BIR Ruling [DA-146-06]

March 17, 2006 BIR RULING [DA-146-06] Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated February 2, 2006 stating that your client, CBK Power Company Limited (CBK), is a duly registered partnership duly organized under Philippine laws under Securities and Exchange Commission (SEC) Certificate of Registration No. A200004027 issued on March 15, 2000; that CBK is registered to engage in power generation and sale of electricity; that in particular, CBK engages in the rehabilitation, upgrade, expansion, testing, commissioning, operation, maintenance and management of the Caliraya, Botocan and Kalayaan I hydroelectric power plants and related facilities, as well as all aspects of the design, financing, construction, testing, commissioning, operation, maintenance, management and ownership of Kalayaan II pump-storage hydroelectric power plant; that CBK is registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer on April 10, 2000; that National Power Corporation (NPC), on the other hand, is a government owned and controlled corporation duly organized and existing under and by virtue of Republic Act (R.A.) No. 6395, as amended; that its principal office is located at the corner of BIR Road, Diliman, Quezon City; that on November 6, 1998, NPC entered into a Build-Rehabilitate-Operate-Transfer Agreement (BROT Agreement) with Industrias Metalurgicas Pescarmona, S.A. (IMPSA or Contractor), a corporation duly organized and existing under the laws of Argentina, whereby IMPSA shall undertake to finance, design, build, rehabilitate, upgrade, expand, commission, test, operate, maintain and manage the Caliraya, Botocan and Kalayaan hydroelectric power plants under the terms and conditions set forth in the BROT Agreement under the BOT Law for the purpose of regulating frequency, generating electricity and providing the ancillary services; that the intention of the parties was expressly stated in the BROT Agreement thus: "ARTICLE 12 SCOPE OF AGREEMENT 2.1. CONTRACTUAL INTENT 2.2.1. Intent. The intent of the parties in entering into this Agreement is for Contractor to finance, design, build, rehabilitate, upgrade, expand, commission, test, operate, maintain and manage the CBK Complex under the terms and conditions set forth herein under the BOT Law for the purpose of regulating frequency, generating electricity and providing the ancillary services of described in Schedule 2 during the Cooperation Period. In consideration thereof, NPC shall pay the Contractor Capital Recovery Fees, Operation and Maintenance Fees and other amounts specified in this Agreement." that the BROT Agreement was amended and supplemented by First Accession Undertaking dated February 18, 1999 among the NPC, IMPSA and CBK Power Corporation, whereby the latter acceded to the rights and obligations of IMPSA under the BROT Agreement; that subsequently, the said BROT Agreement was further supplemented by a Second Accession Undertaking dated September 20, 2000, to which CBK became a party together with NPC, IMPSA and CBK Power Corporation; that under the said Second Accession Undertaking, CBK acceded to the rights and obligations of CBK Power Corporation under the BROT Agreement, and CBK agreed to undertake the rehabilitation, construction and operation, on a build-operate-and-transfer basis, of the hydroelectric power plants known as Caliraya, Botocan, Kalayaan I and Kalayaan II in the province of Laguna, Philippine; that pursuant to the above-mentioned agreements, NPC turned over and transferred to CBK full possession, care, use, and maintenance of its plants (CBK Complex, i.e., Caliraya, Botocan, Kalayaan I, and all Civil Structures existing as of the date of the BROT Agreement as described in Section 15 thereof, as the same may be upgraded pursuant to the Agreement and, when constructed pursuant to the Agreement, Kalayaan II and all new Civil Structures, including all land, buildings and structures forming part thereof), including parts of the Sites that were to be delivered on Turnover Date, and all buildings, structures, improvements, machinery, equipment, vehicles, heavy equipment, water systems, fire-fighting systems, civil works, perimeter fences and internal roads, facilities, and all other assets presently in use in the CBK Complex; that after the Turnover Date, CBK took full possession, control, and operation of the CBK Complex, and assumed all attendant risks over said plants. CBK is Engaged in the Supply of Electricity to NPC That as indicated under Article 7 of the BROT Agreement, CBK engages in the generation and supply of electricity to NPC (par. 7.1, BROT Agreement); that the operating criteria and procedures (i.e., the Operating Parameters) under which CBK undertakes the generation and supply of electricity are specified under Schedule 2 of the BROT Agreement, which specifies, among others, the guaranteed Net Contracted Capacity, which is the net amount of power to be provided by CBK to NPC for each of the generators, together with related turbines and ancillary equipment, forming part of a Power Plant, the Maximum as well as the Minimum Load Operation, and plant performance requirements; that NPC monitors the quantities of electricity delivered by CBK in accordance with prescribed Measurement and Monitoring Procedures under Schedule 6 of the BROT Agreement (par. 7.2, BROT Agreement); that the procedures to be observed by CBK in its delivery of electricity to NPC are set-forth in Schedule 5 of the BROT Agreement; that the place for delivery of electricity from the Power Plants shall be the delivery points at the high voltage side of the main transformer (par. 7.4, BROT Agreement) The Electric Power Supplied by CBK to NPC is Generated Through Hydropower That CBK generates electricity through the Caliraya, Botocan and Kalayaan I Hydroelectric power plants, as well as from the Kalayaan II hydroelectric power plant; that the plants generate electricity by drawing water from an upstream reservoir, passing the water through a penstock, and in the process utilizing the force of gravity to rotate the Turbines; and that the Turbines in turn rotates the generators, thereby generating electricity. Consideration for the Sale/Supply of Electricity That in consideration of its purchase of electricity from CBK, NPC, pays the latter amounts designated as "Capital Recovery Fee" (CRF) and "Operation & Maintenance (O&M) Fees" as provided under the BROT Agreement: "7.5. FEES In respect of each Billing Month or part thereof falling within the Cooperation Period, NPC shall pay to Contractor the following fees: (a) Capital Recovery Fees calculated in accordance with Schedule 7; and (b) O&M Fees calculated in accordance with Schedule 7." and that NPC has certified that it is engaged in the purchase of electricity from CBK, and in consideration for which NPC pays CBK a fixed and periodic consideration consisting of the CRF and O&M Fees. SAHEIc Based on the foregoing consideration, you now request for an opinion as to whether or not the fees billed by CBK to the NPC, composed of Capital Recovery Fees and Operation and Maintenance Fees, for the sale of electricity by CBK generated through hydropower, are subject to zero (0%) percent VAT rate pursuant to the provisions of Section 108(B)(7) of the Tax Code of 1997, as amended by R.A. No. 9337, as implemented by Section 4.108-5 of Revenue Regulations No. 16-2005. In reply thereto, please be informed that Section 108 of the Tax Code of 1997, as amended by R.A. No. 9937, as implemented by Section 4.108-5(b) of Revenue Regulations No. 16-2005 provides that "(a) . . . (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: "xxx xxx xxx "(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." From the foregoing circumstances, there is no dispute that CBK is primarily organized to engage in power generation business, specifically in hydropower generation, i.e., generating/supplying electric power generated through hydropower, a renewable source of energy. This is fortified by the Certificate of Compliance issued by the Energy Regulatory Commission (ERC) that CBK is indeed a hydropower generation company. Thus, the billings of CBK for its sale of electricity to NPC, designated under the BROT Agreement as Capital Recovery Fees and O&M Fees, are subject to zero percent (0%) VAT. Comparatively, in BIR VAT Ruling No. 052-99 dated May 19, 1999 , this Office ruled that "Accordingly, please be informed that, based on the said ruling, the supply of electricity by HOPEWELL PHILS., to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108(B)(3) of the National Internal Revenue Code of 1997. "It shall be understood, however, that your client, HOPEWELL PHILS., shall apply with the Revenue District Office giving jurisdiction over its principal place of business for the effective VAT zero rating of its sale of electricity to the NPC, pursuant to the provisions of Revenue Regulations No. 7-95. Without an approved application for zero rating, the transaction otherwise entitled to zero percent (0%) VAT shall only be considered exempt from the VAT." It is noteworthy that while the aforesaid ruling is anchored on Section 108(B)(3) of the Tax Code of 1997 which is premised on NPC's exemption from direct and indirect taxes, this Office takes cognizant of the rule that the said exemption had already been expressly repealed, notably under Section 24(A) of R.A. No. 9337 insofar as VAT is concerned. However, this Office cannot close its eyes that the sale/supply of electricity by CBK to NPC continues to be zero-rated under Section 108(B)(7) of R.A. No. 9337. Accordingly, payments received by CBK for the sale or supply of electricity to NPC shall be subject to 0% VAT. Moreover, Section 4.108-5(b)(7) of Revenue Regulations No. 16-2005 provides that the sale of power or fuel generation 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, shall be subject to zero percent 0% VAT rate. From the above-cited regulations, it is immediately clear that the requirement for prior approval or confirmation for effective zero-rating therefore applies only to those services specifically identified as "effectively zero-rated" under subparagraph (b) nos. (3), (4) and (5) of Section 4.108-5. Conversely, subparagraph (1), (2), (6) and (7) of Section 4.108-5 are therefore considered zero-rated which do not require prior approval or confirmation with the BIR. WHEREFORE, in view of the foregoing , this Office holds that the billings of CBK, an entity engaged in hydropower generation, to NPC for the sale of electricity generated through hydropower are subject to VAT at zero percent (0%) under Section 108(B)(7) of R.A. 9337. Accordingly, CBK need not apply for any prior approval or confirmation with the BIR as required under Section 4.108-6 of Revenue Regulations No. 16-2005. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service