VAT Ruling No. 045-98

November 26, 1998 VAT RULING NO. 045-98 Sec. 119-000-00-045-98 Sycip Gorres Velayo & Company 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated February 10, 1997 requesting for a ruling on whether or not the sale of utilities (power, steam and carbon dioxide) to Coca Cola Bottlers Philippines, Inc. (CCBPI) by your client, ORCA ENERGY, INC. (ORCA), is subject to the 10% VAT under Sections 100 and 102 (now Secs. 106 and 108 of the Tax Code of 1997) of the Tax Code, as amended. It is represented that ORCA is a joint venture domestic company providing utilities to a single industrial user, CCBPI, pursuant to a joint venture contract entered with the latter, that in the said contract, ORCA undertook on a build-operate and own (BOO) arrangement for 10 years of the co-generation facility project which shall supply the following utilities to CCBPI, viz: (a) Power generated by diesel engines; (b) Steam provided boilers; (c) Carbon dioxide extracted from exhaust emissions generated by the plant that the co-generation facility is subdivided into two, namely, (a) that the engine house, which utilizes heavy fuel generators to provide 8.8 megawatts base load power and 4.5 megawatts standby power 2.5 megawatt power, is required for the station auxiliary load; and (2) that the plant house produces steam and carbon dioxide for use in bottle washing and drink products, respectively; that under BOO, ORCA will undertake to exclusively supply the above-mentioned utilities to CCBPI; and that ORCA will not supply nor sell said utilities to any other party. In reply, please be informed that then Section 117 of the Tax Code, as amended (now Sec. 119 of the Tax Code of 1997), imposes the franchise tax, as follows: "SEC. 117. Tax on Franchises . Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchise . . . on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise. . . ." The above-mentioned provision applies only to entities granted a legislative franchise, it being a tax on the grantee's gross receipts. Thus, this Office in BIR Ruling No. 194-92 dated July 3, 1992 had already ruled that a seller of electricity shall be subject to franchise tax only in case where the seller generates and distributes electricity pursuant to a legislative franchise or charter. Conversely, since ORCA is not a grantee of a legislative franchise, the 2% franchise tax under then Section 117 of the Tax Code, as amended (now Sec. 119 of the Tax Code of 1997), will not apply. Accordingly, ORCA is subject to 10% VAT pursuant to Section 108 of the Tax Code of 1997. LLpr 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