BIR Ruling No. 078-10

September 23, 2010 BIR RULING NO. 078-10 RA 9513; RA 9337; RR 16-2005; BIR Ruling No. DA(VAT-060)-326-09; BIR Ruling No. DA(VAT-022)-356-009; BIR Ruling No. DA(VAT-018)-335-08; BIR Ruling No. DA-146-06 Aboitiz Power AP Renewables, Inc. 110 Legazpi Street Legaspi Village Makati City Attention: Ms. Consuelo D. Labao Comptroller Gentlemen : This refers to your letter dated April 14, 2010 stating that the AP Renewables, Inc. is a corporation organized and existing under the laws of the Philippines duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 15979 dated April 20, 2009 bearing TIN 006-893-465-000; that it is a value-added tax (VAT) registered entity; that it is likewise registered with the Department of Energy (DOE) under Registration Nos. GREOC 2009-10-006 and GREOC 2009-10-007 as an RE Developer of Geothermal Power Plan located in Tiwi-Albay and Makiling/Banahaw, Laguna, respectively; and that it is primarily organized "To invest in, finance, hold, own, purchase, acquire, lease, contract, operate, improve, develop and manage geothermal generating facilities and related assets, including those being privatized by the Power Sector Assets and Liabilities Management Corporation (PSALM) under Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (the EPIRA), as well as acquire, hold, exchange, sell shares of stock and other securities of corporations, partnerships, joint ventures and other entities owning, operating or managing generating facilities powered by geothermal, hydro or other renewable sources of energy; in general to engage in the business of power generation as well as in the marketing, trading, selling and supplying of electricity generated by its generating facilities; to engage in all other businesses incidental to the foregoing, including but not limited to the extraction of steam, the sale of the by-products of power generation, and to acquire, build, construct, own, maintain and operate all necessary and convenient buildings, structures, machineries, sub-stations, dedicated point-to-point limited transmission facilities, as provided by law, poles, wires and other things and devices; and to acquire and hold geothermal, water and flowage rights, and to acquire, lease, hold, occupy or use land rights of way and easements therein." Based on the foregoing representations, you now request a ruling that, as a Renewable Energy (RE) Developer, its sale of energy generated from renewable sources and its purchases of goods and services for the development, construction and installation of power plant facilities, are subject to value-added tax (VAT) at zero percent pursuant to Section 15 (g) of Republic Act (RA) No. 9513 in relation to Section 108 (B) (7) of RA No. 9337, as implemented by Revenue Regulations No. 16-2005, as amended. In reply thereto, please be informed that Section 15 (g) of RA No. 9513 provides that CacTIE "SEC. 15. Incentives for Renewable Energy Projects and Activities. RE Developers of renewable energy facilities, including hybrid systems, in proportion to and to the extent of the RE component, for both power and non-power applications, as duly certified by the DOE, in consultation with the BOI, shall be entitled to the following incentives: xxx xxx xxx (g) Zero Percent Value-Added Tax Rate. The sale of fuel or power generated from 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, shall be subject to zero percent (0%) value-added tax (VAT), pursuant to the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 9337. All RE Developers shall be entitled to zero-rated value-added tax on its purchases of local supply of goods, properties and services needed for the development, construction and installation of its plant facilities. This provision shall also apply to the whole process of exploring and developing renewable energy sources up to its conversion into power, including, but not limited to, the services performed by subcontractors and/or contractors." This Office had already occasion to rule on the matter, when it said in BIR Ruling No. 003-06 dated February 14, 2006, as follows: "xxx xxx xxx 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." TCacIA 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 cSaADC 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. xxx xxx xxx" Later in BIR Ruling No. DA-146-06 dated March 17, 2006, this Office ruled that: "xxx xxx xxx From the foregoing circumstances, there is no dispute that CBK is primarily organized to engage in power generation business, specifically in hydropower generation, i.e., generating/supplying electric power generated through hydropower, a renewable source of energy. This is fortified by the Certificate of Compliance issued by the Energy Regulatory Commission (ERC) that CBK is indeed a hydropower generation company. Thus, the billings of CBK for its sale of electricity to NPC, designated under the BROT Agreement as Capital Recovery Fees and O&M Fees, are subject to zero percent (0%) VAT. Comparatively, in BIR VAT Ruling No. 052-99 dated May 19, 1999, this Office ruled that "Accordingly, please be informed that, based on the said ruling, the supply of electricity by HOPEWELL PHILS., to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108(B)(3) of the National Internal Revenue Code of 1997. It shall be understood, however, that your client, HOPEWELL PHILS., shall apply with the Revenue District Office giving jurisdiction over its principal place of business for the effective VAT zero rating of its sale of electricity to the NPC, pursuant to the provisions of Revenue Regulations No. 7-95. Without an approved application for zero rating, the transaction otherwise entitled to zero percent (0%) VAT shall only be considered exempt from the VAT." It is noteworthy that while the aforesaid ruling is anchored on Section 108(B)(3) of the Tax Code of 1997 which is premised on NPC's exemption from direct and indirect taxes, this Office takes cognizant of the rule that the said exemption had already been expressly repealed, notably under Section 24(A) of R.A. No. 9337 insofar as VAT is concerned. However, this Office cannot close its eyes that the sale/supply of electricity by CBK to NPC continues to be zero-rated under Section 108(B)(7) of R.A. No. 9337. Accordingly, payments received by CBK for the sale or supply of electricity to NPC shall be subject to 0% VAT. Moreover, Section 4.108-5(b)(7) of Revenue Regulations No. 16-2005 provides that the sale of power or fuel generation 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, shall be subject to zero percent 0% VAT rate. SDATEc From the above-cited regulations, it is immediately clear that the requirement for prior approval or confirmation for effective zero-rating therefore applies only to those services specifically identified as "effectively zero-rated" under subparagraph (b) nos. (3), (4) and (5) of Section 4.108-5. Conversely, subparagraphs (1), (2), (6) and (7) of Section 4.108-5 are therefore considered zero-rated which do not require prior approval or confirmation with the BIR. WHEREFORE, in view of the foregoing, this Office holds that the billings of CBK, an entity engaged in hydropower generation, to NPC for the sale of electricity generated through hydropower are subject to VAT at zero percent (0%) under Section 108(B)(7) of R.A. 9337. Accordingly, CBK need not apply for any prior approval or confirmation with the BIR as required under Section 4.108-6 of Revenue Regulations No. 16-2005." SUCH BEING THE CASE, this Office holds that since AP Renewable, Inc. is certified as a RE Developer of Geothermal Power Plant located in Tiwi, Albay and Makiling/Banahaw, Laguna, sale of energy generated from renewable sources and its local purchases of goods and services for the development, construction and installation of power plant facilities are subject to VAT at zero percent (0%) pursuant to Section 15 (g) of RA No. 9513 in relation to Section 108 (B) (7) of RA No. 9337, as implemented by Revenue Regulations No. 16-2005, as amended. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue