Gross Income Earned by NPC on the Buy-out of Enron Power Devt. Corp.'s Power Station Subject to 5% Preferential Tax Rate

January 29, 2002 BIR RULING NO. 006-02 R.A. 7227 R.A. 6395 BR #098A-98; 8-99; DA-090-01 National Power Corporation Agham Road, Diliman Quezon City Attention: Mr. Nonito R. Bernardo, Jr . Vice President for Finance Gentlemen : This refers to your letter dated January 8, 2001 requesting for a ruling on the proposed buy-out by the National Power Corporation (NPC) of a power station of Enron Power Development Corp. ("Enron"). It is represented that the NPC was established in 1936 under Commonwealth Act (CA) No. 120 to primarily be responsible for the development of power grids and the construction of generating facilities for the whole country; that in the early 1990s, in response to the severe power shortage that threatened to cripple the Philippine economy during that time and financial constraints facing NPC from directly constructing additional power plants, NPC entered into various project agreements with private sector companies for the construction and/or operation of power plants in the country; that among the project agreements that NPC entered into in this regard is a Fast-Track Build, Operate and Transfer Project ("BOT") Agreement with Enron dated January 7, 1993, which provided for the construction by the latter of a bunker fuel-fired diesel engine generator power station (Facility) in Subic, Zambales and the purchase of electricity generated therefrom by NPC; that for the ownership and management of this power plant, Enron established the Subic Power Corporation (SPC) and registered it on May 4, 1993 with Subic Bay Metropolitan Authority ("SBMA") as a Subic Bay Freeport Enterprise; that as SBMA-registered entity, SPC was granted all benefits under Republic Act (RA) No. 7227 otherwise known as the "Bases Conversion and Development Act of 1992" and its implementing rules and regulations; that in accordance thereto, it is subject to the 5% special tax on gross income in lieu of all taxes (BIR Ruling No. 098A-98 dated June 29, 1998); that under Republic Act No. 9136, otherwise known as the "Electric Power Industry Reform Act of 2001", the legislature authorized, among others, the privatization of the assets and liabilities of NPC and established Power Sector Assets and Liabilities Management (PSALM) to manage such privatization on behalf of the Government of the Philippines; that in this regard, NPC and Enron have been negotiating the possible buy out of NPC of the Subic plant with the end view of: (a) substantially reducing the Capacity Fees and O&M Fees paid by NPC to Enron; (b) enabling NPC to immediately privatize, and derive material value from the Power Station; and (c) allowing Enron and its affiliates to liquefy the value of its assets and consolidate their interests ("Buy-out Transactions"); and that under the proposed agreements, Enron agrees to transfer to NPC and/or PSALM the power plant in exchange for a lump sum cash payment. This ruling makes reference purely to the tax consequences of the transaction, and assumes that all approvals required for the validity of the transaction have or will be secured at the time of transfer. In reply, please be informed that pursuant to Section 12 (c) of R.A. No. 7227, SBF registered enterprises shall be exempt from all national and local taxes in lieu of paying the preferential tax of five percent (5%) of the gross income earned. Section 3 (o) of Revenue Regulations No. 1-95, as amended by Revenue Regulations No. 12-97 provides that "gross income" refers to gross sales or gross revenues derived from the registered business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus cost of sales, cost of production or direct costs of services but before any deduction for selling and administrative expenses or incidental losses during a given taxable period. Such being the case, the gross income earned on the sale by SPC of its power plant located within the Subic Freeport Zone is subject to the 5% preferential tax rate based on the gross selling price or fair market value of the property as determined under Sec. 6 (E) of the Tax Code of 1997, whichever is higher, minus the depreciated cost of the SPC power plants as of the date of sale. Furthermore, as a duly registered SBF enterprise, SPC is exempt from the value added tax on the sale of its power plant located within the Freeport Zone. (Section 109 (q) of the Tax Code) Moreover, since SPC is subject to the 5% preferential tax in lieu of all taxes, it is also exempt from payment of the documentary stamp tax (DST) on the transfer of its power plant to NPC, subject to the proviso of Section 173 of the Tax Code of 1977 that when one party to the transaction enjoys exemption from DST, the other party thereto who is not exempt shall be the one directly liable for the tax. Considering, however, that NPC enjoys exemption from all direct taxes, including DST, under Section 13 of R.A. No. 6395, as amended by P.D. No. 938, no DST may be collected from it. Accordingly, as both parties to the buy-out transactions enjoy exemptions from DST, no DST is payable on the transfer of SPC power plants to NPC. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. CSHcDT Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue