BIR Ruling No. 007-06

August 8, 2006 BIR RULING NO. 007-06 R.A. 6395; 000-00 R.A. 9337 Hedcor, Inc. 214 Ambuklao Road, Beckel La Trinidad, Benguet Attention: Mr. Jose Venancio P. Batiquin Executive Vice President & CFO Gentlemen : This refers to your letter dated May 29, 2006 requesting for a ruling on whether under the Reformed VAT Law, which took effect on November 1, 2005, NPC is exempt from the liability to pay input VAT on the transmission services of HEDC for which Wheeling Charges are being paid by NPC. As represented, HEDC is a registered Private Sector Generating Facility under Executive Order (EO) No. 215 and is a duly accredited mini-hydro electric power developer and operator under Republic Act (R.A.) No. 7156. On January 20, 1993, HEDC entered into an Electric Power Supply Agreement (EPSA) with NPC pursuant to which HEDC agreed to supply to NPC and NPC agreed to purchase the power and energy produced at HEDC's hydro electric power plants located in Sablan, Benguet Province. Likewise, HEDC, using its own funds and resources, constructed a 5.9 kilometer 69 kilovolt dedicated transmission line connecting its hydro electric power plants to the NPC tapping point also in Sablan, Benguet Province. In exchange for allowing NPC to use the said transmission line, NPC is paying HEDC a Wheeling Charge of P26.03 per kW-month ("the Wheeling Charges"). These charges are separate and distinct from the power purchase rates payable by NPC to HEDC for the sale of electricity. In reply, please be informed as follows: In Maceda vs. Macaraeg, 1 the Supreme Court ("SC") held that under Section 13 of R.A. No. 6395 (the "NPC Charter"), NPC was exempt from all forms of taxes, direct and indirect. As such, the suppliers of NPC could not shift to NPC the economic burden of the taxes paid by them to the BIR. Section 13 of the NPC Charter states: "The Corporation shall be nonprofit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby declared exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and (d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power." Due to the exemption of NPC from all direct and indirect taxes, 2 the sale of goods and services to NPC was characterized as effectively zero-rated pursuant to Sections 106 (A) (2) (c) and 108 (B) (3), both of the 1997 Tax Code, as amended, which state as follows: "SEC. 106. Value-added Tax on Sale of Goods or Properties . xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate." DETACa "SEC. 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. The following services performed in the Philippines by VAT-registered persons shall be 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; xxx xxx xxx." This was confirmed by the Bureau in a number of rulings such as BIR Ruling No. DA-247-99 dated April 19, 1999, in which the Bureau ruled that the sale of electricity to NPC is effectively zero-rated, provided that the seller shall apply with the Revenue District Officer concerned having jurisdiction over its place of business for effective zero rating. Accordingly, while the Wheeling Charges were distinct and separate from the power purchase rates payable by NPC to HEDC for the purchase of electricity, HEDC, nevertheless, did not pass on to NPC the VAT on the Wheeling Charges payable by NPC for the use of HEDC's transmission lines. On November 1, 2005, R.A. No. 9337 (the "Reformed VAT Law") became effective. Under Section 108 (B) (7) of the 1997 Tax Code, as amended by the Reformed VAT Law, the "sale of power or fuel generated through renewable sources of energy such as, but not limited to biomass, wind, hydropower, geothermal, ocean energy and other emerging energy sources" continues to be zero-rated. However, the zero-rating applies only to the sale of power or fuel, and does not cover the sale of other goods and services to NPC, such as the provision of transmission services for which Wheeling Charges are being paid by NPC. In connection with the foregoing, Section 13 of the NPC Charter was amended pursuant to Section 24 of the Reformed VAT Law, which states: "Sec. 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: (A) Section 13 of R.A. No. 9395 on the exemption from value added tax of the National Power Corporation (NPC);" The amendment of Section 13 of the NPC Charter by the Reformed VAT Law resulted in NPC being liable for VAT. Accordingly, NPC became liable for VAT passed on by its suppliers of goods and services. Furthermore, the sale of goods and services to NPC ceased to be effectively zero-rated under Sections 106 (A) (2) (c) and 108 (B) (3), both of the 1997 Tax Code, as amended. Hence, starting November 1, 2005, the date of effectivity of the Reformed VAT Law, HEDC may already pass on to NPC the VAT on the Wheeling Charges. In this regard, this Office takes note of the Energy Regulatory Commission's (ERC) Resolutions No. 10, series of 2006 3 and No. 20, series of 2005 4 instituting and prescribing a mechanism for the recovery of the VAT imposed on the generation, transmission, and distribution of electricity under the Reformed VAT Law. In view of all the foregoing, this Office rules that starting November 1, 2005, NPC is no longer exempt from the liability to pay input VAT on the transmission services of HEDC for which Wheeling Charges are being paid by NPC. 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. AECcTS Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue Footnotes 1. G.R. No. 88291, June 8, 1993. 2. The SC decision stated thus: "A chronological review of the NPC laws will show that it has been the lawmaker's intention that NPC was to be completely tax exempt from all forms of taxes direct and indirect. xxx xxx xxx The Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes impose upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC must absorb all or part of the economic burden of the taxes previously paid to BIR, which they could shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay that part of the "normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR." 3. Dated March 8, 2006. 4. Dated November 7, 2005.