SGV & Co.

October 23, 2008 BIR RULING [DA-(VAT-018) 335-08] Section 108; DA-678-06 SGV & Co. 6760 Ayala Avenue Makati City, Philippines Attention: Atty. Mark Anthony P. Tamayo Partner, Tax and Customs Services Gentlemen : This refers to your letter dated September 1, 2008 requesting on behalf of Montalban Methane Power Corporation ("MMPC"), for a confirmation that: 1. MMPC's sale of electricity generated from Landfill Gas ("LFG"), mainly methane, is classified as generation of electricity through waste-to-energy conversion, and consequently, considered as a sale of electricity "generated through renewable sources of energy", which is automatically Value-Added Tax ("VAT") zero-rated; and 2. MMPC's sale of Certified Emission Reductions ("CERs") or carbon credits (to be acquired under the provisions of the Kyoto Protocol) to various non-resident foreign corporation ("NRFC")-buyers, which will be paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas ("BSP"), is likewise automatically VAT zero-rated. It is represented that MMPC, a domestic corporation, is a Board of Investments ("BOI")-registered entity authorized to operate a power generation project known as the Rodriguez Landfill Methane Recovery and Electricity Generation Clean Development Mechanism ("CDM") Project located at the Montalban Solid Waste Disposal Facility in the Municipality of Rodriguez, Rizal; that it is a VAT registered entity under Tax Identification Number 006-604-154-000. TAECaD It is further represented that MMPC has two business activities namely, (1) sale of electricity and (2) sale of Certified Emission Reductions ("CERs") or carbon credits. Sale of Electricity MMPC, through its CDM Project, collects LFG, the main constituent of which is methane (a flammable greenhouse gas derived from decaying wastes), emitted from solid wastes deposited at the Montalban Solid Waste Disposal Facility. The said solid waste has a biodegradable fraction of around 60%, and is said to have a biodegradable organic content necessary for waste-to-energy conversion. In order to collect LFG, MMPC uses an LFG recovery system which harvests methane through vertical and horizontal pipelines installed in the waste disposal site. MMPC then generates electricity from the collected LFG through gas engine generators which combust methane as fuel to generate electricity. MMPC thereafter sells the said electricity to a domestic power distributor under a power purchase agreement. Sale of CERs In harvesting LFG for conversion into electricity, MMPC will be able to effect a reduction of greenhouse gases emitted to the atmosphere. As such, MMPC's activities will qualify as an emission-curbing project under the mechanisms of the Kyoto Protocol to the United Nations ("UN") Framework Convention on Climate Change, for which MMPC will be entitled to the issuance of CERs or carbon credits (which are to be issued by the UN CDM Executive Board in exchange for a reduction of atmospheric carbon emissions). MMPC will thereafter sell the said CERs or carbon credits to various NRFC-buyers, who in turn will use the same as allowable credits (under the Kyoto Protocol) in engaging in activities that involve the emission of large quantities of greenhouse gases. MMPC's sale of CERs will be paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. In reply, please be informed as follows: cSaCDT Sale of Electricity Under Section 108 of the Tax Code, as amended, and as implemented by Section 4.108-5 (B) (7) of Revenue Regulations ("RR") No. 16-05, as amended, the sale of electricity generated through renewable sources of energy is subject to 0% VAT, to wit: "(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels; Provided, however, that zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power." (Emphasis supplied). The enumeration of renewable sources of energy under the above provision, being non-exclusive, may include other types of renewable sources of energy. In relation thereto, the 2008 Investment Priorities Plan ("IPP") and 2008 General Policies and Specific Guidelines specifically consider waste-to-energy conversion as a renewable source of energy, to wit: 2008 IPP- Part I (I) (B) "B. Infrastructure This covers the development of physical infrastructure (roads, bridges and tollways), power generation [using renewable sources and other energy sources using environmentally-friendly technologies (except oil-fired power generating plants), Small Power Utilities Group (SPUG), and other privatized plants], mass housing (socialized and low cost), bulk water supply (limited to projects that will supply waterless barangays), mass rail transport, pipeline projects for oil and gas, and projects under the Build-Operate-Transfer (BOT) Law." HICSTa 2008 General Policies and Specific Guidelines Part III (B) (2) (a) "1. Power generation projects as specified in the Power Development Plan that may qualify for registration are: (a) Those utilizing indigenous and renewable sources of energy such as biomass, waste to energy conversion, solar, wind, geothermal, hydro and tidal;" (Emphasis supplied) In the present case, the MMPC's power generation activity is clearly performed through waste-to-energy conversion as evidenced by its BOI Certificate of Registration authorizing MMPC to operate a power generation project ("Waste-to-Energy Conversion Montalban Landfill"). Moreover, the fact of waste-to-energy conversion is supported by MMPC's use of solid wastes as its primary source of LFG (including methane), which in turn is composed of biodegradable organic content essential in the generation of electricity. Hence, considering that MMPC's power generation activity is considered as waste-to-energy conversion, and that waste-to-energy conversion is considered as a renewable source of energy, we hereby confirm your opinion that MMPC's sale of electricity is automatically VAT zero-rated pursuant to Section 108 of the Tax Code, as amended, and as implemented by RR No. 16-05, as amended. Sale of CERs Under Section 106 of the Tax Code, as amended, and as implemented by Section 4-106.5 (a) (1) of RR No. 16-05, as amended, the sale of goods from the Philippines to a foreign country shall be subject to 0% VAT, to wit: "The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export sales. "Export Sales" shall mean: TAacCE (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" (Emphasis supplied) The above-cited provision has been applied in a number of rulings where the sale of goods from the Philippines to a foreign country was considered as an export sale of subject to 0% VAT, provided the same is paid for in acceptable foreign currency and accounted for in accordance with the rules and procedures of the BSP ( BIR Ruling Nos. DA-124-05 dated April 6, 2005, DA-532-06 dated September 4, 2006, and DA-678-06 dated November 23, 2006). Hence, considering that MMPC will sell its CERs to NFRC-buyers, and that the same will be paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, we hereby confirm your opinion that MMPC's sale of CERs is considered as an export sale of goods, which is automatically VAT zero-rated. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service