Tan Venturanza Valdez

October 16, 2009 BIR RULING [DA-(C-235) 605-09] RA 9511; RR 2-98; 097-94; 020-02; VAT Ruling No. 043-03; DA-272-2000; DA-156-02; DA-435-03; DA-302-2004; DA-005-08; & DA-005-08 * Tan Venturanza Valdez 2704 East Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Center, Pasig City Attention: Atty. Enrico G. Valdez Gentlemen : This refers to your letter dated March 26, 2009 requesting confirmation of your opinion that the payment by the National Grid Corporation of the Philippines (NGCP) of three percent (3%) franchise tax exempts it from all national internal revenue taxes pursuant to Republic Act (R.A.) No. 9511, including income and withholding taxes, minimum corporate income tax, improperly accumulated earnings tax, value-added tax and documentary stamp tax. The facts as represented are as follows: NGCP is a corporation organized and existing under the laws of the Republic of the Philippines. Its primary purpose is the operation and maintenance of the nationwide transmission grid and provision of open and non-discriminatory access to the transmission system by all authorized electricity distributors and electricity users. The Securities and Exchange Commission (SEC) approved the incorporation of NGCP on February 21, 2008. The incorporation was at the instance of the winning consortium in the public bidding conducted by the government, specifically the Power Sector Assets and Liabilities Management Corporation (PSALM), for the concession to improve, expand, operate, and/or maintain the transmission assets and operate any related business of the National Transmission Corporation (TRANSCO), the sole transmission service provider in the country. As successor of TRANSCO, NGCP itself became the sole participant in the transmission sector. On December 1, 2008, the Congress of the Philippines granted NGCP a legislative franchise by the enactment of R.A. No. 9511, otherwise known as "An Act Granting the National Grid Corporation of the Philippines a Franchise in the Business of Conveying or Transmitting Electricity through High-Voltage Back-Bone System of Interconnected Transmission Lines, Substations and Related Facilities, and for Other Purposes". Section 1 of R.A. No. 9511 provides: EcHTDI "Section 1. Nature and Scope of Franchise. Subject to the provisions of the Constitution and applicable laws, rules and regulations, and subject to the terms and conditions of the concession agreement and other documents executed with the National Transmission Corporation (TRANSCO) and the Power Sector Assets and Liabilities Management Corporation (PSALM) pursuant to Section 21 of Republic Act No. 9136, which are not inconsistent herewith, there is hereby granted to the National Grid Corporation of the Philippines, hereunder referred to as the Grantee, its successors or assigns, a franchise to operate, manage and maintain, and in connection therewith, to engage in the business of conveying or transmitting electricity through high voltage back-bone system of interconnected transmission lines, substations and related facilities, systems operations, and other activities that are necessary to support the safe and reliable operation of a transmission system and to construct, install, finance, manage, improve, expand, operate, maintain, rehabilitate, repair and refurbish the present nationwide transmission system of the Republic of the Philippines. The Grantee shall continue to operate and maintain the subtransmission systems which have not been disposed by TRANSCO. Likewise, the Grantee is authorized to engage in ancillary business and any related business which maximizes utilization of its assets such as, but not limited to, telecommunications system, pursuant to Section 20 of Republic Act No. 9136. The scope of the franchise shall be nationwide in accordance with the Transmission Development Plan, subject to amendments or modifications of the said Plan, as may be approved by the Department of Energy of the Republic of the Philippines." Both the concession and the franchise, from PSALM and Congress, respectively, were granted to NGCP in furtherance of the declared policy of the State in R.A. No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), specifically, to ensure the quality, reliability, security and affordability of electric power supply and enhance the inflow of private capital and broaden the ownership base of the electric power sector, including the privatization of TRANSCO. As part of the consideration for the franchise, Section 9 of R.A. No. 9511 provides tax incentives to NGCP, as follows: "Section 9. Tax Provisions. In consideration of the franchise and rights hereby granted, the Grantee , its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts derived by the Grantee from its operation under this franchise . Said tax shall be in lieu of income tax and any and all taxes , duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes, duties and charges, the Grantee is hereby expressly exempted: Provided, That the Grantee, its successors or assigns, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other corporations are now or hereby may be required by law to pay: Provided, further, That payment by Grantee of the concession fees due to PSALM under the concession agreement shall not be subject to income tax and value-added tax (VAT)." (Emphasis supplied) Pursuant to its legislative franchise, and as successor of TRANSCO, NGCP operates and maintains all transmission assets and related business of TRANSCO, as well as implements the improvement, repair and expansion projects related thereto. In the course of its operations, NGCP earns revenues in the form of charges for the use of the transmission system ("Transmission Charges") which are billed to local or regional power distributors and electricity users, including local electric cooperatives and private distributors. cDCIHT To maximize the utilization of TRANSCO's assets pursuant to its mandate in Section 1 of R.A. No. 9511, NGCP also engages in businesses related or incidental to the operation and management of the transmission system, including