Bureau of Local Government Finance Opinion

August 10, 2001 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Ben-Hur C. Salcedo Undersecretary Department of Energy Energy Center Meritt Road Port Bonifacio, Taguig Metro Manila Sir : This refers to your letter dated July 10, 2001 requesting confirmation that Shell Philippines Exploration B. V. (SPEX) and its co-venturers in Service Contract No. 38 (SC38) are exempt from local business tax, real property tax and other local taxes imposed under RA 7160, otherwise known as the Local Government Code (LGC) of 1991. Representations are made that SPEX, together with its co-venturers Shell Philippines LLC, Texaco Philippines, Inc. and PNOC-Exploration Corporation is a petroleum service contractor of the Government of the Republic of the Philippines under SC 38. As such, it is authorized to perform petroleum operations for the development of Malampaya natural gas field in offshore Palawan. Records show that under SC 38 executed on December 11, 1990, the Government as represented by the Office of Energy Affairs (OEA), entered into a Service Contract with SPEX and its co-venturers. Such contract was executed pursuant to PD 87, also known as "The Oil Exploration and Development Act of 1972" which took effect in 1973. Section 12 (g) thereof, in part, provides: ETIHCa "Section 12. Privilege 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) . . . "(g) Rights and obligations in any contract concluded pursuant to this Act shall be deemed as essential considerations for the conclusion thereof and shall not be unilaterally changed or impaired; and "xxx xxx xxx." This exemption provision was entirely stipulated under Section 6.2 of SC 38 abovementioned. SPEX contends that the Service Contractor is exempt from the payment of local taxes in view of the following: 1. A specific exemption was granted to the Service Contractor under PD 87 and SC 38; 2. The rights and obligations of the Service Contractor under SC 38 shall be governed by the original terms and conditions of said contract, as well as PD 87, the law in force at the time such rights were vested; HTaSEA 3. The express repeal of Section 12 of PD 87 in Section 534 of the LGC only applies to service contracts executed after the effectivity of the LGC, on January 1, 1992; and 4. The imposition of Local Business Tax, Real Property Tax and other local taxes on the Service Contractor violates their right of protection against impairment of contract under the Constitution. This Bureau in resolving a number of related cases involving the withdrawal of exemptions of government-owned and controlled corporations (GOCCs) has consistently cited Sections 193, 234 and 534 of the LGC (RA 7160). However, this Bureau takes particular attention to queries or requests for opinions/rulings concerning the abovecited withdrawal of exemption provisions of the LGC, specifically in cases where such exemptions previously enjoyed were based on contracts entered into by the government. We find the claim of SPEX meritorious. Section 10 of the 1987 Constitutions provides as follows: "Section 10. No law impairing the obligation of contracts shall be passed." Admittedly and although the Local Government Code of 1991, specifically paragraph (e) of Section 534 thereof, expressly repealed Section 12 of PD No. 87, as amended, such repeal could not rescind the tax-exemption privilege already stipulated in the Service Contract in favor of SPEX and its co-venturers, which contract was executed prior to RA 7160. Relatedly, and although Sections 193, 234 and 534 of the LGC made sweeping withdrawals of business and realty tax exemption privileges, the Code nevertheless recognizes also the Constitutional mandate on the non-impairment of contracts. Section 5 (d) of the Code provides: IHDCcT "Section 5. Rules and Interpretation . In the interpretation of the provisions of this Code, the following rules shall apply: "(a) . . . "(d) Rights and obligations existing on the date of effectivity of this Code and arising out of contracts or any other source of prestation involving a local government unit shall be governed by the original terms and conditions of said contracts or the law in force at the time such rights were vested; and "xxx xxx xxx." (Underscoring ours) In conclusion, considering the pertinent provisions of the Constitution and the Local Government Code of 1991, this Bureau believes and so holds that SPEX and its co-venturers are exempt from the payment of business tax, real property tax and other local taxes notwithstanding Sections 193, 234 and 534 of the LGC (RA 7160). HDTSIE Very truly yours, (SGD.) BENJAMIN A. GERONIMO Executive Director <www.blgf.gov.ph/downloads/opinion/localtax/2001/a2001-0803.pdf> last visited January 13, 2014.