VAT Ruling No. 019-99

February 11, 1999 VAT RULING NO. 019-99 109 (q)-055-98-019-99 East Asia Utilities Corporation Brgy. Ibo, Mactan Export Processing Zone (MEPZ) 6015 Lapu-lapu City, Cebu Attention: Mr . John V . Alcordo Executive Vice President, General Manager Gentlemen : This refers to your letter dated September 25, 1998 requesting confirmation of your opinion that East Asia Utilities Corporation (EAUC) is exempt from the 10% value added tax on its sale of electricity to Mactan Export Processing Zone (MEPZ). It is represented that EAUC is domestic corporation with principal office located in Cebu; that pursuant to its registration with the SEC it is authorized to build, construct, erect, own, equip, install, operate, maintain, sell and lease power generation plants, facilities, machinery, equipment, and to purchase, import, acquire, own, lease or let power generation, telecommunications, transportation and other kinds of equipment, materials and facilities; that currently, EAUC operates a 50.154 MW power plant at the MEPZ; that, it has a Power Supply and Purchase Agreement with the Export Processing Zone Authority (now the Philippine Economic Zone Authority) whereby the latter will purchase all its power requirements from EAUC; that, EAUC is registered with Board of Investments (BOI) as a pioneer enterprise and as operator of a power generating plan with a capacity of 50 MW, it has been granted by BOI certain incentives which includes Income Tax Holiday for six years starting from December 1993; likewise, it is accredited by Department of Energy (DOE) as a Private Sector Generation Facility under Executive Order No. 215 for operating a power plant within the MEPZ; and that EAUC is also registered with PEZA as an Ecozone Utilities Enterprise pursuant to the provisions of Republic Act No 7916. Based on the above representations, it is now your contention that EAUC, being a duly registered Ecozone Utilities Enterprise, is entitled to avail of the exemption from all internal revenue taxes in accordance with Section 24 of Republic Act No. 7916 and this necessarily includes the 10% VAT on the sale of electricity to MEPZ. It is your view that Republic Act No. 7916 is a special law and the exemption from VAT under such law is recognized under Section 109(q) of the 1997 Tax Code, which states that among the transactions exempt from VAT are those "which are exempt under international agreements to which the Philippines is a signatory or under special laws except those under Presidential Decree No. 66, 529 and 1590 ."(Emphasis supplied) In reply, please be informed, as follows: 1. That Republic Act No. 7916 merely amended Presidential Decree No. 66, otherwise known as the law "Creating the Export Processing Zone Authority and Revising Republic Act No. 5490", which, among others, ordered the assumption by the newly created PEZA of the powers and functions previously discharged by EPZA in accordance with Section 1 of Executive Order No. 282, series of 1995, in relation to Section 11 of RA 7916. As such, RA 7916 can not be considered a special law within the purview of the provision under Section 109(q) of the 1997 Tax Code, for the reason that such law merely replaced/amended PD 66, which is one of those to which such exempt provision shall not apply. prcd 2. That the provisions of the 1997 Tax Code are generally not applicable to the operations of certain PEZA-registered enterprises inside the zone for the reason that they are governed by the special tax regime of 5% on gross income earned in lieu of local and national taxes (Section 24, RA 7916). However, in the normal course of business, such enterprises are expected to deal with local suppliers of goods and services in the Customs Territory, who, on the other hand, are liable to the taxes imposed under the 1997 Tax Code.The provisions of the said Code, specifically the 0% VAT provisions contained therein as well as the exception of PD 66 in Section 109(q) thereof, are, thus, intended to provide for legal mechanisms by which the purchase of goods and services by these enterprises from local suppliers in the Customs Territory shall be free from VAT by allowing local suppliers to apply for effective 0% VAT-rating on such transactions rather than merely treating them as exempt transactions for which no benefit of application for a claim of tax refund or issuance of tax credit certificate corresponding to the input taxes incurred may be allowed. 3. That, Section 25 of Republic Act No. 7916 provides that " all income derived by persons and all service establishments in the ECOZONE shall be subject to taxes under the National Internal Revenue Code" . As clearly provided by said Section, EAUC, being a service enterprise engaged in the sale of electricity to MEPZ, is not governed by the special tax provision embodied in Section 24 of said Act, therefore, it is subject to the taxes imposed by the 1997 Tax Code, notwithstanding the fact that it is registered with PEZA and that it conducts its business operations in MEPZ. Furthermore, during the time that EAUC was enjoying its 6-year income tax holiday granted by BOI, it is likewise subject to the other taxes imposed by the 1997, Tax Code which necessarily includes the liability to pay the corresponding business tax that may thereupon be imposed. Moreover, since the provision for the imposition of 2% franchise tax on the sale of electricity as provided Section 119 of the 1997 Tax Code is only applicable in cases where the seller generates and distributes electricity pursuant to a legislative franchise or charter, the same can not apply to the sale of electricity by EAUC to MEPZ for the reason that EAUC is neither a legislative franchise grantee nor is it an electric cooperative contemplated under Section 109(x) thereof, which is exempt from the imposition of VAT. As such, EAUC is generally subject to the 10% VAT based on its gross receipts derived from the sale of electricity to enterprises operating inside MEPZ pursuant to Section 108 of same Tax Code,which VAT component when passed on to these enterprises loses its character as a tax and becomes part of the cost of the electricity purchased. llcd However, following the Destination Principle of the VAT System on which our VAT law was based, if the sale of service, which is this particular case - the sale of electricity, was made to an enterprise which is registered with PEZA as an Export Manufacturer / Trader whose products are destined for use or consumption outside the Philippines, such sale is accorded an effective 0%-VAT rate status provided that the requirements for prior application laid down by Sec. 4.107-1(d) of Revenue Regulations No. 7-95, as amended, have been complied with by the seller. Without an approved application for effective zero-rating, the transaction shall be merely considered exempt, in which case the seller thereof shall not be entitled to the benefit of input tax relative to the transaction. (VAT Review Committee Ruling No. DA-055-98) This ruling is being issued on the basis of the facts 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group