BIR Ruling [DA-065-96]

February 7, 1996 BIR RULING [DA-065-96] Pambansang Korporasyon Sa Elektrisidad cor. Quezon Avenue & Agham Road Diliman, Quezon City Attention: Mr . Guido Alfredo A . Delgado Gentlemen : This refers to your letter dated June 16, 1995 stating that a Contract for the Furnishing and Installing Complete (Turn-Key Basis) Overhead Transmission Lines and Electrode Lines under the Leyte-Luzon HVDC Power Transmission Project (the Project) was entered into on December 13, 1994 by and between NPC and ABB SAEDELMI SpA (the Contract); that pursuant to Clause CC-47.1 (b) of the Contract Specifications, NPC (being referred therein as the Purchaser) assumed the payment of certain forms of taxes. thus "b) The Purchaser will assume payment of all present and future taxes, duties, tariffs, fees, imposts, excise and charges of any kind that may be imposed by the Philippines Government, its subdivisions or any of its agencies or instrumentalities in connection with the importation of the imported materials, equipment and supplies to be furnished to the Purchaser under the Contract"; that the assumption by NPC of the payment of all and present taxes, duties, tariffs, fees, imposts, excise and charges of any kind that may be imposed by the Philippine Government, its subdivisions or any of its agencies or instrumentalities on, or in connection with the importation of the imported materials, equipment and supplies that may be imposed on or chargeable to ABB SAEDELMI SpA in connection with the Project is made pursuant to Sections 8(b) and 13 of Republic Act No. 6395, as amended otherwise known as the Revised NPC Charter: that the Project is otherwise known as the Revised NPC Charter; that the Project is funded under the International Bank for Reconstruction and Development Loan No. 3746 dated September 12, 1994 and Japan Eximbank Loan dated December 22, 1994; and that by virtue of Sections 8(b) and 13 R.A. 6395, as amended NPC assumed the payment of all forms of taxes, including the value-added tax which may be imposed to ABB SAEDELMI SpA. In connection therewith, you are requesting a ruling to the effect that NPC and ABB SAEDELMI SpA are exempt from the payment of the value added tax arising from the Project. In reply thereto, please be informed that Section 8 of (R.A. 6395, as amended otherwise known as the NPC Charter provides in part as follows: "The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions, previously and presently imposed, and to be imposed by the Republic of the Philippines or any of its agencies and political subdivisions." That Section 13 of R.A. 6395, as amended likewise provides as follows: ". . . the Corporation, including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeals, bonds, supersedeas bonds, in any court or administrative proceedings." Under the aforementioned contract NPC have assumed the payment of all taxes, duties, tariffs, fees, imposts, excise and charges of any kind that may be imposed by the Philippine Government, its subdivisions or any of its agencies or instrumentalities on, or in connection with the importation of the imported materials, equipment and supplies that may be imposed on or chargeable to ABB SAEDELMI SpA in connection with the Project. cdtech The 10% VAT is a tax upon any person who, in the course of business sells, barters or exchanges goods, renders services or engages in similar transactions and upon any person who imports goods (Sec. 99, NIRC) In the instant case, its your contractor i.e., ABB SAEDELMI SpA that is liable for the payment of the VAT. ABB SAEDELMI SpA's liability to pay for its taxes may not be transferred to another person with binding effect on the BIR. Thus, NPC's contract under which it assumed responsibility for the taxes due from ABB SAEDELMI SpA cannot legally bind the Government. It may only be binding between NPC and ABB SAEDELMI SpA in their respective private capacities. Section 8 of the NPC Charter only exempts from taxation (i) the loan contract and the payment of the principal, interests, and other charges thereon; and (ii) the NPC's importations paid from the proceeds of the loan incurred. There is nothing in Section 8 of the said NPC charter that may exempt NPC's contractor from the payment of its taxes. There is also no provision thereunder that said contractor shall be tax exempt should the NPC assumes responsibility for the said taxes. Section 13 of the said NPC Charter, likewise, only exempts from taxation, the NPC and its subsidiaries. In like manner, there is no provision thereunder that the NPC contractor shall be exempted from taxation should the NPC assumes responsibility for such taxes. Accordingly, the said provision of the NPC Charter may not be relied upon for purposes of making its contractor, ABB SAEDELMI SpA exempted from payment of its taxes, including the 10% VAT on its importations and sale of service to the NPC. However, notwithstanding the foregoing, we would like to invite your attention to the provision of Section 4-A of R.A. No. 4860, as amended by P.D. No. 150, otherwise known as the Foreign Borrowings Act, as follows: "Upon the recommendation of the Secretary of Finance, in consultation with the National Economic and Development Authority and approval of the President of the Philippines, loan agreements as well as contracts, involving the availment of or utilization of the proceeds obtained under the provisions of this Act, may provide for the exemption from taxes, charges, or other levies." Since your aforementioned project is funded from your foreign borrowings, it is suggested that you ascertain whether the said foreign loan may be considered obtained also pursuant to the Foreign Borrowings Act and, in the affirmative, whether such foreign loan agreement has a provision that your contractor, ABB SAEDELMI SpA shall be exempted from taxation, including the 10% VAT. If this law is, likewise , not availing to your said contractor, we regret to inform you that there can be no other existing law to justify the 10% VAT exemption which you are claiming for and in behalf of your said contractor. (VAT Ruling No. 063-91 dated June 27, 1991) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)