BIR Ruling [DA-247-99]

April 19, 1999 BIR RULING [DA-247-99] Balmeo Bautista & Peasales Law Offices Rm. 309 Margarita Building J. P. Rizal cor. Cardona Streets Makati City Attention: Atty . Leonides F . Balmeo Gentlemen : This refers to your letter dated July 21, 1997 stating that your client, Luzon Hydro Corporation (Luzon Hydro), a domestic corporation with principal office in Cebu City, is engaged in the business of construction and operation of Hydroelectric power plant; that it has been registered as a VAT entity by Revenue District Office No. 81, Cebu City North; that Luzon Hydro was formed by a consortium of four corporations, to wit: Northern Mini Hydro Corporation, Aboitiz Equity Ventures Inc., Ever Electrical Manufacturing, Inc. and Pacific Hydro Limited; that the consortium entered into a "Power Purchase Agreement" with National Power Corporation (NPC); that under said Agreement, the consortium undertook to perform the following obligations: LLpr 1. organize and operate Luzon Hydro; 2. build through Luzon Hydro Bakun Hydroelectric Power Plant (Bakun Plant); 3. operate Bakun Hydroelectric Power Plant through Luzon Hydro; 4. sell to NPC the electricity to be produced in the operation of Bakun Plant; and 5. transfer to NPC the Bakun Plant after 25 years of operations; that in other words, functions 2, 3, 4 and 5 will be performed by Luzon Hydro; that the electricity produced by Luzon Hydro in its operation of Bakun Plant will be sold solely to NPC; and that NPC will be billed by Luzon Hydro and 99.9% of said billings will be paid in US Dollar by NPC; In your following letter dated March 29, 1999, you stated that your client, being a VAT registered entity filed last August 12, 1996 an application for zero rating in the Revenue District Office of Cebu City which was the principal place of business of Luzon Hydro at that time, that when the construction of Bakun Plant was started, Luzon Hydro moved its principal place of business to Laoag, Ilocos Norte which is under the jurisdiction of Laoag Revenue District Office; that since at present, the executives of Luzon Hydro Corporation are in Metro Manila, there is a possibility that the principal office of Luzon Hydro might be moved to Metro Manila; and that the 1996 application for zero rating was favorably endorsed by the Regional Director of Cebu to BIR National Office for approval. Based on the foregoing you now request for a ruling that Luzon Hydro Corporation is effectively zero rated as of August 12, 1996 on its sale of electricity to NPC and that it is entitled to claim as tax credit the unutilized input taxes it has accumulated since 1997 provided the claim for such unutilized input taxes are duly and seasonably made or filed and provided further that such input taxes are proven to validly exist in accordance with existing procedures for the granting and issuance of tax credit certificates. LibLex In reply, please be informed that in BIR Ruling No. 003-98 dated January 15, 1998, this Office held that the 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 1997, 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 broad 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 it 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 higher rate to the consumers. Estimates show that a 10% VAT on electricity which purchased by NPC from its independent power producers will increase power costs 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 Section 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 shall re-apply with the Revenue District Officer concerned having jurisdiction over your client's principal place of business for the effective zero rating for the taxable years 1996, 1997 and 1998 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. (VAT Ruling No. 015-99 dated February 12, 1999) This will therefore serve as a notice to the Revenue District Officer of Laoag, Ilocos Norte or RDO of its current principal place of business to issue the proper zero rating certificate effective and starting from August 12, 1996, the date of the original application for zero rating up to the present. LLpr 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue