BIR Ruling [DA-099-06]

March 8, 2006 BIR RULING [DA-099-06] Sec. 108 (B) (7); RA No. 9337; BIR Ruling No. 025-2006 dated 12/28/05 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated November 25, 2005, requesting on behalf of your client, San Roque Power Corporation (SRPC) , confirmation of the following: 1. Sale of electricity by SRPC is subject to Zero percent (0%) value added tax (VAT) rate pursuant to Section 108 (B) (7) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337; and 2. Any input tax on its purchases of goods, properties or services related to such zero-rated sales shall be available as tax credit or refund as provided under Section 112 of the Tax Code, as amended by RA No. 9337. FACTUAL BACKGROUND SRPC is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, with registered office and principal place of business at San Manuel, Pangasinan. SRPC is engaged in the business of power generation through the use of a hydroelectric power generating facility known as the San Roque Multipurpose Hydro-electric Power Project with an estimated capacity of 345 MW. SRPC sells all the electricity generated by the power generating plant to NPC pursuant to the Power Purchase Agreement (PPA) dated October 11, 1997 between SRPC and NPC. As provided under the PPA, SRPC likewise, has a diesel engine generation facility with a capacity of 1.06 MW, the main purpose of which is to serve as standby power in case of a shutdown of the hydroelectric power generating facility or to provide electricity to the building facilities in case of emergency. The electricity generated by the diesel engine, with a minimal capacity of only 1.06 MW is not for sale to NPC. AEIHCS SRPC is duly registered with the Board of Investments (BOI), in accordance with the Omnibus Investments Code of 1987, under Certificate of Registration No. 97-356, dated February 11, 1998, as operator of a hydroelectric power generating plant with pioneer status. It has been certified by the Energy Regulatory Commission as a power generation company and/or independent power producer under Certification No. 04-06-GNI-0064 dated June 16, 2004. It is likewise VAT-registered with TIN/VAT No. 005-501. NPC is a government-owned and controlled corporation duly organized and existing under and by virtue of Republic Act No. 6395, as amended, with its principal office at the corner of Agham Road and Quezon Avenue, Diliman, Quezon City. NPC is primarily tasked to carry out the policy of the government to develop the hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis. Under the PPA, during the 25-year Cooperation Period, SRPC shall operate and maintain the hydroelectric power plant for the purpose of generation and supply of electricity to NPC. NPC shall take all electricity supplied by SRPC and pay to SRPC the agreed fees. The electricity to be generated by SRPC will be sold to and purchased by NPC in its entirety. BIR REPLY We reply as follows: Section 108(B)(7) of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, provides that among the transactions subject to zero percent (0%) VAT rate is: "(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels." However, Section 4.108-5 (b)(7) of Revenue Regulations No. 16-2005 implementing the foregoing provision qualified the applicability of zero rating as follows: "(b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels; Provided , however, that zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power." EACIaT A review of the instant case disclosed that prior to the effectivity of RA 9337, the sale of electricity by SRPC was treated as effectively zero-rated transaction as confirmed by the BIR in VAT Ruling No. 050-03 dated December 1, 2003 issued as Memorandum to Assistant Commissioner Nora E. Tamayo of the Assessment Service in reply to her Memorandum addressed to the Chairman of the VAT Review Committee raising the issue, among others, of "how shall we treat the sale of power by power generating companies? Automatically or effectively zero-rated? (Note: Electricity Power Industry Reform Act (EPIRA) of 2001 simply states that sales shall be VAT zero-rated)." In said ruling, the BIR held that: "However, Section 6, RA 9136, known as the "Electric Power Industry Reform Act of 2001," (EPIRA) and its Implementing Rules and Regulations (IRR) provides that ". . . Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by generation companies shall be value added tax zero-rated . . ." Thus, it was held in BIR Ruling No. 20-2002 dated May 13, 2002, as follows: "Section 6(b), Rule 5 of the IRR in relation to Section 4(x) of the EPIRA, however, expressly provides that the sale of generated power by generation companies shall, upon the effectivity of the Act, be subject to zero percent (0%) VAT. Since PSALM, once registered with the ERC will fall within the definition of a Generation Company under Rule 5 of the aforesaid IRR with respect to its sale of generated power, we confirm your opinion that its sale of generated power will be subject to VAT at the rate of zero percent (0%)." The above quoted statute does not qualify, hence, there is no basis for this Office to make any qualification. It follows, that sale of generated power by generation companies is entitled to the benefit of the zero percent (0%) VAT, pursuant to Section 6, RA 9136, without any qualification that it is merely entitled to effectively zero-rated VAT." The said ruling of the BIR was based on Section 4(x) of the EPIRA Law of 2001 and Section 6(b) Rule 5 of its IRR which clearly provide that sale of electricity by generation companies is VAT zero-rated, to wit: "SEC. 6. Generation Charges and VAT. (b) Pursuant to the policy of reducing electricity rates to End-users, sale of generated power by a Generation Company shall, from the effectivity of the Act, be zero-rated for the purpose of imposition of value-added tax. Towards this end, the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a Generation Company through all stages of sale until it reaches the End-user. . . ." With the amendment introduced by RA 9337, upon its effectivity on November 1, 2005, the zero-VAT rate imposed on the sales of generated power by generation companies under RA 9136 (EPIRA Law) was accordingly repealed as follows: "Section 24. Repealing Clause . The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended: (B) Section 6, fifth paragraph of RA 9136 on the zero VAT rate imposed on the sales of generated power by generation companies; and cSIHCA xxx xxx xxx" Notwithstanding the repeal of Section 6 of RA 9136, this Office is of the opinion that the sale of electricity which is generated through a renewable source of energy, particularly hydropower energy, is still subject to zero percent (0%) VAT rate and automatically VAT zero-rated and without need to apply for effective zero-rating with the BIR. This is in view of the amendments introduced under RA 9337, particularly on Section 108(B)(7) of the Tax Code. Further, in view of the zero-rated sales of electricity by SRPC to NPC, any input tax on its purchases of goods, properties or services related to such zero-rated sales shall be available as tax credit or refund pursuant to Section 112 of the Tax Code, as amended by RA 9337, which provides: "Sec. 112 Refunds of Tax Credits of Input Tax . (A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. . . ." Anent the above, pertinent portion of Section 4.112-1 of Rev. Regs. No. 16-2005 provides that "(a) Zero-rated and Effectively Zero-rated Sales of Goods, Properties or Services "A VAT-registered person whose sales of goods, properties or services are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate/refund of input tax attributable to such sales. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against the output tax. The application should be filed within two (2) years after the close of the taxable quarter when such sales were made. In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1) and (2) of the Tax Code, the payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with the BSP rules and regulations. Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and in taxable (including sales subject to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, only the proportionate share of input taxes allocated to zero-rated or effectively zero-rated sales can be claimed for refund or issuance of a tax credit certificate." Accordingly, we hereby confirm your opinion, to wit: 1. The sale of electricity by San Roque Power Corporation to NPC, is subject to zero percent (0%) VAT rate pursuant to Section 108(B)(7) of the Tax Code, as amended by RA 9337. 2. Any input tax on its purchases of goods, properties or services related to such zero-rated sales shall be available as tax credit or refund pursuant to Section 112 of the same Tax Code, as amended by RA 9337. SEIcAD 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, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service