BIR Ruling No. 003-06

February 14, 2006 BIR RULING NO. 003-06 Secs. 100 (B) (7) & 112 000-00 Mindanao I & II Geothermal Partnership Level 36, Tower I, the Enterprise Center 6766 Ayala Ave., corner Paseo de Roxas 1200 Makati City Attention: Mr. Austin D. Herrick Assistant Executive Director Gentlemen : This refers to your letter dated November 30, 2005, seeking confirmation of the following: 1. That the sale of electricity by Mindanao I Geothermal Partnership (M1GP) and Mindanao II Geothermal Partnership (M2GP) to Philippine National Oil Corporation-Energy Development Corporation (PNOC-EDC) 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; and 2. That any input on their purchases of goods, properties or services related to such zero-rated sales shall be available as tax credit or refund as provided for under Section 112 of the same Tax Code, as amended by R.A. No. 9337. FACTUAL BACKGROUND M1GP and M2GP are duly registered Philippine partnerships duly organized and existing under and by virtue of the laws of the Philippines, with registered office and principal place of business at Level 36, Tower 1, The Enterprise Center, 6766 Ayala Avenue, Makati City, 1200 Philippines and Barangay Ilomavis, Kidapawan City, North Cotabato, respectively. M1GP and M2GP have developed, financed, constructed and now own, operate and maintain the Mindanao I and Mindanao II Geothermal power plants located in Mount Apo, North Cotabato, Mindanao. The electricity generated by these geothermal electrical generation plants is being sold to PNOC-EDC pursuant to the Mindanao I Build-Operate-And Transfer (BOT) Arrangement (M1GP Agreement) dated December 14, 1994, and to the Mindanao II BOT Arrangement (M2GP Agreement) dated March 11, 1997 between M1GP and M2GP, respectively, and PNOC-EDC. M1GP and M2GP are duly registered with the Board of Investments (BOI) in accordance with the Omnibus Investments Code of 1987, under Certificate of Registration No. 94-240, dated September 16, 1994. Both M1GP and M2GP have been certified by the Energy Regulatory Commission (ERC) as power generation facilities under Certificate of Compliance Nos. 03-10-GXT26-0026 and 03-10-GXT25-0025, respectively, dated October 15, 2003. Both are VAT-registered with Registration Nos. 004-712-984 and 004-776-953, respectively. Under the BOT Arrangements, M1GP and M2GP shall operate and maintain the geothermal electrical generation plants for the purpose of generation and supply of electricity to PNOC-EDC. The electricity to be generated by M1GP and M2GP will be sold to and purchased by PNOC-EDC in its entirety. PNOC-EDC then in turn sells it to the National Power Corporation. The contractual relationships between M1GP and PNOC-EDC and between M2GP and PNOC-EDC are disclosed in their respective BOT Agreement, to wit: ISAcHD In respect to M1GP Agreement, Article 8, Section 8.1 Obligations of the Parties , thereof, expressly provides that: "The Operator hereby agrees to convert PNOC-EDC's steam into electric energy, and PNOC-EDC hereby agrees to sell to NAPOCOR, at the Point of Interconnection, the Nominated Capacity and energy delivered by the Operator to NAPOCOR on behalf of PNOC-EDC during the Cooperative Period less any usage by PNOC-EDC is allowed hereunder. PNOC-EDC agrees to pay the Operator for the Nominated Capacity and energy delivered by the Operator at the Point of Interconnection." In respect to M2GP Agreement, Article 8, Section 8.1 Obligations of the Parties , states: "The Operator hereby agrees to convert PNOC-EDC's steam and brine into electric energy, and PNOC-EDC hereby agrees to sell to NAPOCOR, at the Point of Interconnection, the Nominated Capacity and energy delivered by the Operator to NAPOCOR on behalf of PNOC-EDC during the Cooperation Period less any usage by the Operator and PNOC-EDC as allowed hereunder. PNOC-EDC agrees to pay the Operator for the Nominated Capacity and energy delivered by the Operator at the Point of Interconnection plus any deliveries made to PNOC-EDC for its own use to the extent not included in the Nominated Capacity." Evidently, under the foregoing circumstances and for the duration of the cooperation period specified under the BOT arrangements, both M1GP and M2GP as Operators thereof are deemed sellers of electric power to PNOC-EDC which the latter also sells to NPC. The fact that PNOC-EDC pays M1GP and M2GP not only for Nominated Capacity and Energy delivered but also, "for any deliveries made to PNOC-EDC for its own use to the extent not included in the Nominated Capacity" is suggestive of the contractual relationship between the parties. The request is posed in view of the zero-rated (0%) VAT rate status being imposed on sale of power or fuel generated through renewable source, which is being sourced from steam and brine, pursuant to aforementioned BOT arrangements. Under R.A. No. 9337, which amended the Tax Code of 1997, the sale of power or fuel through renewable source is subject to the zero percent (0%) VAT rate. Hence, this request. In support of their request, M1GP and M2GP, submitted the following documents: 1. Copy of ERC Certificates of Compliance, both dated October 15, 2003, issued to M1GP and M2GP, respectively; 2. Copy of Certificate of Registration No. 94-240 dated September 16, 1994 issued by the Board of Investments (BOI) to M1GP and M2GP; and 3. Copy of the pertinent pages of the M1GP and M2GP BOT Agreements, Section 8.1 Obligations of the Parties thereof in particular . BIR REPLY We reply as follows: Section 108 (B) (7) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, provides that among the transactions subject to zero percent (0%) VAT rate is: "(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels." However, Section 4.108-5 (b) (7) of Revenue Regulations No. 16-2005 implementing the foregoing provision qualified the applicability of zero rating as follows: "(b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registration person shall be subject to zero percent (0%) VAT rate: (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." HAcaCS A review of the instant case disclosed that prior to the effectivity of RA 9337, the sale of electricity by M1GP and M2GP was treated as automatically zero-rated transaction as confirmed by the BIR in VAT Ruling No. 050-03 dated December 1, 2003 issued as Memorandum to Assistant Commissioner Nora E. Tamayo of the Assessment Service in reply to her Memorandum addressed to the Chairman of the VAT Review Committee raising the issue, among others, of "how shall we treat the sale of power by power generating companies? Automatically or effectively zero-rated? (Note: Electricity Power Industry Reform Act (EPIRA) of 2001 simply states that sales shall be VAT zero-rated)." In said ruling, the BIR held that: "However, Section 6, R.A. 9136, known as the "Electric Power Industry Reform Act of 2001." (EPIRA) and its Implementing Rules and Regulations (IRR) provides that". . . Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by generation companies shall be value added tax zero-rated. ." Thus, it was held in BIR Ruling No. 20-2002 dated May 13, 2002, as follows: "Section 6(b), Rule 5 of the IRR in relation to Section 4(x) of the EPIRA, however, expressly provides that the sale of generated power by generation companies shall, upon the effectivity of the Act, be subject to zero percent (0%) VAT. Since PSALM, once registered with the ERC will fall within the definition of a Generation Company under Rule 5 of the aforesaid IRR with respect to its sale of generated power, we confirm your opinion that its sale of generated power will be subject to VAT at the rate of zero percent (0%)." The above quoted statute does not qualify, hence, there is no basis for this Office to make any qualification. It follows, that sale of generated power by generation companies is entitled to the benefit of the zero percent (0%) VAT, pursuant to Section 6, R.A. 9136, without any qualification that it is merely entitled to effectively zero-rated VAT." The said ruling of the BIR was based on Section 4 (x) of the EPIRA Law of 2001 and Section 6 (b) Rule 5 of its IRR which clearly provide that sale of electricity by generation companies is VAT zero-rated, to wit: "SEC. 6. Generation Charges and VAT. (b) Pursuant to the policy of reducing electricity rates to End-users, sale of generated power by a Generation Company shall, from the effectivity of the Act, be zero-rated for the purpose of imposition of value-added tax. Towards this end, the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a Generation Company through all stages of sale until it reaches the End-user. . . ." With the amendment introduced by R.A. 9337 on EVAT provisions, upon its effectivity on November 1, 2005, the zero-VAT rate imposed on the sales of generated power by generation companies under RA 9136 (EPIRA Law) was accordingly repealed as follows: "Section 24. Repealing Clause . The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended: (B) Section 6, fifth paragraph of R.A. 9136 on the zero-VAT rate imposed on the sales of generated power by generation companies; and xxx xxx xxx" Notwithstanding the repeal of Section 6 of R.A. 9136, this Office is of the opinion that the sale of electricity which is generated through a renewable source of energy, particularly geothermal energy, is still subject to zero percent (0%) VAT rate and automatically VAT zero-rated and without need to apply for effective zero-rating with the BIR. This is in view of the amendments introduced under R.A. 9337, particularly on Section 108 (B) (7) of the Tax Code. Further, in view of the zero-rated sales of electricity by M1GP and M2GP to PNOC-EDC, 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, which provides: SATDHE "Sec. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax . . . ." Anent the above, pertinent portion of Section 4.112-1 of Rev. Regs. No. 16-2005 provides that "(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. Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and in taxable (including sales subject to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, only the proportionate share of input taxes allocated to zero-rated or effectively zero-rated sales can be claimed for refund or issuance of a tax credit certificate." Accordingly, we hereby confirm your opinion, to wit: 1. The sale of electricity by M1GP and M2GP to PNOC-EDC, which is generated through a renewable source of energy, particularly geothermal energy, continues to be subject to automatic zero percent (0%) VAT rate pursuant to Section 108 (B) (7) of the Tax Code, as amended by R.A. 9337. 2. Any input tax on their purchases of goods or services, except capital goods 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. 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, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue