Battle of the laws

What would happen if there is a conflict between two laws which may both be applicable in a given scenario?

This appears to be the dilemma faced by Semirara Mining Corp.  (SMC), a registered non-VAT (value-added tax) domestic corporation engaged in the business of production and sale of coal. It conducts its business by virtue of Presidential Decree (PD) 972 (Coal Development Act of 1976), a special law issued by then president Ferdinand E. Marcos. Under Section 16 of PD 972, one of the incentives granted to operators under a COC is exemption from all taxes except income tax.

On 08 June 1983, SMC executed a Coal Operating Contract (COC) with the Department of Energy. As a coal mine operator, SMC sells its coal production to various customers in accordance with the COC. National Power Corp. (NPC), a government-owned and controlled corporation which is engaged in the production, transmission and distribution of electric power, is one of SMC’s customers.

For years, SMC had been selling coal to NPC without paying VAT pursuant to the tax exemption granted under Section 16 of PD 972.

On 01 July 2005, Republic Act (RA) 9337 took effect which amended certain provisions of the National Internal Revenue Code of 1997, as amended (Tax Code). The “sale or importation of coal and natural gas” was removed from the list of VAT exempt transactions. Thus, it would appear that the “sale or importation of coal and natural gas” will now be subject to 12 percent VAT.

NPC, believing that the sale of coal by SMC was no longer exempt from VAT under RA 9337, started to withhold five percent representing the final withholding VAT on SMC’s coal billings pursuant to Section 114 (C) of the Tax Code. Disagreeing with NPC’s argument, SMC requested a ruling from the Bureau of Internal Revenue (BIR) to confirm its position that its sale of coal to NPC was still exempt from VAT despite the effectivity of RA 9337, which the BIR granted through BIR Ruling 006-2017.

Armed with the said BIR Ruling, SMC filed with the BIR a claim for refund or issuance of a tax credit certificate for final withholding VAT erroneously withheld by NPC. Due to the inaction of the BIR, SMC filed its petition for review with the Court of Tax Appeals.

In defense, the Commissioner of Internal Revenue argued that the provision which grants tax exemption to SMC under Section 109 (e) of the Tax Code was withdrawn by RA 9337 by deleting the “sale or importation of coal and natural gas” from the list of VAT exempt transactions.

The question now is – as between the Tax Code, as amended by RA 9337 (a general law) and PD 972 (a special law), which must prevail?

On 19 June 2017, the Supreme Court in the case of Commissioner of Internal Revenue vs. Semirara Mining Corp. (G.R. 202922) finally decided the above matter. The Court ruled that SMC’s claim for VAT exemption is anchored not on the paragraph deleted by RA 9337 from the list of VAT exempt transactions under Section 109 of the Tax Code but on the tax incentives granted under PD 972.

In other words, the tax exemption under Section 16 of PD 972 was not revoked or repealed – expressly or impliedly – by RA 9337.  If there is a conflict between a general law and a special law, the special law remains to be in effect unless the general law (which is the later law in this case) expressly repeals the special law (old law) or there is a clear irreconcilable inconsistency between the two laws. In this case, the repealing clause of the later law, RA 9337 (a general law) did not provide for the express repeal of the old law, PD 972 (a special law). Further, RA 9337 could not have impliedly repealed PD 972 because RA 9337 could not have been intended to substitute PD 972 and there is also no irreconcilable inconsistency between the two laws. While under RA 9337, the “sale or importation of coal and natural gas” was deleted from the list of VAT exempt transactions, Section 7 of RA 9337 provides that transactions which are exempt under special laws (such as PD 972) are considered as VAT exempt.

The Court further noted that the BIR itself validated SMC’s VAT exemption under PD 972 through BIR Ruling 006-2007 which provides that the tax exemption on the sale of coal is premised on PD 972 which is a special law.

Considering that neither RA 9337 provide for the expressly repeal of PD 972 nor is there any irreconcilable inconsistency between the two laws, the sale of coal by SMC to NPC under the COC is exempt from VAT. Accordingly, SMC is entitled to claim for a refund of the final withholding VAT erroneously withheld by NPC.

Given that the sheer number of laws in the Philippines can be overwhelming, it is inevitable that conflicts between laws can and will occur. However, there may be instances where the conflicts are merely presumptive rather than real. Thus, an effective harmonization of laws will eventually lead to giving effect to the true intention behind our laws.

Marino P. Lizaso V is a supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].