Word definition can make a mountain of a difference between paying a massive amount of tax or not, proven by a recent Supreme Court (SC) decision on the government’s share in the profits from the Malampaya Natural Gas Project.

The question was whether the private contractors owe the government P53 trillion or if the amount was included in the contracted royalty.

In a decision penned by Associate Justice Japar B. Dimaampao, the SC en banc dismissed the charges against Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC to settle unpaid income taxes.

In 1990, the government signed a service contract with the companies for the Malampaya natural gas project.

Under the contract, the contractors must remit 60 percent of the project’s net proceeds to the government. They were exempt from all taxes except income tax, but the contract also stated that the government’s 60-percent share already covered the contractors’ income taxes from 2002 to 2009.

The provision is known as the tax assumption provision. Tax assumption is not tax exemption, according to the ruling.

Based on a report of the Commission on Audit (CoA), the members of the Malampaya consortium owed the government unpaid taxes.

The SC decision indicated that assumption is the “act of taking, especially someone else’s debt or other obligation, for or on oneself.”

“This means that the obligation or liability remains, although the same is merely passed on to a different person.”

Using this perspective, it becomes pretty clear that, contrary to the standpoint of CoA, the concept of an assumption is distinct and not synonymous with an exemption.

It argued that Section 6.3 of the Service Contract was not like a tax exemption.

It therefore does not infringe upon the sovereign prerogative of the government, and the constitutional provisions on tax exemptions do not find application, according to the ruling.

The court cited the exemption of the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) from payment of real property taxes over the Mt. Apo Geothermal Reservation Area.

“Relatedly, the service contract entered into by the government and PNOC-EDC contained a similar provision in Section 6.3 of the subject Service Contract anent the payment of income taxes.”

It added that the tax assumption made by the Department of Energy (DoE) was done “for a legitimate, not a fraudulent, purpose, namely as an incentive for the claimants, or consortium members, to agree to explore for oil and gas in the Philippines.”

The project also enabled the government to earn billions as its share of the project.

The energy companies indicated that the tax assumption incentive was usual in the oil and gas industry.

The ruling then stated, “There is no public policy that is offended when an agency of the government adopts it as a business strategy, especially when its overall effect is beneficial to the government.”

The sovereign right of the government to tax is not at issue, as all the taxes due to the State have been paid, according to the SC decision.

The case does not involve any tax exemption claim but rather tax sharing, a legitimate business practice in the oil industry.

The High Tribunal gives high persuasive effect to the positions of the different branches and agencies of the government of the Philippines that have recognized the legality of the tax assumption provision of Service Contract 38 (which covers the Malampaya field).

“The SC is on all fours with CoA to zealously ensure that the government is never placed at a disadvantage and that it rightfully receives what is due to it in all its transactions,” according to the ruling.

“Bound by the Constitution and the laws of the land, the government cannot be allowed to renege on its obligation,” the SC provided.

The point that the SC wanted to underline is that the government must honor obligations in a contract.