San Roque Power Corporation

June 10, 2004 VAT RULING NO. 019-04 Sec. 108 (B) (3) VAT Ruling No. 009-02 SGV & Co . 6700 Ayala Avenue Makati City Attention: E.C. Alcantara Tax Division RE : San Roque Power Corporation Gentlemen : This refers to your letter dated March 8, 2004 seeking a reconsideration of the recommendation of the Office of the Regional Director of Revenue Region No. 1, Calasiao, Pangasinan, denying the claim for the refund of unutilized input VAT in the total amount of P1,438,480,388.94, for the period of December 1998 to December 2001, as filed by your client, San Roque Power Corporation (SRPC). It appears that SRPC is a domestic corporation engaged in the business of generating electricity and its sale to the National Power Corporation (NPC). On October 11, 1997, it entered into a Power Purchase Agreement (PPA) with the National Power Corporation (NPC) to develop the hydro-potential of the Lower Agno River and generate additional power and energy for the Luzon Power Grid, by building and operating the San Roque Multi-Purpose Project located in San Miguel, Pangasinan. As operator of the hydroelectric generating power plant and during the co-operation period of twenty-five years commencing from the completion of the power station, SRPC will sell all generated power to NPC, commencing in the year 2004 or actual commencement of operations, whichever comes first. For the period December 1998 to December 2001, SRPC claimed to have incurred input VAT from the purchase of capital goods and services, for which it has filed its claim for the refund of the same pursuant to Section 112 (B) of the Tax Code of 1997. As per the memorandum report affirmed by the Regional Director on January 27, 2004, the grounds for the administrative denial of the claim for refund are as follows: 1. that the taxpayer's claim for refund of input Value-added Tax (VAT) purchases of capital goods shall only be ratable portion corresponding to taxable operation pursuant to Section 4.106.1 of Revenue Regulations No. 7-95, as amended. 2. that with regard to the National Power Corporation (NPC), contribution to the construction cost of the non-power components (dam and other facilities) which form part of the whole project of SRPC, the claim of input taxes on its total project disbursements should only be limited to capital goods purchased for the construction of the power component ; 3. that SRPC does not qualify under Section 108(B)(3) and Section 112(A) and (B) of the 1997 Tax Code as it will start selling its product to NPC only on year 2004 or upon actual operations whichever comes first, and further that it did not submit the special law or international agreements which subjects the supply of such services to zero percent (0%) rate. 4. that while SRPC may have filed its application for issuance of tax credit certificate or refund of input VAT within the two year period after the close of the taxable quarter when the purchases were made in accordance with Section 113(A) and (B), it failed to appeal to the CTA after the expiration of the 120 day period from the date of complete submission of documents in support of its application as required under the provision of Section 112 of the Tax Code of 1997. In reply, please be advised that Revenue Memorandum Circular (RMC) No. 49-03 dated August 15, 2003, states that " (I)n cases where the taxpayer has filed a "Petition for Review" with the Court of Tax Appeals involving a claim for refund/TCC that is pending at the administrative agency (Bureau of Internal Revenue or OSS-DOF), the administrative agency and the tax court may act on the case separately ". Since you have already filed your judicial claim for refund with the Court of Tax Appeals as per your admission, we find it prudent to let the court take due cognizance of the various issues now submitted to it which presumably include the issues stated above. However, without prejudice to the outcome of the final determination of the court on all factual and legal issues submitted to it, we can reiterate the relevant rulings and opinions of this Office in relation to issues bearing similarity to the above. 1. On the issue of the VAT treatment of sales of electricity to the National Power Corporation . It has been well-settled that such sales are to be considered effectively zero-rated, following the ruling of the Secretary of Finance dated January 26, 1998 on this specific issue, the dispositive portion being that " 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". Thus, the purchases of NPC of electricity from independent power producers are subject to a VAT at zero-rate ." (emphasis supplied). Hence, this Office has consistently held since then that the sale of electricity to NPC is effectively subject to zero percent (0%) VAT pursuant to Section 108(B)(3) of the Tax Code of 1997, subject to the condition that the IPP shall apply with the Revenue District Officer concerned having jurisdiction over it 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. (VAT Ruling No. 015-99 dated February 12, 1999 [San Roque Power]); VAT Ruling No. 022-99 dated March 11, 1999 [Hopewell Mobile Power]); VAT Ruling No. 052-99 dated May 13, 1999 [Hopewell Phil.]); (VAT Ruling No. 067-99 dated July 14, 1999 [Western Mindanao Power]); VAT Ruling No. 099-99 dated September 16, 1999 [PNOC Energy]); VAT Ruling No. 018-00 dated March 21, 2000 [Magellan Cogeneration]); VAT Ruling No. 064-01 dated October 3, 2001 [Kepco]); VAT Ruling No. 009-02 dated March 6, 2002 [Bauang Power]) . Record shows that the Commissioner of Internal Revenue himself has already made a prior approval of the zero-rated status of SRPC's sales to NPC which approval was secured even before such sale transaction is to take place, as required. (VAT Ruling Nos. 015-99 and 064-01) . There being no showing of an exempt portion, there will be no need to make any allocation or apportionment between exempt and taxable operations for the computation of the allowable input VAT that may be refunded. 2. On the issue of whether the claim of input taxes on SRPC's total project disbursements should only be limited to capital goods purchased for the construction of the power component and not for construction cost of the non-power components . We take note of the fact that the San Roque Multi-Purpose Power Plant was envisioned to harness the " hydropower potential of the Lower Agno River to generate additional power and energy for the Luzon Power Grid ". The term "hydropower" or "hydroelectric" necessarily connotes generation of electric energy by harnessing water energy. In fact, the term "Hydroelectric power" is defined under Sec. 4(a) of RA 7156 (Mini-Hydroelectric Power Developers Act) to refer to the " electric power produced by utilizing the kinetic energy of falling or running water to turn a turbine generator ". In relation thereto, SRPC submitted relevant documentations to the effect that the dam, spillway and related facilities are necessary for the generation of electric power. Section 112(B), Tax Code of 1997 provides, that " (R)efund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business ." If the main product of SRPC is electricity which is subject to VAT at zero rate, and there is a showing that all such inputs for the purchase of capital goods relate to such VAT taxable business or necessarily connected to that activity, then the refund claimed would appear to be in order. Besides, there is no indication that SRPC is engaged in other non-VAT taxable business. We note that a related issue has been decided by the courts in CIR vs. Hopewell Power (Phils.) Corporation, CA-G.R. No. 51617 dated March 17, 2000 , where the CA affirmed the ruling of the CTA that even engineering and structural services are in the nature of "capital goods" as defined under then Section 106(b) in relation to Section 4.106-1(b) of Revenue Regulations No. 7-95. As such, the CA held: "Arriving at its finding that Hopewell is entitled to a refund or tax credit of the input VAT, it held: " The records show that petitioner expended for engineering and structural services for the purpose of constructing power plant facilities needed in the production of electricity, which is petitioner's main product. We are therefore convinced that said expenses are necessary and should form part of the cost of the power plant facilities ." (emphasis ours) 3. On the issue that SRPC does not qualify under Section 108(B)(3) [effective zero rated sales under special laws] and Section 112(A) [refund for zero-rated or effectively zero-rated sales] and (B) [refunds of capital goods] of the 1997 Tax Code as it will start selling its product to NPC only in year 2004 or upon actual operations whichever comes first, and further that it did not submit the special law or international agreements which subjects the supply of such services to zero percent (0%) rate . As previously stated, this Office specifically requires that in all cases of sales of electricity to NPC, the condition imposed under Sec. 4.107-1(d) of Rev. Regs. No. 7-95, must be complied with before the request for effective zero-rating may be granted, thus: "(d) Application for effective zero-rating Except for actual export sale, other cases of zero-rated sales in Sec. 4.100-3 and Sec. 4.102-2(c) shall require prior application with the Revenue District Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt" As may be gleaned from the foregoing provision, it is clear that even before such sale transaction is to take place , it is necessary that a prior application for effective zero rating be filed with the RDO concerned, otherwise, the transaction shall be considered exempt. ( VAT Ruling No. 064-01 dated October 3, 2001 ). (emphasis supplied). Records show that the above condition has been complied with since SRPC was granted separate Certificates for Zero-rate through the Chief of the Regulatory Operations Monitoring Division for the period of September 27, 1998 up to December 31, 1998 and January 1, 1999 up to December 31, 1999, with further assertions that certificates for zero-rate for subsequent claims for refund have likewise been consistently granted to SRPC. Again, on top of these, a specific ruling was issued to SRPC by the Commissioner himself which confirmed that SRPC's sales of power to NPC are subject to VAT at zero percent (0%) rate. ( BIR Ruling No. 015-99 ). Finally, there is no need for the submission of the " special law or international agreements which subjects the supply of such services to zero percent (0%) rate " as it is sufficient for the taxpayer to cite the specific law relied upon to support his claim. At any rate, this is already moot and academic since the fact of zero-rated sales of electricity to NPC is already a well-settled issue and long recognized by this Office and by the courts. 4. On the issue of alleged prescription for alleged failure to appeal to the CTA after the expiration of the 120 day period from the date of complete submission of documents in support of its application as allegedly required under the provision of Section 112(D) of the Tax Code . Since this issue refers to the timeliness of judicial claims, it will be most prudent to let the CTA render its learned decision on the matter, including the rest of the issues outlined above. AaDSTH Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group