VAT Ruling No. 003-98

January 15, 1998 VAT RULING NO. 003-98 Sec. 102 (b) (3)-000-003-98 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr . Ruben R . Rubio Tax Division Gentlemen : This refers to your letter dated September 16, 1997 for and behalf of your client, San Pascual Cogeneration Co. (SPCC),requesting for confirmation of your opinion that its sales of electricity to the National Power Corporation (NPC) may qualify for effective zero-rating pursuant to Section 102(b)(3) of the NIRC, as amended. LibLex It is represented that SPCC is contemplating to undertake a cogeneration project with the NPC; that since 1992, the sponsors of SPCC had worked actively with the Department of Energy to design an energy cogeneration project which would meet the stringent thermal efficiency standards set by the Republic of the Philippines; that as a result of this concerted effort, the San Pascual Cogeneration project (referred to as the project) is to be established, which is considered to be the first large scale (304MW) cogeneration project in the country; that the Project shall be undertaken on a build-operate-and-own arrangement that will supply electricity to NPC, as well as steam and other useful thermal energy to certain thermal hosts; that SPCC is in the process of negotiating with NPC on the terms and conditions for the supply of electricity which shall constitute their primary product. In reply, please be informed that Section 102(b)(3),NIRC, on zero-rated sales of services, provides: "(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-rate." The same is implemented by Section 4.102-2(c) of Revenue Regulations No. 7-95, 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 to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Under these Regulations, effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subpar (b),Nos. (3),(4) and (5) of this section." cdll Basically, the issue raised for resolution herein is whether or not NPC is exempted from "indirect tax" under an existing law or international agreement. If the answer is in the affirmative, your client's sale of services to NPC (i.e.,sale of electric power) will consequently qualify for zero-rating in conformity with the requirements of the law. In resolving the above, the case in point is ERNESTO M. MACEDA vs. HON. CATALINO MACARAIG, JR.,et al, G.R. No. 88291, June 8, 1993 (223 SCRA 217) where the High Court in a chronological review of the relevant NPC laws, ruled, which we quote: "Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes, etc." in its Section 10, amending Section 13, RA No. 6395, as amended by P.D. No. 380, does not expressly include "indirect taxes." His points is not well taken. xxx xxx xxx Actually, P.D. No. 938 attests to the ingenuousness of then Pres. Marcos no matter what his faults were. It should be noted that Sec. 13, R.A. No. 6395, provided for tax exemptions for the following terms: 13(a): ... 13(b): income, franchise, realty taxes; 13(c): import of foreign goods required for its operations projects; 13(d): petroleum products used in generation of electric power. P.D. No. 938 lumped up 13(b), 13(c) and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.," included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax exemptions. xxx xxx xxx Five (5) years on into the now discredited New Society, the Government decided to rationalize government receipts and expenditures by formulating and implementing a National Budget. The NPC, being a government owned and controlled corporation had to shed off its tax exemption status privileges under P.D. No. 1177. llcd xxx xxx xxx The NPC tax exemption privileges withdrawn by Section 1, P.D. No. 1931, were, therefore, the same NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which it did, and the same were granted under FIRB Resolutions No. 10-85 and 1-86 as approved the Minister of Finance. xxx xxx xxx Under. E.O. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President Aquino. Its Section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The same was granted under FIRB Resolution No. 17-87 dated June 24, 1987 which restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. 93 (986). xxx xxx xxx Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June 11, 1984 up to the present." cdlex A cursory reading of the above Decision reveals that the tax exemption privileges of NPC which were successively repealed but, thereafter, also successively restored by FIRB Resolutions Nos. 10-85, 1-86, and 17-87 were the very same tax exemption privileges of NPC availing under its Charter, as amended by P.D. No. 938, namely, exemption from the following taxes: 1. income, franchise, realty taxes; 2. import of foreign goods required for its operations and projects; 3. petroleum products used in generation of electric power. Accordingly, NPC's exemption from direct taxes covers "income, franchise, realty taxes" and taxes on "import of foreign goods required for its operations and projects" while its exemption from indirect taxes covers the taxes otherwise due on its purchase of "petroleum products used in generation of electric power" [see pp. 236-237 of decision].Therefore, NPC is not exempt from the VAT on its purchase of electricity from San Pascual Cogeneration Co. In view thereof, your request that SPCC's sale of services (i.e.,sale of electric power) to the NPC qualifies as a zero-rated transaction is hereby denied for lack of legal basis. Accordingly, your client's sale of electric power to NPC is subject to the 10% VAT imposed under Section 102 of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue