BIR rules: Malampaya group exempted from excise tax, VAT

BY JUDY T. GULANE, BusinessWorld Senior Reporter A two-year-old dispute over the Malampaya consortium’s taxes has been finally resolved, with the Bureau of Internal Revenue ruling that the group is covered by a special law and not the National Internal Revenue Code of 1997 and should pay only the income tax. The Malampaya consortium members — Shell Philippines Exploration BV, Shell Philippines LLC, Chevron Malampaya LLC and Philippine National Oil Co. Exploration Corp. (PNOC-EC) — therefore, need not pay excise or value-added taxes since these are not provided by Presidential Decree (PD) No. 87 or the Oil Exploration and Development Act of 1972 and Service Contract (SC) 38 that the group entered into with the government. The dispute began in 2005 after Revenue District Office (RDO) 53-Las Piñas-Muntinlupa of the tax bureau assessed the two Shell companies and Chevron for excise, value-added and income tax deficiencies covering taxable year 2003. The three companies were then under the jurisdiction of RDO 53, while PNOC-EC was under RDO 44-Taguig-Pateros. The consortium was transferred to the Large Taxpayers Service in January for closer monitoring. RDO 53’s assessment was in line with the tax bureau’s annual audit program that covered taxable year 2003. The RDO issued a letter of authority to the three companies, gained access to the three’s records, and conducted an audit. It used the taxation rules under the Tax Code, which prescribed payment of excise and value-added taxes on top of income tax. The three companies protested, saying they are covered by the special tax regime under PD 87 and SC 38. Section 19 of PD 87 states: "The contractor shall be liable each taxable year for Philippine income tax derived from its petroleum operations under its contract of service..." This is reiterated in Section 6.2.a of SC 38: "Contractor shall have the following rights... exemption from all taxes except income tax..." PD 87 also provides that the contractor’s gross income is to be computed based on the gross proceeds from the export of crude oil, or the sale of crude oil to the domestic market. In the case of natural gas or casinghead petroleum, the gross income is computed based on the total quantity exported or sold to the domestic market at the prevailing market price. The decree also allows the contractor to deduct operating expenses and "Filipino participation incentive" from his gross income. And to cap it all, PD 87 directs the government, specifically the Energy department, to shoulder the contractor’s income tax obligation. Meetings were held between the Malampaya consortium and RDO 53 and Revenue Region 8-Makati City, to which the RDO belongs, to resolve the issue. The matter was subsequently brought to the attention of Lilian B. Hefti, then the tax bureau’s deputy commissioner for legal and inspection group, now deputy commissioner for operations group. Finally, in a Jan. 18, 2007 ruling signed by Internal Revenue Commissioner Jose Mario C. Buñag, the tax bureau said it agreed with the consortium that it is covered by a special tax regime. It said the special law — PD 87 — should prevail over the general law — the Tax Code — especially in the computation of the income tax. "This is in recognition of the fact that the special income tax regime laid down under PD 87 and SC 38 is specifically intended to address the particular circumstances applicable only to petroleum service contractors." It added that SC 38 is protected by the non-impairment clause in the 1987 Constitution, while PD 87 has specified that contracts concluded under its ambit cannot be unilaterally changed. Mr. Buñag, in an interview, said the tax bureau’s ruling can be cited to resolve similar cases. The Energy department, in its Web site, said there are 28 active service contracts at present. But production of either petroleum or gas is confined only to the Nido and Matinloc Fields, Malampaya in offshore Palawan, and the San Antonio field in Isabela. The Malampaya deepwater gas-to-power project, costing $4.5 billion, represents the single-biggest foreign direct investment to the Philippines. It was inaugurated in 2001 and began operations in 2002, supplying three gas turbine power plants with a combined capacity of 2,760 megawatts of power. Energy Undersecretary Guillermo R. Balce said the Energy department has paid a total of P25.5 billion in income tax and branch profit remittance tax — the tax levied on profit remitted by a branch to its head office — from taxable year 2002 to 2006. The tax bureau expects to collect P9.897 billion in income and branch profit remittance taxes this year. "I know that people are worried that the government is paying the taxes... but it will be difficult to attract foreign investments without this," he said. He explained that under SC 38, the contractor is allowed to deduct expenses up to 70% of sales. Of the 30% balance, 60% goes to the government as its share, while the remaining 40% goes to the contractor as its service fee. The income tax is computed based on the contractor’s service fee, but it is paid by the government out of its share.