Puyat Jacinto and Santos

June 25, 2009 BIR RULING [DA-(VAT-060) 326-09] Sec. 108 (B) (7); DA 146-06; DA-678-06; DA-(VAT-018)335-08; DA-371-07; DA-371-07 Puyat Jacinto and Santos 12/F Manilabank Bldg. 6772 Ayala Avenue Makati City, 1226, Philippines Attention: Atty. Virginia B. Viray and Atty. Arnaldo M. Cario Gentlemen : This refers to your letter dated November 26, 2008 requesting for and in behalf of your client, KENZAR BIOCORE (hereinafter referred to as "Kenzar"), for confirmation of your opinion that the sale and purchase of power by Vitarich Corporation to Kenzar is subject to zero percent (0%) value added tax (VAT) rate pursuant to Section 108 (B) (7) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, otherwise known as the Expanded VAT Law. It is represented that Kenzar is a corporation duly organized and existing under Philippine laws with principal office address at Vito Cruz St. cor. Kamagong St., San Antonio Village, Makati City; that it is licensed by the Securities and Exchange Commission ("SEC") to engage in the conversion, processing and production of fuel and steam generated through the operation of Boiler Machines; that said Boiler Machines are powered by bagasse, a residual pulp from sugar cane used as a primary fuel source; that the power processed and produced from such conversion are sold and purchased by Vitarich Corporation; and that prior to Kenzar's operation, it entered into a Deed of Assignment with Aftermath Resources, Incorporated ("ARI") wherein ARI transferred to Kenzar all its rights and interests over the Service Contract with Vitarich Corporation for the conversion, processing and production of steam which will be used as fuel to heat up and cook animal and aqua feeds. In reply thereto, please be informed that Section 108 (B) of the 1997 Tax Code in relation to Section 4.108-5 (B) of Revenue Regulations No. 16-2005 1 provides as follows: "(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (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." On the other hand, Sec. 3 (c) Rule 1 of the Implementing Rules and Regulations of R.A. 9513 (The Renewable Energy Act of 2008) defines "Biomass Resources" as follows: "Sec. 3. Definition of Terms. xxx xxx xxx (c) "Biomass Resources" refers to non-fossilized, biodegradable organic materials originating from naturally-occurring or cultured plants or parts thereof, animals and micro-organisms, including agricultural products, by-products and residues such as, but not limited to, biofuels except corn, soya beans and rice but including sugarcane and coconut, rice hulls, rice straws, coconut husks and shells, wood chips/residues, forest residues, corn cobs, corn stovers, bagasse, biodegradable organic fractions of industrial and municipal wastes that can be used in bioconversion process and other processes, as well as gases and liquids recovered from the decomposition and/or extraction of non-fossilized and biodegradable organic materials." From the foregoing, there is no question that the services performed by Kenzar fall under the aforequoted provisions of law. It is clear that in order for sale of fuel to be subject to zero percent (0%) VAT, it must be generated from renewable sources of energy, e.g., biomass, solar, wind, hydropower, steam, geothermal and ocean energy. As can be gleaned from the Service Contract, the subject matter of the transaction is the conversion, processing and production of fuel and steam through the operation of the Boiler Machines. This, in effect, is utilized to fuel aqua feeds production as well as animal feeds production. Therefore, payments received by Kenzar arising from its sales of power or fuel generated through renewable sources shall be subject to VAT at zero percent (0%) rate pursuant to Section 108 (B) (7) of the 1997 Tax Code, as amended (BIR Ruling Nos. DA-146-06; DA-(VAT-018)335-08; DA-678-06; DA-371-07). This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. IaAEHD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Footnotes 1. Section 108 (B) in relation to Section 4.108-5 (B) of Revenue Regulations No. 16-2005 enumerates the services that are subject to zero-rate for VAT purposes, thus: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; (2) Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; (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; (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code starting Feb. 1, 2006 (as amended by Revenue Regulations No. 4-2007); (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of the total annual production; (6) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to a percentage tax of three percent (3%) based on their gross receipts as provided for in Sec. 118 of the Tax Code but shall not to be liable to VAT; and (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.