VAT Ruling No. 040-03

September 24, 2003 VAT RULING NO. 040-03 Secs 106 (A) (c) 108 (B) (3) VAT Ruling 040-2000 064-2001 Balmeo Bautista & Peasales 3rd Flr., Doa Margarita Building corners Cardona and J.P. Rizal Sts. Makati City Attention: Atty. Leonides F. Balmeo Gentlemen : This refers to your letter dated December 8, 2000 requesting for confirmation of your opinion that the sales proceeds derived from the contracts entered into by your clients, ABB Alstom Power Philippines, Inc. ("AAPPI") and Asea Brown Boveri, Inc. ("ABBI"), either by itself or as assignee of its parent companies or affiliates, with the National Power Corporation ("NPC") involving electric power generating equipment, implements, machineries and other movable goods related to power generation and transmission, as well as, services ancillary thereto, are effectively subject to zero percent (0%) VAT pursuant to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997, and that AAPPI is entitled to claim as tax credit the unutilized input taxes it had accumulated since 1997 provided the claim for such unutilized input taxes are duly and seasonably made or filed and provided further that such input taxes are proven to validly exist in accordance with existing procedures for the granting and issuance of tax credit certificates. It is represented that AAPPI and ABBI are affiliated corporations duly organized under the laws of the Philippines; that AAPPI (formerly known as ABB Power, Inc.) is authorized under its charter to enter into any contract, and render any service to government agencies, in relation to the construction, repair, alteration, restoration, development, management, supervision, consultation and designing of power stations, sub-stations, relay stations, electric distribution systems, electric control systems, electrical structures and other related works; that ABBI is authorized under its charter to buy, import, manufacture, assemble, repair and sell electric power generation, transmission and distribution equipment up to the highest voltages and powers; that in 1997, AAPPI and/or ABBI entered into a series of contracts, among others, a) the Contract for the Supply and Delivery of 138 and 69 KV S/S equipment for the Mindanao Expansion Project (NPC and ABB Power, Inc.); b) the Contract for the Furnishing and Installing Complete, Converter, Electrode, and Cable Terminal Stations under the Leyte Luzon HVDC Project as assignee of ABB (Sweden)/Marubeni Consortium; that on October 18, 2000, in response to our questions, you informed this Office that the 138 and 69 KV SS Equipment, Complete Converter, Electrode, Cable Terminal Stations, Telecommunications System Equipment for National Control Center are imported from abroad; that the cost of Supply and Installation of the Complete Converter, Electrode and Cable Terminal Stations for Leyte HVDC Project are also foreign exchange funded by foreign government-owned international lending banks; that on September 7, 2000, you have likewise requested for certification of AAPPI for zero percent (0%) VAT in connection with the Sucat-Araneta-Balintawak Project of NPC originally awarded to ABB Calor Emag Schaltanlagen AG and Siemens AG (and later assigned to AAPPI) for the supply and installation of the Sucat-Araneta-Balintawak Power Transmission facilities; that the later Project is also foreign funded by Kreditanstait fuer Wiederaufbau, a German financial institution and the equipment and materials utilized and installed in the said transmission facilities are likewise imported from abroad; that until now, AAPPI and ABBI continue to comply with the terms and conditions provided under the aforesaid contracts with NPC; that since 1997 up to the present, its applications for zero rating based on contracts with NPC have not been acted upon; and that on the other hand, ABB Power Automation which has a contract for Supply, Delivery, Installation, testing and Commissioning of Telecommunications Systems essential to the effective functioning of the power generating systems for the National Control Center (NCC) of NPC is assigning to ABBI such contract; and that the cost of the supply, delivery and installation of the telecommunications system equipment for the National Control Center Project is also foreign funded. In reply, please be informed that pursuant to Section 8(b) of RA 6395 (the "NPC Charter"), as amended by Sec. 9(4) of PD No. 380, "payments made out of the proceeds of any loan, credit or indebtedness contracted by NPC, including the importation of machinery, equipment, materials, supplies and services by NPC are exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions . " Based on the foregoing and in relation to Section 13 of the same Act, NPC is authorized to contract such loans, credits, in any convertible foreign currency, or capital indebtedness from time to time from foreign government or fund source, as well as to import machinery/ies, equipment/s, materials, supplies and services, using the proceeds of the loan. Moreover, the amount so paid out of the proceeds of said loan is deemed exempt, among others, from all direct and indirect taxes imposed by the Government. SDECAI However, the said tax exemptions were withdrawn by EO 93 effective March 10, 1987 pursuant to FIRB Resolution No. 1-86. On June 24, 1987, FIRB Resolution No. 17-87 clarified the coverage of the exemption under Section 8(b) and restored the tax and duty exemption privileges of the NPC, excluding, however, certain transactions from the coverage, to wit: 1. The restoration of the tax and the duty exemption privileges does not apply to the following: 1.1. Importation of fuel (crude equivalent and coal); 1.2. Commercially-funded importations (i.e. importations which include but are limited to those financed by the NPC's own internal funds domestic borrowings from any source whatsoever, borrowings from foreign based financial institutions, etc.); and 1.3. Interest income derived from any source. Clearly, non-commercially funded importations are still exempt from all direct and indirect taxation. In other words, if the loan is funded by a government-owned financial institution, such loan funds shall be exempt from all direct and indirect taxes. Hence, since foreign loans granted to the NPC are funded by a government-owned financial institution, such loan funds shall be exempt from all direct and indirect taxes. Thus, importation of foreign goods required for its operations and projects is subject to VAT at zero percent (0%) pursuant to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997. Moreover, the supply of electric generating equipment, i.e. , 138 and 69 KV S/S by ABB Power, Inc., the converters, electrode and cable terminal stations by ABB, Sweden and the direct cost of installation and starting usage thereof, which were all imported from abroad, qualifies as an effectively zero-rated VAT transaction under Section 106(A)(2) of the Tax Code of 1997 in relation, to then Section 13(c) (now Section 13) of the Revised NPC Charter. Furthermore, the sale of the following materials, supplies and equipment and the services attendant thereto, the cost of which are foreign funded by the international lending banks and funders like the Kreditanstait fuer Wiederaufbau, viz : 1) The installation of the Complete Converter, Electrode and Cable Terminal Stations for Leyte HVDC Project; 2) The installation of the telecommunications system equipment for the National Control Center Project; 3) The entire cost of the Sucat-Araneta-Balintawak Project for supply and installation of Sucat-Araneta-Balintawak Power transmission are effectively subject to zero percent (0%) VAT pursuant to the afore-cited Section 108(B)(3) of the 1997 Tax Code. (VAT Ruling No. 040-2000 dated October 3, 2000). In fact, the aforecited three (3) projects likewise qualifies for zero rating because of the fact that the materials, equipment and supplies utilized are all imported from abroad. In this connection, Section 4.107-1(d) of Rev. Regs. 7-95 provides that " 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 ." Thus, it is necessary that a prior application for effective zero rating be filed with the RDO concerned, otherwise, the transaction shall be considered exempt. In the instant case, it is represented that your clients, AAPPI and ABBI, were able to file their applications for VAT zero rating for the years 1997, 1998 and 1999 with then ROMD, 2nd Floor, National Office, BIR. Those applications, however, were not duly acted upon by the said Division. This has been sustained by the VAT Review Committee in its VAT Ruling No. 064-2001 dated October 3, 2001, the dispositive portion of which states as follows: "In view thereof, this Office is of the opinion that the retroactivity of the DOF ruling shall not apply insofar as your sale of electricity to NPC covering the taxable quarters and taxable years for which no prior application for zero-rating has been filed. Thus, the same shall be considered exempt from sales pursuant to Sec. 4.107-1(d) of said Regulations, whereby no output taxes could arise therefrom and for which no input taxes may be claimed in respect to such sales. Nevertheless, your sale of electricity to NPC shall be subject to 0% VAT effective September 17, 1998." Considering the foregoing, the proceeds derived in 1997, 1998 and 1999 from the contracts entered into by AAPPI and ABBI with NPC shall be considered effective zero percent (0%) VAT. (VAT Ruling No. 015-99 dated February 12, 1999 and BIR Ruling No. DA-247-99 dated April 19, 1999) 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 Deputy Commissioner Legal & Inspection Group