BIR Ruling [DA-308-03]

September 22, 2003 BIR RULING [DA-308-03] VAT Ruling Nos. 015-99; BIR Ruling Nos. DA-247-99, 242-88, 243-88, DA-252-03 Sec. 108 (B) (3); Section 10 of P.D. 938; Section 13 of R.A. 6395 Hydro Electric Development Corporation 214 Ambuclao Road, Obulan Beckel, La Trinidad Benguet Province Attention: Mr. Jose Venancio P. Batiquin Managing Director Gentlemen : This refers to your letter dated April 1, 2003 requesting for a confirmation of your opinion that: "1. The sale of electricity by HEDC to the National Power Corporation (NPC) constitutes sale to an entity exempt under special law. "2. The sale of electricity by HEDC to NPC is subject to VAT at zero rate pursuant to Section 108(B)(3) of the Tax Code. "3. HEDC is entitled to zero rating for its sale of electricity to NPC." BACKGROUND HYDRO ELECTRIC DEVELOPMENT CORPORATION (HEDC) is engaged in the business of developing sites for mini-hydroelectric power in the Province of Benguet and Baguio City. It has been registered as such pursuant to Republic Act ("R.A.") No. 7156, otherwise known as "An Act Granting Incentives to mini-Hydroelectric Power Developers and For Other Purposes" and its implementing regulations as evidenced by its Certificates of Registration dated November 20, 1992 (HEDCOR Asin & Kenon, Omico-Cauyas, Irisan, Bineng 2B), May 30, 1994 (Bineng 1), June 17, 1996 (Bineng 3, Ampohaw), and May 6, 1999 (Lower Labay & Bineng 2Mini-Hydro . At present, it is registered as VAT taxpayer with the Bureau of Internal Revenue (BIR) under VAT Registration No. 000-309-914. ETaHCD HEDC is a lawful operator of certain Hydro Electric Plants situated at Bakun, Benguet more particularly known as Lower Labay Mini-Hydro Power Plant; in Itogon, Benguet it owns and operates the Omico-Cauyas Mini-Hydro Plant; in Tuba, Benguet the Irisan Mini-Hydro Plant; in Sablan, Benguet the Ampohaw, Bineng 1, Bineng 2, Bineng 2B, and Bineng 3 Mini-Hydro Plants. On March 26, 1999, HEDC entered into an Electric Supply Agreement with the National Power Corporation for the purchase of uncommitted power and energy produced by the aforesaid hydroelectric plant which agreement is valid until January 30, 2018. Furthermore, in compliance with the requirement of R.A. 9136, HEDC has applied for a Certificate of Compliance (COC) with the Energy Regulatory Commission. In support of your request, you submitted the following documents: 1. Copy of the Amended Articles of Incorporation of HEDC; 2. Copy of VAT Registration Certificate of HEDC; 3. Copy of Electric Power Supply Agreement between NPC and HEDC; 4. Copies of the Certificate of Registration of HEDC from the Dept. of Energy; and 5. Copy of its application for a Certificate of Compliance (COC) with the Energy Regulatory Commission. We reply as follows: I. As held by the High Court in the case of Maceda vs. Macaraig, supra, NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No. 938 . The original Charter of the NPC is Republic Act No. 6395, otherwise known as "An Act Revising the Charter of the National Power Corporation", has been amended by Presidential Decree ("PD") Nos. 380, 395, 759, and 938. Section 10 of PD 938 amended Section 13 of R.A. 6395, as follows: "Sec. 13. Non-profit Character of the Corporation; Exemption from all taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities . The Government shall be non-profit and shall devote all its return from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from payment of all forms of taxes, duties, fees, imposts as well as cost and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." In the case of Maceda vs. Macaraig, G.R. No. 88291 dated June 8, 1993 , the Supreme Court had the occasion to rule on the nature of NPC's exemption from taxes, thus "A chronological review of the NPC laws will show that it has been the lawmaker's intention that NPC was to be completely tax exempt from all forms of taxes direct and indirect." "P.D. No. 380 added the phrase "directly or indirectly" to said Section 13(d), which now reads as follows: "xxx xxx xxx "(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power." (Emphasis supplied) "Then came Presidential Decree No. 938 which amended Section 13(a), (b), (c) and (d) into one very simple paragraph as follows: "The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS OF taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." (Emphasis supplied) "It should be noted that Section 13 of Republic Act No. 6395, provided for tax exemptions for the following items: 13(a): court administrative proceedings; 13(b): income, franchise, realty taxes; 13(c): import of foreign goods required for its operations and projects; 13(d): petroleum products used in generation of electric power. "PD 938 lumped up 13(c) and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.," included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax exemptions. "This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or issuance as narrated above in part I hereof. President Marcos must have considered all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up with a very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938. "P.D. No. 938 did not amend the same and so the tax exemption provision in Section 8(b), R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8(b) had to do only with loans and machinery imported, paid for from the proceeds of these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH , and so, the tax exemption stood as is with the express mention of "direct and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes, fees, imposts, other charges . . . to be imposed" in the future surely, an indication that the lawmakers wanted the NPC to be exempt from ALL FORMS of taxes direct and indirect." DcSACE As regards its exemption from indirect taxes, the High Court noted that while the revised charter is silent on the indirect tax liability of the NPC, it, nonetheless, mandates that the rule on strictissimi juris in the interpretation of tax statutes could not be invoked against the NPC. Under such circumstances, the High Court found the legislative intent to exempt the NPC from indirect taxes to be unmistakable. Thus, the High Court concluded: "It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No. 938." (Maceda vs. Macaraig, supra, p. 241, SCRA, Vol. 223) Likewise, in said case, the High Court quoted: "Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as to defeat their purpose. It is common knowledge that many impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption granted the National Power Corporation to direct taxes notwithstanding the general and broad language of the statute will be to thwart the legislative intention in giving exemption from all forms of taxes and impositions without distinguishing between those that are direct and those that are not." (Maceda vs. Macaraig, supra, p. 255256, SCRA Vol. 223) II. NPC, being a tax-exempt entity, the sale of electricity by HEDC to NPC is subject to VAT at zero percent (0%) rate. 