VAT Ruling No. 052-98

December 2, 1998 VAT RULING NO. 052-98 108-000-00-052-98 Sycip Gorres Velayo & Company 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated November 19, 1997 requesting clarification on the taxability for VAT purposes of the Capital Cost Recovery Fees (CCRF) to be received by Mindanao I Geothermal Partnership (MIGP) from the Philippine National Oil Corporation-Energy Development Corporation (PNOC-EDC), pursuant to the Agreement for the Finance, Engineering, Supply, Installation, Construction, Testing Commissioning, Operation and Maintenance of the 47-Megawatt Mindanao I Geothermal Power Plant under the Build-Operate-Transfer Arrangement (the BOT Contract). It is represented that PNOC-EDC, a wholly-owned subsidiary of the PNOC, is among the government infrastructure agencies authorized by Republic Act 6957 (BOT Law) to enter into contracts with private contractors for the financing, construction, operation and maintenance of infrastructure projects; that it has entered into the BOT contract with MIGP, a partnership between Marubeni Mindanao Power Holdings, a wholly-owned subsidiary of Marubeni Corporation (a Japanese corporation) and Oxbow Mindanao I Partners C.V., a Netherlands limited partnership, commonly-owned affiliate of Oxbow Power Corporation; that under the BOT Contract, MIGP shall be responsible for the finance, design, construction, testing commissioning, operation, maintenance and repair of a 47-Megawatt geothermal power plant to be built on a site provided by PNOC-EDC; that PNOC-EDC shall supply and deliver steam to MIGP at no cost; that MIGP shall convert the steam into electric capacity and energy for PNOC-EDC and deliver it to the National Power Corporation (NPC) in behalf of PNOC-EDC; that the following payments are to be made pursuant to the BOT Contract: 1. Capacity Payments (a) Capital Cost Recovery Fee (A) to be paid in dollars; (b) Fixed Operating Cost Recovery Fee (B) to be paid in dollars; (c) Service Fee for Return on Investment (C) stated in dollar but payable in equivalent Philippine Pesos using the prevailing exchange rate at the time of payment. In no case shall the Service Fee be lower than 8% of the sum of the Capital Cost Recovery Fee and the Fixed Operating Cost Recovery Fee. All three (3) components of the Capacity Payments are structured to reward MIGP for good performance and penalize it for poor performance. 2. Energy Efficiency Payment This payment is a bonus or penalty for MIGP based on how efficiently it utilizes the steam provided by PNOC-EDC. that MIGP shall own the Power Plant until the buy-out date or the transfer date, whichever comes earlier; that the transfer date is the date following the end of the Cooperation Period, referring to a period of ten years of commercial operation during which time MIGP shall deliver electric capacity and energy to NPC on behalf of PNOC-EDC starting from the Commercial Operation Date of the Power Plant and continuing until the 10 th anniversary of that Commercial Operation Date; that the buy-out date is that date at which PNOC-EDC exercises its buy-out under Article 9 of the Agreement; that the option may be exercised under the following conditions: a) Delay in the obtention of the permits not attributable to MIGP and materially affecting its capacity to perform its obligations under the BOT Contract, in excess of 60 days after notification. (Article 4.6); b) Failure to reach an agreement on adjustments relative to elective modifications on the design of the Power Plant requested by PNOC-EDC within 60 days. (Article 4.7.2); c) Any condition of Force Majeure delaying a party's performance for a period of exceeding 90 days (Article 14.3.(c); d) Failure to reach an agreement within 90 days on the amendments to the BOT contract as a result of changes in Philippine laws which result in the Power Plant being unable to operate in accordance with the terms of the BOT Contract or the interest of MIGP being adversely affected. that on the buy-out date, PNOC-EDC shall purchase all of MIGP's right, title and interest in Power Plant and return all security held by PNOC-EDC; that the buy-out price shall be determined as follows: a) if the buy-out date is prior to the Commercial Operation Date of the Power Plant, the purchase price payable is the aggregate of all the costs and expenses, including accrued interest and all other direct costs incurred by financing the development, the Power Plant incurred by MIGP plus 10% of such aggregate; LLpr b) if the buy-out date is after commercial operation date, the buy-out price shall be the net present value of the remaining stream of payments for Capital Cost Recovery Fees (CCRF) discounted from the Transfer Date to the date of completion of the buy-out on basis of the last Nominated Capacity. On the basis of the foregoing representations, you now request a ruling on the proper tax treatment of the capacity payments to be made under the BOT Contract. In reply, please be informed that the Capital Cost Recovery Fee and Fixed Operation Cost Recovery Fee as payments in consideration of MIGP's services of steam conversion shall be subject to the 10% VAT imposed under Section 108 of the Tax Code of 1997. The capacity payments are directly dependent on the nominated capacity which is specified by MIGP for each year of the Cooperation period. The nominated capacity refers to the amount of electric capacity that MIGP guarantees to deliver to NPC on behalf of PNOC-EDC. This method of computation results in the actual payments being variable and dependent on the energy conversion being rendered by PNOC-EDC in favor of MIGP. Hence, since the computation of the capacity payments (the capital cost recovery fee, the fixed operation cost recovery fee, and the service fee) is dependent on the performance by MIGP in carrying out the energy conversion service for PNOC-EDC and the payments are directly related to the electrical capacity generated throughout any given billing period, the payments are made in consideration of the service of MIGP in converting the steam supplied by PNOC-EDC to electric capacity and shall be subject to the 10% VAT. 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. llcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue