BIR Ruling No. 363-13

October 1, 2013 BIR RULING NO. 363-13 Antonio Atendido Tan Brgy. Burgos, San Leonardo Nueva Ecija Sir : This refers to your letter dated 20 December 2012 requesting for legal opinion on the propriety and legality of the imposition of 12% Value-Added Tax (VAT) on Members' Contribution for Capital Expenditure or Reinvestment Fund for Sustainable Capital Expenditure by the Ilocos Norte Electric Cooperative, Inc. and Nueva Ecija Electric Cooperative II Area 2. DHIETc Background The Members' Contribution for Capital Expenditures is an amount charged by electric cooperatives to member-consumers upon prior approval by the Energy Regulatory Commission (ERC).The MCC is envisioned to fund the amortization of debt service of the electric cooperative's indebtedness associated with the expansion, rehabilitation or upgrading of their existing electric power system in accordance with their ERC-approved capital expenditure plan. In its Resolution No. 14 Series of 2011 the Energy Regulatory Commission (ERC) modified the term Members' Contribution for Capital Expenditures (MCC) to Reinvestment Fund for Sustainable Capital Expenditures (RFSC). The primary reason for the modification of the term is because the MCC was being erroneously interpreted as a capital build-up or compulsory "capital contributions" from member-consumers. In reply, VAT is an indirect tax which may be shifted or passed on to the buyer, transferee or lessee of the goods, properties, or services. Pursuant to Section 105 of the National Internal Revenue Code (NIRC) of 1997, as amended, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the NIRC. The MCC or RFSC is collected by electric cooperatives from member-consumers as part of the cost of services rendered by the electric cooperatives. It is payment for services rendered and not capital contribution. This confusion was what prompted ERC to change the nomenclature from Members' Contribution for Capital Expenditures (MCC) to Reinvestment Fund for Sustainable Capital Expenditures (RFSC). Funding or recovery of capital expenditures is not unique to electric cooperatives. Most businesses take into account funding or recovery of capital expenditures in determining the amount they would charge or collect from their customers or clients. For instance, a lessor of a commercial building recovers capital expenditures through rentals. Part of the amount the lessor collects from his tenants are meant to fund future expansion or recover capital expenditures. Such amount is subject to VAT. When it comes to taxation, the doctrine of strict interpretation applies. It should always be remembered that taxes are the lifeblood of the nation, the court has always applied the doctrine of strict interpretation in construing tax exemptions. A claim for exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. ( Paseo Realty & Development Corporation v. Court of Appeals, et al. ,G.R. No. 119286, October 13, 2004, as cited in Davao Oriental Electric Cooperative, Inc. vs. The Province of Davao Oriental, G.R. No. 170901, January 20, 2009) TaDSCA In Quezon City and The City Treasurer of Quezon City vs. ABS-CBN Broadcasting Corporation , 1 the Supreme Court declared that: "He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that 'exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt'.In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms." Based on the foregoing, this Office rules that the Members' Contribution for Capital Expenditures or Reinvestment Fund for Sustainable Capital Expenditures collected by Ilocos Norte Electric Cooperative and Nueva Ecija Electric Cooperative II Area 2 from their member-consumers are subject to VAT . Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. G.R. No. 166408, October 6, 2008.