the lease of power lines to electric power producers and other interested entities. By the same legislative fiat, NGCP engages in the business of operation or lease of the telecommunications system included in the grant of the concession. NGCP earns income from these related and incidental activities. Moreover, as part of the concession granted to NGCP, it takes over from TRANSCO the management of the lease contracts that the latter had executed with certain electric cooperatives whereby electric transformers and related equipment owned by TRANSCO are leased to the electric cooperatives. The transformers are necessary to reduce the very high voltage transmitted through the transmission system to such a lower voltage as can be utilized by the electric cooperatives, without which the electricity could not be used by the latter. Also, to make use of scrap materials and used by-products of NGCP's operations, including used oil, it sells the same and likewise earns income therefrom. Further, as part of NGCP's financial management strategies, pending the use of its funds for its operations, it deposits or places the same with banks and other financial institutions, including placements in money market activities, from which the funds earn interest income and other types of passive income. Based on the above representations, you are requesting confirmation of your opinion as follows: 1. NGCP's income from business activities included within the scope of its authority under Section 1 of R.A. No. 9511 is exempt from income tax, and consequently from withholding taxes, the minimum corporate income tax (MCIT) and the improperly accumulated earnings tax (IAET). In view thereof, the income of NGCP from its management and operation of the nationwide transmission system, including any expansion, improvement, rehabilitation, repair and refurbishing thereof, as well as all activities related and incidental to the foregoing, including the lease of transmission lines and transformers, the telecommunications systems included in the concession, and the sale of scrap materials and by-products of the above business activities, are exempt from income and withholding taxes, MCIT and IAET; DEICTS 2. NGCP's revenues from business activities included within the scope of its authority under Section 1 of R.A. No. 9511 are likewise exempt from VAT. In view thereof, the revenues and receipts of NGCP from its management and operation of the nationwide transmission system, including any expansion, improvement, rehabilitation, repair and refurbishing thereof, as well as all businesses related and incidental to the foregoing, including the lease of transmission lines and transformers, the telecommunications systems included in the concession, and the sale of scrap materials and by-products of the above business activities, are exempt from VAT; and 3. NGCP is exempt from documentary stamp tax (DST). In reply thereto, please be informed as follows: 1. NGCP is exempt from income and withholding taxes, including MCIT and IAET. Section 9 of R.A. No. 9511 specifically imposes upon NGCP a tax on its franchise equivalent to three percent (3%) of all gross receipts derived from its operations. Pursuant to the same provision, said franchise tax shall be in lieu of income tax and any and all taxes of any kind, nature or description on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes NGCP is expressly exempted. By clear import of the law, there is no question that under Section 9 of R.A. No. 9511, NGCP is exempt from income tax on all income derived from all its business activities included within the scope of its franchise as mandated in Section 1 of R.A. No. 9511, namely: a) operate, manage and maintain, and in connection therewith, to engage in the business of conveying or transmitting electricity through high voltage back-bone system of interconnected transmission lines, substations and related facilities, system operations, and other activities that are necessary to support the safe and reliable operation of the transmission system; b) construct, install, finance, manage, improve, expand, operate, maintain, rehabilitate repair and refurbish the present nationwide transmission system of the Republic of the Philippines; c) operate and maintain the subtransmission system which have not been disposed by TRANSCO; d) engage in construct, install, finance, improve, expand, rehabilitate and repair the nationwide transmission system and the grid of the Republic of the Philippines, ancillary business and any related business which maximizes utilization of its assets such as, but not limited to, telecommunications system, pursuant to Section 20 of RA No. 9136; e) modify, improve and change the transmission system, grid and related facilities in such manner and to such extent as the progress in science and improvements in the electric power services may reasonably require; In the same manner, NGCP's income from business necessarily related and incidental to its primary services, including the operation or lease of TRANSCO's assets including power lines, telecommunications system, and transformers, are exempt from income tax, being related and incidental business activities aimed at maximizing the utilization of TRANSCO's assets under Sec. 1 of R.A. No. 9511. cTEICD In relation thereto, this Office in BIR Ruling No. 020-2002 dated May 13, 2002 opined that incidental business activities are considered business conducted in accordance with the franchise, to wit: "The exemption of NPC is not limited only to the sale and transmission of generated power, but includes transactions incidental to and necessarily connected with the operations of the public utility , such as a sale or transfer on an isolated basis of its assets, which transaction is not conducted as a separate business. (Radio Communications vs. Court of Tax Appeals, G.R. No. 60547, July 11, 1985; Phil. Power Development Co. vs. Commissioner, CTA Case No. 1152, Oct. 13, 1965) , "Where something is done as a mere incident to, or as a necessary consequence of, the principal business, it is not ordinarily taxed as an independent business in itself. What is usually taken as essential is the main activity in which the taxpayer is engaged. All the various transactions tending to better accomplish the principal end in view must be treated as merely incidental". (De la Rama Steamship Co. vs. Comm. of Internal Revenue, CTA No. 1499, March 5, 1967). Thus, the income, if any, from the sale or transfer of NPC's assets is not income from other business activities conducted by NPC but rather earnings and profits realized in connection with the business conducted in accordance with the franchise, and thus covered by the exemptions provided for in Section 32(B)(7)(b) of the Tax Code of 1997. " (Emphasis supplied). In view of the foregoing, this Office hereby confirms your opinion that NGCP's income from business within the scope of its franchise and necessarily related and incidental to its primary services, including the operation or lease of TRANSCO's assets including power lines, telecommunications system, and transformers, are exempt from income tax, being related and incidental business activities aimed at maximizing the utilization of TRANSCO's assets under Sec. 1 of R.A. No. 9511. Moreover, its sale of scrap materials and used by-products, including used oil, is likewise exempt from any income tax, being incidental activities dealing with properties used in the connection with NGCP's franchise. Further, as provided in Section 2.57.5 (B) of Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, the withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. In addition, in Samar-I Electric Cooperative, Inc. vs. Commissioner of Internal Revenue 1 it was held that since MCIT is but an income tax, exemption from income tax is logically an exemption from payment thereof. Consequently, NGCP, being exempt from income tax on the business activities described earlier, it is likewise exempt from withholding taxes and MCIT on any of its income from said activities. On the other hand, in BIR Ruling DA-302-2004, this Office opined that an entity subject to a final withholding tax on its income in lieu of any and all taxes is not subject to IAET. Since Section 9 of R.A. No. 9511 provides that the franchise tax imposed on NGCP shall be in lieu of income tax and any and all taxes, this Office likewise confirms your opinion that NGCP is exempt from IAET on any of its income derived from its business activities. 2. NGCP is exempt from VAT on its sale of transmission and related services. SCEDAI VAT is a tax imposable on receipts and revenues from sale of services or use or lease of properties, the sale of goods in the case of scrap materials and other by-products. Thus, in the case of NGCP, VAT would apply to its receipts or revenues from the exercise of its business pursuant to its franchise, as stated in Section 1 of R.A. No. 9511. Section 9 of R.A. No. 9511, however, exempts NGCP from the payment of "income tax and any and all taxes of any kind, nature or description on its franchise, rights, privileges, receipts, revenues and profits". In lieu thereof, NGCP shall pay a franchise tax equivalent to three percent (3%) of all gross receipts derived by NGCP from its operation under its franchise. In BIR VAT Ruling No. 043-03 dated October 13, 2003, this Office, referring to the "in lieu of" provision in Republic Act No. 7916, opined that in an enterprise operating within a PEZA zone and which is subject to 5% gross income tax in lieu of paying national and local taxes, the exemption covers VAT, such that the VAT regime in the Tax Code does not apply to it. Given that Section 9 of R.A. No. 9511 includes receipts and revenues in the coverage of the exemption granted to NGCP and also has the "in lieu of" provision, this Office hereby confirms your opinion that VAT, which is a tax on receipts and revenues, is necessarily included in the exemption granted to NGCP. Further, in BIR Ruling DA-435-03 dated December 3, 2003, this Office opines that "if the regular activity is exempt from VAT, it follows that the incidental transactions are also exempt". Given the foregoing, this Office confirms your opinion that the exemption from VAT covers NGCP's revenues from its management and operation of the nationwide transmission system, including any expansion, improvement, rehabilitation, repair and refurbishing thereof, as well as all activities related or incidental to the foregoing, including the sale of scrap materials and by-products of the above business activities, and lease of transformers and operation or lease of the telecommunications lines included in the franchise. 3. NGCP is exempt from documentary stamp tax. Also by virtue of Section 9 of R.A. No. 9511, NGCP is exempt from any documentary stamp tax levied under the Tax Code of 1997, as amended, with respect to transactions/activities which are directly related to its franchise activities. In other words, only those transactions/business activities entered into by NGCP which are included within the scope of its franchise as mandated in Section 1 of R.A. No. 9511 shall be exempt from the DST imposed under the Tax Code of 1997, as amended. Corollary thereto, those transactions which are not covered by its franchise activities shall be subject to the corresponding DST. DIHETS Moreover, Section 173 of the Tax Code of 1997, as amended, provides, in part as follows: ". . ., That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax." Thus, assuming that NGCP is exempt from the DST imposed on a particular transaction, the DST imposed therein shall nevertheless be paid by the other party, unless such other party is also exempt from the DST pursuant to the provision of any existing law. 2 Further, if in a transaction whereby NGCP is exempt from the DST, NGCP assumes the liability to pay the DST due thereon, NGCP, in this case, cannot invoke its exemption from the DST as it voluntarily relinquish its immunity. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. CTA Case No. 6697, 27 May 2008. 2. BIR Ruling Nos. DA-156-02 dated September 11, 2002 & DA-107-2001 dated June 1, 2001.