BIR Ruling [DA-111-96]

March 15, 1996 BIR RULING [DA-111-96] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. C. P. Noel Gentlemen : This refers to your letter dated November 17, 1995 requesting on behalf of your client, Philippine Geothermal, Inc. (PGI), for a confirmation of your opinion that the supply of steam by PGI to the National Power Corporation (NPC) for the production of electricity, is exempt from the Value-Added Tax as prescribed under Section 103 (u) of the Tax Code. It is represented that your client, PGI, entered into a service contract with NPC in September 1971 for the development of geothermal energy. By virtue of said service contract, NPC assumed the responsibility to pay the 10% VAT; that the input VAT is being shouldered by NPC as part of the operating cost reimbursements it pays PGI for the cost of materials and services spent for the geothermal project; that the input taxes are not being deducted from the output VAT, hence, the VAT becomes an indirect tax shouldered by the NPC. In reply, please be informed that the Supreme Court has ruled in the case of Maceda v. Macaraig , 223 SCRA 217 (1993), on the issue as to "what kind of tax exemption privileges did NPC have?", to wit: "A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes direct and indirect." ECTIHa It bears emphasis that in the decision on the same case, the Supreme Court noted that under R.A. No. 358, the exemption was worded in general terms, as to cover "all taxes, duties, fees, imposts, charges, etc. . . . ." However, the amendment under R.A. No. 6395 enumerated the details covered by the exemptions. Subsequently, P.D. No. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from all forms of taxes, duties, fees, imposts, as well as costs and service fees, including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings. The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the exemption it has been enjoying before. The rationale for this exemption is that being non-profit, the NPC "shall devote all its return from its capital investment as well as excess revenues from its operation, for expansion. . . ." In view of the foregoing, this Office is of the opinion as it hereby holds, that the supply of steam by your client, Philippine Geothermal, Inc. (PGI) to National Power Corporation NPC/NAPOCOR to be used in generating electricity is exempt from the value-added tax. (BIR Ruling No. 078-95 dated April 26, 1995) Very truly yours, (SGD.) ALICIA P. CLEMENO Assistant Commissioner (Legal Service)