BIR Ruling [DA-386-03]

October 28, 2003 BIR RULING [DA-386-03] R.A. 7156; DA-052-02, DA-308-03 Northern Mini Hydro Corporation 110 Legaspi Street, Legaspi Village Makati, City Attention: Mr. Jose Venancio P. Batiquin Gentlemen : This refers to your letter dated October 15, 2003 stating that Northern Mini Hydro Corporation (NMHC, for brevity) is engaged in the business of developing for hydroelectric power in the Province of Benguet; that it has been registered as such pursuant to Republic Act No. 7156 otherwise known as "An Act Granting Incentives to Mini-Hydroelectric Power Developers and For Other Purposes" and its Implementing Rules & Regulations as evidenced by its Certificates of Registration dated December 1993; that it is registered as a VAT taxpayer with TIN 001-946-9; that NMHC is the lawful owner and operator of the Lon-oy Mini-Hydroelectric Power Plant; F.L. Singit Mini-Hydroelectric Power Plant and Lower Labay Mini-Hydroelectric Power Plant all located in Bakun, Benguet; that NMHC by virtue of said registration was entitled to certain tax incentives as provided for under Section 10 of Republic Act No. 7156 enumerated as follows: Section 10. Tax Incentives. Any person, natural or juridical, authorized to engage in mini-hydroelectric power development shall be granted the following tax incentives or privileges: (1) Special Privilege Tax Rates. The tax payable by all grantees to develop potential sites for hydroelectric power and to generate, transmit and sell electric power shall be two percent (2%) of their gross receipts from the sale of electric power and from transactions incident to the generation, transmission and sale of electric power. Such privilege tax shall be made payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the 20th day of the month following the end of each calendar or fiscal quarter. (2) Tax-and Duty-free Importation of Machinery, Equipment and Materials. Within seven (7) years from the date of award importation of machinery and equipment, materials and parts shipped with such machinery and equipment including control and communication equipment shall not be subject to tariff duties and value added tax: Provided, That the said machinery, equipment, materials and parts: (a) are not manufactured domestically in reasonable quantity and quality at reasonable prices; (b) are directly and actually needed and will be used exclusively in the construction and impounding of water, transformation into energy, and transmission of electric energy to the point of use; and (c) are covered by shipping documents in the name of the duly registered developer to whom the shipment will be directly delivered by customs authorities: Provided, further That prior approval of the OEA was obtained before the importation of such machinery, equipment, materials and parts was made; (3) Tax Credit on Domestic Capital Equipment. A tax credit equivalent to one hundred percent (100%) of the value of the value-added tax and customs duties that would have been paid on the machinery, equipment, materials and parts had these items been imported shall be given to an awardee-developer who purchases machinery, equipment, materials and parts from a domestic manufacturer: Provided, That such machinery, equipment, materials and parts are directly needed and will be used exclusively by the awardee-developer: Provided, further, That prior approval by the OEA was obtained by the local manufacturer: Provided, finally, That the sale of such machinery, equipment, materials and parts shall be made within seven (7) years from the date of award; (4) Special Realty Tax Rates on Equipment and Machinery . xxx xxx xxx (5) Value-added Tax Exemption. Exemption from the ten percent (10%) value-added tax on the gross receipts derived from the sale of electric power whether through the NPC grid or through existing electric utility lines; and (6) Income Tax Holiday. For seven (7) years from the start of commercial operation, a registered mini-hydroelectric power developer shall be fully exempt from income taxes levied by the National Government. and that NMHC's incentive for Lon-oy Mini-Hydroelectric Power Plant; F. L. Singit, Mini-Hydroelectric Power Plant and Lower Labay Mini-Hydroelectric Power Plant expired on June 23, 2000; November 6, 1999; and January 25, 2000, respectively. Based on the foregoing, you now request for a ruling whether or not the following privileges and incentives as enumerated under Section 10 of R. A. No. 7156, can still be enjoyed by NMHC: 1. Tax-and Duty-free importation of Machinery, Equipment and Materials; 2. Tax Credit on Domestic Capital Equipment; 3. Special Realty Tax Rates on Equipment and Machinery; 4. Value-added Tax Exemption; 5. Income Tax Holiday; and 6. Special Privilege Tax of 2%. In reply, please be informed that the objectives of Republic Act No. 7156 were, among others, to "encourage entrepreneurs to develop potential sites for hydroelectric power existing in their respective localities" and to encourage entrepreneurs to develop potential sites for hydroelectric power existing in the country by granting the necessary incentives which will provide a reasonable rate of return " such tax incentives are, however, self limiting because they expire seven (7) years from the date of the award of the incentives. The privileges and incentives: tax and duty-free importation of machinery, equipment and materials; tax credit on domestic capital equipment; special realty tax rates on equipment and machinery; VAT exemption and income tax holiday, were granted for a period of seven (7) years. By virtue of the grant of these incentives, those availing of the benefits of the aforementioned law were levied a special privilege tax of 2% as provided for under Section 10 par. (1) of the same law. AIDSTE By virtue of the expiration of the privileges and incentives on June 23, 2000; November 6, 1999; and January 25, 2000 for Lon-oy Mini-Hydroelectric Power Plant; F. L. Singit Mini-Hydroelectric Power Plant and Lower Labay Mini-Hydroelectric Plant, respectively, NMHC became a regular taxpayer subject to tax under existing laws devoid of any tax privileges and incentives (DA-052-02 dated March 25, 2002). And as such, it became subject to corporate income tax at the rate of 32% of its gross income and value-added tax at 10% on its importation of machineries, equipments and materials. Further, it is not entitled to tax credit on the purchase of domestic capital equipment. (BIR Ruling No. DA-368-2003 dated October 15, 2003) With the loss of privileges and incentives, it is just fair that the special privilege tax of 2% which was the consideration for the enjoyment of the privileges and incentives by minihydro developer should now likewise be considered to have expired. Otherwise, this will overburden the minihydro developer, thus defeating the very purpose of R. A. No. 7156 that is: "to encourage entrepreneurs to develop potential sites for hydroelectric power existing in their respective localities" and "to encourage entrepreneurs to develop potential sites for hydroelectric power existing in the country by granting the necessary incentives which will provide a reasonable rate of return ". Such being the case, this Office is of the opinion as it hereby holds that by the reason of the expiration of the privileges and incentives as enumerated under Section 10 of R.A. No. 7156, NMHC is no longer enjoying the following special privileges: Tax-free Importation of Machinery, Equipment and Materials; Tax Credit on Domestic Capital Equipment; Value-added Tax Exemption (DA-308-03 dated September 22, 2003); Income Tax Holiday (DA-052-02); and Special Privilege Tax of 2% by reason of the expiration of the aforementioned privileges and incentives. (BIR Ruling No. DA-368-2003) 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group