Sycip Gorres Velayo & Co.

February 11, 2009 BIR RULING [DA-(VAT-019) 076-09] 108 (B) (3); RR 16-05; RMC 61-05; RMC 74-99; DA (VAT-023) 358-2008 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated April 10, 2008 requesting confirmation of your position that the sale of electricity by TeaM (Philippines) Energy Corporation (TPEC), formerly Mirant (Philippines) Energy Corporation, to the Manila Electric Company (MERALCO), a known distribution utility which will exclusively distribute/deliver electricity to Sunpower Philippines Mfg. Ltd. (Sunpower), a Philippine Economic Zone Authority (PEZA) registered entity, is subject to value-added tax (VAT) at zero percent (0%) rate. The facts as represented are as follows: On November 25, 2003, a Memorandum of Understanding (MOU) was executed by and among the Department of Energy, National Power Corporation (NPC), National Transmission Corporation (TRANSCO), Sunpower, TPEC (formerly Mirant) and MERALCO; that the parties therein agreed to undertake responsibilities and obligations to address the power requirements of Sunpower, which, on the other hand, intends to establish a Solar Fabrication Plant for the manufacture of high-efficiency photovoltaic cells and other related activities; that specifically, under the MOU, TPEC, similar to NPC, is represented as "a generating company" which shall supply Sunpower's power requirements through MERALCO, a distribution utility. Further, it is also represented that MERALCO was granted a franchise to construct, operate and maintain a distribution system for the conveyance of electric power in Laguna, among others, under Republic Act (RA) No. 9209; that Sunpower is a PEZA registered entity; and that pursuant to the MOU, TPEC and MERALCO agreed to execute a power purchase agreement under which TPEC will sell power to MERALCO which will be delivered to Sunpower; that TPEC and MERALCO entered into an Electric Power Purchase Agreement (EPPA), where TPEC undertakes to supply the electricity to MERALCO for delivery to Sunpower. In reply, please be informed as follows: MERALCO was engaged in the supply of power to Sunpower in view of its existing distribution facilities in Laguna Technopark and that under the MOU, it shall source all power requirements of Sunpower from TPEC and NPC. In effect, TPEC and NPC, as the generation companies, collect generation charges based on the power supply to Sunpower, while MERALCO operates as the distribution utility that delivers the power/electricity to Sunpower generated by TPEC and NPC. DTIcSH In this regard, Question and Answer No. 26 of Revenue Memorandum Circular (RMC) No. 61-05 dated October 27, 2005 deals with the treatment of generation and transmission charges, including the VAT thereon (which are pass through charges of the distribution companies and electric cooperatives), thus "Q26 What is the treatment of the Generation and Transmission charges including the VAT thereon which are pass-through charges of the Distribution Companies and Electric Cooperatives? A26 The Generation and Transmission companies shall bill the end-user through the Distribution Companies and Electric Cooperatives for the sale and transmission of electricity and ancillary services including the VAT thereon. The amount collected from the end-user for such charges shall not form part of the gross receipts of the Distribution Companies and Electric Cooperatives. The Distribution Companies and Electric Cooperatives shall not claim an input tax on such pass-through charges. The amount collected from the end-user as payment for the generation and transmission charges including the VAT thereon shall form part of the gross receipts and output VAT of the Generation Company or Transmission Company, accordingly. The Distribution Companies and Electric Cooperatives may advance, exclusive of the corresponding VAT, the generation fee to the Generation company. The amount advanced may be offset against the amount collected from the end-user and only the VAT portion of the generation fee shall be remitted to the generation company upon collection from the end-user. The reckoning of the VATable sale between the generation company and the end-user shall be upon collection on the billing made by the Distribution Companies and Electric Cooperatives. " (Emphasis supplied.) Thus, the amount collected by distribution companies, like MERALCO, from the end-users, Sunpower in this instance, for the sale of electricity, does not form part of its gross receipts but that of the generation and transmission companies, such as TPEC in this case. In connection therewith, since the end-user is Sunpower which is a PEZA registered enterprise, and MERALCO as a distribution utility is a pass-through entity, the sale of power is subject to Section 108 (B) (3) of the Tax Code of 1997, as amended; and Section 4.118-5 (b) (3) of Revenue Regulations No. 16-2005, as amended, which provide as follows: "Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate. xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;" "SEC. 4.118.5. Zero-Rated Sale of Services. xxx xxx xxx (b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: cETCID xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;" Corollarily, Section 3 (3) of RMC No. 74-99 also applies, thus "SEC. 3. Tax Treatment Of Sales Made By A VAT Registered Supplier From The Customs Territory, To A PEZA Registered Enterprise. xxx xxx xxx 3. In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. 7916 and the "Cross Border Doctrine" of the VAT system . . . " [Emphasis supplied] On the sale of electricity to PEZA enterprises, note that RMC 61-05, provides in Question and Answer No. 19 that such sale shall be subject to zero percent, thus "Q19 What is the treatment of sales of electricity (by generation, transmission and distribution companies or electric cooperatives) to PEZA- or SBMA-registered enterprises? A19 Since PEZA- or SBMA-registered enterprises are entitled to the five percent (5%) preferential tax rate under R.A. 7916 and R.A. 7227, respectively, sales of electricity by generation, transmission and distribution companies or electric cooperatives shall effectively be subject to the zero percent (0%) VAT rate. Sales to enterprises duly-registered and accredited with the SBMA and PEZA shall effectively be subject to zero percent (0%) VAT . The zero-percent (0%) VAT rate shall not apply to sales made to individuals who are mere residents in the PEZA Ecozone or Subic Bay Freeport and Economic Zone." [Emphasis supplied] Under the cross-border principle, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of VAT, then the same rule holds for such exports from the national territory except specifically declared areas to an ECOZONE (Commissioner of Internal Revenue v. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005). Significantly, an ECOZONE indubitably a geographical territory of the Philippines is regarded in law as foreign soil (Commissioner of Internal Revenue v. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005). Moreover, in BIR Ruling No. DA (VAT-023) 358-2008, dated October 27, 2008, the BIR has already ruled that the sale of electricity by TPEC to PEZA for distribution to PEZA registered entities, the ultimate end-user/consumers, is subject to VAT at zero-percent (0%). aIcTCS Based on the rules of our VAT system, the supply of power needs by TPEC to Sunpower previously established as a PEZA registered entity through MERALCO is effectively destined for consumption outside of the territorial border of the Philippines. Accordingly, the said supply of power by TPEC to Sunpower is effectively subject to zero percent (0%) VAT pursuant to Section 108 (B) (3) of the Tax Code, as implemented by Sec. 4.118.5 (b) (3) of Rev. Regs. No. 16-2005, as amended and clarified by RMC No. 61-05. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service