BIR Ruling

November 19, 1974 The General Manager National Power Corporation 181 Bonifacio Drive Port Area, Manila S i r : This refers to your request for the reconsideration of our ruling to the effect that NPC cannot claim exemption from the franchise tax payable by MERALCO, although shifted to it, under the Power Interchange Agreement between yourselves for the tax is the direct liability of MERALCO. cdta This Office, after a close reexamination of the scope and rationale of the power interchange agreement, feels that it was entered into for the purpose of accommodating one's power deficiency and for fuel economy and not essentially for a business purpose. This Office also considered very seriously the grant of direct and indirect exemption to the corporation and, for that matter, it also feels that the corporation's indirect exemption is broad enough to include all excise taxes that can be shifted to it by the other party with whom it may transact business. Finally, this Office cannot disregard the character of the corporation as a government agency, and, for that matter again, this Office feels that Opinion No. 198, series of 1972, of the Secretary of Justice may properly apply. For the foregoing considerations, this Office is of the opinion, as it hereby holds, that the taxes on the petroleum products utilized by MERALCO in the generation of power delivered to NPC under the agreement as well as the franchise tax due on such power which can be shifted to it need not be included in the "out-of-pocket cost" incurred by Meralco in generating the power delivered to NPC since such taxes would eventually be indirectly shouldered by NPC if it will be included. Accordingly, MERALCO need not include in its taxable gross receipts the "out-of-pocket cost" thus determined of the power delivered to NPC which the latter cannot repay in kind. cdta Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5