G.R. No. 238846 , 238852, 238862, February 25, 2025
SHELL PHILIPPINES EXPLORATION B.V. AND CHEVRON MALAMPAYA LLC, PNOC EXPLORATION CORPORATION, and THELMA M. CERDEÑA AND NORA A. TUAZON, PETITIONERS, vs. COMMISSION ON AUDIT, RESPONDENT.

FACTS

The controversy stems from the alleged under-collection of the government’s 60% share in the Malampaya Natural Gas Project revenues amounting to PHP 53,140,304,739.86 from 2002 to 2009. The Government, through the Department of Energy (DOE), entered into Service Contract No. 38 with the contractor-consortium (Shell Philippines Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC) pursuant to Presidential Decree No. 87 (The Oil Exploration and Development Act of 1972). Under the contract, the contractors perform petroleum operations and provide financing and technology, retaining 40% of net proceeds as a service fee and remitting 60% to the government. As an incentive under P.D. No. 87 and Section 6.2(a) of the contract, the contractors are exempt from all taxes except income tax. Section 6.3 of the contract provides that this income tax “shall be paid on behalf of the CONTRACTOR by the DOE.” A 2004 post-audit revealed that the contractors’ corporate income taxes had been deducted from the government’s 60% share, leading COA to issue a Notice of Charge holding the contractors and certain DOE officials liable. COA, in its assailed Decision and Resolution, denied the appeals of the DOE and contractors, ruling that the inclusion of the contractors’ income taxes in the government’s share was improper and unsupported by law. This prompted the filing of Petitions for Certiorari before the Supreme Court.

ISSUE

Whether the Commission on Audit committed grave abuse of discretion in ruling that the income tax obligations of the service contractors under Service Contract No. 38 should not have been included as part of the government’s 60% share of net proceeds and in affirming the Notice of Charge.

RULING

Yes, the Commission on Audit committed grave abuse of discretion. The Supreme Court granted the consolidated Petitions for Certiorari, reversed the assailed COA decisions, and lifted the Notice of Charge. The tax assumption provision in Service Contract No. 38 is firmly rooted in the clear language and intent of Presidential Decree No. 87. P.D. No. 87 was enacted to encourage private participation in petroleum exploration by providing meaningful incentives, including exemption from all taxes except income tax. The law and the contract explicitly establish a mechanism where the government assumes the payment of the contractor’s income tax liability. This assumed tax payment is correctly included as part of the government’s guaranteed 60% share of the net proceeds. COA’s ruling disregarded the explicit terms of the governing law and the contract, thereby acting without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction. The Court’s conclusion is supported by its prior ruling in Republic v. City of Kidapawan, which upheld a similar tax assumption mechanism in a geothermal service contract, noting that while the government assumes and pays the income tax, the contractor remains the actual taxpayer, with the government acting as its agent for payment.