BIR Ruling [DA-228-06]

April 11, 2006 BIR RULING [DA-228-06] 106; 109 VAT Ruling Nos. 034-2001; DA-130-2003 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 17, 2005, requesting confirmation of your opinion that the turn over by San Roque Power Corporation (SRPC) to National Power Corporation (NPC) of the non-power components of the San Roque Multipurpose Hydroelectric Power Project, consisting of the dam and spillway, pursuant to the Power Purchase Agreement (PPA) is not subject to value-added tax (VAT) under Section 106 of the Tax Code of 1997. It is represented that SRPC is a domestic corporation engaged in the business of power generation and sale of electricity. On October 11, 1997, SRPC entered into a PPA with NPC for the construction, operation and maintenance of the San Roque Multipurpose Project which includes a power plant, dam and spillway. Under the PPA, as operator of the hydroelectric power generating facility and during the 25-year Cooperation Period, SRPC will sell all generated power to NPC. It is further represented that NPC infused US$400 million as contribution to the cost of constructing the non-power components of the multipurpose Project, that under the PPA, NPC will make schedule disbursements over a three-year period from 1998 to 2000 and SRPC will turn over the dam and spillway to NPC upon completion of the said facilities, that the said dam and spillway were turned over to NPC pursuant to a Deed of Conveyance dated March 10, 2003. In reply, please be informed that Sections 106 and Section 109 (w) of the Tax Code of 1997 and Section 4.103-(B)(w)(1) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provide as follows: "Sec. 106. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchange, such tax to be paid by the seller or transferor. (1) The term "goods or properties" shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx xxx xxx" "Section 109. Exempt Transactions . The following shall be exempt from the value-added tax: (w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related law, house and lot and other residential dwellings valued at One million pesos (P1,000,000) and below; Provided, That not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million pesos (P1,000,000) shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); xxx xxx xxx". "Section 4.103-1. Exemptions . xxx xxx xxx (B) Exempt transactions . The following shall be exempt from the VAT: xxx xxx xxx (w) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; . . ." ISAaTH Based on the above-mentioned provisions, only the sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business is subject to VAT. In BIR Ruling No. 20-2002 dated May 13, 2002, it was held that the transfer by NPC of its generation assets, real properties, and other assets to PSALM and TRANSCO is not subject to VAT since it is not necessary to carry out its primary function as a utility and neither was it done in the course of its trade or business. In the same manner, it was held in VAT Ruling No. 034-2001 June 13, 2001, which involved the transfer of an onshore gas pipeline from FGP to SPEX, that sale of property may only be imposed with the 10% VAT provided the same is "held primarily for sale to customers or held for lease in the ordinary course of trade or business". In that case, the business of FGP involves the operation of the power generating plant. The gas pipeline was not held by FGP for sale to customers or held for lease in the ordinary course of its trade or business. Thus, it was held therein that FGP is not subject to VAT on the sale of the gas pipeline. It was further held in BIR Ruling No. DA-130-2003 dated April 25, 2003 that since the real properties sold by JS Gaisano are not among its stock in trade and since JS Gaisano is not primarily engaged in the buying and selling of real properties, nor in the leasing of properties, the sale of the said real properties is not subject to VAT. Considering that SRPC is primarily engaged in the operation of the hydroelectric power generating facility and sale of electricity to NPC and the dam and spillway are neither held for sale to customers not held for lease in the ordinary course of the trade or business of SRPC, the transfer of the dam and spillway from SRPC to NPC is not subject to VAT. Moreover, the construction and turn-over by SRPC of the dam and spillway was in compliance with its undertaking under the PPA and not done by SRPC regularly in the course of its trade or business. The PPA, which is the underlying agreement pursuant to which the turn-over of the dam and spillway was made by SRPC, should be looked into to determine the real intent of the parties. The intent of the parties is for SRPC to construct the dam and spillway on behalf of NPC, utilizing the contribution of NPC and for SRPC to turn over the said facilities upon its completion. There being an implied trust in favor of NPC, there is no taxable sale or transfer of property that took place between SRPC and NPC which may be subject to VAT. It was held in BIR Ruling No. DA-215-2003 dated July 9, 2003, wherein real properties were turned over without consideration to the party on whose behalf an implied trust was created, that the conveyance is not a sale, exchange or other disposition of the said properties but merely a surrender or restoration of the properties to its rightful owner. In BIR Ruling No. 21-2002 dated May 31, 2002, it was held that the transfer/conveyance of the lots to the liquidator will not be subject to VAT since under Section 4.100-1 of Revenue Regulations No. 7-95, the transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary. In addition to this, NPC is an entity exempt from all direct and indirect taxes as provided under its charter and affirmed by the Supreme Court in Maceda vs. Macaraig (G.R. No. 88291, May 31, 1991). This exemption was repealed by Republic Act No. 9337. However, since the transaction was made on March 10, 2003, the said exemption of NPC was still in effect. As a consequence of the exemption of NPC, the transfer by SRPC to NPC is a VAT-exempt transaction under Section 109(q) of the Tax Code even if the transaction is interpreted as a sale. In view of the foregoing, your opinion is hereby confirmed that the turn-over of the dam and spillway from SRPC to NPC in accordance with the PPA is not subject to VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. IcCDAS Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue