BIR Ruling [DA-269-99]

May 6, 1999 BIR RULING [DA-269-99] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Ma Victoria A. Villaluz Gentlemen : This refers to your letter dated August 14, 1998 requesting for a ruling on behalf of your client, Schneider Electric S.A. ("Schneider"), that the latter's sale of services to NPC paid from the proceeds of foreign loans qualify for effective zero-rating pursuant to Section 108(B)(3) of the Tax Code of 1997. It is represented that Schneider is a branch office licensed to do business in the Philippines under SEC Certificate of Registration No. A1997-2663, and duly registered with the Bureau of Internal Revenue with TIN 048-005-179-971; that it executed a contract with the National Power Corporation ("NPC") for the furnishing and delivering of substation equipment and materials and construction/expansion of Labrador, San Manuel and San Jose 500/230 Kv substation on turnkey basis; that the work is divided into four (4) schedules as follows: 1. Schedule I Labrador Substation 2. Schedule II San Manuel Substation 3. Schedule III San Jose Substation 4. Schedule IV Line Protection and Communication System for the above substations that Schneider has been engaged to perform Schedule III-San Jose Substation of the work; that under the contract, the technical services amounting to FRF19,493,790.00 French francs shall be paid by NPC through a foreign loan from the Asian Development Bank under Loan Number 1398-PHI and Japan Eximbank under Loan Number 041810. In reply, please be informed that Section 8(b) of Republic Act 6395, otherwise known as the "Revised Charter of the National Power Corporation", provides among others as follows: "(b) Foreign loans The corporation is hereby authorized to contract loans, credits, in any convertible foreign currency, or capital goods, and indebtedness from time to time from foreign government or fund source . . . "The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes , fees, impost, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions." (Emphasis ours) In this connection, Section 108(B)(3) of the Tax Code of 1997 provides as follows: Section 108 (B) Transactions subject to zero percent (%) rate The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) . . . (2) . . . (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) percent rate ; (Emphasis ours) In the case of ABB Power Generation, Ltd. vs. Commissioner of Internal Revenue , CTA case no. 4888, February 6, 1996, the Court of Tax Appeals decided that the services of the contractor to NPC are effectively zero-rated. The Court ruled that ABB is entitled to a refund of its input tax credits considering that it qualified for zero-rating, on the basis of Section 8(b) of NPC's charter and VAT Ruling No. 097-90, to wit: "Both parties agree that the legal authority for herein claim springs from Section 8(b) of Republic Act No. 6935, the enabling statute of the NPC, which states, to quote: "(b) Foreign loans The corporation (NPC) is hereby authorized to contract loans, credit, in any convertible foreign currency, or capital goods, and indebtedness from time to time from foreign government or fund source. . . The loans credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of the machinery, equipment, materials, supplies and services, by the corporation, paid from the proceeds of any loan, credit or indebtedness incurred under the Act, shall also be exempt from all direct and indirect taxes , fees, imposts, other charges and restrictions." (Petition for Review and Answer, pars. 4 and 3 respectively, underscoring supplied) On the basis of the above provision of law, and VAT Ruling No. 097-90 dated May 2, 1990, wherein the BIR ruled that the construction services rendered by a foreign corporation to NPC, if funded by loans incurred under R.A. No. 6935 shall not be subjected to VAT because NPC's exemption include "indirect taxes" on the purchases of services funded by foreign loans, petitioner applied for VAT zero-rating pursuant to Section 102(a)(3) of the Tax Code , inasmuch as the services rendered by it to NPC are under similar circumstances with said BIR ruling. Consequently, respondent approved petitioner's application for zero-rating on May 3, 1991. (Petition for Review, par. 7; Answer, par. 2) (Emphasis Ours)" Considering the foregoing and since this is a case where the exemption of the grantee (i.e., NPC) extends to its suppliers of goods and services, the services rendered by Schneider, as a VAT registered entity, to NPC paid from the proceeds of foreign loans shall qualify for effective zero-rating under Section 108(B)(3) of the Tax Code of 1997, provided that an application for effective zero-rating has been approved by this Office pursuant to A-10 of Revenue Memorandum Circular ("RMC") No. 17-96. Without prior approval for effective VAT zero-rating, the above-mentioned transaction by Schneider shall be considered exempt pursuant to A-15 of RMC No. 17-96. IESDCH 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