Quiason Makalintal Barot Torres & Ibarra

July 18, 2008 BIR RULING [DA-(VAT-007) 063-08] Sec 4.110-3, RR 16-05; VAT Ruling No. 003-07 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue Corner Pedro Poveda Avenue 1605 Ortigas Center, Pasig City Attention: Attys. Ruelito Q. Soriano and Benedict R. Tugonon Gentlemen : This refers to your letter dated May 23, 2007 requesting on behalf of your client, FIRST GAS POWER CORPORATION ("First Gas"), for confirmation of your opinion that the input VAT credits that First Gas incurred on its payments of the Monthly Fixed Operation Fee to Siemens Power Operations, Inc. can be claimed during the month on which the payments are made. EHScCA The facts, as represented, are as follows: First Gas is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines. It is a power generating company and the owner and operator of the 1000 megawatts gas-fired power generating facility located in the Municipality of Sta. Rita, Province of Batangas (the "Sta. Rita Plant"). First Gas entered into an Operation & Maintenance Agreements ("O&M") with Siemens Power Operations, Inc. ("Siemens"), a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with address at 17th Floor, Salcedo Towers, H.V. Dela Costa Street, Salcedo Village, Makati City. As the operator of the Sta. Rita Plant, Siemens is responsible for the day-to-day operations of the power plant, the maintenance and repair of the power plant complex including the replacement of its gas turbine blades and vanes ("Gas Turbine Strategic Spares") during major overhauls of the power plant. As the operator of the Sta. Rita Plant, Siemens is paid by First Gas a Monthly Fixed Operating Fee and a Monthly Variable Operating Fee, among other fees. Siemens issues a monthly VAT invoice to First Gas. Upon receipt of the monthly payments, Siemens issues a VAT official receipt to First Gas as evidence of its receipt of the payments. All the payments of First Gas to Siemens are net of the 2% withholding tax which First Gas is required by law to remit and pay to the Bureau of Internal Revenue (BIR) for and on behalf of Siemens. The cost of the Gas Turbine Strategic Spares which forms part of the O&M Monthly Fixed Operating Fee due to Siemens is booked by First Gas as non-current assets. The Gas Turbine Strategic Spares are the usual items to be replaced during scheduled major overhauls of the power plant. The overhauls are scheduled approximately at the end of the useful life of the parts to be replaced ( i.e. every three (3) years and six (6) years). IDCcEa Given that the replacement of the Gas Turbine Strategic Spares is already anticipated by Siemens and First Gas, Siemens already included a portion that will form part of the cost of the Gas Turbine Strategic Spares in the O&M Monthly Fixed Operating Fee even before the Gas Turbine Strategic Spares are deployed or installed in the power plant. What is included in the Monthly Fixed Operating Fee payment is just a small portion of the total cost of the Gas Turbine Strategic Spares, not the full cost. Siemens builds up a fund over a period of time to fund the cost needed to acquire and install the spare parts. Based on the foregoing representations, you now seek confirmation of your opinion that First Gas may claim the input VAT credits pertaining to its Monthly Fixed Operation Fee on the same month the payments are made and received by Siemens, given the fact that payments made by First Gas to Siemens are payments for services and such payments are Construction In Progress (CIP) cost of First Gas. AcSCaI In reply, please be informed that in VAT Ruling No. 003-2007 dated March 15, 2007, this Office had occasion to state that if the input taxes paid on importation and local purchase of parts which are not existing or of finished depreciable assets to be assembled into a depreciable asset or equipment and on spare parts which are likewise not existing or finished depreciable assets for the maintenance of a Project (under completion), such input taxes are not subject to amortization, but may be claimed as credit against the output tax in the month of acquisition regardless of whether or not the aggregate acquisition cost in a calendar month exceeds One Million Pesos (P1,000,000.00), exclusive of the VAT. The foregoing position is embodied in Revenue Regulations (RR) 16-2005, as amended by RR 4-2007. Section 4.110-3 thereof lays down the rule in claiming input tax on construction in progress cost, thus: " Construction in progress (CIP) is the cost of construction work which is not yet completed. CIP is not depreciated until the asset is placed in service . Normally, upon completion, a CIP item is reclassified and the reclassified asset is capitalized and depreciated. CIP is considered, for purposes of claiming input tax, as a purchase of service, the value of which shall be determined based on the progress billings. Until such time the construction has been completed, it will not qualify as capital goods as herein defined, in which case, input tax credit on such transaction can be recognized in the month the payment was made; Provided, that an official receipt of payment has been issued on the progress billings . In case of contract for the sale of service where only the labor will be supplied by the contractor and the materials will be purchased by the contractee from other suppliers, input tax credit on the labor contracted shall still be recognized on the month the payment was made based on a progress billings while input tax on the purchase of materials shall be recognized at the time the materials were purchased. Once the input tax has already been claimed while the construction is still in progress, no additional input tax can be claimed upon completion of the asset when it has been reclassified as depreciable capital asset and depreciated." (Emphasis supplied) In the instant case, while First Gas pays the O&M Monthly Fixed Operating Fee, the Gas Turbine Strategic Spares will not be installed yet by Siemens until the anticipated major overhaul takes place. In effect, prior to the major overhaul, First Gas is just making an advance payment with respect to the cost of the Gas Turbine Strategic Spares. In view of the advance nature of the payments with respect to the portion allotted to fund the cost of the Gas Turbine Strategic Spares, the payments fall within the definition of the term CIP as defined above. Accordingly, this Office hereby confirms your opinion that the input VAT credits that First Gas incurred on its payments of the Monthly Fixed Operation Fee to Siemens Power Operations, Inc. can be claimed during the month on which the payments are made. HCTEDa 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service