BIR Ruling [DA-399-05]

September 26, 2005 BIR RULING [DA-399-05] Sec. 246, RMC 30-05 & RMC 27-94 BIR Ruling No. 20-02; DA-131-03; DA-252-03; & DA-308-03 Isla Lipana & Co . 8767 Paseo de Roxas 1226 Makati City Attention: Atty. George Lavadia Tax Services Gentlemen : This refers to your letter requesting for confirmation of your opinion that consultancy services provided by Sinclair Knight Merz (Phils.) Inc. (SKM) to the National Transmission Corporation (TRANSCO) prior to July 01, 2005 and even during the pendency of the temporary restraining order (TRO) on Republic Act (RA) No. 9337 shall be entitled to value-added tax (VAT) zero-rating and that no withholding VAT shall be made on payments for such services pursuant to Section 108(B)(3) of the Tax Code of 1997 in relation to RA No. 9136, also known as the "Energy Power Industry Reform Act of 2001" (EPIRA). As represented, under the EPIRA, TRANSCO was created as a vehicle for the eventual privatization of the transmission facilities of the National Power Corporation (NPC). SKM is a consulting firm having an agreement for consultancy services with TRANSCO in connection with the said privatization process. Pursuant to this agreement, TRANSCO will pay SKM service fees. During the contract negotiation, SKM understood that the fees for the services rendered to TRANSCO would be VAT zero-rated pursuant to the EPIRA and the relevant rulings issued by the Bureau on the similar issue. For this reason, TRANSCO has not made any VAT withholding on the service fees in accordance with Section 114(C) of the National Internal Revenue Code of 1997 in relation to BIR Ruling Nos. 020-2002 dated May 13, 2002 and DA-131-03 dated April 25, 2003. As a result of the enactment of RA No. 9337, TRANSCO is already subject to VAT on its purchase of goods and services. The said law became effective July 1, 2005, although the effectivity of the law was suspended due to a TRO issued by the Supreme Court. Given the enactment of RA No. 9337, TRANSCO is now intending to make a withholding VAT on the payments to SKM for services rendered prior to July 1, 2005 even if the billings and collection for such services is made after July 1, 2005 as well as for services rendered during the pendency of the TRO of the Supreme Court. HIAcCD In reply, please be informed that the issue on whether or not consultancy services rendered to TRANSCO is subject to zero percent (0%) VAT has been ruled upon in BIR Ruling No. DA-131-2003 dated April 25, 2003 whereby this Office ruled "xxx xxx xxx Although the aforesaid ruling mentioned that TRANSCO, as the transferee of NPC's franchise, will be exempt from all forms of taxes, it proceeded to rule only on the foregoing tax exemption. As noted, the exemption ruled was focused only on the direct taxes from which TRANSCO, as the transferee of NPC's transmission and sub-transmission facilities and all other assets related to transmission operation, including the national franchise of NPC, shall be exempt. It did not proceed to rule on the indirect tax exemption of TRANSCO. On the other hand, in the same BIR Ruling No. 020-2002, supra, this Office also ruled on the NPC's tax liability on its income arising from the service agreements with PSALM and TRANSCO to the effect that services rendered by NPC under the Operations & Management Agreement (O&M) are deemed rendered in the course of its business, hence, subject to VAT or the appropriate percentage tax, as the case may be.' While this Office ruled that the services rendered by NPC to TRANSCO is indeed subject to VAT or appropriate percentage tax, it did not, however, rule on whether or not such services rendered may actually be subject to the zero percent (0%) VAT considering the present status of TRANSCO as the successor-transferee of NPC's franchise. After a thorough review of Sec. 13 of RA 6395, as amended by Presidential Decree No. 938, and other NPC laws, the Supreme Court in the case of Maceda vs. Macaraig, Jr. (G.R. No. 88291, June 8, 1993, 223 SCRA 217) held that NPC is exempt from all taxes direct and indirect. The logic espoused by the High Court was explained as follows: 'It should be noted that Section 13, R.A. No. 6395, provided for tax exemptions for the following terms: 13(a): court or 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. P.D. No. 938 lumped up 13(b), 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 alcove 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. aDHCEA One common theme in all these laws is that the NPC must be enabled to pay its indebtedness which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and US$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved.' Admittedly, this Office has previously issued various rulings recognizing NPC's status as exempt from both direct and indirect taxes; hence, we ruled that either the sale of electricity to NPC is exempt from VAT or it is subject to the zero percent (0%) VAT. It is noted that the subject matter of those rulings was focused on the sale of electricity to NPC. In one case, the BIR ruled that 'the exemption privilege of NAPOCOR cannot be invoked in this case because its exemption from the payment of indirect taxes is limited only to its importation and/or purchases of petroleum products and not on the purchases of other goods or services.' The exemption from all forms of taxes, direct and undirect, of NPC, which was aptly settled by the High Court in the case of Maceda vs. Macaraig , has been recognized by then Secretary of Finance Roberto de Ocampo in his Memorandum to then Commissioner of Internal Revenue dated January 26, 1998, via his review power of BIR VAT Ruling No. 003-98. In some instances, this Office proceeded to rule on issues involving NPC exemption. As earlier discussed, 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 Secs. 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 Sec. 108(q) thereof. Further, as ruled by this Office, the tax exemption privileges of NPC have been effectively transferred to TRANSCO by virtue of the transfer of NPC's franchise pursuant to Sec. 8 of the EPIRA, henceforth, the application of similar VAT treatment to the latter. In view of the above, we hereby confirm your opinion as follows: In cases where the purchaser of goods or services is an entity exempt from indirect taxes, such as the VAT, the Tax Code of 1997 specifically prescribes the rate of VAT to be imposed on such transaction. Thus, Secs. 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997 subject to zero-percent (0%) VAT 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. It must be noted that VAT, being an indirect tax, may be passed on by the seller to the buyer as part of the cost of goods/services pursuant to Sec. 105 of the Tax Code of 1997. AHDcCT Consistent with our previous ruling that TRANSCO shall be taxed in the same manner as NPC from the time the latter's franchise was transferred to it, this Office hereby rules that the supply and delivery of asset management and consultancy services by the Concessionaire to TRANSCO under Phase One of the TRANSCO Privatization pursuant to the provisions of the EPIRA shall be subject to zero-percent (0%) VAT; provided that the former is VAT registered and shall apply with the Revenue District Office having jurisdiction over its principal place of business for the effective VAT zero-rating pursuant to the provisions of Revenue Regulations No. 7-95. However, if the Concessionaire is not VAT-registered or there is no prior approval of such application for the effective zero-rating, then such transactions shall be exempt only from VAT." Moreover, Revenue Memorandum Circular No. 30-2005 dated July 2, 2005, provides "xxx xxx xxx In line with the TRO, the Bureau shall revert the VAT status of concerned taxpayers to their registration status prior to July 1, 2005 and make the necessary notification. All taxpayers shall be liable for the taxes and the tax rates they were subject to prior to the effectivity of Republic Act No. 9337 on July 1, 2005." In view of the foregoing, and consistent with our previous rulings that TRANSCO shall be taxed in the same manner as NPC from the time the latter's franchise was transferred to it, this Office hereby confirms your opinion that the services rendered by SKM to TRANSCO prior to July 01, 2005 and even during the pendency of the TRO on RA No. 9337 should be entitled to VAT zero-rating. Consequently, no withholding VAT shall be made on payment for such services; provided that SKM is VAT registered and shall apply with the Revenue District Office having jurisdiction over its principal place of business for the effective VAT zero-rating pursuant to Revenue Regulations No. 7-95. However, if SKM is not VAT registered or there is no prior approval of such application for the effective zero-rating, then such transactions shall be exempt only from VAT. 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, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue