VAT Ruling No. 071-02

October 22, 2002 VAT RULING NO. 071-02 106 (A) (2) (c), 108 (B) (3), 109 (q) VAT Ruling 003-98 Textron Corporation Textron Bldg., 168 Luna Mencias Street San Juan, Metro Manila Attention: Mr. Alfonso J. Legaspi President Gentlemen : This refers to your letter dated July 7, 2000, applying for zero-rated Value-Added Tax (VAT) treatment of the sales of all items that GE Harris and Textron Corp. are going to supply to the National Power Corporation. It is represented that Textron Corporation (TEXTRON) is a domestic corporation engaged in the business of telecommunications; that GE Harris Energy Control Systems, LLC (GEH), a non-resident foreign corporation whose principal office address is in the U.S.A., in 1999, entered into a contract with the National Power Corporation (NPC) for the supply and delivery of energy management systems and data acquisitions and control equipment for the National Control Center Project (NPC-EMS Project) of the latter; that thereafter on February 28, 2000, GEH entered into a sub-contract agreement with TEXTRON for the said NPC-EMS Project; that your herein application is based upon the NPC Charter (Commonwealth Act No. 120, as amended by Republic Act No. 6395) declaring NPC as exempt from all taxes, duties, fees, imposts and other charges, and Section 106(A)(2)(c) of the National Internal Revenue Code (NIRC) of 1997. In reply, please be informed that, based on Sec. 13 of RA 6395, as amended by Presidential Decree No. 938, and on Fiscal Incentives Review Board Resolution No. 17-87, and as confirmed by the Supreme Court in the case of Maceda vs. Macaraig, Jr. (G.R. No. 88291, June 8, 1993, 223 SCRA 217), NPC is exempt from all taxes direct and indirect. This has been amplified in the Memorandum of then Secretary of Finance Roberto de Ocampo to the Commissioner of Internal Revenue dated January 26, 1998 (in reviewing BIR VAT Ruling No. 003-98). Likewise, Secs. 106(A)(2)(c) and 108(B)(3) of the NIRC of 1997 subjects to zero percent (0%) VAT sales and services rendered by VAT-registered persons to persons or entities whose exemption under special laws effectively subjects such sales or services to zero percent (0%) rate; and Sec. 109(q) thereof exempts from VAT, among others, transactions which are exempt under special laws where the supplier of the goods or services is a non-VAT-registered person, or even if VAT-registered but there is no prior-approval of application for the effective VAT zero-rating pursuant to the provisions of Revenue Regulations No. 7-95. VAT is an indirect tax, which may be passed on by the seller to the buyer as part of the cost of goods/services pursuant to Sec. 105 of the NIRC of 1997. The indirect tax exemption being enjoyed by NPC has always been the basis for treating its purchases as either effectively zero-rated VAT in the case of VAT-registered sellers pursuant to Secs. 106(A)(2)(c) and 108(B)(3) of the NIRC of 1997, or VAT exempt in the case of non-VAT-registered seller pursuant to Sec. 109(q) thereof. However, such privilege may not be extended and used as the basis for treating the sales of sub-contractors to the NPC suppliers as either effectively subject to zero-rated VAT or VAT exempt. Based on the foregoing, therefore, the supply and delivery of energy management systems and data acquisitions and control equipment for the NPC-EMS Project by GEH to NPC shall be subject to zero percent (0%) VAT; provided that the former is VAT registered and shall apply with the Revenue District Office having jurisdiction over its principal place of business for the effective VAT zero-rating pursuant to the provisions of Revenue Regulations No. 7-95. However, if GEH is not VAT-registered or there is no prior approval of such application for the effective VAT zero-rating, then such transactions shall only be exempt from VAT. Inasmuch as there is no showing that GEH is exempt from indirect tax under any existing law, sales by TEXTRON to the same pertaining to the said NPC-EMS Project shall be subject to the normal ten percent (10%) VAT. This ruling is being issued based on the foregoing facts as represented. If, upon investigation, it will be discovered 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