DA ITAD BIR Ruling No. 062-07

May 10, 2007 DA ITAD BIR RULING NO. 062-07 Sections 109 and 108, NIRC of 1997; Sections 8 and 13, R.A. 6395; Section 24, R.A. 9337 National Power Corporation Corner Quezon Avenue and BIR Road Diliman, Quezon City Attention: Cyril C. Del Callar President Gentlemen : This refers to your letter dated 27 October 2005, requesting for a ruling on the following issues: 1. Whether the contract between the National Power Corporation (NPC) and Marubeni Corporation (Marubeni) for the Supply and Rehabilitation Works of Units 1, 2, 5 and 6 of Tiwi Geothermal Power Plants , fully funded by foreign loans from the Japan Bank for International Cooperation (JBIC), may appropriately be classified as VAT zero-rated and/or exempt from the payment of value-added tax (VAT); and 2. That in case NPC is subject to VAT under the aforementioned contract, whether the opinion of Marubeni that the additional 10% VAT being billed to NPC for each progress billing "should not be subject to the 8.5% withholding VAT" pursuant to the provisions of Revenue Memorandum Circular No. (RMC) 42-99, is correct. It is represented that the Government of the Republic of the Philippines (GRP) and the Overseas Economic Cooperation Fund, Japan (now the JBIC) entered into a Loan Agreement (No. PH-P139) for the Tiwi Geothermal Power Plant Complex Rehabilitation Project dated 7 December 1994; that under the Loan Agreement, the Borrower ( i.e. , the GRP) shall authorize the NPC, as the Executing Agency, to implement the said Project, and shall cause NPC to employ consultants for the implementation of the same; that on 5 December 2001, NPC and Marubeni entered into a Contract for the Supply and Rehabilitation Works of Units 1, 2, 5 and 6 of the Tiwi Geothermal Power Plants located in Albay, Philippines; that under Article II of the said Contract, Marubeni shall furnish all labor, plant, equipment, materials, supplies for the rehabilitation of the power stations, design, manufacture, supply, and install the new equipment/materials for replacement, and commission four (4) geothermal generating units, namely Units 1, 2, 5 and 6 of the said Tiwi Geothermal Power Plant; that under Article VIII of the same Contract, NPC assumed the payment of certain taxes, to wit: "ARTICLE VIII TAXES 1. For Onshore Portion CORPORATION (i.e., NPC) shall, pay any and all forms of taxes (including VAT), which may be imposed by the Philippine Government, or any of its agencies and political subdivisions under this Contract, CORPORATION shall be also responsible for municipal business taxes, Customs duties/tariffs and etc., if any under this Contract. cSTHaE 2. For Offshore Portion 2.1 CONTRACTOR shall assume payment of all taxes, duties, tariffs, fees, imports, excise and other taxes assessed and charged by the taxing authority of the country of origin upon the production, manufacture, sale or shipment of the materials, equipment supplies to be furnished to CORPORATION under the Contract. 2.2 CORPORATION shall assume payment of all taxes (including VAT) duties, tariffs, fees, imposts, excise, and other taxes that may be imposed by the Philippine Government, or any of its agencies and political subdivisions on the imported materials, equipment and supplies (Offshore Portion) to be supplied to CORPORATION under the Contract, except corporate income tax, income tax of CONTRACTOR's personnel, license, permits, etc., as well as that of CONTRACTOR's Subcontractor, if any. 2.3 CONTRACTOR shall assume payment of all taxes, duties, tariffs, fees, imposts, excise, and other taxes assessed and charged by the taxing authority of the country of origin on CONTRACTOR's construction equipment which CONTRACTOR may bring into the country for use in connection with the Contract. 2.4 CORPORATION shall also assume payment of all taxes (including VAT), duties, tariffs, fees, imposts, excise and charges, except all fees, charges and insurance relative to registration of construction equipment of motor vehicles that the Philippine Government, or any of its agencies and political subdivision may impose upon such construction equipment or motor vehicles provided that these equipment or motor vehicles shall be transported back to such country of origin. Should CONTRACTOR decide to dispose of the same, CONTRACTOR shall reimburse all duties and taxes paid by the CORPORATION thereof. Custom's charges and insurance will be for the CORPORATION's account only if title of ownership for these equipment and motor vehicles shall have already been transferred to CORPORATION. that NPC's assumption of the payment of any other tax (including VAT), duty, tariff, fee and impost, of any kind, that may be imposed on or chargeable to the Contractor was made pursuant to Sections 8(b) and 13 of Republic Act No. (RA) 6395, as amended, otherwise known as the "Revised NPC Charter"; that the project under the said Contract with the original amount of JP 4,141,826,000, including a contingency sum of JP 376,500,000 was already completed, provisionally accepted and fully paid as of September 2004, except the unutilized portion of the contingency sum amounting to JP 347,410,000; that Marubeni also filed separate VAT billings on top of all its progress billings for onshore portion in the total amount of JP 48,340,699.86 or approximately PHP 26,394,022.12; that NPC's processing and payment of these VAT billings were held in abeyance pending resolution of the cited issues; that on May 31, 2004, NPC and Marubeni signed a Supplemental Agreement (SA) to the original contract; that activities under this SA are ongoing, with only JP 473,406,000 of the offshore portion actually paid as of July 31, 2005; and that the offshore portion of the contract and its supplemental agreement were similarly declared duty and tax free by the Department of Finance in its various endorsements to the Bureau of Customs pursuant to Presidential Decree No. (PD) 380, as restored by FIRB Resolution No. 17-87 dated June 24, 1987. In reply, please be informed as follows: I. Value-added tax treatment of the subject or similar transaction BEFORE the effectivity of R A 93 37 VAT Exemption and VAT Zero-rating, distinguished In general, VAT exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. [Section 4.103-1 (A), Revenue Regulations No. 7-95; now, Section 4-109-1, Revenue Regulations No. 16-2005] On the other hand, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. [Section 4.102-2 (a), Revenue Regulations No. 7-95; now, Section 4-108-5, Revenue Regulations No. 16-2005] Thus, in terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not. In zero rating, there is total relief for the purchaser from the burden of the tax. But in an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit for input taxes paid. [ Commissioner of Internal Revenue vs. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005 ] To the foregoing distinction, this should be added: In zero-rating, since there is an imposition of tax, albeit zero percent (0%), such imposition is construed strictly against the government and liberally in favor of the taxpayer; while in an exemption, the granting thereof is construed strictly against the taxpayer and liberally in favor of the taxing power. Section 109 (q) [now, Section 109 (1) (K), as amended by Republic Act No. 9337] of the National Internal Revenue Code (Tax Code) of 1997 provides as follows, to wit: "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590;" 1 Thus, a transaction may be exempt from the VAT if there is an international agreement to which the Philippines is a signatory, or if there is a special law (except PDs 66, 529 and 1590), exempting that particular transaction from VAT. On the other hand, Section 108 (B) (3) of the Tax Code of 1997 provides as follows, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;" Based on the foregoing, the following are the requisites to be entitled to a zero rated VAT on the sale of services, viz : 1. The service must be performed in the Philippines; 2. The service must be performed by a VAT-registered person 3. The service must be rendered to persons or entities enjoying VAT exemption under a special law or an international agreement to which the Philippines is a signatory; and 4. Such special law or international agreement effectively subjects the supply of such services to zero percent (0%) rate. NAPOCOR's tax exemption It is noteworthy that a common phrase is found in the VAT law in order to be entitled to VAT exemption or zero rating, i.e. , the existence of a " special law ". But the use of such phrase differs. In a zero rated transaction, the " special law " must not only give tax exemption to the person or entity to whom the service was rendered, but also that such tax exemption " effectively subjects the supply of such services to zero percent (0%) rate ". In a VAT exemption, however, it simply requires that the " special law " grants a VAT exemption to a particular transaction. In this particular case, that special law is Republic Act No. (RA) 6395, as amended by Presidential Decree Nos. 380 and 938, otherwise known as the Revised NPC Charter. Sections 8(b) and 13 thereof, respectively, provides as follows, viz : "Section 8. Authority to Incur Indebtedness and Issue Bonds, Their Conditions, Privileges and Exemptions, Sinking Fund Guarantee. xxx xxx xxx (b) Foreign Loans The Corporation is hereby authorized to contract loans, credits, in any convertible foreign currency, or capital goods, and indebtedness from time to time from foreign governments, or any international financial institutions or funds source, or to issue bonds, the total outstanding amount of which, exclusive of interests, shall not exceed one billion United States dollars or the equivalent thereof in other currencies, on such terms and conditions as it shall deem appropriate for the accomplishment of its purposes and to enter into and execute agreements and other documents specifying such terms and conditions. TcDAHS xxx xxx xxx The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes , fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions." (Emphasis supplied) "Section 13. Non-profit Character of the Corporation; Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities. The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes , duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." (Emphasis supplied) A reading of the foregoing provisions will reveal that the tax exemption under Section 8 is on " (t)he loans, credits and indebtedness contracted . . . and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation (NPC), paid from the proceeds of any loan, credit or indebtedness incurred ", while, the tax exemption under Section 13 refers to the exemption from direct and indirect taxes of NPC itself. Value-added tax treatment of the subject transaction An analysis of the pertinent provision of law will reveal that the subject transaction ( i.e. , the furnishing by Marubeni of " all labor, plant, equipment, materials, supplies for the rehabilitation of the power stations, design, manufacture, supply, and install the new equipment/materials for replacement, and commission four (4) geothermal generating units ") may be considered exempt from VAT, pursuant to the above-quoted Section 109 (q) of the Tax Code of 1997 in relation to Section 8 (b) of RA 6395, as amended. This is so because, as represented, the proceeds of the loan granted by JBIC to NPC are being utilized in paying billings from Marubeni in connection with the Tiwi Geothermal Power Plant Complex Rehabilitation Project. Such VAT exemption may also be based on the same Section 109 (q) but already in relation to Section 13 of RA 6395, as amended, because NPC is exempted from the payment of all forms of taxes. The furnishing of the said services by Marubeni to NPC may also be subject to the zero percent (0%) VAT rate because it complies with the above-stated requisites of Section 108 (B) (3) of the Tax Code of 1997. Firstly , the service is being performed in the Philippines, i.e. , in Albay, Philippines. Secondly , the service is being performed by a VAT-registered person, Marubeni. 2 Thirdly , the service is being rendered to NPC, an entity which enjoys VAT exemption under Section 13 of RA 6395, as amended. Lastly , such law effectively subjects the supply of such services to zero percent (0%) rate, since as held in Ernesto M. Maceda vs. Hon. Catalino Macaraig, Jr., et al. (G.R. No. 88291, June 8, 1993), the NPC is exempt from ALL FORMS of taxes. Thus, NPC is not only exempt from direct taxes, but also from indirect taxes such as the VAT. Such being the case, the burden of paying the VAT may not be shifted or passed on the NPC, the buyer of the services. In addition, for purposes effective zero-rating, Section 4.107-1 (d) of Revenue Regulations No. 7-95 should be considered, to wit: "(d) Application for effective zero-rating. Except for actual export sale, other cases of zero-rated sales in Sec. 4.100-3 and Sec. 4.102-2(c) 3 shall require prior application with the Revenue District Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt ." TaSEHC Based on the foregoing, the subject transaction should be treated as an exempt transaction because there is no showing that Marubeni filed an application for zero-rating and has obtained a prior approval from this Bureau. Nevertheless, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held: "The BIR Regulations additionally requiring an approved application for effective zero-rating cannot prevail over the clear VAT nature of respondent's transaction. The scope of such regulation is not 'within the statutory authority . . . granted by the legislature.' . . . a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter. The courts will not countenance one that overrides the statute it seeks to apply and implement. Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires additional application to be made for such taxpayer's transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents. A VAT-registered status, as well as compliance with the invoicing requirements, is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer's negligence a result not at all contemplated. Administrative convenience cannot thwart legislative mandate." Thus, by reason of all the foregoing, the transaction entered into by NPC and Marubeni in the specific Tiwi Geothermal Power Plant Complex Rehabilitation Project in Albay, Philippines may be treated as exempt from the payment of VAT arising out of the subject contract, pursuant to the above-quoted Section 109 (q) of the Tax Code of 1997, in relation to Sections 8 (b) and 13 of RA 6395, as amended, OR may be treated as zero-rated, even without an approved application for zero-rating by Marubeni, pursuant to Section 108 (B) (3) of the Tax Code of 1997 and the above-quoted pronouncement of the Supreme Court. However, to allow the concerned taxpayers to choose between the two treatments will create an absurdity in law where, in one hand, a transaction is subject to tax, and in the other, the same is exempt from tax. Where there is ambiguity, such interpretation as will avoid inconvenience and absurdity is to be adopted [Commissioner of Internal Revenue vs. TMX Sales, Inc., 205 SCRA 184 (1992)] . For Congress could not have intended absurd interpretation of the law [Darangani vs. Republic, 106 Phil. 735 (1959)] . In view thereof, since tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power, this Office is of the opinion as it hereby holds that the subject transaction between NPC and Marubeni shall be treated only as zero-rated, with or without an approved application. As a consequence, the input tax to be credited against the output tax by Marubeni at zero percent (0%) shall be fixed at one and one-half percent (1 1/2%) of their contract price, pursuant to Section 111 (B) (2) of the Tax Code of 1997, to wit: "SEC. 111. Transitional/Presumptive Input Tax Credits . xxx xxx xxx (B) Presumptive Input Tax Credits. xxx xxx xxx (2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom ." (Emphasis supplied) Moreover, according to Section 110 of the same Code, the above input tax shall be creditable against the output tax of Marubeni and should there be any excess, the same shall be carried over to the succeeding quarter or quarters, and may, at the option of Marubeni, be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112 (A), which provides as follows: "SEC. 112. Refund or Tax Credits of Input Tax . "(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: . . ." II. Value-added tax treatment of the subject or similar transaction upon the effectivity of RA 9337 Section 24 of R.A. 9337 provides as follows, viz : "SEC. 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: (A) Section 13 of R.A. No. 6395 on the. exemption from value-added tax of the National Power Corporation (NPC) ; xxx xxx xxx" (Emphasis supplied) Based on the foregoing, it is crystal clear that the legislature intended to diminish the tax exemption privileges of the NPC upon the effectivity of RA 9337, i.e. , on November 1, 2005. CaSHAc Thus, the ruling of the Supreme Court in Ernesto M. Maceda vs. Hon. Catalino Macaraig, Jr., et al. (supra) that the NPC " to be exempt from ALL FORMS of taxes direct and indirect " is modified accordingly. As a consequence, the sale of services by Marubeni to NPC may no longer be treated as a transaction subject to the zero percent (0%) VAT rate under Section 108 (B) (3) of the Tax Code of 1997, since it no longer enjoys exemption from the payment of the VAT. More specifically, it fails to comply with the third and last requisites, as above-stated, namely: (1) that the service must be rendered to persons or entities enjoying VAT exemption under a special law; and (2) that such special law or international agreement effectively subjects the supply of such services to zero percent (0%) rate. It must be emphasized, however, that the tax exemption under Section 8 (b) of RA 6395, as amended, on " ( t )he loans, credits and indebtedness contracted . . . and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation (NPC), paid from the proceeds of any loan, credit or indebtedness incurred under this Act" remains true and unaltered. Such being the case, so long as the proceeds of the loan granted by JBIC to NPC was used in paying for the specific project for which the loan was granted, such proceeds are exempt from the payment of the VAT. In this instance, there is no more absurdity in law to speak of because the transaction may no longer be treated, simultaneously, as subject to the zero percent (0%) VAT rate or as an exempt transaction. III. Non-applicability of Revenue Memorandum Circular No. 42-99 The guidelines enunciated in RMC 42-99, for VAT purposes, may not be squarely applied for the following reasons: 1. There is no showing that the loan is covered by an appropriate Exchange of Notes between Japan and the Philippines containing similar provisions quoted under RMC 42-99; 2. Even when the loan is covered by an appropriate Exchange of Notes, the ruling herein stated is not entirely consistent with RMC 42-99, since the latter is to the effect that " the suppliers and sub-contractors of the Japanese contractors shall bill and pass on the 10% VAT to the said Japanese contractors ", thereby presupposing that the subject transaction is subject to VAT at the rate of 10% (now 12%), not at the rate of 0%, nor is it treated as VAT exempt; and 3. RMC 42-99 affects, in general, the concerned executing government agencies, which do not have any respective charter of their own that contains provisions which affect our tax laws, unlike that of NPC, which enjoys certain tax privileges and given different tax treatments under RA 6395, as amended. IV. Comment on the undertaking of NPC to assume payment of taxes which are due Marubeni On a last note, the Supreme Court, in a recent case entitled Fels Energy, Inc. vs. The Province of Batangas, et al. (G.R. Nos. 168557 and 170628, February 16, 2007), made, among others, the following pronouncement: "The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be responsible for the payment of all real estate taxes and assessments, does not justify the exemption. The privilege granted to petitioner NPC cannot be extended to FELS (the contractor). The covenant is between FELS and NPC and does not bind a third person not privy thereto, in this case, the Province of Batangas (the taxing authority)." It has been observed that the NPC has in its contract with Marubeni the assumption of NPC of the payment of taxes due on the transaction. It must be pointed out that such assumption does not entitle Marubeni to any tax exemption. Nor will the tax exemption granted to the NPC be extended to Marubeni. This is so because the power to give tax exemption is not lodged on NPC but on Congress alone. Thus, even when NPC fails in its contractual obligation to pay the taxes of Marubeni which NPC assumed, Marubeni cannot justify the non-payment of taxes due it to the Government within the prescribed period by simply raising such failure of NPC. In such case, Marubeni will be assessed of all deficiency taxes plus surcharges, interest, and compromise penalties, when appropriate. Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. ( Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue, et al., G.R. No. 117359, July 23, 1998 ) V. Summary To recapitulate, this Office is of the opinion as it hereby holds that: 1. Prior to the effectivity of RA 9337, the subject transaction should be treated as zero-rated, even without an approved application for zero-rating by Marubeni, pursuant to Section 108 (B) (3) of the Tax Code of 1997 and the pronouncement of the Supreme Court in the case of Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (supra) . 2. Upon the effectivity of RA 9337 on November 1, 2005, the subject transaction shall be treated already as VAT exempt, since the requisites of Section 108 (B) (3) of the Tax Code of 1997 can no longer be met by virtue of the withdrawal of the VAT exemption privilege of NPC under Section 24 of RA 9337. 3. RMC 42-99 is not applicable in this particular case for the above-stated reasons. 4. The tax exemption privileges of NPC may not be extended to Marubeni. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered to be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue Footnotes 1. Republic Act No. 9337 has deleted Presidential Decree Nos. 66 and 1590. 2. Marubeni did not present a copy of its BIR Certificate of Registration. Upon verification, however, it appears that Marubeni is a VAT-registered person. 3. Section 4.102-2 of Revenue Regulations No. 7-95 provides as follows: "(c) Effectively zero-rated sale of services. Effectively zero-rated sales of services shall refer to the sale by a VAT-registered person or entity who was granted indirect tax exemption under special laws, or international agreements. . . . "