VAT Ruling No. 042-91

May 29, 1991 VAT RULING NO. 042-91 LUVIMIN Cebu Mining Corp. 56 V. Gullas St., Cebu City Attention: Mr . Fermin C . Arpon, Jr . Executive Vice-Pres./Gen . Mgr . Gentlemen : Referring to your letter dated January 2, 1991 please be informed that Presidential Decree No. 972, otherwise known as "An Act to Promote an Accelerated Exploration, Development, Exploitation, Production and Utilization of Coal", provides: cdll " The Government , through the Energy Development Board, its successors or assigns, shall undertake by itself the active exploration, development and production of coal resources. It may also execute coal operating contracts as hereafter defined. . . ." (SEC. 4, P.D. 972) "Each coal operating contract herein authorized shall, subject to the approval of the President, be executed by the Energy Development Board. In a coal operating contract, service, technology and financing are furnished by the operator for which it shall be entitled to the stipulated fee and reimbursement of operating expenses. Accordingly, the operator must be technically competent and financially capable as determined by the Energy Development Board to undertake the coal operations as required in the contract." (SEC. 8, ibid) " 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; . . ." (SEC. 16, ibid) Thus, the tax exemption privileges that may be available to the "Operator" depends upon the provisions of its duly approved coal operating contract with the Government. Further, since the said incentives are only available to the said "Operator" it follows that the same may not be extended to other persons with whom such operator may contract with even where such contract is incidental or in furtherance of his coal operating contract. Hence, granting that you have awarded some of your coal mining areas to sub-contractors/permittees with an agreement that you will buy all the coal mined by the latter, such sub-contracting of your coal operating contract may not make your sub-contractors also entitled to the tax exemption privileges availing under Section 16(a) of the said law since this exemption privilege may only be extended to the Operator. In short, the said operator's sub-contractors are not given the same exemption grant. In view thereof, your said sub-contractors are subject to the applicable national internal revenue taxes, including the 10% Value-Added Tax on their sales of coal to your company, pursuant to Sections 99 and 100, NIRC. aisadc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue