Vat Ruling No 7-2006

VAT RULING NO.
7-2006
SHELL PHILIPPINES EXPLORATION B.V. (SPEX), SHELL PHILIPPINES LLC (SPL),

CHEVRON MALAMPAYA LLC (CHEVRON) and PNOC EXPLORATION CORPORATION
(PNOC-EC) (collectively referred to as the Service Contractor or Consortium) are service
contractors of the Government of the Republic of the Philippines, through the Department of
Energy (DOE) under Service Contract 38 (SC 38) for the exploration, development and
utilization of petroleum in the Camago-Malampaya.
The Service Contractor undertakes and executes petroleum operations under the full control
and supervision of the DOE.
One of the rights granted to a petroleum service contractor is exemption from all taxes except
income tax.
The Service Contractor received a letter from the Revenue Director and informed them that their
"sale of natural gas in whatever form or state from the Malampaya Project is now subject to
value-added tax pursuant to R.A. No. 9337. They were advised to commence filing and paying
VAT on or before December 20, 2005 to avoid the imposition of penalties and interests.
The Service Contractor, through Atty. Baniqued and Atty. Bello, submit that the Service
Contractor's sales of natural gas remain exempt from VAT pursuant to Section 12(a) of PD No.
87 and Section 6.2 of SC 38.
The BIR confirmed that except for income tax, a service contractor under SC 38 is exempt from
all taxes for which it is directly liable, including exemption from VAT.
On the other hand, Section 24 of R.A. No. 9337 provides —

"Sec. 24. Repealing Clause. — The following laws or provisions of laws are hereby repealed
and the persons and/or transactions affected herein are made subject to the value-added tax
subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:
"(a) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power
Corporation (NPC);
"(b) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of
generated power by generation companies; and
"(c) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts
thereof which are contrary to and inconsistent with any provisions of this Act are hereby
repealed, amended or modified accordingly."
Prescinding from the above-cited provisions of laws, it is clear that R.A. No. 9337 explicitly
identifies the laws which have been repealed, i.e., R.A. No. 6395 and R.A. No. 9136. It is a
principle in statutory construction that the express mention of one person, thing, act, or
consequence excludes all others, as expressed in the familiar maxim expressio unius est
exclusion alterius. Thus, the absence of PD No. 87 in Section 24 of R.A. No. 9337 clearly
evinces the legislature's intent not to repeal PD No. 87. This is so because, had it been the
intent of Congress to repeal PD No. 87, it would have simply included PD No. 87 in the specific
enumeration of the laws repealed by R.A. No. 9337.
That PD No. 87 is a special law and should be regarded as an exception to the general
provisions of R.A. No. 9337, and therefore petroleum service contractors remain exempt from all
taxes including VAT, except income tax.
Finally, the principle of non-impairment of contracts is enshrined under Section 10, Article III of
the 1987 Philippine Constitution which states that —
"No law impairing the obligation of contracts shall be passed."
The tax exemption privilege of the Service Contractor under SC 38 is a contractual tax
exemption granted by the government in exchange for a valid and material consideration, the
valid and material consideration obtained by the government in exchange for granting the
Service Contractor the right to be exempt from all taxes (except income tax) under SC 38
consists of the Service Contractor's obligation (i) to furnish services, technology, and financing
for, and (ii) to assume all risk relating to, the conduct of petroleum operations. Accordingly, said
contractual tax exemption is protected by the non-impairment clause of the 1987 Philippine
Constitution. In the instant case, the government expressly acknowledged that the tax
exemption privilege of the Service Contractor under SC 38 is a contractual tax exemption
granted by the government in exchange for a valid and material consideration as when the
parties stipulated in Section 6.2(g) of SC 38 that the rights and obligations in the Contract shall
be deemed an essential consideration for the conclusion thereof and shall not be unilaterally
changed or impaired.
WHEREFORE, in view of the foregoing, this Office holds that the Service Contractor's sales of
natural gas remain exempt from VAT pursuant to Section 12(a) of PD No. 87 in relation to
Section 6.2. of SC 38.

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VAT RULING NO.

SHELL PHILIPPINES EXPLORATION B.V. (SPEX), SHELL PHILIPPINES LLC (SPL),

On the other hand, Section 24 of R.A. No. 9337 provides —

"No law impairing the obligation of contracts shall be passed."

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