BIR Ruling [DA-209-00]

April 4, 2000 BIR RULING [DA-209-00] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . M . F . A . Balili Tax Division Gentlemen : This refers to your letter February 22, 1999 requesting for a ruling on behalf of your client, Luzon Hydro Corporation (LHC), that the sale of electricity by LHC to the National Power Corporation (NPC) is an effectively VAT zero-rated transaction pursuant to Section 108(B)(3) of the Tax Code of 1997. LibLex It is represented that NPC and LHC entered into a Power Purchase Agreement (Agreement) dated November 24, 1996 for the construction and operation of a consolidated hydroelectric facility (facility) on a Build Operate and Transfer (BOT) basis; that under the Agreement, LHC shall be responsible for the construction, installation, completion, testing, and commissioning of the facility; that after the completion of the construction phase, LHC shall undertake the management, operation, maintenance and repair of the facility; that at a specified "transfer date", LHC shall transfer ownership of the facility/power station to NPC; that prior to the said transfer date, LHC shall supply electricity from the facility and deliver it to NPC; that in consideration for the electricity delivered NPC shall pay LHC a prescribed Energy Fee computed in accordance with the terms of the Agreement; and that LHC is presently registered with the Revenue District Office No. 2, Vigan, Ilocos Sur, as a VAT registered taxpayer with TIN 004-266-526. In reply, please be informed that in BIR Ruling No. 003-98 dated January 15, 1998, this Office held that sale of electricity by San Pascual Cogeneration Co. to NPC is subject to the 10% VAT pursuant to then Section 102 of the Tax Code, as amended. The NPC requested the Department of Finance for a review of said ruling in view of its significant implications on national interest. In a Memorandum to the Commissioner of Internal Revenue dated January 26, 1998, the then Hon. Secretary of Finance Roberto F. de Ocampo, in the exercise of its power to review rulings issued by the BIR under Section 4 of the Tax Code of 1998, held that: "The Department has consistently held the view that NPC's purchase of electricity should be treated in the same manner as its purchase of petroleum products. This is in recognition of the board and comprehensive tax exemption privilege granted to NPC by Congress. The NPC Charter clearly provides for NPC's exemption from all taxes direct and indirect. No less than the Supreme Court ruled that is has been the lawmakers' intention that the NPC's is completely exempt from all taxes. The Department of Justice and the Office of the Solicitor General have also issued opinions supporting the full tax exemption of the NPC. Even the BIR has ruled that NPC is exempt from direct and indirect taxes. As explained by the Supreme Court, the rationale for the NPC's tax exemption is to ensure cheaper power. If the BIR's recent view is to be implemented, the VAT, being an indirect tax, may be passed on by the seller of electricity to NPC. Effectively, this means that electricity will be sold at a higher rate to the consumers. Estimates show that a 10% VAT on electricity which is purchased by NPC from its independent power producers will increase power cost by about P109.4 million a month or about P1.30 billion a year. The effect on the consumer is an additional charge of P0.059 per kilowatt-hour. The recognition of NPC's broad privilege will insure to the ultimate benefit of the Filipino consumer. In view of the foregoing and using the power of review granted to the Secretary of Finance under Sec. 4 of Republic Act No. 8424, the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases of NPC of electricity from independent power producers are subject to a VAT at zero-rate". 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 Corporation, shall apply with the Revenue District Officer concerned having jurisdiction over your client's principal place of business for the effective zero rating 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. 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. (VAT Review Committee Ruling No. 015-99 dated February 12, 1999; VAT Review Committee Ruling No. 03-99 dated January 7, 1999.) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)