VAT Ruling No. 052-99

May 13, 1999 VAT RULING NO. 052-99 108 (B) (3) 003-98 052-99 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated January 28, 1999 requesting confirmation of your opinion that the energy fees and capacity fees payable by the National Power Corporation (NPC) to HOPEWELL POWER (PHILIPPINES) CORPORATION (HOPEWELL PHIL . for short) for the latter's supply of electricity under a Build-Operate-Transfer (BOT) basis, shall be subject to the zero percent (0%) value added tax (VAT) pursuant to Section 106 (A) (2) (c) and 108 (B) (3) of the National Internal Revenue Code of 1997. It is represented that HOPEWELL ENERGY INTERNATIONAL LIMITED (HOPEWELL, for short), a corporation duly organized and existing under the laws of Hongkong, entered into an Energy Conversion Agreement with the National Power Corporation (NPC) on a build-operate-transfer basis; that, under the agreement, HOPEWELL agreed to construct, and operate for a period of twenty-five (25) years (co-operation period), a coal fired thermal power plant at Pagbilao, Quezon; that, the electricity generated therefrom shall be purchased by the NPC; that, after the lapse of the co-operation period, HOPEWELL shall transfer to the NPC the ownership of the said power plant, free from all liens and encumbrances and without payment of any compensation; that, Hopewell has organized a subsidiary Philippine corporation, namely HOPEWELL POWER (PHILIPPINES) CORPORATION (HOPEWELL PHIL. for short), which has been duly registered with the Bureau of Internal Revenue as a VAT taxpayer, that, in an Accession Undertaking executed between HOPEWELL, HOPEWELL PHIL., and the NPC, HOPEWELL PHIL. assumed all obligations of HOPEWELL, its parent company, in respect of the development, construction and operation of the power plant; that, in consideration for the supply of electricity and related undertakings under the agreement, the NPC shall compensate HOPEWELL PHIL. in the form of monthly capacities fees and energy fees. In reply thereto, please be informed that, in BIR Ruling No. 003-98 dated January 15, 1998, this Office held that the sale of electricity made by the San Pascual Co-generation Co., to the NPC, shall be subject to the 10% VAT pursuant to Section 102 of the old NIRC (now, Sec. 108, NIRC of 1997). The NPC requested the Department of Finance to review and reconsider the said ruling, in view of its impact on the national interest considering that the cost of the 10% VAT will translate into higher cost of electricity to the general public. In a Memorandum to the Commissioner of Internal Revenue dated January 26, 1998, the then Hon. Secretary of Finance Roberto F. de Ocampo, in the exercise of his power to review rulings issued by the BIR under Section 4 of the Tax Code of 1998, held that: "The Department has consistently held the view that NPC's purchase of electricity should be treated in the same manner as its purchase of petroleum products. This is in recognition of the broad and comprehensive tax exemption privilege granted to NPC by Congress. The NPC Charter clearly provides for NPC's exemption from all taxes-direct and indirect. No less than the Supreme Court ruled that it has been the lawmakers intention that the NPC's is completely exempt from all taxes. The Department of Justice and the Office of the Solicitor General have also issued opinions supporting the full tax exemption of the NPC. Even the BIR has ruled that NPC is exempt from direct and indirect taxes. "As explained by the Supreme Court the rationale for the NPC's tax exemption is to ensure cheaper power. If the BIR 's recent view is to be implemented, the VAT, being an indirect tax may be passed on by the seller of electricity to NPC. Effectively, this means that electricity will be sold at a higher rate to the consumers. Estimates show that a 10% VAT on electricity which is purchased by NPC from its independent power producers will increase power costs by about P109.4 million a month or about P1.30 billion a year. The effect on the consumer is an additional charge of P0.059 per kilowatt hour. The recognition of NPC's broad privilege will insure to the ultimate benefit of the Filipino consumer. prcd "In view of the foregoing and using the power of review granted to the Secretary of Finance under Sec. 4 of Republic Act No. 8424 the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus the purchases of NPC of electricity from independent power producers are subject to a VAT at zero-rate ". Accordingly, please be informed that, based on the said ruling, the supply of electricity by HOPEWELL PHIL., to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108(B)(3) of the National Internal Revenue Code of 1997. It shall be understood, however, that your client, HOPEWELL PHIL. shall apply with the Revenue District Office having jurisdiction over its principal place of business for the effective VAT zero rating of its sale of electricity to the NPC, pursuant to the provisions of Revenue Regulations No. 7-95. Without an approved application for zero rating, the transaction otherwise entitled to zero percent (0%) VAT shall only be considered exempt from the VAT. This ruling is being issued on the basis of your foregoing representations. 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 Local & Enforcement Group