VAT Ruling No. 009-02

March 6, 2002 VAT RULING NO. 009-02 108 (b) (2) & (3) 052-99; 06-99; 120-99; 018-00 Puno and Puno Law Offices Textron Bldg., 168 Luna Mencias Street San Juan, Metro Manila, Philippines Attention: Atty. Roderico V. Puno Partner Gentlemen : This refers to your letter dated October 2, 2000, requesting, in behalf of your client, Bauang Private Power Corporation (BPPC), for a ruling on the following issues, to wit: (a) Whether or not the US Dollar receipts from the sale of electricity by BPPC to National Power Corporation (NPC) are subject to zero percent (0%) value-added tax (VAT); (b) Whether or not the Philippine Peso receipts from the sale of electricity by BPPC to NPC are effectively zero rated (0%) VAT; and (c) Whether or not BPPC may apply for tax credit or refund of creditable input taxes paid attributable to such sales of electricity. It is represented that BPPC is a VAT-registered domestic corporation and registered with the Board of Investments as a pioneer enterprise granted with various incentives notably an income tax holiday for six (6) years; that initially on January 11, 1993, First Private Power Corporation (FPPC) and NPC executed the Fast-Track, Build, Operate, and Transfer Agreement (BOT Agreement); that, subsequently, on March 15, 1993, BPPC became a party to the same BOT Agreement by virtue of an Accession Undertaking entered into by FPPC, BPPC and NPC whereby FPPC transferred its rights and obligations thereunder as Contractor to BPPC; and that, pursuant to the said agreement, NPC is obligated to pay BPPC capacity fees, operation and maintenance fees and energy fees partly in Philippine Pesos, and partly in US Dollars remitted by NPC to BPPC. In reply thereto, please be informed that, in BIR Ruling No. 003-98 dated January 15, 1998, this Office held that the sale of electricity made by the San Pascual Cogeneration Co., to the NPC, shall be subject to the 10% VAT pursuant to Section 102 of the old NIRC (now, Sec. 108, NIRC of 1997). The NPC requested the Department of Finance to review and reconsider the said ruling, in view of its impact on the national interest considering that the cost of the 10% VAT will translate into higher cost of electricity to the general public. In a Memorandum to the Commissioner of Internal Revenue dated January 26, 1998, the then Hon. Secretary of Finance Roberto F. de Ocampo, in the exercise of his power to review rulings issued by the BIR under Section 4 of the Tax Code of 1998, held that: "The Department has consistently held the view that NPC's purchase of electricity should be treated in the same manner as its purchase of petroleum products. This is in recognition of the broad and comprehensive tax exemption privilege granted to NPC by Congress. The NPC Charter clearly provides for NPC's exemption from all taxes-direct and indirect. No less than the Supreme Court ruled that it has been the lawmakers intention that the NPC is completely exempt from all taxes. The Department of Justice and the Office of the Solicitor General have also issued opinions supporting the full tax exemption of the NPC. Even the BIR has ruled that NPC is exempt from direct and indirect taxes. "As explained by the Supreme Court, the rationale for the NPC's, tax exemption is to ensure cheaper power. If the BIR's recent view is to be implemented, the VAT, being an indirect tax, may be passed on by the seller of electricity to NPC Effectively, this means that electricity will be sold at a higher rate to the consumers. Estimates show that a 10% VAT on electricity which is purchased by NPC from its independent power producers will increase power costs by about P109.4 million a month or about P1.30 billion a year. The effect on the consumer is an additional charge of P0.059 per kilowatt hour. The recognition of NPC's broad privilege will insure to the ultimate benefit of the Filipino consumer. "In view of the foregoing and using the power of review granted to the Secretary of Finance under Sec. 4 of Republic Act No. 8424, the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases of NPC of electricity from independent power producers are subject to a VAT at zero-rate". However, please be informed further that Sec. 102(a)(3) of the Tax Code of 1977, now Sec. 108(B)(3) of the Tax Code of 1997, provides that 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 VAT. Thus, the sale of electricity by BPPC to NPC is subject to zero percent (0%) VAT pursuant thereto. (VAT Ruling No. 067-99) It is understood, however, that BPPC is VAT-registered and shall apply with the Revenue District Officer having jurisdiction over its principal place of business for the effective VAT zero-rating of its sale of electricity to NPC pursuant to the provisions of Revenue Regulation No. 7-95 (formerly Revenue Regulation No. 5-87). Without an approved application therefor, such sales will be treated merely as VAT-exempt transactions under Sec. 109(q) of the Tax Code of 1997 (formerly Sec. 103(u) of the Tax Code of 1977). (VAT Review Committee Ruling No. 018-00.) Furthermore, if BPPC has been VAT-registered and has obtained an approved application for effective zero-rating of such sales, it 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; such claim may be granted only upon submission of the documentary requirements prescribed under Revenue Regulation No. 3-88. Accordingly, whether BPPC is entitled to claim for tax credit and/or refund, the accumulated input VAT attributable to its sales of services to NPC will depend on the submission of the documents prescribed under Revenue Regulation No. 3-88. This ruling is being issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group