Fees Paid by NPC to Enron Subic Power Corp. Under Energy Conversion Agreement, Subject to 5% Preferential Tax Rate

June 29, 1998 BIR RULING NO. 098-A-98 000-00-098A-98 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . M . F . A . Balili Gentlemen : This refers to your letter dated August 18, 1997 requesting, on behalf of your client, Enron Subic Power Corporation (ESPC), for a ruling that the fees paid to ESPC by the National Power Corporation (NPC) pursuant to an Energy Conversion Agreement are subject to the 5% preferential tax rate on "gross income earned" in lieu of all national and local taxes, under Section 12(c) of Republic Act No. 7227, otherwise known as "The Bases Conversion and Development Act of 1992." It is represented that ESPC is a domestic corporation duly organized and existing under the laws of the Philippines with principal office in the Subic Bay Freeport Zone (SBFZ), Olongapo City; that ESPC is also duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport enterprise under SBMA Certificate of Registration No. 930001 to engage in the generation and sale of electric power; that on January 8, 1993, NPC and Enron Power Development Corporation (EPDC) executed an Energy Conversion Agreement (ECA), whereby NPC agreed to take and pay for all electricity generated by EPDC; that for this purpose, NPC agreed, at its own cost, to supply and deliver to EPDC all fuel and start-up electricity required by EPDC to generate the electricity required to be produced by EPDC; that EPDC, in turn, agreed at its own cost, to manage, operate, maintain and repair the Cubi Power Station and the Subic Power Station (Power Stations), which are both located in the Subic Bay Freeport (SBF) Zone, subject among others, to the supply by NPC of the necessary fuel and start-up electricity; that EPDC also agreed to use its reasonable efforts to ensure that the Power Stations are in good operating condition and capable of converting the fuel supplied by NPC into electricity; that in essence, therefore, EPDC agreed to convert the NPC's fuel into electricity, and NPC agreed to take and pay EPDC certain fees for the conversion of electric energy produced and delivered by EPDC; that on January 12, 1993, pursuant to the Electric Generating Facility Lease Agreement, the SBMA leased the Power Stations, which are both located within the SBF Zone and which were both transferred and conveyed to the SBMA by R.A. 7227, to EPDC so that the latter may produce the electricity required under the ECA with NPC; that EPDC and ESPC subsequently executed, with the NPC's consent, an Accession Undertaking, whereby ESPC was fully substituted for EPDC in the ECA, as a consequence of which ESPC agreed to perform and comply with all the obligations on the part of EPDC, and to assume all the rights, benefits and interests of EPDC under the ECA, as though ESPC were originally named as a party to the ECA; that conformably with the said Accession Undertaking, ESPC took delivery of all fuel supplied by NPC, converted the said fuel into electricity, and received payments from NPC for the electricity so produced; and that EPDC subsequently assigned to ESPC, with the SBMA's consent, the Electric Power Generating Facility Lease Agreement covering the Power Stations. In reply, please be informed that pursuant to Section 12(c) of R.A. No. 7227, there is quoted hereunder as follows: "Sec. 12. Subic Special Economic Zone. "xxx xxx xxx "(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes , local and national , shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas." (Emphasis supplied) "xxx xxx xxx" Moreover, the term "gross income earned" shall mean gross sales or gross revenues derived from the business activity within the zone, net of sales discounts and sales returns and allowances and minus costs of sales or direct costs but before any deduction for administrative expenses or incidental losses during a given taxable period. . . . (see Sec. 3(o) of Revenue Regulations No. 1-95) Based on the foregoing representations, since the conversion of fuel and generation and transmission of electricity by ESPC to NPC constitute the income producing activities of ESPC which took place in the power plants located within the SBF Zone, the fees paid to ESPC by NPC pursuant to the aforementioned Energy Conversion Agreement are subject to the 5% preferential tax rate imposed under Section 12(c) of R.A. 7227, as implemented by Revenue Regulation No. 1-95, as amended by Revenue Regulation No. 12-97. 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. LexLib Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue