National Power Corporation

April 24, 2007 VAT RULING NO. 007-07 BIR Ruling No. 007-06 National Power Corporation Quezon Avenue corner BIR Road Diliman, Quezon City Attention: Mr. Rainier B. Butalid Vice President Office of the General Counsel Gentlemen : This refers to your letter dated September 6, 2006 requesting for a ruling on whether the use of sub-transmission lines and the payment of the wheeling fee by NPC to HEDCOR, Inc. form an integral part of the sale of hydroelectric power by HEDCOR, Inc. to NPC such that the said wheeling charges are exempt from the VAT. As represented, on January 30, 1993, a contract for a 25 year cooperation period was signed under a Build-Operate-Own (BOO) scheme between HEDCOR, Inc. and NPC for the Ampohaw and Bakun Mini hydro power plants. The mini hydro power plants are of the run-of-the-river type which means that they do not involve dam construction and need no fuel for its operation. HEDCOR, Inc. generates and sells power to NPC and such power is wheeled or transmitted through wood poles sub-transmission lines that are owned and maintained by HEDCOR, Inc. NPC pays to HEDCOR, Inc. a separate wheeling fee for the use of those sub-transmission lines but these lines are used exclusively to deliver the power generated by the Hydroelectric Plants to the Luzon Grid. ESHcTD NPC, to this effect, issued "Notice of Disallowances" to HEDCOR, Inc. for its application of the value-added tax (VAT) of 12% on these wheeling charges. This disallowance was based primarily on Energy Regulation Commission (ERC) Resolution No. 20, series of 2005, and BIR Ruling on RVAT Law, which stipulates that transactions subject to zero percent (0%) VAT rate include the sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. In reply, please be informed that in BIR Ruling No. 007-2006 dated August 8, 2006, this Office had occasion to rule as follows: xxx xxx xxx "On November 1, 2005, R.A. No. 9337 (the "Reformed VAT Law") became effective. Under Section 108(B)(7) of the 1997 Tax Code, as amended by the Reformed VAT Law, the 'sale of power or fuel generated through renewable sources of energy such as, but not limited to biomass, wind, hydropower, geothermal, ocean energy and other emerging energy sources' continues to be zero-rated. However, the zero-rating applies only to the sale of power or fuel, and does not cover the sale of other goods and services to NPC, such as the provision of transmission services for which Wheeling Charges are being paid by NPC. In connection with the foregoing, Section 13 of the NPC Charter was amended pursuant to Section 24 of the Reformed VAT Law, which states: '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. 9395 on the exemption from value added tax of the National Power Corporation (NPC);' The amendment of Section 13 of the NPC Charter by the Reformed VAT Law resulted in NPC being liable for VAT. Accordingly, NPC became liable for VAT passed on by its suppliers of goods and services. Furthermore, the sale of goods and services to NPC ceased to be effectively zero-rated under Sections 106(A)(2)(c) and 108(B)(3), both of the 1997 Tax Code, as amended. Hence, starting November 1, 2005, the date of effectivity of the Reformed VAT Law, HEDC may already pass on to NPC the VAT on the Wheeling Charges. In this regard, this Office takes note of the Energy Regulatory Commission's (ERC) Resolutions No. 10, series of 2006 and No. 20, series of 2005 instituting and prescribing a mechanism for the recovery of the VAT imposed on the generation, transmission, and distribution of electricity under the Reformed VAT Law. In view of the foregoing, this Office rules that starting November 1, 2005, NPC is no longer exempt from the liability to pay input VAT on the transmission services of HEDC for which Wheeling Charges are being paid by NPC." In view of the foregoing, the wheeling charges which NPC pays to HEDCOR, Inc. for the use of sub-transmission lines used to deliver the power generated by the Hydroelectric Plants to the Luzon Grid is now subject to VAT beginning November 1, 2005. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner