SGV & Co.

October 24, 2008 BIR RULING [DA-(VAT-022) 356-08] Section 112; DA-099-06 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 input VAT on MMPC's purchases of goods and services, including input VAT on importation of capital equipment, attributable to zero-rated sales are available as tax credit or refund pursuant to Section 112 of the Tax Code, as amended, and as implemented by Section 4.112-1 of RR No. 16-05, as amended. 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 TIN 006-604-154-000. It is further represented that MMPC is engaged in zero-rated sales, namely sale of electricity generated through renewable sources of energy ( i.e. waste-to-energy conversion), and sale of Certified Emission Reductions ("CERs") or carbon credits to nonresident foreign corporations acquired pursuant to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas ("BSP"). ScaATD Lastly, it is represented that MMPC imported various capital equipment, which mainly consist of gas engine generator sets and other related equipment, for which it paid 12% VAT on importation, for use in the sale of electricity, and incidentally, in the sale of CERs. MMPC has likewise incurred input VAT for various local purchases of goods and services. In reply, please be informed as follows: Under Section 112 of the Tax Code, as amended, and as implemented by Section 4.112-1 of RR No. 16-05, as amended, a VAT-registered taxpayer may apply for tax credit or refund of input VAT attributable to its zero-rated sales, to wit: "Section 4.112-1. Claims for Refund/Tax Credit Certificate of Input Tax. (a) Zero-rated and Effectively Zero-rated Sales of Goods, Properties or Services. A VAT-registered person whose sales of goods, properties or services are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate/refund of input tax attributable to such sales. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against the output tax. The application should be filed within two (2) years after the close of the taxable quarter when such sales were made. In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1) and (2) of the Tax Code, the payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with the BSP rules and regulations. xxx xxx xxx." (Emphasis supplied) This has been confirmed by the BIR in BIR Ruling No. DA-099-06 dated March 18, 2006, wherein it was ruled that any input VAT, without distinction, incurred by a company engaged in the zero-rated sale of electricity generated through renewable sources of energy ( i.e. hydropower), which are related to the said company's zero-rated sales, shall be available as tax credit or refund pursuant to Section 112 of the Tax Code, as amended, to wit: HTcDEa "Further, in view of the zero-rated sales of electricity by SRPC to NPC, any input tax on its purchases of goods, properties or services related to such zero-rated sales shall be available as tax credit or refund pursuant to Section 112 of the Tax Code, as amended by R.A. 9337, . . . . Accordingly, we hereby confirm your opinion, to wit: xxx xxx xxx 2. Any input tax on its purchases of goods, properties or services related to such zero-rated sales shall be available as tax credit or refund pursuant to Section 112 of the same Tax Code, as amended by R.A. 9337. Furthermore, the BIR has reaffirmed in a subsequent BIR Ruling No. DA-646-06 dated October 31, 2006 that input VAT directly attributable to the acquisition of capital goods and/or importation of imported or locally purchased capital goods may be subject of a claim for refund, to wit: "In reply, please be informed that pursuant to Section 112, Tax Code of 1997, a VAT-registered person may, to the extent such input taxes have not been applied against output taxes, apply for the issuance of a tax credit certificate or refund of input taxes which are (1) directly attributable to zero-rated or effectively zero-rated sales, the acquisition of capital goods, purchase of land, or cancellation of VAT registration due to retirement, change or cessation of status as a VAT-registered person and (2) paid on imported or locally purchased capital goods. In case a person is engaged in taxable as well as exempt sales of goods, properties and services, only the input taxes on purchases directly attributable to taxable transactions, i.e., zero-rated and acquisition of capital goods, are eligible for refund or issuance of tax credit certificate. The input taxes directly attributable or allocable to exempt transactions become part of the cost of capital goods purchased or of operating expenses (cited in BIR Ruling No. DA234-2004 dated May 7, 2004) In other words, only the input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense (Sec. 4.110-4, Rev. Regs. No. 16-2005)." (Emphasis supplied) HASTCa Based on the foregoing, we hereby confirm your opinion that MMPC's input VAT on purchases of goods and services, including VAT on importation of capital equipment which are attributable to zero-rated sales, is available as tax credit or refund pursuant to Section 112 of the Tax Code, as amended, and as implemented by Section 4.112-1 of RR No. 16-05, as amended. 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. STcHEI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service