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 his power to review rulings issued by the BIR under Section 4 of the Tax Code of 1997, held that: "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 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 ruled that NPC is exempt from direct and indirect taxes. "xxx xxx xxx "In view 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 NPC is exempt under its charter and subsequent laws from all direct and indirect taxes in its purchases of petroleum products and electricity. Thus the purchases of NPC of electricity from independent power producers are subject to VAT at zero rate." In view of the foregoing, Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997 shall be apropos in such cases, to wit: "Section 106. Value-Added Tax on Sale of Goods or Properties . "xxx xxx xxx (2) [Zero-rated Sales.] The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: CcSEIH "xxx xxx xxx "(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. "xxx xxx xxx "Section 108. Value-Added Tax on Sale of services and Use or Lease of Goods or Properties . "xxx xxx xxx "(B) Transactions Subject to Zero Percent (0%) The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: "xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero percent (0%) rate; "xxx xxx xxx Transactions falling under category (3) of the above Section 108(B)(3) are considered effectively zero-rated sale of services. As further described under Sec. 4.102-2(c) of Revenue Regulations No. 7-95, effectively zero-rated sales of services refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws. However, it must be noted that the value added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105, NIRC; BIR Ruling Nos. 242-88 dated June 6, 1988 and 243-88 dated June 6, 1988) . But shifting of the VAT is allowed only when the purchaser does not enjoy exemption from indirect taxes. III. DOJ Opinion No. 58 states to the effect that while the EPIRA mandates the transfer of the assets and liabilities within 180-day period, and the unbundling of NPC's transmission operations including the nationwide franchise within six months, such events have not taken place; therefore, NPC shall continue to enjoy the privileges attached to its franchise activities. The Department of Justice in its Opinion No. 58 which clarified Opinion No. 42, both Series of 2002, categorically states that "Opinion No. 42 was issued on the assumption that everything that has been envisioned in the EPIRA is already in place, meaning the function of NPC have already been unbundled, the transfer of its assets and liabilities to PSALM Corp. has been effected within the 180-day period provided for in Section 49 of the EPIRA, both TRANSCO and PSALM are fully operational, and all other conditions precedent have otherwise been fulfilled. Considering that these events have not taken place, our ruling in Opinion No. 42, current series, pertinent to the borrowing authority of NPC is not controlling. . . ." While the issue in consideration under the foregoing Opinion No. 58 is the borrowing authority of NPC under its Charter, the line of reasoning taken by DOJ in sustaining the legal personality of NPC notwithstanding the effectivity of the EPIRA is the fact of the non-occurrence of the conditions precedent which would divest NPC of such authority. Conversely, to divest NPC of such authority, including the tax privileges granted under its charter, the transfer of its assets and liabilities to PSALM, as well as the transfer of transmission operations including its nationwide franchise to TRANSCO must have taken place. Accordingly, since the events envisioned under the EPIRA have not in fact taken place, NPC continues its mandate under its charter and therefore, it shall continue to enjoy the tax privileges attached to its franchise activities. In view of the foregoing and considering that the special law creating NPC (R.A. No. 6395, as amended by PD 938), confers upon NPC the exemption from all forms of taxes, whether direct or indirect, and since VAT is a form of indirect tax, the sale of goods or services rendered to NPC subjects such supply of goods or services to VAT at zero percent (0%) rate pursuant to the aforecited Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997. (VAT Ruling No. 015-99 dated February 12, 1999) . However, it shall be understood that the sellers or suppliers of electricity (generated power) and ancillary services or are consequent to such sale or supply to the NPC shall apply with the Audit Information, Tax Exemption & Incentives Division for the effective zero rating of the proceeds derived from the contracts entered with NPC pursuant to Revenue Regulations No. 7-95. Failure to do so on their part would render the transaction as only exempt from VAT. (VAT Ruling No. 015-99 dated February 12, 1999 and BIR Ruling No. DA-247-99 dated April 19, 1999) Finally, this Office declines to rule with respect to the applicability of the EPIRA to the transactions herein since conditions precedent for the full transfer of the asset and liabilities of NPC under the EPIRA have not yet been fulfilled. ISHCcT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group