VAT Ruling No. 097-90

May 2, 1990 VAT RULING NO. 097-90 Sycip, Gorres, Velayo & Co. Certified Public Accountants P.O. Box 5 89, Manila Attention: Mr . W . E . Sanches Tax Division Gentlemen : This refers to your letter dated January 17, 1990 requesting a ruling that the services rendered by your client, Marubeni Corporation (MC) to National Power Corporation (NPC) are effectively zero rated for value-added tax purposes. It is represented that MC is a foreign corporation engaged in business in the Philippines; that NPC entered into a contract with MC for the rehabilitation of the Sucat Thermal Power Plant Nos. 1 and 4 and the construction of the Malaya Gas Turbine Project; that the contracts are financed by the Japan EXIMBANK under Power Loan To NPC No. 8, dated December 29, 1988; that MC proposed to bill the 10% VAT on gross receipts for services rendered in the Philippines under the foregoing contracts; that NPC refuses to pay the VAT on the ground that under Sec. 8(b) of R.A. No. 6395, its charter, it is exempt from the payment of all forms of direct and indirect taxes, including the value-added tax. cdta Sec. 8(b) of R.A. No. 6395 provides, among others: "(b) Foreign loans The corporation is hereby authorized to contract loans, credits, in any convertible foreign currency, or capital goods, and indebtedness from time to time from foreign government or fund source . . . 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 the Act, shall also be exempt from all direct and indirect taxes , fees, imposts, other charges and restrictions" (emphasis supplied). By virtue of Executive Order No. 93, the tax and duty exemption privileges of the National Power Corporation were repealed but were subsequently restored by FIRB Resolution No. 17-87 except the following: 1. Importation of fuel oil (crude equivalent) and coal; 2. Commercially funded importations (i.e. importations which include but are not limited to those by the NPC's internal funds, domestic borrowings from any source whatsoever, borrowings from foreign based private financial institutions, etc.) and; 3. Interest income from any source. It is clear from the aforecited resolution that the restoration of the exemption privileges includes the loans, credits and indebtedness from foreign government or fund source contracted under Section 8(b) of RA 6395. Furthermore, the services rendered by your client as presented above are also not subject to VAT since the taxes from which NPC is exempt include "indirect taxes" on its purchases of services funded by foreign loans, in this case, the loan by the Japan Eximbank. Considering that this involves a case where the exemption of the grantee (i.e. NPC) extends to its suppliers of goods and services, the services of your client as a VAT registered person qualify for effective zero-rating under Section 102(a) (3) of the Tax Code, as amended, provided that an application for zero-rate has been approved by this Office pursuant to Section 7(d) of RR 5-87. LexLib Very truly yours, VICTOR A. DEOFERIO, JR. Deputy Commissioner