Petroleum Products Sold to East Asia Utilities Corp. Exempt from Excise Tax

August 30, 1999 BIR RULING NO. 135-99 R.A. 7916-000-00-135-99 Castro Cadiz & Carag Law Offices Suite 25PC, Eisenhower Condominium No. Eisenhower Street, Greenhills San Juan, Metro Manila Attention: Atty . Othelo C . Carag Gentlemen : This refers to your letter dated August 11, 1999, requesting for a confirmation of your opinion that petroleum products imported or manufactured and sold by Subic Bay Fuels Co., Inc. ("SBFC") to East Asia Utilities Corporation ("EAUC"), formerly Mactan Power Corporation, are exempt from excise tax. LexLib It is represented that EAUC is a domestic corporation registered on 27 April 1998 with the Philippine Economic Zone Authority ("PEZA") as an Ecozone Utilities Enterprise pursuant to the provisions of Republic Act No. 7916 ("PEZA Law"); that it is authorized to operate a 50.1 MW power plant inside the Mactan Export Processing Zone ("MEPZ") in Mactan, Cebu; that it purchases petroleum products from SBFC, an enterprise registered with and/or licensed by Subic Bay Metropolitan Authority ("SBMA") pursuant to the provisions of R.A. No. 7227; that EAUC uses said petroleum products in its power plant and sells the electricity generated by its power plant to PEZA for use by the PEZA locators; however, it also sells electricity to Visayan Electric Company ("VECO"), a customs territory enterprise. You are now requesting for opinion that: "1. The petroleum products imported or manufactured and sold by SBFC, a SBF enterprise, to EAUC, an Ecozone Utilities Enterprise, for its use and consumption within the Ecozone, are exempt from excise tax [Section 24 of the PEZA Law; Section 1(A) of Rule XIV of the Rules and Regulations to Implement Republic Act No. 7916, otherwise known as "The Special Economic Zone Act of 1995" ("PEZA Rules")]; and "2. The corresponding petroleum products used and consumed by EAUC as inputs to produce the electricity sold to VECO are not subject to excise tax because it is the electricity which is the final product sold to VECO, a customs territory enterprise, that is subject to applicable taxes under the National Internal Revenue Code ("Tax Code") [Rule VIII of the PEZA Rules; BIR Ruling No. 117-99 dated 10 August 1999]. In reply, please be informed as follows: 1. Under Section 24 of R.A. 7916 otherwise known as "The Special Economic Zone Act of 1995", business establishments, except service establishments, operating within the Ecozone shall be exempt from national and local taxes and that in lieu of paying taxes, five percent (5%) of their gross income earned from their registered operations within the Ecozone shall be remitted to the national government. Similar to R.A. 7916, Section 12(b) and (c) of R.A. 7227, the law creating the Subic Freeport Zone, also exempts from all national and local taxes enterprises registered with SMBA and operating within the Subic Special Economic Zone. Further, under Section 51 of R.A. 7916, all privileges, benefits, advantage or exemptions granted to special economic zones under R.A. 7227, shall ipso-facto granted to special economic zones already created or to be created under R.A. 7916. In view thereof, enterprises registered in different special economic zones are exempt from all national and local taxes. In lieu thereof, these enterprises are subject to a final tax on their gross income. As such, any sale of goods by enterprises registered in different special economic zones to enterprises registered in other special economic zones are also exempt from all national and local taxes. Hence, EAUC which is registered with PEZA as an Ecozone Utilities Enterprise, and not a service establishment, is exempt from national and local taxes, which include, among others, excise tax. Likewise, SBFC, a SBF enterprise, is also exempt from national and local taxes, including excise tax. Hence, no excise tax attaches to the petroleum products imported or manufactured and sold by SBFC and EAUC for the latter's use and consumption within the Ecozone. (Sections 23, 24, 25 and 51 of R.A. 7916; Section 2, Rule XVI and 1(A)(1)(2), Rule XIV of the PEZA Rules; BIR Ruling No. 70-97 dated June 9, 1997; BIR Ruling No. 049-99 dated April 13, 1999). 2. The excise tax exemption equally applies to the petroleum products used and consumed by EAUC to produce electricity sold to VECO. However, EAUC shall be subject to the 33% corporate income tax, 2% franchise tax but exempt from VAT on its sale of electricity to VECO. Since there is no provision in the Tax Code which subjects the sale of electricity to excise tax, then no excise tax can be imposed on the sale of electricity of EAUC to VECO. (Rule VIII of the PEZA Rules; BIR Ruling No. 117-99 dated August 10, 1999). This ruling is being issued on the basis of the facts 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.) BEETHOVEN R. RUALO Commissioner of Internal Revenue