Bureau of Local Government Finance Opinion

March 19, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Wilter Yap Palma Municipal Mayor Diplahan, Zamboanga Sibugay Sir : This refers to your letter dated February 12, 2012 regarding your claim from Philippine National Oil Company Exploration Corporation (PNOC EC) to pay business tax assessment due to the Local Government of Diplahan. Representations are made that PNOC EC has been operating in the Municipality since 1976. Eversince, said company has not paid its business tax and Mayor's permit fees except for LGU share for the utilization of National Wealth. Representation are made further that as a 3rd class municipality, it is dependent on Internal Revenue Allotment (IRA) for the operation and service delivery thus, local revenue generated could be utilized to improve basic social, economic services and infrastructures most needed by its constituents. It is claimed that Section 16 of Presidential Decree (P.D.) No. 972, which PNOC EC invoked its exemption from local taxes, was already repealed by Section 534 (e) of the Local Government Code (LGC) of 1991. Moreover, Article 474 (b) (1), Rule XXXIX of the Implementing Rules and Regulations (IRR) of the LGC explicitly repealed said Section 16 of P.D. No. 972. HDCAaS It is worth noting that in its letter dated February 9, 2012, PNOC EC maintains its position that it is exempt from the payment of local taxes by virtue of Section 16 of P.D. No. 972, and that its express repeal by Section 534 of R.A. 7160, otherwise known as the LGC, does not affect PNOC EC's tax exempt status as its Coal Operating Contract (COC No. 41) which was executed prior to the effectivity of the LGC on January 1, 1992. PNOC EC respectfully maintains that a contrary application of the same violates its rights of protection against impairment of contracts under the Constitution. In this connection and for ready reference, Sections 193 and 534 (3) of the LGC, Article 474 (e) of the IRR, Section 16 of P.D. No. 972 and Section 5.2 of COC No. 41 are quoted as follows: "Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently 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duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." "Section 534. Repealing Clause. (a) . . . "(e) The following provisions are hereby repealed or amended insofar as they are inconsistent with the provisions of this Code: Sections 2, 16, and 29 of Presidential Decree 704; Section 12 of Presidential Decree No. 87, as amended; Sections 52, 53, 66, 67, 69, 70, 71, 72, 73 and 74 of Presidential Decree No. 463, as amended; and Section 16 of Presidential Decree No. 972 , as amended, and "xxx xxx xxx." "Article 474. Repealing Clause. (a) . . . "(b) Insofar as they are inconsistent with the provisions of the Code, the following are repealed, amended, or modified accordingly: "(1) Sections 2, 16, and 29 of P.D. 704; Section 12 of P.D. 87, as amended; Sections 52, 53, 66, 67, 68, 69, 70, 71, 72, 73, and 74 of P.D. 463, as amended; and Section 16 of P.D. 972 , as amended; and "(2) . . . (Underlining supplied) Section 16 (a) of P.D. 972: aIcDCT "Section 16. Incentives to Operators. The provisions of any law to the contrary notwithstanding, a contract executed under this Decree may provide that the operator shall have the following incentives: "(a) Exemption from all taxes except income tax; "(b) . . . . Coal Operating Contract (COC) No. 41 "5.2 The OPERATOR shall have the following rights: "(a) Exemption from all taxes except income tax: "(b) . . . ." This Bureau in resolving a number of related cases involving the withdrawal of exemptions of government-owned and controlled corporation's (GOCC's) has consistently cited Sections 193 and 534 of the LGC. 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 PNOC EC meritorious. Section 10 of the 1987 Constitution provides as follows: "Section 10. No law impairing the obligation of contracts shall be passed." Admittedly and although the LGC, specifically paragraph (e) of Section 534 thereof, expressly repealed Section 16 of P.D. No. 972, as amended, such repeal could not rescind the tax exemption privilege already stipulated in the Service Contract in favor of PNOC EC, which contract was executed prior to R.A. 7160. Relatedly, and although Sections 193 and 534 of the LGC made a sweeping withdrawal of business tax exemption privileges, the Code nevertheless recognizes also the Constitutional mandate on the non-impairment of contracts. Section 5 (d) of the Code provides: DcICEa "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." In conclusion, considering the pertinent provisions of the Constitution and the LGC, this Bureau believes and so holds that PNOC EC is exempt from the payment of business taxes notwithstanding Sections 193 and 534 of the LGC. It bears emphasis however that upon expiration of its Coal Operating Contract, PNOC EC shall be subject to the payment of business taxes imposed under a duly-enacted tax ordinance of the Municipality of Diplahan. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director