VAT Ruling No. 078-99

August 9, 1999 VAT RULING NO. 078-99 109 (q) 108 (A) 000-00 078-99 Manila North Tollways Corporation Suite 501, East Tower, PSE Centre, Exchange Road, Ortigas Center Pasig City 1605, Metro Manila Attention: Mr . Jose B . T . Aldon Chief Operating Officer Gentlemen : This refers to your letter dated June 8, 1999 requesting for confirmation of your opinion that the Manila North Tollways Corporation (MNTC) is exempt from VAT, as assignee and transferee of the franchise granted to Philippine National Construction Corporation (PNCC) under and pursuant to P.D. 1113, as amended by P.D. 1894, and as concessionaire under the Supplemental Toll Operation Agreement (STOA) dated 30 April 1998 among the Republic of the Philippines, as Grantor, PNCC as Franchisee and MNTC, as Concessionaire. Per representations, the facts of the case are outlined as follows: 1. PNCC is the grantee of a franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways and the Metro Manila Expressway by virtue of P.D. 1113, as amended by P.D. 1894. 2. On January 21, 1993, the President of the Philippines launched the "Philippines 2000" Program, which among others, calls for the acceleration and development of the Subic and Clark Special Economic Zones. For this purpose, there is a need for the rehabilitation, modernization and expansion of the North Luzon Expressway (NLE); 3. To support the development of the North Luzon Expressway (NLE), PNCC, as the franchisee, had to enter into a Joint Venture with the private sector. PNCC's legal capacity to enter into such an agreement is confirmed by Opinion No. 224, series of 1993 issued by the Government Corporate Counsel and concurred in by the Secretary of Justice in its Opinion No. 79, dated 02 June 1994. 4. Consequently, a Joint Venture Agreement dated 21 April 1994 was executed between the First Philippine Infrastructure Development Corporation (FPIDC) and PNCC to implement the rehabilitation, modernization and expansion of the North Luzon Expressway (the Project). 5. Pursuant to the terms of the Joint Venture Agreement, the Manila North Tollways Corporation (MNTC) was incorporated for the primary purpose of implementing the Project. 6. Hence, a Supplemental Toll Operation Agreement (STOA) was executed on May 5, 1998 by and between the Philippine Government, through the Toll Regulatory Board (TRB), as Grantor, PNCC as Franchisee, and MNTC, as Concessionaire, which among others, confirmed (a) the recognition of the assignment by PNCC of its Franchise in favor of MNTC over the NLE and its expansion projects, as approved by the President of the Philippines on 16 May 1995, and (b) the grant by TRB to MNTC of the Concession Rights over the NLE project. 7. The right of PNCC, as the original franchise grantee, to transfer or assign its usufructuary rights, interest and privileges under its franchise is provided for under Section 8 of P.C. 113, as amended by its reproduction in Section 13 of P.D. 1894, as follows: "Section 8. The Grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise nor the rights or privileges required hereby, to any person, firm, company, corporation or other legal entity, nor merge with any other company or corporation without the prior approval of the President of the Philippines. In the event that this franchise is sold, transferred or assigned, the transferee shall be subject to all the conditions, terms, restrictions and limitations of this Decree as fully and completely and to the same extent as if the franchise has been granted to the said person, firm, company, corporation or other legal entity." (Emphasis supplied). 8. The assignment by PNCC of its Franchise in favor of MNTC over the North Luzon Expressways and its expansion projects was approved by the President of the Philippines on 16 May 1995; 9. Under the law, PNCC, as the franchise grantee, is entitled to certain tax exemption. Thus Section 14 of P.D. 1894, amending Section 10 of P.D. 1113 provides as follows: "Section 14. The provisions of existing laws to the contrary notwithstanding, no tax, charges or fees of any kind, nature or description now or in the future imposed or levied by any municipal, city, provincial or national authority shall be imposed, levied or assessed on or be collected from the GRANTEE in connection with its exercise of the right and privilege under this franchise and/or in connection with its activities pursued in accordance with and pursuant to this Decree, other than taxes on its income and real property in conformity with existing laws." 10. As established in BIR VAT Ruling No. 254-89, PNCC has been declared to be VAT exempt by virtue of its franchise for its direct tax liability for the projects it directly undertakes in connection with its franchise. llcd 11. The Supplemental Toll Operation Agreement (among the PNCC, TRB, and MNTC) establishes that the franchise granted to PNCC is based on a consideration and therefore constitute a contract between the parties thereto, hence, all the rights, duties, responsibilities and other considerations, including the grant of tax exemption, remains effective and binding with respect to all parties concerned. Based on the foregoing, it is therefore your contention that being subrogated to all the rights, duties, and responsibilities of PNCC, the Manila North Tollways Corporation, as the Concessionaire under the STOA and as assignee of the North Luzon Expressway project, is likewise entitled to the same tax exemption privilege as that enjoyed by the PNCC. In reply, we hereby confirm that under the above-narrated set of facts, MNTC is likewise entitled to the same tax exemption privileges of PNCC by virtue of the assignment of franchise. It is already settled that the state may enter into a binding contract with a person or corporation in respect to taxation, which contract can be enforced against it. Likewise, it is settled by repeated adjudications of the Court that a State may by contract based on a consideration exempt the property of an individual or corporation from taxation and that the exemption is presumed to be on sufficient consideration and binds the State if the charter containing it is accepted. (Casanovas vs. Hord, 8 Phil. 125). Since the franchise, in the nature of a contract, also imposes certain obligations and liabilities to the transferee, it is logical that the law creating the franchise should carry with it the consent of the tax exemption being transferable. This is substantiated by the following facts: 1. Section 2 of P.D. 1113 and Section 5 of P.D 1894 clearly specifies that the franchise was granted to PNCC for certain considerations to be made to the Government. Such obligations of the grantee, e.g. payment of concession fee, construction of expressways at grantee's expense, turn-over of toll facilities and equipment to the Government for free, are likewise the obligations assumed by the concessionaire under the STOA. 2. The prior approval of the President of the Philippines has been obtained pertaining to the assignment of PNCC's rights, interest and privileges under the franchise to MNTC. This is the compliance requirement and operative act under the PNCC franchise that transfers "fully and completely and to the same extent as if the franchise has been granted to the said person, firm, company, corporation or other entity". cdlex 3. There is therefore a clear acceptance and express recognition that such transfer of the franchise, including the tax exemption therein, is valid and binding under and pursuant to the STOA as well as the provision of Section 13 of P.D. 1894, amending P.D. 1113. 4. Since the source of the tax exemption being enjoyed by PNCC and which was assigned to MNTC emanates out of a valid franchise, such exemption was not affected by the withdrawal of the tax exemption privileges and preferential tax treatment of government and private entities under Executive Order No. 93, since the same is covered by one of the exceptions therein, i.e., those covered by the non-impairment clause of the Constitution (Section 1(a), E.O. 93). Hence, MNTC is exempt from VAT on its gross receipts from the management and operations of the North and South Expressways by virtue of P.D. No. 1113 as amended by P.D. 1894, as well as under the Supplemental Toll Operations Agreement. This is further confirmed by Sec. 109 (q) of the Tax Code of 1997 which exempts from VAT transactions given exemption under special laws. However, since the said exemption is limited only to taxes for which MNTC is directly liable as a vendor/seller, MNTC is not exempt from the VAT passed on to it for its purchases of goods and services in connection with the construction and maintenance of the NLE. Furthermore, projects by the MNTC other than those expansion projects covered by STOA shall be subject to VAT pursuant to Sec. 108(A) of the same Code. (VAT Ruling No. 254-89 dated Oct. 9, 1989). llcd This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue