BIR Ruling [DA-392-04]

July 20, 2004 BIR RULING [DA-392-04] 106 (A) (2) (c) VAT 015-99; DA 247-99 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated February 27, 2004 applying on behalf of your client, Schneider Electric Industries, S.A.,Philippine Branch, (Schneider) for zero-rated value-added tax (VAT) treatment of the sale of services to the National Power Corporation. It is represented that Schneider is a VAT-registered entity duly registered with the Bureau of Internal Revenue (BIR) under VAT Registration No. 048-005-179-971 dated May 8, 1997; that it is engaged in the project management construction business; that Schneider has entered into a contract with the National Power Corporation for the furnishing, delivering, installing, testing and commissioning complete of substation equipment including line protection and communication systems for Dasmarias Substation, San Jose Substation and Iligan Power Plant; and that the BIR has approved that its sale of services to the National Power Corporation, to the extent of the foreign portion of the project from May 8, 2001 up to December 31, 2001, is subject to zero-rated VAT; and that your herein application is based upon the NPC Charter declaring it as exempt from all taxes, duties, fees, imposts and other charges in relation to Section 106(A)(2)(c) of the Tax Code of 1997. In reply thereto, please be informed that based on Section 13 of R.A. 6395, as amended by Presidential Decree No. 938, and on Fiscal Incentives Review Board Resolution No. 17-87, and as confirmed by the Supreme Court in the case of Maceda vs. Macaraig, Jr. ( G.R. No. 88291, June 8, 1993, 223 SCRA 217 ), NPC is exempt from all taxes-direct and indirect. This has been amplified in the Memorandum of then Secretary of Finance Roberto de Ocampo to the Commissioner of Internal Revenue dated January 26, 1998 (in reviewing BIR VAT Ruling No. 003-98). Likewise, Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997 subjects to zero percent (0%) VAT sales and services rendered by VAT-registered persons to persons or entities whose exemption under special laws effectively subjects such sales or services to zero percent (0%) rate; and Section 109(q) thereof exempts from VAT, among others, transactions which are exempt under special laws where the supplier of the goods or services is a non VAT-registered person, or even if VAT-registered but there is no prior-approval of application for the effective VAT zero-rating pursuant to the provisions of Revenue Regulations No. 7-95. VAT is an indirect tax, which may be passed on by the seller to the buyer as part of the cost of goods/services pursuant to Section 105 of the Tax Code of 1997. The indirect tax exemption being enjoyed by NPC has always been the basis for treating its purchases as either effectively zero-rated VAT in the case of VAT-registered sellers pursuant to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997, or Vat exempt in the case of non-VAT-registered seller pursuant to Section 109(q) thereof. However, such privilege may not be extended and used as the basis for treating the sales of sub-contractors to the NPC suppliers as either effectively subject to zero-rated VAT or VAT exempt. IN VIEW OF THE FOREGOING, the sale of services by Schneider to NPC shall be subject to zero percent (0%) VAT, provided that the former is VAT registered and has applied with the Tax Exemption and Incentives Division for the effective VAT zero rating. ( VAT Ruling No. 015-99 dated February 12, 1999; DA247-99 dated April 19, 1999 ) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group