BIR Ruling [DA-070-05]

March 2, 2005 BIR RULING [DA-070-05] DA-247-99 Balmeo & Go Law Offices Rm. 309 Margarita Bldg., JP Rizal cor. Cardona Sts., Makati City Attention: Atty. Ma. Thristle L. Buxani Gentlemen/Ladies : This refers to your letter dated January 27, 2005 requesting for clarification on BIR ruling No. DA-247-99 which was issued to Luzon Hydro Corporation (LHC) on April 19, 1999. The dispositive portion of the aforementioned ruling states as follows: "In view thereof, the sale of electricity by Luzon Hydro Corporation to NPC is subject to zero percent (0%) VAT pursuant to Section 108(B)(3) of the Tax Code of 1997. "It shall be understood, however, that your client, Luzon Hydro shall re-apply with the Revenue District Office concerned having jurisdiction over your client's principal place of business for the effective zero rating ford (taxable years 1996, 1997 and 1998 of its sale of electricity to NPC pursuant to Revenue Regulations No. 7-95. Without an approved application for zero rating, the transaction otherwise entitled to zero rating shall be considered exempt. (VAT Ruling No. 015-99 dated February 12, 1999)." 2005cdtai It is requested that this Office clarify the following issues relative to the effective zero rating of LHC's sale of electricity to the National Power Corporation pursuant to Revenue Regulations No. 7-95, to wit: 1. Whether or not the above ruling applies to the Power Purchase Agreement (PPA) with National Power Corporation and consequently for the entire duration or effectivity of said PPA. 2. Whether or not LHC is required to re-apply for an effective zero rating after the lapse of its application which is effective only for one (1) year. ATcaID 3. Whether or not the absence of said approved application for an interim period. would render the sale of electricity exempt. In reply, please be informed as follows: 1. BIR Ruling No. DA-247-99 was issued on the basis of the Memorandum of the then Hon. Secretary of Finance Roberto F. De Ocampo to "the Commissioner of Internal Revenue dated January 26, 1998, adopting the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes. Consequently, said memorandum stated that the purchases of NPC of electricity from independent power producers are subject to a Value Added Tax (VAT) at zero percent (0%) rate. Since the purchase of electricity of NPC to LHC is embodied in the PPA, then logically, the effective zero-rating of said purchase is dependent on and subsists for the duration of said contract. 2. On the second issue, this Office is of the opinion that since the application for VAT zero-rating refers, to a single transaction between NPC and LHC as evidenced by the PPA, which has been determined to be effectively zero-rated there is no need to re-apply for the same status. The requirement for an approved application for effective zero-rating as prescribed in Section 4.107-1 of Revenue Regulations No. 7-95 which states: "(d) Application for effective zero-rating . Except for actual export sale, other cases of zero-rated sales in Sec. 4.100-3 and Sec. 4.102-2 (c) shall require prior application with the Revenue District Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. . ." imposes a duty upon the seller of the goods or services to file a prior application for transactions which may qualify as effectively zero-rated on the basis of the fact that the buyer of the goods or services is either exempt, from payment of taxes under special law or international agreement or it enjoys a preferential tax rate in lieu of payment of national internal revenue taxes. If the buyer's exemption under special laws or international agreements to which the Philippines is a signatory effectively subject such transactions to zero-rate, the seller's failure to secure the approved application will not make the buyer indirectly liable to pay the VAT. Rather, such failure will not benefit the seller by not allowing him tax credit on input taxes directly attributable to the transaction thereby making the transaction as only exempt from VAT. In fine, the rule does not require a repeated filing of application for approval of effective zero-rating covering a single transaction the performance/completion of which does not end in one (1) taxable year but is continually implemented for the duration of the contract. In the instant case, since the supply of electricity to NPC is in the nature of sale of services covered by a long-term PPA and does not expire on a yearly basis but for the duration of the contract, the approved application for effectively zero-rated status of the transaction remains effective until the expiration of the PPA, unless the PPA itself is terminated. 3. On the third issue, with the objective to clarify the dispositive portion of BIR Ruling No. DA-247-99, this Office has noted that pending the determination of the status of the sale of electricity to NPC, all applications of independent power producers (IPPs) for VAT zero-rated sale to NPC were never acted upon by the BIR. When the BIR finally ruled on the matter pursuant to the Memorandum of then Sec. De Ocampo, the purchase of electricity by NPC were accorded zero percent (0%) VAT, subject to the requirement of securing a "prior approved" application for effectively zero-rated VAT status. aTEHCc In the case of the supply of electricity by LHC to NPC, it was in BIR Ruling No. DA-247-99 that the zero-rate VAT status of the transaction was confirmed thereupon requiring the former to re-apply for effective VAT zero-rating on its sale off electricity to NPC for taxable years 1996, 1997 and 1998. This does not, however, impose upon the concerned IPP the duty to secure an effective zero-rating on a yearly basis. The reapplication was merely for the purpose of acknowledging the fact of LHC's prior application for VAT zero-rating thereby confirming the allowance of accumulated input VAT for the years so mentioned. NPC's exemption from direct and indirect taxes was affirmed by the High Court in 1993 in the case of Maceda vs. Macaraig (G.R. No. 88291, June 8, 1993) which was the basis of the Memorandum of then Sec. de Ocampo in subjecting the purchase of electricity of NPC to the zero percent (0%) VAT. In view of the above factual consideration this Office hereby rules, LHC is not required to re-apply for effective zero-rating of its supply of electricity to NPC pursuant to a PPA, it being qualified and ruled to be such based on said BIR ruling. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group