Request for Exemption from Payment of VAT on Importation of Machineries Used in Generating and Selling Electricity

May 27, 1998 BIR RULING NO. 072-98 119-000-00-072-98 Balmeo Bautista & Penasales LAW OFFICES UNIT 314 Cityland III Condominium, 105 Herrera cor., Esteban Streets Legaspi Village, Makati City Attention: Atty . Leonides F . Balmeo Gentlemen : This refers to your letter dated February 3, 1998 requesting on behalf of your client, Davao Light & Power Company, Inc., for exemption from the payment of Value Added Tax (VAT) on its future importation of machineries, equipment, spare parts and implements exclusively used in its business of generating and selling electric light and power under its franchise operation. It is represented that Davao Light and Power Company, Inc. (Davao Light for short), a domestic corporation, was granted a legislative franchise by Act No. 3760 dated November 26, 1930 under which laws it was granted right and privilege: prLL ". . . to construct, maintain and operate an electric light, heat and power for sale within the limits of the Municipality of Davao (now Davao City) subject to the terms and conditions of Act 3636 (Model Electric Light and Power and franchise, dated December 7, 1929)." that the legislative franchise of Davao Light is subject to the terms and conditions established in Act Numbered Thirty-Six Hundred Thirty-Six (Model Electric Light and Power Franchise Act dated December 7, 1929), which were incorporated therein as follows: "Sec. 10. The grantee shall pay the same taxes as are now or may hereafter be required by law from other individuals, co-partnerships, private, public or quasi or quasi-public associations, joint-stock companies on his (its) real estate , buildings , plants , machinery , and other personal property , except property declared exempt in this section . In consideration of the franchise and rights hereby granted , the grantee shall pay into the municipal treasury of the (of each) municipality in which it is supplying electric current to the public under this franchise, a tax equal to two per centum of the gross earnings from electric current sold or supplied under this franchise in said (each said) municipality. Said tax shall be due and payable quarterly and shall be in lieu of any and all taxes of any kind , nature or description levied , established , or collected , by any authority whatsoever , municipal, provincial, or insular, now or in the future, on its poles, wires, insulators, switches, transformers and structures, installations, conductors, and accessories, placed in and over and under all public property, including public streets and highways, provincial roads, bridges and public squares, and on its franchise , rights , privileges , receipts , revenues and profits , from which taxes the grantee is hereby expressly exempted ." (Emphasis supplied.) and that its franchise, i.e., Act No. 3760 was extended for another twenty five (25) years in a National Electrification Administration (NEA) Resolution No. 134 dated September 16, 1976 subject to the same terms and conditions embodied in Act 3636. dctai In reply, please be informed that pursuant to the above-quoted Section of Act No. 3636, which was duly incorporated as part of the legislative franchise granted to Davao Light, it shall pay a franchise tax of two per centum (2%) of the gross earnings from the electric current sold or supplied, which shall be in lieu of any and all taxes of any kind, nature or description levied, by any authority, now or in the future on its "rights" and "privileges". Parallel to this, Section 119 of the Tax Code of 1997 provides as follows, viz: "SEC. 119. Tax on Franchises . Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000,000), subject to Section 236 of this Code, a tax of three percent (3%) and on electric , gas , water utilities , a tax of two percent (2%) on the gross receipts derived from the business covered by law granting the franchise: Provided , however , That radio and television broadcasting companies referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided , further , That once the option is exercised, it shall not be revoked. "xxx xxx xxx." (Emphasis supplied.) The foregoing Section 119 of the Tax Code of 1997 was a republication of Section 117 of the Tax Code, as amended by Republic Act No. 7716 (the EVAT Law) and further amended by R.A. No. 8241 (the IVAT Law), the latter law having been implemented by Revenue Regulations No. 6-97, pertinent portion of which reads: "SEC. 2. Value-Added Tax on Sale of Services and Use or Lease of Properties . . . . xxx xxx xxx "(f) Services of franchise grantees of telephone and telegraph, radio and/or television broadcasting and all other franchise grantees, except electric, gas and water utilities, shall be subject to VAT. However , franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year does not exceed Ten Million Pesos (P10 , 000 , 000 . 00) shall not be subject to VAT , but to the three percent (3%) franchise tax imposed under Sec . 117 of the Code , subject to the optional registration provisions under Sec . 4 . 107-1(c) of Rev . Reg . No . 7-95 , as amended by these Regulations . " Likewise , franchise grantees of electric , gas and water utilities shall be subject to two percent (2%) franchise tax on their gross receipts derived from the business covered by the law granting the franchise pursuant to Section 117 of the Code . " Provided , further , That all franchise grantees not falling under Sec . 117 of the Code are no longer subject to the franchise tax on their gross receipts derived from their franchised operations under their respective charters . prcd "xxx xxx xxx" The charter of Davao Light is a legislative franchise granted by the Government of the Philippines and is in the nature of private contract constituting a property right. It stands upon a different footing from the general laws. The Legislature when granting a franchise considers such facts and circumstances which the Act or charter is intended to meet. Having specially considered all of the facts and circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting a general law containing provision repugnant to the provisions of the charter, and without making any mention of its intention to amend or modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 Ill. App. 151; Philippine Railway Co. vs. Nolting, 34 Phil. 401.) Thus, the enactment of the EVAT Law, being an amendment to the general law, did not in any way, alter, amend, nor repeal the terms and conditions of the Charter under which Davao Light is required to pay 2% of its gross earning "in lieu of any and all taxes of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal, provincial, or insular, now or in the future, on its franchise rights, privileges, receipts, revenues and profits, from which taxes the grantee is exempted. Moreover, the provisions of the R.A. 7716 as further amended by R.A. No. 8241 specifically subjects franchise grantee of electric utilities to only two percent (2%) franchise tax and thereby expressly exempting them from VAT. In the light of the foregoing provisions, this Office hereby holds that Davao Light is exempt from VAT on its importation of machineries, equipment, spare parts and implements exclusively used in the business of generating and selling electric light and power and shall be subject only to the two percent (2%) franchise rate imposed under Section 117 of the Tax Code of 1997. 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. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue