VAT Ruling No. 061-99

May 18, 1999 VAT RULING NO. 061-99 119 059-90 061-99 Cebu Private Power Corporation Brgy. Ibo, Mactan Export Processing Zone (MEPZ) 6015 Lapu-lapu, Cebu City Attention: Mr . John V . Alcordo Executive Vice President, General Manager Gentlemen : This refers to your letter dated September 25, 1998 requesting confirmation of your opinion that Cebu Private Power Corporation (CPPC) is exempt from the 10% value-added tax (VAT) and is, instead, subject to the 2% franchise tax on electric utilities. It is represented that CPPC is a domestic corporation duly authorized to build, construct, erect, own, equip, install, operate, maintain, sell, or lease power generation plants, facilities, machinery equipment and to purchase, import, acquire, own lease or let power generation services, telecommunications, transportation and other kinds of equipment, materials and facilities; that CPPC is registered with the Board of Investments (BOI) as a pioneer enterprise and granted with tax incentives, including income tax holiday for a period of six (6) years from June 1998 or the actual start of its commercial operations, whichever comes first; that CPPC has entered into a Power Purchase Agreement with the Visayan Electric Co., Inc. (VECO), a duly enfranchised public utility authorized to engage in the production, transmission, distribution and sale of electric energy in Cebu City and its surrounding areas; that under this Agreement, CPPC shall build a power generating plant and operate the same for a period of 15 years, after which, it shall transfer ownership of the power plant to VECO; that, during the said period, VECO shall purchase electricity from CPPC. It is also represented that the Department of Energy (DOE) has granted CPPC a provisional accreditation for the operation of the proposed 75MW Bunker-C Power Plant Project to be undertaken under the Build-Operate-Transfer scheme with VECO and that a final accreditation as a Private Sector Generation Facility (PSGF) under Executive Order No. 215 shall then be issued upon finalization and implementation of said Agreement. In connection therewith, Section 1(b) of Article II of the Implementing Rules and Regulations (IRR) of Executive Order No. 215 provides that an owner or operator of a proposed PSGF shall apply for accreditation as a qualified PSGF, subject to terms and conditions, a portion of which provides: "Private corporations, cooperatives and similar associations primarily engaged in the generation or sale of electric power referred to in these implementing rules and regulations as electric utilities, may own, construct and operate generating facilities but shall be subject to electric utility regulations concerning rates, financial limitations and other laws applicable to their operations as electric utilities ." In view thereof, it is now your contention that CPPC is subject to the 2% franchise tax on electric utilities under Section 119, in lieu of the 10% value added tax under Section 108, of the Tax Code of 1997. In reply, please be informed that your above opinion is hereby confirmed. This finds support in VAT RULING NO. 059-90, dated February 28, 1990, where it was ruled that sales of electricity by Private Sector Generation facilities (PSGF), pursuant to E.O. No. 215 and its implementing rules and regulations, shall be governed by the 2% franchise tax imposed under Section 117 of the old NIRC (now Sec. 119, NIRC, as renumbered by R.A. 8424), as follows: ". . . PSGF are governed by laws applicable to electric utilities . . . they are exempt from the payment of value added tax on their sale of electricity pursuant to Section 103 (j) of the Tax Code. However, as electric utilities granted authority by NPC or NEA, as the case may be, to own, operate and generate electricity, they are subject to the 2% franchise tax as prescribed in Section 117 of the Tax Code. . . ." LibLex "Sec. 119. 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 franchises . . . and 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. . . ." (Emphasis supplied) Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue