BIR Ruling [DA-334-99]

June 2, 1999 BIR RULING [DA-334-99] Pambansang Korporasyon sa Elektrisidad (National Power Corporation) Cor. Quezon Avenue & Agham Road Diliman, Quezon City Attention: Mr . Lamberto P . Melecio Officer-in-Charge Office of the General Counsel Gentlemen : This refers to your letter dated January 7, 1999 requesting for a ruling in favor of both the NPC and Mitsubishi Corporation for zero-rating and/or exemption from the payment of value-added tax arising out of the Contract for the furnishing, supply construction, installation, testing and commissioning of Stage I of the two (2) 300MW Masinloc Coal-fired Thermal Power Project in Masinloc, Zambales. It is represented that the National Power Corporation (NPC) entered into the subject contract with Mitsubishi Corporation on October 19, 1994; that pursuant to Article, VII of the Contract, NPC assumed the payment of certain taxes, thus: "ARTICLE VII "A. Construction/Erection/Installation Works Portion "All forms of taxes (including the Value-Added Tax), duties, tariffs, fees, imposts and other changes that may be imposed by the Philippine Government, or any of its agencies and political subdivisions which are directly related to the Contract shall be assumed by NPC, except corporate income tax, income tax of CONTRACTOR's personnel, taxes imposed on local subcontractors, licenses, permits, etc. "CONTRACTOR shall be responsible for payment of all taxes, duties, tariffs, fees, imposts, excise, and other taxes assessed and charged by the taxing authorities of the country of origin for CONTRACTOR's construction equipment which the CONTRACTOR may bring into the country for use in connection with the Contract. NPC shall assume all taxes, duties, tariffs, fees, imposts, excise and charges (except all fees and insurances relative to the registration of vehicles that the Philippine Government, or any of its agencies and political subdivisions may impose upon such equipment, provided that the said Construction Equipment/Temporary Facilities/Vehicles shall be re-exported to the country of origin within twelve (12) calendar months after the completion of the Works. Should the CONTRACTOR dispose of said Construction Equipment/Temporary Facilities/Vehicles in the Philippines, CONTRACTOR shall pay all taxes and duties or reimburse NPC for any tax it has paid therefor. "NPC will not be held responsible whatsoever for the payment of tax obligations of CONTRACTOR's subcontractors under this Contract. "B. Supply Portion "CONTRACTOR shall assume payment of all taxes, duties, tariffs, fees, imposts, excise and other taxes assessed and charged by the taxing authority of the country of origin upon production, manufacture, sale or shipment of the materials, equipment and supplies to be furnished to NPC under the Contract. "NPC will assume payment of all present and future taxes, duties, tariffs, fees, imposts, excise and other taxes that may be imposed by the Philippine Government, or any of its agencies and political subdivision on the imported material, equipment and supplies to be supplied to NPC under this Contract." That the assumption by NPC of the payment of any other tax, duty, tariff, fee, and impost, of any kind, that may be imposed on or chargeable to the Contractor in connection with the Contract is made pursuant to Sections 8(b) and 13 of Republic Act No. 6395, as amended, otherwise known as the "Revised NPC Charter"; that this Contract is being financed under the loans obtained from the Asian Development Bank (ADB) in the amount of US$200 Million and The Export-Import Bank of Japan in Japanese Yen equivalent to US$150 Million (Loan No. 1042-PHI). In reply, please be informed that Sections 8 and 13 of the Revised NPC Charter provide 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 any international financial institution of fund source, or to issue bonds, in such amount and in any foreign currency, on such terms and conditions as it shall deem appropriate for the accomplishment of its purposes and to enter into and execute agreements and other documents specifying such terms and conditions . xxx xxx xxx "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, imposts, other charges and restrictions, previously and presently imposed and to be imposed by the Republic of the Philippines or any of its agencies and political subdivisions." (Emphasis supplied.) xxx xxx xxx "SEC. 13. Non-profit Character of the Corporation, Exemption from all taxes, duties, frees, imposts and charges by the government and Government Instrumentalities. The Corporation shall e 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 obligation and in furtherance and effective implementation of the policy enunciated in Section One of this Act, the Corporation 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, supersedes bonds, in any court or administrative proceedings ." Considering therefore that the subject Contract is being financed under the foreign loans obtained from Asian Development Bank and the Export-Import Bank of Japan in Japanese Yen, NPC in effect assumed the payment of taxes which may be imposed on the Contractor but passed on to NPC by virtue of the aforequoted Sections 8 and 13 of the Revised NPC Charter plus the fact that NPC was given the power to enter into and execute agreements to that effect under its Charter. LibLex In view thereof, and in consideration of the terms and conditions set forth in the said Agreement entered into by NPC and Mitsubishi Corporation which is funded by foreign loans, the transactions entered into by both taxpayers in this specific Masinloc Coal-Fired Thermal Power Project in Masinloc, Zambales shall be exempt from the payment of VAT arising out of the subject contract. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different from what has been represented, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue