VAT Ruling No. 050-01

July 23, 2001 VAT RULING NO. 050-01 R.A.'s 3247, 3570, 6020 Sec. 119, E.O. 92 BIR Rulings 46-97 and 072-98 Quiason Makalintal Barot Torres & Ibarra 21/F Robinsons-Equitable PCIBank Tower ADB Avenue cor. P. Poveda Road Ortigas Center, Pasig City Attention: Messrs : Wilfrido E . Sanchez, Ruelito S . Soriano and Aurelio J . Dequito Gentlemen : This refers to your letter dated February 29, 1999 requesting for a confirmation of your opinion that: (1) the importation by your client, Cagayan Electric Light & Power Company (CEPALCO), of equipment, machinery and spare parts necessary in the conduct of CEPALCO's business is exempt from the value-added tax; and (2) CEPALCO is not liable for the payment of value-added tax on its gross receipts other than the franchise tax of three percent (3%). Documents submitted show that under Republic Act No. 3247 approved on June 17, 1961, CEPALCO was granted a legislative franchise, with the appurtenant right, privilege and authority to construct, maintain and operate an electric light, heat and power system for the purpose of generating and/or distributing electric light, heat and/or power for sale within the City of Cagayan de Oro and its suburbs for a period of fifty years; that Republic Act No. 3247 was amended on June 21, 1963 by Republic Act No. 3570 which added the municipalities of Tagoloan and Opol, both of the province of Misamis Oriental, to CEPALCO's area of operation; that CEPALCO's franchise was further amended on August 4, 1969 by Republic Act. No. 6020 to include in said area the municipalities of Villanueva and Jasaan, also in Misamis Oriental; and that Section 3 of Republic Act Number 3247, as amended by Republic Act Nos. 3570 and 6020, provides " that the said franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted ." It is your position that CEPALCO is not liable for the value-added tax on the importation of equipment, machinery and spare parts necessary in the conduct of CEPALCO's business on the following grounds: 1. Sections 108 and 109 of the Tax Code specifically excludes electric franchisees from coverage of the value-added tax; 2. In BIR Ruling 46-97, the Honorable Commissioner of Internal Revenue ruled that an electric franchisee is exempt from value-added tax; 3. The Court of Tax Appeals has held that electric franchisees are exempt from value-added tax on importations; and 4. The Supreme Court has consistently upheld the "in lieu of all taxes" proviso in the franchises of numerous grantees. In reply, please be advised that this Office is of the opinion as it hereby holds that pursuant to the aforequoted provisions of Republic Act No. 3247, as amended by Republic Act Nos. 3570 and 6020, CEPALCO's liability to the franchise tax shall be in lieu of all taxes and assessments of whatever authority, and this includes the value-added tax on its importation of various equipments, machineries and spare parts to be used in the conduct of its business. In its decision in the case of Davao Light and Power Company vs. The Commissioner of Internal Revenue (C.T.A. Case No. 5413, August 7, 1998, citing Philippine Long Distance Telephone Company vs. The Commissioner of Internal Revenue, C.T.A. Case No. 5106, December 18, 1995, and the Commissioner of Internal Revenue vs. Philippine Long Distance Telephone Company, CA-G.R. SP No. 40881), the Court of Tax Appeals held that the "in lieu of all taxes" proviso has the effect of exempting from taxation the value-added tax which is covered under the general term "taxes" on the purchases of imported equipments, machineries and spare parts by virtue of the payment of the franchise tax . (Emphasis supplied). Furthermore, CEPALCO, as an electric franchise grantee, is expressly exempt from the ten percent (10%) value-added tax pursuant to Section 109 (j) of the Tax Code and Revenue Memorandum Circular No. 5-96. Moreover, the provisions of RA 7716 as further amended by RA 8241 specifically subject franchise grantees of electric utilities to only two percent (2%) franchise tax and thereby expressly exempting them from VAT. (BIR Ruling No. 072-98 dated May 27, 1998) In the light of the foregoing, this Office hereby holds that CEPALCO is exempt from VAT on its importation of machineries, equipment, spare parts and implements to be exclusively used in the business of generating and selling electric light and power and shall be subject only to the rate of two percent (2%) franchise tax imposed under Section 117 of the Tax Code of 1997. CIDTcH 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.) REN G. BAEZ Commissioner of Internal Revenue