G.R. No. 238846 - Dissenting Opinion

G.R. No. 238846, February 25, 2025,
♦ Decision, Dimaampao, [J]
♦ Dissenting Opinion, Leonen, [J]
♦ Concurring Opinion, Caguioa, [J]
♦ Concurring Opinion, Lopez, [J]
♦ Concurring Opinion, Hernando, [J]

SHELL PHILIPPINES EXPLORATION B.V. AND CHEVRON MALAMPAYA LLC, PETITIONERS,
vs.
COMMISSION ON AUDIT, RESPONDENT.

PNOC EXPLORATION CORPORATION, PETITIONER,
vs.
COMMISSION ON AUDIT, RESPONDENT.

THELMA M. CERDEÑA AND NORA A. TUAZON, PETITIONERS,
vs.
COMMISSION ON AUDIT, RESPONDENT.

Presidential Decree No. 87,1 the governing law on indigenous oil exploration, development and production, does not explicitly state that the government's share in petroleum revenues includes income taxes. Section 18 of Presidential Decree No. 87, the supposed statutory basis of Section 6.3 of the Service Contract, states:

The phrase "including all taxes paid by or on behalf of the Contractor" means "additionally" or "in addition to," such that both the annual net revenue or government's share in petroleum production and all taxes paid would be taken into account in meeting the minimum threshold of 60%. It comes from an understanding that the "taxes paid" are part of the larger or broader group of revenues to the government, and not necessarily of the "annual net revenue or share of the government in petroleum production." Otherwise, had the latter been the intent, a clearer phrasing should have been used such as "which includes," "inclusive of," or any language clearly and unequivocally indicative of such intent.

This is the proper interpretation if we look at the immediate context of the provision stating the function of the Petroleum Board (now Department of Energy) to "enter into contracts. . . with such terms and conditions as may be appropriate" and "provide for the manner and form of the income tax payment. . ." and of Presidential Decree No. 87 as a whole. The purpose and objective sought to be attained and particularly those provisions outlining the privileges of contractors3 and providing for their income tax liability.

It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, i.e., that every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the whole enactment. Because the law must not be read in truncated parts, its provisions must be read in relation to the whole law. The statute's clauses and phrases must not, consequently, be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts in order to produce a harmonious whole. Consistent with the fundamentals of statutory construction, all the words in the statute must be taken into consideration in order to ascertain its meaning.5 (Emphasis in the original, citations omitted)

The government's share in petroleum production is distinct from income tax, although ultimately, both are revenues of the government. To add, the government's share in the proceeds of the Malampaya Natural Gas Project springs from the State's ownership of the natural resource discovered, produced, and sold. On the other hand, the income tax payment flows from the Service Contractors' derivation of income from activities within the Philippines' territorial jurisdiction. It is a tax on the privilege of earning income.6

Again, Section 18(b) of Presidential Decree No. 87 should be construed to mean only that the government's share and all taxes paid by or on behalf of the contractor should not be less than 60%.

A contrary interpretation such as that being pressed upon this Court — that income taxes are included in the government's share—would run counter to Presidential Decree No. 87's policy of maximum revenues to the government and just return to the contractors from production of indigenous petroleum. More importantly, it amounts to an income tax exemption. To justify such result, it is imperative that the language employed be of the clearest and most satisfactory character. However, the clause relied upon in Section 18(b) of Presidential Decree No. 87 is indefinable.

Tax exemptions are strictly construed and are never presumed.7 They must be clearly and categorically expressed and cannot be established by implications.8 The reason for this is explained in Associate Justice Isagani Cruz's Dissenting Opinion in Maceda v. Macaraig9:

A tax exemption represents a loss of revenue to the State and must therefore not be lightly granted or inferred. When claimed, it must be strictly construed against the taxpayer, who must prove that he comes under the exemption rather than [the] rule that every one [sic] must contribute his just share in the maintenance of the government. If granted, tax exemption is strictly construed against the taxpayer.10

Section 6.3 of the Service Contract, which states that "The OFFICE OF ENERGY AFFAIRS shall assume and pay on behalf of CONTRACTOR and its parent company, on the first transaction in each instance where the tax is imposed, all income taxes payable to the Republic of the Philippines based on income and profits . . ."11 is not supported by law, particularly Section 18(b) of Presidential Decree No. 87.

It is tantamount to an income tax exemption and goes against the specific provisions under Presidential Decree No. 87, which allows exemption by the contractor from all taxes except income tax:

Moreover, Section 6.3 of the Service Contract constitutes a usurpation of Congress' exclusive prerogative to grant a tax exemption. Article VI, Sec. 28 (4) of the 1987 Constitution particularly requires that "no law granting any tax exemption shall be passed without the concurrence of a majority vote of all the members of Congress."

Indeed, tax assumption may enable the foreign contractors to claim tax credit from their home jurisdiction.12 In this sense, tax assumption is different from tax exemption. Nonetheless, from our standpoint, tax assumption ultimately has the effect of tax exemption:13 it frees the taxpayer from the burden or charge of paying the tax.

In Collector of Internal Revenue v. McGrath,14 it was declared that "[t]axes are not subject to agreements between the taxpayer and the tax officer, and if any such agreements are made, they cannot serve to defeat or discharge the liability that the law fixes as the full amount of the tax."

In the same vein, tax exemptions are granted by law and are not subject to contract between the Department of Energy, representing the government, and the foreign contractors. To repeat, Presidential Decree No. 87 explicitly provides the liability of the contractor for income tax, and there is nothing in the said law that clearly allows the shifting of this burden to the government.

The arbitral award in an investor-state arbitration done abroad cannot stay or overturn the prior finding of the Commission on Audit (COA)—an independent constitutional body tasked to safeguard public funds and properties.15

Under Section 2, Article IX-D of the 1987 Constitution, the COA is vested with the following:

[T]he power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations with original charters[.]

Consequently, Section 28 of Presidential Decree No. 144516 describes the examining authority of the COA:

SECTION 28. Examining Authority. — The Commission shall have authority to examine books, papers, and documents filed by individuals and corporations with, and which are in the custody of, government offices in connection with government revenue collection operations, for the sole purpose of ascertaining that all funds determined by the appropriate agencies as collectible and due the government have actually been collected, except as otherwise provided in the Internal Revenue Code of 1977.

The audit jurisdiction of the COA is extensive, covering all funds and properties of the government, its agencies and instrumentalities.17 Further, Section 3, Article IX-D of the 1987 Constitution categorically provides that "[n]o law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the COA." In Feliciano v. Commission on Audit,18 the Court held that the said provision prohibits any scheme or devise to escape the audit jurisdiction of the COA.

Nevertheless, while jurisprudence recognizes that the COA had primary jurisdiction over money claims against the government, such jurisdiction is not exclusive. In Taisei Shimizu Joint Venture v. Commission on Audit,19 this Court held that "[o]ther tribunals/adjudicative bodies, too, may have concurrent jurisdiction with the COA over money claims against the government or in the audit of the funds of government agencies and instrumentalities."20

In Development Bank of the Phils. v. Commission on Audit,21 the Court held that the COA does not have the sole and exclusive power to examine and audit government banks; this power is shared with the Central Bank. Nonetheless, the Court still recognized the primacy of the government audit conducted by the COA:

[D]espite the Central Bank's concurrent jurisdiction over government banks, the COA's audit still prevails over that of the Central Bank since the COA is the constitutionally mandated auditor of government banks. And in matters falling under the second paragraph of Section 2, Article IX-D of the Constitution, the COA's jurisdiction is exclusive. Thus, the Central Bank is devoid of authority to allow or disallow expenditures of government banks since this function belongs exclusively to the COA.22

In Taisei Shimizu Joint Venture, the Court held that the COA's primary jurisdiction over money claims against the government does not prevent the Construction Industry Arbitration Commission's exercise of jurisdiction:

Considering that TSJV and DOTr had voluntarily invoked CIAC's jurisdiction, the power to hear and decide the present case has thereby been solely vested in the CIAC to the exclusion of COA. Being a specific law, EO No. 1008 providing for CIAC's exclusive jurisdiction prevails over PD 1445, granting the COA the general jurisdiction over money claims due from or owing to the government.(awÞhi( For this reason alone, the COA should have stayed its hands from modifying the CIAC's final arbitral award here, let alone from claiming exclusive jurisdiction over the case.23

The Court also clarified that the COA's review power over claims for judgment awards is limited. Due to the principle of immutability of judgments, the COA could no longer reverse or modify the final and executory arbitral award rendered by the Construction Industry Arbitration Commission and "should have restricted itself to determining the source of public funds from which the final and executory arbitral award may be satisfied pursuant to the general auditing laws the COA is tasked to implement."24

Notably, in Taisei Shimizu Joint Venture, the dispute was first brought to the Construction Industry Arbitration Commission, which had original and exclusive jurisdiction over construction disputes under the law.

Here, the COA first acquired jurisdiction over the subject matter through the conduct of post-audit proceedings. As a necessary part of its constitutional mandate to examine and audit government entities, the COA had the power and duty to rule on questions of law,25 such as whether the corporate income taxes of the contractors were included in the government's share. Arbitration proceedings subsequently conducted abroad cannot interfere with the COA's exercise of its mandated powers and duties.

However, the COA's ruling on the question may be subject to judicial review. The Constitution prescribes the remedy of certiorari to this Court, from decisions and resolutions of the COA,26 for the limited purpose of determining whether there has been a grave abuse of discretion amounting to lack or excess of jurisdiction.

To be sure, this Court's review power may be invoked only by filing a petition for certiorari within the 30-day reglementary period and in the manner provided by relevant laws and the Rules of Court.27 If the proper remedy is not availed of and the ruling becomes final, execution will issue as a matter of right.28

This Court generally sustains the COA's rulings, cognizant of its audit power as a check and balance mechanism under the Constitution and its expertise on the subject matter. However, should there be any taint of grave abuse of discretion, this Court may intervene to correct them. Delos Santos v. Commission on Audit29 instructs:

At the outset, it must be emphasized that the CoA is endowed with enough latitude to determine, prevent, and disallow irregular, unnecessary, excessive, extravagant or unconscionable expenditures of government funds. It is tasked to be vigilant and conscientious in safeguarding the proper use of the government's, and ultimately the people's property. The exercise of its general audit power is among the constitutional mechanisms that gives life to the check and balance system inherent in our form of government.

Corollary thereto, it is the general policy of the Court to sustain the decisions of administrative authorities, especially one which is constitutionally-created, such as the CoA, not only on the basis of the doctrine of separation of powers but also for their presumed expertise in the laws they are entrusted to enforce. Findings of administrative agencies are accorded not only respect but also finality when the decision and order are not tainted with unfairness or arbitrariness that would amount to grave abuse of discretion. It is only when the CoA has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, that this Court entertains a petition questioning its rulings[.]30 (Citation omitted)

Therefore, government officials and agencies are bound by the findings and conclusions of the COA, unless such findings and conclusions are modified or reversed by the Court.

The foreign arbitral tribunal's ruling upholding Sec. 6.3 of the Service Contract on the assumption by the Department of Energy of the contractors' income tax violates the Constitution; hence, it is not binding upon us. Moreover, it undermines the COA's exercise of its mandated powers, duties, and functions and by-passes the prescribed mode of review of the COA's decisions.