VAT Ruling No. 015-99

February 12, 1999 VAT RULING NO. 015-99 Sec. 108 (B) (3)-000-00-015-99 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty . E C Alcantara Tax Division Gentlemen : This refers to your letter dated February 5, 1998 requesting confirmation of your opinion that the sale of electricity by your client, San Roque Power Corporation (San Roque) to the National Power Corporation (NPC) is an effectively zero rated transaction pursuant to Section 108(B)(3) of the Tax Code of 1997. It is represented that San Roque is a domestic corporation primarily engaged to design, construct, erect, assemble, own, commission and operate electric power-generating plants and related facilities pursuant to and under contract with the Government of the Philippines, or any subdivision, instrumentality or agency thereof, or any government-owned or controlled corporation, or other entity engaged in the development, supply or distribution of energy; that pursuant to its aforesaid business purpose, San Roque entered into a Power Purchase Agreement with NPC to develop the hydropower potential of the Lower Agno River to generate additional power and energy for the Luzon Power Grid, by building the San Roque Multi-Purpose Project located in San Manuel, Pangasinan; and that under the Power Purchase Agreement, the entire electricity to be generated therefrom will be purchased by NPC 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 by San Pascual Cogeneration Co. to NPC is subject to the 10% VAT pursuant to then Section 102 of the Tax Code, as amended. The NPC requested the Department of Finance for a review of said ruling in view of its significant implications on national interest. 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 its 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's 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". In view thereof, the sale of electricity by San Roque to NPC is subject to zero percent (0%) VAT pursuant to Section 108(B)(3) of the Tax Code of 1997. It shall be understood, however, that your client, San Roque shall apply with the Revenue District Officer concerned having jurisdiction over your client's principal place of business for the effective zero rating of its sale of electricity to NPC pursuant to Revenue Regulations No. 7-95. Without an approved application for zero rating, the transaction otherwise entitled to zero rating shall be considered exempt. 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue