the foregoing, this Office holds that Palawan Sulu Sea Gas, Inc. shall be exempt from all taxes for which it is directly liable, except income tax, in proportion to its participating interest, which is 55% interest in the rights and obligations of Burgundy Global Exploration Corporation under Service Contract No. 62, pursuant to Sections 11 and 12 of PD No. 87. However, the exemption privileges of PALAWAN SULU SEA GAS, INC. shall pertain only to transactions involving Service Contract No. 62. PALAWAN SULU SEA GAS, INC. shall, therefore, be liable each taxable year for Philippine income tax on income derived from its petroleum operations under Service Contract No. 62, computation of which is provided under Sections 20 through 25 of PD 87. CSaITD 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 null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue