VAT Ruling No. 003-99

January 7, 1999 VAT RULING NO. 003-99 Sec. 108 (B) (3)-023-95-003-99 PunongBayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St.,Salcedo Village Makati City Attention: Atty . V . C . Mamalateo Gentlemen : This refers to your letter dated April 6, 1998 requesting confirmation of BIR Ruling No. 023-95 dated February 14, 1995, wherein this Office ruled that: "xxx xxx xxx "(3) BWSC-Mindanao, being a duly registered corporation engaged in trade or business in the Philippines, is subject to ordinary Philippine corporate income tax. Its gross receipts from the services it renders to the Consortium shall, however, be subject to VAT even if it fails to register as a VAT taxpayer. On the other hand, if it chooses to register as such, and the consideration for such services is paid for the acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to zero-rate. xxx xxx xxx" It is represented that the National Power Corporation (NAPOCOR) entered into a contract for the operation and maintenance of two-megawatt power barges for a 15 year term with a non-resident foreign consortium (Consortium) composed of Burmeister & Wain Scandinavian Contractor A/S (BWSC Denmark), a Danish corporation, Mitsui Engineering & Shipbuilding, Ltd., a Japanese corporation, and Mitsui & Co., Ltd., another Japanese corporation; that as coordination manager for the Consortium, BWSC-Denmark established BWSCMI, a wholly-owned Philippine corporation; that the Consortium entered into a subcontract with BWSCMI for the actual operation and maintenance of the power barges and the performance of other services under the Agreement that necessarily have to be performed in the Philippines; that the Consortium pays BWSCMI for its services in foreign currency inwardly remitted to the Philippines through the banking system; that BWSCMI is registered as a VAT taxpayer; that BWSCMI is subject to ordinary Philippine corporate income tax calculated on the fees paid by the Consortium under the subcontract less allowable deductions; that NAPOCOR pays the capacity and energy fees due under the Agreement to the Consortium in a mixture of currencies; that the freely convertible non-Peso component of the fees is paid directly to the Consortium's bank accounts in Denmark and Japan; that because the Peso component is not freely convertible and cannot be remitted and held overseas, it is deposited in a separate and especially designated bank account in the Philippines; that NAPOCOR deposits the Peso component directly into the bank account and BWSCMI assists in its subsequent conversion to foreign currency for remittance to the Consortium's bank account in Denmark; that on May 5, 1994, the President of the Philippines signed into law Republic Act No. 7716, otherwise known as the "Expanded VAT Law" amending Executive Order No. 273 by deleting from Section 102(b)(2) the requirement that foreign currency payments be inwardly remitted in order for services to be zero-rated; and that the Expanded VAT Law also left intact and unchanged the other two requirements for the zero-rating of BWSCMI's services, namely, that the consideration for services must be paid in acceptable foreign currency and accounted for in accordance with the rules and regulations for the Bangko Sentral ng Pilipinas. In reply, please be informed that since BWSCMI's services comprise the actual operation and maintenance of the two power barges under contract to NAPOCOR, its services are effectively connected with the sale of electricity to NAPOCOR. In a memorandum-ruling of the Secretary of Finance dated January 26, 1998, it was held that the purchase of NAPOCOR of electricity from independent power producers are subject to VAT at zero-rate. Otherwise, the VAT may simply be passed on by the seller of electricity to NAPOCOR which in turn will result into a corresponding increase in the rate of electricity it charges to the consumers. prLL Accordingly, the Peso component of the fees which NAPOCOR pays to the Consortium and which will be used to pay for the services of BWSCMI is subject to VAT at zero rate in accordance with the above ruling. On this basis, BIR Ruling No. 023-95 dated February 14, 1995 is reconfirmed insofar as it held that the services being rendered by BWSCMI is subject to zero percent (0%) VAT. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue