AMENDING PRESIDENTIAL DECREE NO. 8 ISSUED ON OCTOBER 2, 1972, AND PROMULGATING AN AMENDED ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF INDIGENOUS PETROLEUM AND APPROPRIATE FUNDS THEREFOR
WHEREAS, Presidential Decree No. 8 dated October 2, 1972 was issued to promote the discovery and development of the country's indigenous petroleum resources and adopting therefore as part of the law of the land the provisions of Senate Bill No. 531 (An Act to Promote the Discovery, Production of Indigenous Petroleum and Appropriate Funds Therefor);
WHEREAS, it was found necessary for the national interest to amend Senate Bill No. 531 among others things to provide more meaningful incentives to prospective service contractors.
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, do hereby amend Presidential Decree No. 8 as follows:
(a) "Petroleum" shall include any mineral oil hydrocarbon gas, bitumen, asphalt, mineral gas and all other similar or naturally associated substances with the exception of coal, peat, bituminous shale and/or other stratified mineral fuel deposits.
(b) "Crude oil" or "crude" means oil in its natural state before the same has been refined or otherwise treated. It does not include oil produced through destructive distillation of coal, bituminous shales or other stratified deposits, either in its national state or after the extraction of water, and sand or other foreign substances therefrom.
(c) "Natural gas" means gas obtained from boreholes and wells and consisting primarily of hydrocarbons.
(d) "Petroleum operations" means searching for and obtaining petroleum within the Philippines through drilling and pressure or suction or the like, and all other operations incidental thereto. It includes the transportation, storage, handling and sale (whether for export or for domestic consumption) of petroleum so obtained but does not include any: (1) transportation of petroleum outside the Philippines; (2) processing or refining at a refinery; or (3) any transactions in the products so refined.
(e) "Petroleum in commercial quantity" means petroleum in such quantities which will permit its being economically developed as determined by the contractor after taking into consideration the location of the reserves, the depths and number of wells required to be drilled and the transport and terminal facilities needed to exploit the reserves which have been discovered.
(f) "Posted price" refers to the FOB price established by the Contractor in consultation with the Petroleum Board for each grade, gravity and quality of crude oil offered for sale to buyers generally for export at the particular point of export, which price shall be based upon geographical location, and the fair market export values for crude oil of comparable grade, gravity and quality.
(g) "Market Price" shall mean the price which would be realized for petroleum produced under a contract as hereinafter defined if sold in a transaction between independent persons dealing at arm's length in a free market.
(h) "Barrel" means 42 U.S. gallons or 9702 cubic inches at temperature of 60º Fahrenheit.
Any reference in this Act to the value of any crude oil at the posted price or market price shall be construed as a reference to the amount obtained by multiplying the number of barrels of that crude oil by the posted price or market price per barrel applicable to that crude oil.
(i) "Crude oil exported" shall include not only crude oil exported as such but also indigenous crude oil refined in the Philippines for export.
(j) "Government" means the Government of the Republic of the Philippines.
(k) "Contractor" means the contractor in a service contract whether acting alone or in consortium with others.
(l) "Contract" refers to a service contract.
(m) "Filipino participation incentive" means the allowance which may be given the Contractor with Filipino participation as provided in Section 28 hereof.
(n) "Philippine corporation" means a corporation organized under Philippine laws at least sixty per cent of the capital of which is owned and held by citizens of the Philippines.
(o) "Affiliate" means (a) a company in which a contractor holds directly or indirectly at least fifty per cent of its outstanding shares entitled to vote; (b) a company which holds directly or indirectly at least fifty per cent of the contractor's outstanding shares entitled to vote; or (c) a company in which at least fifty per cent of its share outstanding and entitled to vote are owned by a company which owns directly or indirectly at least fifty per cent of the shares outstanding and entitled to vote of the contractor.
(p) "Gross income" means the gross proceeds from the sale of crude, natural gas or casinghead petroleum spirit produced under the contract and sold during the taxable year at posted or market price, as the case may be, and such other income which are incidental to and arising from any one or more of the petroleum operations of the contractor.
(q) "Taxable net income" means the gross income less the deductions allowed in this Act.
(r) "Taxable year" means the calendar or fiscal year of the contractor.
(s) "Casinghead petroleum spirit" means any liquid hydrocarbon obtained from natural gas by separation or by any chemical or physical process.
(t) "Petroleum Board" refers to the Petroleum Board created in Section seventeen of this Act.
(u) "Operating Expenses" means the total expenditures for petroleum operations made by the Contractor both within and without the Philippines as provided in a service contract.
In opening contract areas and in selecting the best offer for petroleum operations, any of the following alternative procedures may be resorted to by the Petroleum Board, subject to prior approval of the President:
Provided, That if during any contract year the Contractor shall spend more than the amount of money required to be spent, the excess may be credited against the money required to be spent by the Contractor during the succeeding contract years: Provided, further, That in case the same Contractor holds two or more areas under different contracts of service, the total amount of work obligations for exploration required for the initial term of all contracts may be spent within any one or more of them as if they are covered by a single contract of service: Provided, further, That should the Contractor fail to comply with the work obligations provided for in the contract, it shall pay to the Government the amount it should have spent but did not in direct prosecution of its work obligations: Provided, finally, That the Contractor shall drill a minimum footage of test wells before the end of periods of time as may be specified in the contract with the Petroleum Board in order to be entitled to the extension of the exploration period for 3 years as provided for in paragraph (e) herein.
(b) In case the contractor renounces or abandons wholly or partly the area covered by his contract within two years from its effective date, it shall in respect of the abandoned area pay the Government the amount it should have spent, but did not, for exploration work during said two years, for which payment, among other obligations, the performance guarantee posted by the contractor shall be answerable.
(c) Every contract shall provide for the compulsory relinquishment of at least twenty-five per cent of the initial area at the end of five years from its effective date and in the event of an extension of the contract from seven to ten years, an additional relinquishment of at least twenty-five per cent of the initial area at the end of seven years from its effective date. But the portion already delineated as production area pursuant to the succeeding paragraph shall not be taken into account in ascertaining the extent of relinquishment required. Any area renounced or abandoned under Sec. 9(b) above shall be credited against the portion of the area subject to the contract which is required to be surrendered hereunder.
(d) The Contractor shall, from the discovery of petroleum in commercial quantity, delineate the production area within the period agreed upon in the contract.
(e) The exploration period under every contract shall be seven years, extendible for three years if the contractor has not been in default in its exploration work obligations and other obligations after which the contract shall lapse unless Petroleum has been discovered by the end of the tenth year and the contractor for requests a further extension of one year to determine whether it is in commercial quantity, in which event, another extension of one year for exploration may be granted. If Petroleum in commercial quantity has been discovered, the Contractor may retain after the exploration period and during the effectivity of the Contract twelve and one-half per cent of the initial area in addition to the delineated production area: Provided, however, That the contractor shall pay annual rentals on such retained area which shall not be less than ten pesos per hectare or fraction thereof for on-shore areas and not less than twenty pesos as determined by the Petroleum Board per hectare or fraction thereof for off-shore areas: Provided, further, That such rentals can be offset against exploration expenditures actually spent on such area.
(f) Where petroleum in commercial quantity is discovered during the exploration period in any area covered by the contract, the contract with respect to said area shall remain in force for production purposes during the balance of the ten year exploration period and for an additional period of twenty-five years, thereafter renewable for a period not exceeding fifteen years under such terms and conditions as may be agreed upon by the parties at the time of renewal.
(g) All materials, equipment, plants and other installations erected or placed on the exploration and/or production area of a movable nature by the contractor shall remain properties of the contractor unless not removed therefrom within one year after the termination of the contract.
(h) The contractor shall be subject to the provisions of laws of general application relating to labor, health, safety, and ecology insofar as they are not in conflict with the provisions otherwise contained in this Act.
(i) Every contract executed in pursuance of this Act shall contain provisions regarding the discovery, production, sale and disposal of natural gas and casinghead petroleum spirit that shall be in line with the rules herein prescribed for crude oil except that:
(1) The market price shall be the basis for tax and all other purposes;
(2) After meeting requirements in secondary recovery operations priority shall be given to supplying prospective demand in the Philippines.
Section 10. Contract areas. Subject to Section eighteen hereof, a contractor or its affiliate may enter into one or more contracts with the Government. Contracts for off-shore areas may cover any portion beneath the Philippine territorial waters or its continental shelf, or portion of the continental slope, terrace or areas which are or may be subject to Philippine jurisdiction: Provided, That for off-shore areas beyond water depths of 200 meters, the Petroleum Board may provide for more liberal terms than that provided for herein with respect to contract areas, exploration period and relinquishment.
Section 11. Transfer and assignment. The rights and obligations under a contract executed under this Act shall not be assigned or transferred without the prior approval of the Petroleum Board: Provided, That with respect to the transfer or assignment of contractual rights and obligations under this Act to an affiliate of the transferor, the approval thereof by the Petroleum Board shall be automatic, if the transferee is as qualified as the transferor to enter into such contract with the Government: Provided, further, That the affiliate relationships between the original transferor or a company which holds at least fifty per cent of the contractor's outstanding shares entitled to vote and each transferee shall be maintained during the existence of the contract.
Section 12. Privileges of contractor. The provisions of any law to the contrary notwithstanding, a contract executed under this Act may provide that the contractor shall have the following privileges:
(a) Exemption from all taxes except income tax.
(b) Exemption from payment of tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations subject to the conditions that said machinery, equipment, spare parts and materials of comparable price and quality are not manufactured domestically; and directly and actually needed and will be used exclusively by the contractor in its operations or in operations for it by a subcontractor are covered by shipping documents in the name of the contractor to whom the shipment will be delivered direct by the customs authorities; and prior approval of the Petroleum Board was obtained by the contractor before the importation of such machinery, equipment, spare parts and materials which approval shall not be unreasonably withheld: Provided, however, That the contractor or its subcontractor may not sell, transfer or dispose of these machinery, equipment, spare parts and materials without the prior approval of the Petroleum Board and payment of taxes due the Government: Provided, further, That should the contractor or its subcontractor sell, transfer or dispose of these machinery equipment, spare parts or materials without the prior consent of the Petroleum Board, it shall pay twice the amount of the tax exemption granted: Provided, finally That the Petroleum Board shall allow and approve the sale, transfer, or disposition of the said items without tax if made (1) to another contractor; (2) for reasons of technical obsolescence; or (3) for purposes of replacement to improve and/or expand the operations of the contract;
(c) Exemption upon approval by the Petroleum Board from laws, regulations and/or ordinances restricting the (1) construction, installation, and operation of power plant for the exclusive use of the contractor if no local enterprise can supply within a reasonable period and at reasonable cost the power needed by the contractor in its petroleum operations, (2) exportation of machinery and equipment which were imported solely for its petroleum operation when no longer needed therefor;
(d) Exemption from publication requirements under Republic Act Numbered Five thousand four hundred fifty-five; and the provisions of Republic Act Numbered Sixty-one hundred and seventy-three with respect to the exploration, production, exportation or sale or disposition of crude oil discovered and produced in the Philippines;
(e) Exportation of petroleum subject to the prior filing pro-rata of domestic needs as elsewhere provided in this Act;
(f) Entry, upon the sole approval of the Petroleum Board which shall not be unreasonably withheld, of alien technical and specialized personnel (including the immediate members of their families), who may exercise their professions solely for the operations of the contractor as prescribed in its contract with the Government under this Act: Provided, That if the employment or connection of any such alien with contractor ceases, the applicable laws and regulations on immigration shall apply to him and his immediate family: Provided, further, That Filipinos shall be given preference to positions for which they have adequate training: And provided, finally, That the contractor shall adopt and implement a training program for Filipinos along technical or specialized lines, which program shall be reported to the Petroleum Board;
(g) Rights and obligations in any contract concluded pursuant to this Act shall be deemed as essential considerations for the conclusion thereof and shall not be unilaterally changed or impaired; and
(h) The privileges and benefits granted to a contractor under the provisions of this Act together with any applicable obligations shall likewise be made available to concessionaires under the Petroleum Act of 1949 and their authorized contractors and/or service operators, whether local or foreign, if they so elect.
Section 13. Repatriation of capital and retention of profits abroad. The contractor shall be entitled to (1) repatriate over a reasonable period the capital investment actually brought into the country in foreign exchange or other assets and registered with the Central Bank; (2) retain abroad all foreign exchange representing proceeds arising from exports accruing to the contractor over and above (a) the foreign exchange to be converted into pesos in an amount sufficient to cover, or equivalent to, the local costs for administration and operations of the exported crude and (b) Revenues due the Government on such crude: Provided, however, That the Government and the contractor shall stipulate in the contract the currency in which the Government revenues arising under (b) above are to be paid; (3) convert into foreign exchange and remit abroad at prevailing rates no less favorable to Contractor than those available to Contractor than those available to any other purchaser of foreign currencies, any excess balances of their peso earnings from petroleum production and sale over and above the current working balances they require, and (4) convert foreign exchange into Philippine currency for all purposes in connection with its petroleum operations at prevailing rates no less favorable to contractor than those available to any other purchaser of such currency.
Section 14. Full disclosure of interest in contractor. Interest held in the contractor by domestic mining and petroleum companies and/or the latter's stockholders may be allowed to any extent after full disclosure thereof to, and approved by the Petroleum Board.
Section 15. Arbitration. The Petroleum Board may stipulate in a contract executed under this Act that disputes in the implementation thereof between the Government and the contractor may be settled in accordance with generally accepted international arbitration practice.
Section 16. Performance guarantee. In order to guarantee compliance with the obligations of the contractor in contracts executed under this Act, the contractor shall post a bond or other guarantee of sufficient amount in favor of the Government and with surety or sureties satisfactory to the Petroleum Board, conditioned upon the faithful performance by the contractor of any or all of the obligations under and pursuant to said contracts.
IMPLEMENTING AGENCY
Section 17. There is hereby created a Petroleum Board composed of the Secretary of Agriculture and Natural Resources, as Chairman, and the Secretary of Finance, the Secretary of Justice, the Chairman of the Board of Investments, the Governor of the Central Bank, the Secretary of Trade and Tourism and the Director of Mines as members. The Director of Mines shall be its Executive Officer. The Board shall be attached to the National Economic Development Authority.
Section 18. Functions of Petroleum Board. In accordance with the provisions and objectives of this Act, the Petroleum Board shall:
(a) Define and give public notice when applicable of the areas available for service contract;
(b) Enter into contracts herein authorized with such terms and conditions as may be appropriate under the circumstances including the grant of special allowance: Provided, however, That no depletion allowance shall be granted: Provided, further, That except as provided in Sections twenty-six and twenty-seven hereof, no contract in favor of one contractor and its affiliates shall cover less than fifty thousand nor more than seven hundred and fifty thousand hectares for on-sphere areas, or less than eighty thousand nor more than one million five hundred thousand hectares for off-shore areas: Provided, finally, That in no case shall the annual net revenue or share of the Government, including all taxes paid by or on behalf of the contractor, be less than sixty per cent of the difference between the gross income and the sum of operating expenses and Filipino participation incentive;
(c) Provide for the manner and form of the income tax payment, the reimbursement of operating expenses, the payment of service fee, and payment of Filipino participation incentive allowance, if any, in the service contract;
(d) Make specific proposals to Congress for the grant of subsidy to contractors and petroleum companies at least sixty per cent of the capital of which is owned by Philippine citizens, to be derived from the revenue or share that will accrue to the Government in pursuance of this Act;
(e) Undertake intensive studies and researches on oil field practices, procedures, and policies;
(f) Promulgate such rules and regulations as may be necessary and assess charges for services rendered, to implement the intent and provisions of this Act;
(g) Appoint, discipline and remove, and determine the compensation of, its technical staff and other personnel: Provided, That positions which are highly technical or primarily confidential shall not be subject to the Civil Service Laws and Rules, and of the Wage and Position Classification Office;
(h) Within four months after the close of every fiscal year, submit to the President and Legislature an annual report on its activities, with appropriate recommendation; and
(i) Generally, exercise all powers necessary or incidental to attain the objectives of this Act.
TAX PROVISIONS
Section 19. Imposition of tax. The contractor shall be liable each taxable year for Philippine income tax on income derived from its petroleum operations under its contract of service, computed as provided in Section 20, through 25.
Section 20. Determination of gross income. The gross income shall consist of:
(a) In respect of crude oil exported, the gross proceeds from the sale of crude oil at the posted price;
(b) In respect of crude oil sold for consumption in the Philippines, the gross income shall consist of the gross proceeds from the sale thereof at market price per barrel;
(c) In respect of natural gas and/or casinghead petroleum exported or sold for consumption in the Philippines the gross income shall consist of the total quantity sold at the prevailing market price thereof; and
(d) Such other income which are incidental to and/or arising from any petroleum operation.
Section 21. Deductions from gross income. In computing the taxable net income, there shall be allowed as deductions:
(1) Filipino participation incentive; and
(2) Operating expenses reimbursed pursuant to Section 8 (1) which includes amortization and depreciation as provided in Section 22.
Section 22. Amortization and Depreciation. Intangible exploration costs may be deductible in full; all tangible exploration costs such as capital expenditures and other recoverable capital assets are to be depreciated for a period of ten years.
Section 23. Deductions not allowed. In ascertaining the taxable net income, no deduction from gross income shall be allowed in respect of any interest or other consideration paid or suffered in respect of the financing of its petroleum operations.
Section 24. Return and payment of tax. Every party to a service contract shall render to the Petroleum Board a return for each taxable year in duplicate in such form and manner as provided by law setting forth its gross income and the deductions herein allowed. The return shall be filed by the Petroleum Board with the Commissioner of Internal Revenue or his deputies or other persons authorized by him to receive such return within the period specified in the National Internal Revenue Code and the Rules and Regulations promulgated thereunder. Every party to a service contract shall be subject to tax separately on its share of taxable income arising from such contract.
Section 25. Applicability of the provisions of the National Revenue Code. All provisions of the National Internal Revenue Code and rules and regulations promulgated in relation therewith which are not inconsistent with the provisions of this Act shall be applicable to the Contractor.
SPECIAL PROVISIONS
Section 26. Option of exploration concessionaires. A holder of a valid and subsisting petroleum exploration concession under the Petroleum Act of 1949 may, at his option enter into a contract of service under the rules of the Petroleum Act of 1949, subject to constitutional restrictions, with any local or foreign oil company under such terms and conditions as may be agreed upon by the concessionaire and the service contractor. As an alternative the concessionaire may convert his concession into a service contract as provided in this Act through negotiations, with all the rights and privileges herein authorized: Provided, That the contract which may be concluded after said negotiation shall contain at least the minimum terms and conditions provided in this Act and shall take into account terms and conditions more favorable to the Government contained in contracts involving exploration pursuant to this Act: Provided, further, That the exploration period shall commence to run from the effective date of the original concession, except when the concession has been effective for a period of seven years or more, in which case the contractor shall be required to commence exploratory drilling operations within a period of not exceeding eighteen months from the date of effectivity of the service contract. If the contractor is not in default in the drilling operations as hereunder required, an extension of the exploration period may be granted as provided in Section nine, paragraph (e) of this Act.
Section 27. Alternative option of exploration concessionaire. The concessionaire referred to in the preceding section may form a consortium with another company or companies and jointly enter into a service contract with the Government under this Act, with the right to assign to the consortium, subject to the approval of the Petroleum Board, the area covered by his concession which shall thereupon be governed by the provisions of this Act: Provided, That the voluntary relinquishment of the concession and its assignment, as well as all technical data on the area resulting from studies conducted by the concessionaire subsisting improvement introduced by him thereon, shall be evaluated and given a fair value which may constitute his contribution, wholly or in part, to the consortium: Provided, however, That the exploration period under the new contract shall commence to run from the date of the effectivity of the contract if it covers areas in addition to the assigned areas; otherwise the provisions of the preceding section shall apply: Provided, further, That duly published applications, for exploration concessions or bids therefor already awarded by the Secretary of Agriculture and Natural Resources under the provisions of the Petroleum Act of 1949 shall be recognized and the corresponding deeds of concessions issued accordingly: Provided, finally, That exploration concessions on which the holder thereof failed to perform the three consecutive years the exploration work required under the provisions of the Petroleum Act of 1949, as amended by Republic Act Numbered Five Thousand Eighty-Six shall be considered automatically cancelled.
Section 28. Filipino Participation Incentive. The contractor under a service contract in which Philippine citizens or corporations have a minimum participating interest of fifteen per cent in the contract area may be subject to reasonable conditions imposed by the Petroleum Board be granted by a government subsidy, commensurate with the scope of Filipino participation, i.e., a Filipino participation incentive, not exceeding seven and one-half per cent, which shall be computed by deducting the said allowance from the posted or market price, whichever, is the higher, of crude oil exports produced in the contract area, and from the market price of crude oil produced in the contract area, sold or disposed of for consumption in the Philippines.
Section 29. Publicity. Negotiation with the Government for the conclusion of a contract under this Act and every contract concluded hereunder shall be given publicity consistent with the best interest of the Government.
Section 30. Provisions of Petroleum Act applicable. The provisions of the Petroleum Act of 1949, as amended, shall not be applicable to the service contract provided in this Act, except the following Articles:
(a) Article 16, referring to public easements on lands covered by concessions;
(b) Article 17, providing that petroleum operations are subject to existing mining rights, permits, leases and concessions in respect of substances other than petroleum and to existing petroleum rights;
(c) Article 18, referring to the right of the Government to establish reservations or grant mining rights on petroleum concessions;
(d) Article 20, granting exploration and exploitation concessionaires the right to enter private lands covered by their concessions;
(e) Article 21, referring to easement and the exercise of the right of eminent domain over private lands for the purpose of carrying out any work essential to petroleum operations;
(f) Article 22, providing for easements over public land for the purpose of carrying out any work essential to petroleum operations; and
(g) Article 23, which grants concessionaires the right to utilize for any of the work to which the concession relates, timber, water, and clay from any public lands within their concessions.
Section 31. Preference to Local Labor. The Contractor shall give priority in employment to qualified personnel in the municipality or municipalities or province where the exploration or production operations are located.
Section 32. Foreign Assistance. Nothing in this Act or of any other law shall preclude the Government of the Republic of the Philippines, through the Petroleum Board or any other proper office or agency, from negotiating or entering into any agreement with any foreign country or government for assistance in terms of equipment, technical know-how and financing for the exploration and production of indigenous crude oil and its by-products.
Section 33. Funds. To carry out the purpose of this Act, there is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, the sum of five hundred thousand pesos for the fiscal year nineteen hundred seventy-three. Hereafter, the necessary appropriations shall be included in subsequent General Appropriations Act.
Section 34. Repealing Clause. All laws, executive orders and regulations inconsistent with the provisions of this Act are hereby repealed, provided that no existing rights shall be prejudiced thereby.
Section 35. Effectivity date. This Act shall take effect upon its approval.
Done in the City of Manila, this thirty first day of December, in the year of Our Lord, nineteen hundred and seventy-two.
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