VAT Ruling No. 034-01

June 13, 2001 VAT RULING NO. 034-01 Sec. 106 (A) (1) 000-00 Puno and Puno Law Offices 12th Floor East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Attys . Helena Rosales-Calo and Rosalinda F . Rivera Gentlemen : This refers to your letter dated 13 November 2000 concerning your request for a confirmation that the sale by your client, FGP CORPORATION (FGP), of its "gas pipeline" is exempt from the value added tax (VAT). It is represented that FGP is a domestic corporation; that, it is a BOI-registered enterprise, with a preferred pioneer status, as a new operator of a 500 MW combined cycle gas turbine power generating plant; that, on 30 April 1998, it entered into a Gas Sale and Purchase Agreement with Shell Philippines Exploration B.V. (SPEX), pursuant to which, SPEX is obligated to deliver natural gas to FGP which the latter will use in running the Power Plant; that, FGP owns an onshore "gas pipeline" that was purposely constructed to transport natural gas from the SPEX refinery located in Tabangao, Batangas to FGP's Power Plant located in Santa Rita, Batangas; that, FGP desires to transfer and convey ownership of the said "gas pipeline" to SPEX upon the consideration that the said gas pipeline will be used for the delivery of natural gas to FGP without gas transportation charges; that, as a consequence of the said transaction, SPEX will thereafter assume all the risks associated with the gas pipeline and SPEX will operate, maintain and preserve the gas pipeline at its own cost; and that the first delivery of natural gas is expected to take place sometime in the year 2002 and shall continue until about twenty-two years thereafter. That, in the case of MERALCO SECURITIES INDUSTRIAL CORPORATION VS. CENTRAL BOARD OF ASSESSMENT APPEALS, ET. AL., 1 the Supreme Court held that a Pipeline is "real property" within the purview of the Civil Code, hence, FGP, Corporation's sale thereof is exempt from the value added tax, pursuant to the VAT law and its implementing rules and regulations. In reply, please be informed that the aforementioned "Gas Pipeline" is real property within the purview of the New Civil Code. Thus, in the decision of the Supreme Court in the aforestated case, it has been held: " Pipeline means a line of pipe connected to pumps, valves and control devices for conveying liquids, gases or finely divided solids . It is a line of pipe running upon or in the earth, carrying with it the right to the use of the soil in which it is placed (Note 21[10], 54 C.J.S. 561) . " Article 415[1] and [3] provides that real property may consist of constructions of all kinds adhered to the soil and everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object . " The pipeline system in question is indubitably a construction adhering to the soil (Exh . B, p . 39, Rollo) . It is attached to the land in such a way that it cannot be separated therefrom without dismantling the steel pipes which were welded to form the pipeline . HIACEa " Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of oil, it is in a sense machinery within the meaning of the Real Property Tax Code . " It should be borne in mind that what are being characterized as real property are not the steel pipes but the pipeline system as a whole . Meralco Securities has apparently two pipeline systems . " A pipeline for conveying petroleum has been regarded as real property for tax purposes (Miller County Highway, etc . , Dist . vs . Standard Pipe Line Co . , 19 Fed . 2nd 3; Board of Directors of Red River Levee Dist . No . 1 of Lafayette County, Ark vs . R . F . C . , 170 Fed . 2nd 430; 50 C . J . 750, note 86) ." Under Section 106 (A) (1) (a) of the National Internal Revenue Code of 1997, sale of real property may only be imposed with the 10% VAT provided the same is " held primarily for sale to customers or held for lease in the ordinary course of trade or business ." (See also RMC No. 3-96; Sec. 4.100-1, Revenue Regulations No. 7-95; VAT RULING No. 002-96, May 9, 1996; VAT RULING No. 063-97, Oct. 6, 1997) Since the aforesaid "Gas Pipeline" is not held by FGP Corporation primarily for sale to customers or held for lease in the ordinary course of its trade or business, considering that its business involves the operation of the aforesaid power generating plant, it follows that FGP Corporation is not subject to VAT in respect of the sale of its aforesaid Gas Pipeline, pursuant to the aforesaid provision of the Code and its implementing rules and regulations. This ruling is being issued based on 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.) REN G. BAEZ Commissioner of Internal Revenue Footnotes 1. G.R. No. L-46245, May 31, 1982.