Gas pipeline

This refers to your request for a confirmation that the sale by your client, FGP Corp., of its gas pipeline is exempt from the VAT. In the case of Meralco Securities Industrial Corp. vs. the Central Board of Assessment Appeals, et.al., the Supreme Court held that a pipeline is "real property" within the purview of the Civil Code.

FGP is a domestic corporation registered with the Board of Investment as a preferred pioneer new operator of a 500MW combined cycle gas turbine power generating plant. On April 30, 1998, it entered into a gas sale and purchase agreement with Shell Phils. Exploration BV where SPEX is obligated to deliver natural gas to run FGP’s power plant. The first delivery of first gas is expected to take place sometime in 2002 and shall continue for the next 22 years.

The purchased natural gas from SPEX’s refinery located in Tabangao, Batangas will be transported to FGP’s power plant located in Sta. Rita, Batangas through an onshore gas pipeline, which was constructed by FGP for that specific purpose.

Because of this set-up, FGP does not have a gas transportation charge. It will be SPEX which will assume all the risks associated with the gas pipeline and SPEX which will operate, maintain and preserve the gas pipeline at its own cost.

FGP’s gas pipeline is indeed real property within the purview of the New Civil Code.

Thus, in the case of Meralco Securities Industrial Corp. vs. the Central Board of Assessment Appeals, et.al., the Supreme Court has held that:

"A pipeline means a line of pipe connected to pumps, valves and control devices for conveying liquids, gases or finely divided solids. It is a line of pipe running upon or in the earth, carrying with it the right to the use of the soil in which it is placed. (Note21[10], 54 C.J.S. 561).

"Article 415[10] and [3] provides that real property consist of construction of all kinds adhered to the soil and everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object.

"The pipeline in system in question is indubitably a construction adhering to the soil (Exhibit B, p. 39, Rollo). It is attached to the land in such a way that it cannot be separated therefrom without dismantling the steel pipes which were welded to form the pipeline.

"Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of oil, it is, in a sense, a machinery within the meaning of the Real Property Tax Code.

"It should be borne in mind that what are being characterized as real property are not the steel pipes but the pipeline system as a whole. Meralco Securities has apparently two pipeline systems.

"A pipeline for conveying petroleum has been regarded as real property for tax purposes (Miller County Highway, etc. Dist. Vs. Standard Pipeline Co., 19Fed. 2nd 3; Board of Directors of Red River Levee Dist. No. 1 of Lafayette County, Ark. Vs. R.F.C., 170 Fed. 2nd 430; 50 C.J. 750, note 86)."

Under Section 106 (A)(1))a) of the National Internal Revenue Code of 1997, a 10% may be imposed on the sale of real property only if the property is "held primarily for sale to customers or held for lease in the ordinary course of trade or business." (See also EMC No. 3-96; Sec. 4,100-1; Revenue Regulations No. 7-95; VAT Ruling No. 002-96, May 9, 1996; VAT Ruling No. 063-97, Oc. 6, 1997).

Since the gas pipeline is not held by FGP Corp. primarily for sale to customers or held for lease in the ordinary course of its trade or business (which is the operation of the power generating plant in Sta. Rita, Batangas), it follows that FGP Corp. is not subject to VAT when it sold its gas pipeline.

(VAT ruling No. 034-2001 dated June 13, 2001 has issued on the basis of represented facts. However, if upon investigations, it will be disclosed that the facts are different, then this ruling shall be considered null and void).