VAT Ruling No. 063-91

June 27, 1991 VAT RULING NO. 063-91 Mr. Ernesto M. Aboitiz President, National Power Corp. (NPC) Cor. Quezon Ave. & Agham Road Diliman, Quezon City S i r : This refers to your letter dated February 19, 1991, requesting for a confirmation that your contractor, ASEA BROWN BOVERI, LTD. (ABB), a foreign corporation organized under the laws of Switzerland, may be exempted from the 10% value-added tax vis-a-vis its construction of the NPC Gas Turbine Power Plant Project at Naga, Cebu. It is represented that said NPC Project is funded under the Swiss Mixed Credit Agreement (copy of loan agreement is not, however, submitted in your query); that, under Section 8 of the NPC Charter (R.A. 6395, as amended: "The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest, and other charges thereon as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation , paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines or any of its agencies and political subdivisions." That, under Section 13 of the said NPC Charter: ". . . the Corporation , including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." That, in said contract with ABB, NPC have assumed the responsibility for the taxes due from ABB, hence ABB may not be levied with taxes; that, the NPC-transferee may not also be levied with the said taxes assumed from ABB, because the NPC is tax exempt under Sections 8 and 13 of its Charter. Please be informed that the 10% VAT is a tax upon any person who, in the course of business, sells, barters or exchanges goods, renders services, or engages in similar transactions and upon any person who imports goods. (See, Sec. 99, NIRC) In the herein case, it is your contractor (i.e., ABB) which is constituted as the taxable person. ABB's personal liability to pay for its taxes may not be transferred to another person with binding effect on the BIR. Hence, NPC's contract under which it assumed responsibility for the taxes due for ABB cannot legally bind the Government. It may only be binding between NPC and ABB, in their respective private capacities. cdt Section 8 of the NPC Charter only exempts from taxation (i) the loan contract and the payment of the principal, interests, and other charges thereon; and (ii) the NPC's importations paid from the proceeds of the loan incurred. There is nothing in Section 8 of the said NPC charter that may exempt NPC's contractors from the payment of their taxes. There is also no proviso thereunder that said contractors shall be tax exempt should the NPC assumes responsibility for the said taxes. Section 13 of the said NPC Charter, likewise, only exempts from taxation, the NPC and its subsidiaries. In like manner, there is no proviso thereunder that the NPC contractors shall be exempted from taxation should the NPC assumes responsibility for such taxes. Accordingly, the said provisions of the NPC Charter may not be relied upon for purposes of making its contractors (e.g., the ABB) exempted from payment of their taxes, including the 10% VAT on their importations and sale of service to the NPC. However, notwithstanding the foregoing, we would like to invite your attention to the provisions of Section 4-A of R.A. No. 4860, as amended by P.D. No. 150, otherwise known as the Foreign Borrowings Act, as follows: "Upon the recommendation of the Secretary of Finance, in consultation with the National Economic and Development Authority and approval of the President of the Philippines, loan agreements as well as contracts involving the availment of or utilization of the proceeds of loans, credits or indebtedness obtained under the provisions of this Act, may provide for the exemption from taxes, charges, or other levies." Since your said Project is funded from your foreign borrowings, it is suggested that you ascertain whether the said foreign loan may be considered obtained also pursuant to the Foreign Borrowing Act and, in the affirmative, whether such foreign loan agreement has a proviso that your contractor (i.e., ABB) shall be exempted from taxation, including the 10% VAT. If this law is, likewise, not availing to your said contractor, we regret to inform that there can be no other existing law to justify the 10% VAT exemption which you are claiming for and in behalf of your said contractor. LibLex Very truly yours, JOSE U. ONG Commissioner of Internal Revenue