VAT Ruling No. 064-01

October 3, 2001 VAT RULING NO. 064-01 108 (B) (3) 246 VAT 018-00 Kepco Philippines Corporation Suite 2501-A 25th Floor Tektite Tower, Exchange Road Ortigas Center, Pasig City Attention: Song, Chang- Hyun General Manager Gentlemen : This refers to your letter dated March 29, 2001 requesting confirmation of your opinion that DOF ruling dated January 26, 1998, holding that the sale of electricity to National Power Corporation (NPC) is subject to 0% VAT, may be given retroactive application in respect to your sale of electricity to said company for the third and fourth quarters of 1996 and years 1997 and 1998, which application for effective zero-rating was filed with our Office on September 17, 1998. It is represented that Kepco Philippines Corporation (KEPHILCO) is a duly-registered VAT taxpayer and is engaged in the business of power generation; that it sells electricity to NPC; that on September 17, 1998, it filed at the RDO-San Juan an application for zero-rated sales on its sale of electricity to NPC for the third and fourth quarters of 1996 and the years 1997 and 1998; that this application was endorsed by the said RDO to the National Office for appropriate action which unfortunately is still pending as of to date; that prior to June 1996, KEPHILCO was able to pass on 10% VAT to NPC in its billings, however, subsequent to that period it was already precluded from passing on the 10% VAT to NPC as the latter was invoking its indirect tax exemption; that on January 15, 1998, BIR issued a ruling that the sale of electricity to NPC is not zero-rated but subject to 10% VAT; and that on January 26, 1998, DOF revoked the ruling of the BIR stating therein that the purchases of NPC of electricity from independent power producers are subject to VAT at zero-rate. Based on the foregoing facts, it is now your considered view that said DOF ruling may be given retroactive application on your sale of electricity to NPC for the third and fourth quarters of 1996 and taxable years 1997 and 1998 because the DOF ruling, being one that is beneficial to taxpayer, does not run counter with the nonretroactivity clause provided for under Section 246 of the Tax Code of 1997 which precludes the retroactive application of rulings if the revocation, modification or reversal contained therein is prejudicial to the taxpayer. In reply, please be informed that while we may agree with your view above, it must be noted, however, that before retroactive application of such ruling may be granted in this instant case, it is important to first determine whether there has been full compliance with the pertinent provisions of the Tax Code of 1997 and their implementing regulations for effective zero-rating. Section 108(B)(3) of the Tax Code of 1997, as implemented by Sec. 4.102-2(c) of Revenue Regulations No. 7-95, as amended, provides that, "services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero-percent VAT," Pursuant to its charter, NPC is exempt from direct and indirect taxes, which exemption has been affirmed by the Supreme Court in the case of Maceda vs. Macaraeg, GR No. 88292, May 31, 1991 (VAT Ruling No. 018-00 dated March 21, 2000) Corollary to the aforementioned provision, Sec. 4.107-1(d) of Rev. Regs. No. 7-95, as amended, has provided a condition for the grant of effective zero-rating, as follows: "(d) A pplication for effective zero-rating Except for actual export sale, other cases of zero-rated sales in Sec. 4.100-3 and Sec. 4.102-2(c) shall require prior application with the Revenue District Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt" (Emphasis supplied) As may be gleaned from the foregoing provision, it is clear that even before such sale transaction is to take place, it is necessary that a prior application for effective zero rating be filed with the RDO concerned, otherwise, the transaction shall be considered exempt. Based on your representation, however, your application for effective zero-rating rating for the 3rd and 4th quarters of 1996 and the years 1997 and 1998 was filed with the Bureau only on September 17, 1998 which means that no prior application corresponding to said periods had been filed with the Bureau even before the issuance of the DOF ruling on January 26, 1998. In view thereof, this Office is of the opinion that the retroactivity of the DOF ruling shall not apply insofar as your sale of electricity to NPC covering the taxable quarters and taxable years for which no prior application for zero-rating has been filed. Thus, the same shall be considered exempt sales pursuant to Sec. 4.107-1(d) of said Regulations, whereby no output taxes could arise therefrom and for which no input taxes may be claimed in respect to such sales. Nevertheless, your sale of electricity to NPC shall be subject to 0%-VAT effective September 17, 1998. This Ruling is being issued on the basis of the foregoing facts as represented. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group