BIR Ruling No. 232-11

July 15, 2011 BIR RULING NO. 232-11 Team (Philippines) Energy Corporation CTC Bldg., 2232 Roxas Boulevard Pasay City Attention: Kazunobu Takijima Vice-President Gentlemen : This refers to your letter dated April 18, 2011 requesting confirmation of your opinion that with respect to the excess capacities of Team Sual Corporation and/or Team Energy Corporation traded in the Wholesale Electricity Spot Market/Philippine Electricity Market Corporation by Team (Philippines) Energy Corporation through San Miguel Energy Corporation and Therma Luzon Inc., the corresponding output VAT shall be based on the amount of VAT actually collected from the Distribution Utilities/Electric Cooperatives, as buyer of electricity from the Wholesale Electricity Spot Market/Philippine Electricity Market Corporation, and as remitted to Team (Philippines) Energy Corporation. The facts as represented are as follows: Team (Philippines) Energy Corporation (TPEC) is a corporation duly registered with the Philippine Securities and Exchange Commission (SEC) on August 11, 1992 primarily to develop, design, construct, erect, assemble, commission, own, operate, maintain, rehabilitate and manage facilities used in the generation of electricity including but not limited to gas-turbine and other power generating plants and related facilities. On October 22, 2001, the SEC approved the amendment of the Company's articles of incorporation to include the business to supply and deliver electricity, and to provide services necessary in connection with the supply or delivery of electricity thereof. The Company is a wholly owned subsidiary of TeaM Energy Corporation. TeaM Energy Corporation (TEC), is also a corporation duly organized and existing under the laws of the Philippines. It operates the Pagbilao Power Station (Pagbilao) pursuant to the Energy Conversion Agreement (ECA) between TEC and the National Power Corporation (NPC) dated November 9, 1991. TeaM Sual Corporation (TSC), likewise is a corporation duly organized and existing under the laws of the Philippines. It operates the Sual Power Station (Sual) pursuant to the Energy Conversion Agreement (ECA) between TSC and the National Power Corporation (NPC) dated May 20, 1994. Based on the ECAs of TSC and TEC, the Net Contracted Capacities of 1,000 MW and 700 MW of the Pagbilao and Sual Power Stations respectively are contracted to NPC. However, both power stations are capable of generating more power than the Net Contracted Capacities of 1,000 MW and 700 MW respectively. Pagbilao and Sual Power Stations are capable of generating up to 1,200 MW (net) and 735 MW (net) thus, having available excess capacities of 200 MW and 35 MW respectively. These excess capacities are being managed and marketed by TPEC. TaDIHc Pursuant to Section 49 of Republic Act No. 9136 otherwise known as "Electric Power Industry Reform Act" (EPIRA), the said ECAs were among the contracts of NPC with Independent Power Producers (IPPs), which the Power Sector Assets and Liabilities Management Corporation (PSALM) is mandated to take ownership of. On June 18, 2009, TPEC, together with TSC and TEC, entered into separate Memorandum of Agreement (MOAs) with PSALM in respect of these excess capacities. The MOAs clarified that, TSC and TEC shall be entitled, by itself and/or through the TPEC, to offer, sell and supply the nominal excess capacities of Sual and Pagbilao, respectively, to any customer, independent of and without payment of any fee to PSALM and/or NPC, through bilateral contracts, the WESM, ancillary services and reserve market and other schemes. Under the MOAs, TSC, TEC and/or TPEC may also purchase power from any source for its customers. The MOAs also set out the procedures for the company's fuel accounting and submission of offers and/or trading in the WESM through PSALM until such time that the company is capable of trading separately and independently of PSALM through the use of software developed by the Market Operator of WESM. This clarification of ownership and control of plant capacities is in line with PSALM's effort to ensure the successful transfer of the management of the contracted Sual and Pagbilao capacities to the Independent Power Producer Administrators (IPPA). In 2009, as required under the EPIRA, certain assets of NPC/PSALM were privatized. This included the transfer of the management and control of the energy output of the IPP power plants under contract with NPC to private entities. The administration of contracted capacities with TSC and TEC were awarded to San Miguel Energy Corporation (SMEC) and Therma Luzon, Inc. (TLI) respectively as IPPAs. As IPPAs, SMEC and TLI assumed the function of PSALM under the respective MOAs, on the trading of electricity of TPEC through WESM/PEMC. At present, TPEC is only legally and technically/logistically allowed to trade the excess capacities of Sual and Pagbilao through the respective IPPAs, pending the approval of its application with PEMC as Direct Member and Trading Participant-Generator, and PEMC's improvement of its systems to allow and accommodate TPEC's direct trading in the WESM. IPPAs trade TPEC's capacity to the WESM/PEMC, which in turn offers the same to the end-users through Distribution Utilities (DUs)/Electric Cooperatives (ECs). With this set-up, delays in the VAT payments made by end-users through DUs/ECs are usually encountered. In reply, please be informed that Revenue Memorandum Circular No. 61-2005 specifically provides for the treatment of generation and transmission charges, including the VAT thereon (which are pass-through charges of the distribution companies and electric cooperatives), as follows: "Q26 What is the treatment of the Generation and Transmission charges including the VAT thereon which are pass-though charges of the Distribution Companies and Electric Cooperatives? A26 The Generation and Transmission companies shall bill the end-user through the Distribution Companies and Electric Cooperatives for the sale and transmission of electricity and ancillary services including the VAT thereon. The amount collected from the end-user for such charges shall not form part of the gross receipts of the Distribution Companies and Electric Cooperatives. The Distribution Companies and Electric Cooperatives shall not claim an input tax on such pass-through charges. The amount collected from the end-user as payment for the generation and transmission charges including the VAT thereon shall form part of the gross receipts and output VAT of the Generation Company or Transmission Company, accordingly. DcHSEa The Distribution Companies and Electric Cooperatives may advance, exclusive of the corresponding VAT, the generation fee to the Generation Company. The amount advanced may be offset against the amount collected from the end-user and only the VAT portion of the generation fee shall be remitted to the generation company upon collection from the end-user. The reckoning of the VATable sale between the generation company and the end-user shall be upon collection on the billing made by the Distribution Companies and Electric Cooperatives." (Emphasis supplied) Also, the Energy Regulatory Commission's Resolution No. 20, Series of 2005 states that "the VAT collected by the DU on generation, transmission and system loss shall be remitted to the concerned generation company and transmission company, which in turn, shall be responsible for the tax due to the BIR." Based on the foregoing provisions, the amount collected by the DU from the end-users for the sale of electricity, does not form part of its gross receipts but that of the generation and transmission companies. In this case, since TPEC's transactions with SMEC and TLI are merely pass-through with respect to its electricity trading in the spot market, the amount collected from DU buyers through WESM/PEMC should not also form part of the gross receipts of SMEC and TLI, but that of TPEC. Therefore, only the VAT portion of the generation fee shall be remitted to TPEC upon collection by SMEC and TLI from the WESM/PEMC, and the reckoning of the VATable sale between TPEC and the end-user shall be only upon remittance of the VAT, collected by SMEC and TLI From WESM/PEMC to TPEC. Based on the foregoing, this Office rules that TPEC's transactions with SMEC and TLI, IPPAs of Sual and Pagbilao Power Stations, respectively, for the sale of the excess capacities are merely pass-through transactions. As such, TPEC, for purposes of VAT recognition, shall be treated as a generating IPP directly dealing with DUs/ECs through the WESM/PEMC. Thus, with respect to the excess capacities of TSC and/or TEC traded in the WESM/PEMC by TPEC through SMEC and TLI, the corresponding output VAT shall be based on the amount of VAT actually collected from the DUs/ECs, as buyer of electricity from the WESM/PEMC, and as remitted to TPEC. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue