VAT Ruling No. 011-05

August 8, 2005 VAT RULING NO. 011-05 Sec. 8, R.A. 9136 Sec. 6 (b) Hydro Electric Development Corporation 110 Legaspi Street, Legaspi Village Makati, Metro Manila Attention: Mr. Jose Venancio P. Batiguin Managing Director Gentlemen : This refers to your letter dated November 7, 2003 requesting for a ruling to the effect that the "sales of generated power by generation companies shall be value added tax zero-rated" pursuant to Chapter II Section 6 paragraph 5 of Republic Act (R.A.) No. 9136 (EPIRA); and such sales of generated power by said generation companies is subject to value added tax at zero percent from the effectivity of the EPIRA. FACTUAL BACKGROUND Hydro Electric Development Corporation (HEDCOR for brevity) is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with office address at 214 Obulan, Beckel, La Trinidad, Benguet. HEDCOR is engaged in the business of developing potential sites for hydroelectric power in the Province of Benguet and Baguio City. It has been registered as such pursuant to Republic Act No. 7156 otherwise known as "An Act Granting Incentives to Mini-Hydroelectric Power Developers and For Other Purposes" and its Implementing Rules and Regulations (IRR) as evidenced by its Certificates of Registration dated November 20, 1992. All the incentives it enjoys under R.A. No. 7156 have expired last January 25, 2002 after ten years of enjoying the same. It is presently registered as a VAT taxpayer with the Bureau of Internal Revenue (BIR) under VAT Registration No. 609-000134. On February 27, 2003, HEDCOR filed with the Energy Regulatory Commission (ERC) an Application for Certificate of Compliance as a Generation Company under application number LMMD-COC APP 2003 047. On November 5, 2003, the Energy Regulatory Commission (ERC) pursuant to Section 38 of the EPIRA creating the ERC, the pertinent Rules and Regulations to Implement the EPIRA and the Guidelines for the Issuance of Certificate of Compliance for Generation Companies/Facilities granted HEDCOR a Certificate of Compliance (COC) No. 03-11-GXT33-033. By virtue of said certificate, HEDCOR shall be entitled to all the rights subject to such obligations appertaining, consistent with the laws, rules and regulations pertinent thereto. SEHaDI HEDCOR at present generates electric power which it supplies by virtue of an electric power supply agreement to the following corporations: 1. PHILEX Mining Corporation; 2. Benguet Electric Cooperative, Inc.; 3. Davao Light & Power Co., Inc. and 4. San Fernando Electric Light and Power Company. Copies of said electric power supply agreements are attached and made integral part of taxpayer's request. TAXPAYER'S POSITION/OPINION 1. HEDCOR posits that from the effectivity of the EPIRA, generation companies shall be zero-rated for the purpose of imposition of value-added tax . Republic Act No. 9136 entitled "An Ordaining Reforms in the Electric Power Industry, Amending for the Purpose Certain Laws and for Other Purposes" was approved on June 8, 2001. It took effect fifteen (15) days following its publication or on June 26, 2001 as provided under Section 81 of said Act. Its Implementing Rules and Regulations took effect on March 22, 2002 (having been published on March 7, 2002.) Chapter II Section 6 paragraph 5 of said R.A. No. 9136 provides that "sales of generated power by generation companies shall be value added tax zero-rated." Further, Section 6(b) Rule 5 Part II of the abovementioned IRR dated February 27, 2002, provides that from the effectivity of the Act, the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a Generation Company through all stages of sale until it reaches the End-user. Thus, pursuant to the provision of Section 6 par. 5 of the EPIRA, sales of generated power by a Generation Company shall be subject to the zero percent (0%) rate. 2. HEDCOR opines that it is subject to VAT at zero rate and that said zero rating shall retroact to June 26, 2001 which is the effectivity date of the EPIRA . Pursuant to Section 6(b) Rule 5 Part II of the IRR "sales of generated power by Generation Company shall, from the effectivity of the Act , be zero-rated for the purpose of imposition of value-added tax." Since the IRR provides that the zero rate VAT shall be imposed on the sales of generated power by a Generation Company from date of the effectivity of the law then it follows that the sale of HEDCOR of generated power shall be considered zero rated for VAT purposes from June 26, 2001, the effectivity of the EPIRA. Henceforth, by operation of law, HEDCOR is considered zero rated from the effectivity of EPIRA. cITaCS Further, it is no longer required to secure an approved application for zero rating under Section 8(d) of Revenue Regulations No. 5-87, as amended by Revenue Regulation No. 7-95. "Section 8. Zero-rating : "xxx xxx xxx "(d) Application for imposition of zero rate . Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 (now Sec. 106) and 102 (now Sec. 108) shall file an application in a form prescribed therefore with the Commissioner of Internal Revenue justifying the imposition of zero rate on the said transaction. Upon approval, his status as zero rated taxpayer shall remain valid until revoked." BIR REPLY We reply as follows: Section 6(b), Rule 5, Part II of the Rules and Regulation implementing Section 6 paragraph 5 of the EPIRA provides that "Section 6. Generation Charges and VAT. "(a) . . . "(b) Pursuant to the policy of reducing electricity rates to End-users, sales of generated power by a Generation Company shall, from the effectivity of the Act, be zero-rated for the purpose of imposition of value-added tax. Towards this end, the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a Generation Company through all stages of sale until it reaches the End-user. The DOF, through the BIR, shall issue the necessary revenue regulation within sixty (60) calendar days from effectivity of these Rules." The Above Rule provides that, from the effectivity of the Act, sales of generated power by a Generation Company shall be subject to zero percent (0%) VAT through all stages of sale until it reaches the End-user. It is a fact that the EPIRA came into law on June 26, 2001. On the other hand, the aforementioned Implementing Rules and Regulations which was approved by the Joint Congressional Power Commission (JCPC) on February 27, 2002 took effect on March 22, 2002. In the light of the clear intention of the Congress through the JCPC to subject the sales of generated power by a Generation Company, to zero percent (0%) VAT from the date the EPIRA came into law, this Office hereby opines that HEDCOR as a generation company duly issued by the ERC a Certificate of Compliance (COC) No. 03-11-GXT33-033 on November 5, 2003, is subject to the zero percent (0%) VAT from the effectivity of the Act (i.e., June 26, 2001) Further, considering that the benefit of VAT zero rating is in pursuance to a clear mandate of the EPIRA, sales of Generation Companies are considered subject to automatic zero percent (0%) VAT. Thus, generation companies already registered with the BIR as a VAT entity shall not be required to re-register as such. However, a generation company who is registered with the BIR as a non-VAT entity is required to re-register as a VAT person to avail of the VAT zero rating. Accordingly, since HEDCOR, a duly VAT registered entity, is a generation company whose sales of generated power is subject to zero percent (0%) VAT pursuant to the provision of the EPIRA, it is not required to secure an approved application for zero rating under the aforequoted Section 8(d) of Revenue Regulations No. 5-87, as amended by Revenue Regulations No. 7-95 which apply only to those effectively zero rated. DHITcS This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue