BIR Ruling No. 345-2022

REPUBLICOF THE PHILIPPINES

BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE

Quezon City

VAT-3Z52027 Secs.106,108,&114C,NIRC Sec. 4.114-2 (a). RR No. 16-2005 RA No.9136 BIR Ruling No.020-02 JUN 3 0 2022 BIR Ruling No.014-09

Palawan NAPOCOR Coripund Brgy. Tiniguiba I uerto Princesa City PALAWAN P(W ER GENERATION,INC.

Attention: Ms. Ma. Theresia N.Delena VP-Finance and Administration

Gentlemen:

This refe s t your request for confirmation of the following:

1.The lissionary ElectrificationME Subsidy being disbursed by National

PoweorporationNPC to Palawan Pewer Generation.Inc.PPGI from thUniversal Charge for Missionary Electrification UCME Fund pursunt to the Subsidy AgreementsSAsbetween PPGI,Palawan Electric

No.136.otherwise known as the Electric Power Industry Reform Act of electr fication areas") to PALECO is not subect to the twelve percent (12% Coop raive.Inc.PALECO.andNPC executing Republic ActRA 200lorEPIRA Lawas a result of its sale of electricity in an area that is not conrected to the transmission systemoff-grid areas or missionary value ad led taxVAT. and consequenly the five percent 5% Final Interr l Revenue Code of 1997.as amendedTax Codeand Withl olding VAT.in connection with Sectibns 106 and 108 of the National

2.The I IE Subsidy is not subiect to VAT aad as such.an acknowledgment

receirt ornon-VAT receipt or VAT-exempt receipt is proper,not being a sale of go d r service contemplated under the existing laws.rules,and regulations on VI

Background

1 PPGI is domestic corporation organized and existing under the laws of the

Comr ond. Brgy.Tiniguiban. Puerto Princesa City,Palawan. It is registered SECeistration Nmber Repul li of the Philiopines with principal place of business at NAPOCOR with the Securities ard Exchange Commission (SEC) on July 11,2007 with to establish. construct. develop.

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distri outing. selling and supplying to the general public such power and electi icin for their consumption. pipes tr insmission and distribution lines. power stations and substations and other w rks to transmit. generate. supply. sell, whether in bulk or retail. such powetindustrial users. distributors and other public utilities. electric coop rative and industrial consumers: to operate as a public utility in operi e. maintain and administer power plants, auxiliary plants, reservoirs.

2. PAL O is a non-stock. non-profit elecrric cooperative organized and withi the Province of Palawan. undei Registration No. locat d nt Tiniguiban Puerto Princesa CityPalawan.It is a holder of Certi icate of Franchise issued by the National Electrification Commission to opera e as an electric distribution utility servicing its member-consumers existi ig by virtue of the provisions of Presidential Decree No. 269. as amen le. It is duly registered with the Cooperative Development Authority with principal office address

3. NPC is 1 government-owned-and-controlled corporation GOCC created SPI G and provides power generation ard its associated power delivery systei is in areas that are not connected to the transmission system. Its princi al office is located in BIR Road corner Quezon Avenue.Diliman.1100 Quez n ity.Philippines. missi nary electrification function through the Small Power Utilities Group under Cmmonwealth Act No.120 on November 3.1936,as revised by RA No.69.as amended. It is mandated to energize far-flung.off-grid areas and islan in the Philippines by virtue of the EPIRA Law.It performs its

+.The I PIRA Law signed on June 8.2001 was enacted to institute reforms and EPIR I aw states that comp titive structure.and the definition of the responsibilities of the various prescbe UCME which institutionalized the provision of subsidies in areas not in eronnected to the main grids or missionary areas. Section 34 of the inclu in the privatization of the assets of NPC, the transition to the desired gover m nt agencies and private entities. Furthermore. the subject law provi e framework for the restructuring of the electric power industry

en l-users for the following purposes: et-ctivity of this Act.a universal charge to be determined.fixed mI approved by the ERC.shall be inposed on all electriciny "Section 34. Universal Charge. - Within one (1) year from the

ru Panment for the stranded debts and stranded contract costs centavo per kilowatt-hour (P0.0025 kWh).which shall The equali-ation of the taxes ard royalties applied to imported energ fuels: An emvironmental charge equivalent to one-fourth of one of NPC and qualified distribution utilities resulting from the restructuring of the industry: Missionary electrification: indigenous on renewable sources of energy vis-a-vis

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accrue to an emvironmental fund to be used solely for watershec rehabilitation and management. Said fund shall period not exceeding three (3) vears. be manag?d by NPC under existing arrangements;and A charge to account for all forms of cross-subsidies for a

5.On Jne 2.2004.Power One Corporation POC entered into Electricity Supp greementsESAswith PALECO for peak and reserve electricity suppl hich was amended on June 1.2006.May 11.2007.and August 1. 2007The terms and conditions of the ESAs are as follows:

1 PAECO has agreed to buy such electricity up to the plant production

I. AlECO has agreed to buy such electricity without prejudice to ap city and level of service provided in the agreement. AlECO's applicable agreement with NPC for a coordinated and ystematic supply sharing and payment priorities acceptable to all parties

6.On A gust 9.2007.POC assigned all its rights,title.interests,and obligations Case No.2007-143 RC dated May21.2008.and ERC Case No.2007-144 RC and A ssumption Agreement. Upon assignment, the ESAs were approved by the E iery Regulatory Commission ERC through its decisions in ERC dated Tul 7. 2008. in the EAs to Palawan Power Generation. Inc. by virtue of an Assignment

7.Subse jucntly.Subsidy Agreements were entered into by NPC,PALECO,and PPGI in November 2008 for the power plant in Puerto Princesa. Palawan and enter I into by the above-parties in furtherance to the EPIRA Law in Fe ru ry 2010 for the power plant in Nara, Palawan. These SAs were

8.By vi tu of the subject SAs.the existence of the ESAs between PPGI.as the assigr ee.and PALECO was acknowledged to be in full force and effect.The

electr itsupplied by PPGI to PALECO in the form of a subsidy subsiy a portion of the True Cost of Generation RateTCGR for the SAs 1 irther recognized that NPC shall adm inister the disbursement of the

9 folloy s: Per tlAs. the scope of the agreements between the signatories are as

cipacity of up to l0.000 kW to OFFTAKER (PALECO) in accordance with the ESA between SUPPLIER and r ceive OFFTAKER Fee from OFFTAKER in accordance ith the ESAand should the TCGR be greater than the SAGR this Agreement. the missionary electrification function of NPC-SPUG in mainland Paawan by supplying a guaranteed dependable FFTAKER.In consideration.SUPPLIER shall be entitled to Subsidized Approved Generation Rate),the Subsidy Fee from PC-SPUG under the terms and subject to the conditions of By this Agreement.SUPPLIHRPPGIshall take over

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10.Based n he foregoing agreements.after supplving electricity.PPGI issues a

Statem nt of AccountSOA in favor of PALECO for the Subsidized Approed Generation Rate(SAGR) with the.following breakdown

S 1GR Total Amount Billed to PALECO I lectricity in kWh Multiply:SAGR Rate Add: 12%VAT XXX XXX XXX XXX XXX

11.Upon p 1yment by PALECO.PPGI issues a VAT official receipt in favor of the PAEO covering the SAGR as indicated in the SOA

12.On the other hand.PPGI issues a Billing Stateinent in favor of NPC for the compo ing of the following: ME S bsidy amounting to the difference between TCGR and SAGR

Am unt Subject to VAT Elec ricity Fee LssNon-VAT Sales XXX XXX XXX

TotaElectricity Fec A Id: 12%VAT A Id: Fuel Reimbursement XXX XXX XXX TOTAI INVOICE AMOUNT XXX

ME Subsidy LESBILLED TO PALECO XXX XXX

13.The ab ve Electricity Fee which is part of the ME Subsidy is both subjected

to incot te taX and VAT in the books and tax returns of PPGI.

14.Before elasing the ME Subsidy by NPC as indicated in the SAs. the latter

require: PPGI to issue a VAT official receipt.By reason of this requirement. the dist ur ement of the ME Subsidy is subject to the twelve percent (12%) VAT b NPCand a five percent5%Final Withholding VAT is withheld by NPC or it disbursement to PPGI.

15.Howevr.perusal of the SAs between PPGI,PALECO.and NPC will show

that the e is no requirement to issue a VAT official receipt as a precondition for dist irsement of the subsidy fee. The pertinent provisions for the billing of NPC un ter the SAs are as follows:

5.Payment of Subsidy Fee

5.1 Station during a Billing Month, SUPPLIER is entitled to receive payment equal to the Total Fee calculated using the Energy Fee Formula in the Ninth Schedule of the General. For the supply of electricity from the Power ESA.Tne terms and conditious for the SUPPLIER's right to receive the OFFTAKER Fee from OFFTAKER shall be governed by the ESA. Furthermore, should the

0

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Subsidy.In such cases. the Subsidy Fee shall be entitled to recover the difference therein from the ME in accordance with the procedire provided in this Section. TCGR be higher than the SAGR.the SUPPLIER shall be governed by the ESA and payment thereof shall be made

XXXXXX XXX

5.3. Billing to NPC. Within five 5 business days from the

documents settling forth the amount of Subsidy Fee due Schedule of the ESA. end of each Billing Month.SUPFLIER shall deliver to the appropriate NPC-SPUG Area Manager Area Manager, the Subsidy Fee Invoice and its attached from NPC-SPUG computed in accordance with Ninth

forward the Subsidy Fee Invoice and its attached documents to NPC-SPUG. Within five (5 business days.the SUPPLIER shall

the ME Subsidy Account Administrator fail to issue the Invoice. issue a written notice to the SUPPLIER. confirming the Subsidy Fee Invcice or certain portions thereof. Should the confirmation be partial, the written notice shall indicate the portion that is disputed. Should written notice within ten (10 basiness days from the The ME Subsidy Account Administrator shall,within ten (10 business days from receipt of the Subsidy Fee

receipt of ihe Subsidy Fee Invoice.the Invoice shall be

the ME Subsidy Account Administrator shall process the disbursement voucherDV anc endorse the same to the NPC Head Office for payment to SUPPLIER. deemed confirmed. Within the sa ne ten(10day period.

XXXXXX XXX

5.5 Payments. The amount stated in he DV under Section 5.3 above, shall be due and payable within fifteen (15 Subsidy Account Administrator. provided that the following terms shall be complied with at all times: business days from issuance of the DV by the ME

5.5.1 Maniner of Payment. All sums indicated in the disbursement voucher shall be paid in Philippine Pesos.

5.5.2 Supp!ier Account.The p:iyment to SUPPLIER the SUPPLIER Account, aintained either at the shali be made through a bank-to-bank transfer to

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Landbank of the Philippines LBP or the Philippine National Bank PNB.with details indicated as required under Section 4.3.1(d) above.

5.5.3 No deduction. All payments shall be free and clear of any deductions. bank draft or deliver charges. and charges.except those which are required by law to be withheld by NPC set-offs. counterclaims. taxes or other similar fees

5.5.4 Interest. prov ided herein shall bear an interest at the rate of date. from the date payment was due until payment is received by SUPPLIER the 91-day T-Bill Rate prevailing as of the due All sums not paid within the period

In reply.pl asbe informed that Section 114(Cof the Tax Code reads:

SEC.114. Return and Payment of Value-Added Tax.

Xxx xxxxxx

percent (5% rof the gross pay'ment thereof . . political governmeni-oned or -comrolled corporations (GOCCs) shall, before making pay ue nt on account of each purchase of gosds and services which are subject o 1e value-added tax imposed in Sections 106 and 108 of this Code. deditmd withhold a final value-added fux at the rate of five C) Withho ding of Ialue-added Tax.-The Government or any of its ub divisions. instrumentalitiesor agencies, including

circumstances whe AT may be imposed on sale of servies,to wit: imposed on sale f oods.while Section 108 of the same Tax Code discusses the In connecti n thereto. Section 106 of the Tax Code discusses when VAT may be

"SEC.106.Value-Added Tax on Sale of Goods or Properties.

equivalent t h elve percent (12%) of the gross selling price or gross value on every sa,iarter or exchange of goods or properties, value-added tax (A) Rate ar 1 Buse of Tax. - There shall be levied, essessed and collected in money of rh goods or properties sold, bartered or exchanged such tax to he paid h the seller or transferor.

Properties. "SEC.108.Vlue-added Tax on Sale of Services and Use or Lease of

a value-adi d tax equivalent to tvelve percent (12%) of gross receipts derived fror il sale or exchange of services. including the use or lease of () Rate a t I'ase of Tax-There shall be levied, assessed and collected.

properties.

O

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kinds of se vi es in the Philippines for others for a fee,remuneration or The phrast"sale or exchange of services" means the performance of all

considerat on

to the twelve per ent (12% VAT. and consequently.to the five percent (5% Final Withholding VA7 the following must concur: Based on te oregoing prov isions of the Tax Code. as amended,to be subjected

Purchse of goods and services should be subject to the VAT imposd in Sections 106 and 108 of the Tax Code: and

2. The pa ment is related to the purchase of goods and services by the agenci s. including GOCCs. goveri m nt or any of its political subdivisio is. instrumentalities or

In the pres nt case. the above-enumerated requisites are not present. to wit:

as the administrat r cf the disbursement of the fund is not a taxable income being a mere or gift of money fi m a governmert to a private company.organization.or charity to help Subsidy is not an ncome neither does it fall within the definition of income; it is a grant grant or gift of n oney in favor of PALECO as an incentive from the government. it to function. 1. The gi ini of the ME subsidy from the UCME Fund being disbursed by NPC

of the latter.PPGI performed services only in favor of PALECO for supplying electricity to PALECO.whi h vas already subjected to VAT. Cleatly,there is no sale.barter or PPGI did not rendr any form of service in favor of NPC neither did it sell goods in favor exchange of good oi services in the subsidy given by NPC to PPGI. VAT may be lev ed In this casethe transaction betwen PPGI and NPC does not involve any sale o gods or services but a mere cash disbursement from the UCME Fund 2.There must be a sale. barter or exchange of goods or properties before any

requirement of making payment on its own purchase of goods or services subject to VAT. Implementing Rules and Regulaticns of the EPIRA Law.As such, it does not make any pursuant to Secti n 70 of the EPIRA Law. as implemerted by Section 2 (a.of the payment to PPGI. The receipt of the subsidy from NPC from the UCME Fund lacks the Therefore.no pay nent was made by NPC on account of purchase of goods and services in favor of PPGI. 3.NPC i . a mere administrator of the disburserrent of funds from the UCME

income since it is armarked by lawor regulation for some reason other than the taxpayer. that Universal Ch.rge is not considered compensation for services or in the nature of In BIR Ru ing No.020-02 dated May 13.2002, thi Office had occasion to rule

BIR Ruling No.014-(9 dated July 24,2009 Commissioner of Int rnal Revenue v. Sony Philippines,G.R.No.178697 dated November 17,2010 2 BIR Ruling No.014-(9 dated July 24,2009 G L

to wit: Palawan Power Ger era tion Inc. Page 8 of 9 VAT- H

its gross re ipts for I'ATpurposes. taxes.Lik wrse,the collection of Universal Charge by PSALM will not b. considered as tuxable income nor will it form part of utilities is nor part of their taxable revenues nor will it be part of their gross receipts for purposes-of determining their franchise "I. Collection of Universal Charge by distribution

stranded c onract costs of distribution utilities resulting from the restructur ng of the industry. The EPIRA provides that the Universal Charge is a non-bypassable charge. by the di tribution utilities. These charges will be remitted to PSALM aid will be used exclusively for the liquidation of the stranded ehis and stranded costs of NPC as well as qualified Th: Iniversal Charge will be collected from all end-users

another cc'se. the Supreme Court ruled that the gross receipts of a taxpaye- should not include any money which although delivered to it has been especially earmarked by law or regulation for some reason other than the taxpuyer. However. we requirthi u the Universal Charge appear as c separate item taxpaver hi h do not belong to them and do not redound to the taxpaver's henefit; and it is not necessary'that there must be a law or regula ior which would exempt such monies and receipts within the maning of gross receipts under the Tax Code. In in the hill in the nat re of income. Neither will the same form part of the determinir g heir franchise tax liability. Gross receipts of a taxpaver lo not include monies or receipts entrusted to the would not ecioumd to their benefit,the same will not be considered gross rec ipis of the distribution utilities for purposes of by the dis ribution utilities do not belong to them and therefore. Acordingly since the Universal Charges to be collected

XXX XXX xXX

performed or to be performed for another person. The Universal is earmar eu to be utilized for purposes mentioned in the immediate rpreceding paragraph.(Emphasis supplied. servicesnd depositsoradvance paymentsactually or constructi eh received during the taxable quarter for the services gross rec ipi of PSALM jor VAT purposes. The term gross representi g the contract price, compensation of service fee including Charge is noi compensation for services performed by PSALM. While it is uhorized underthe EPIRAreceive said charges,it receipts" Ne th r can the Universal Charge be deenied part of the he amount charged for materials supplied with the nems the total amount of money or nts equivalent

purview of the term gr ss income because it does not involve any sale of goods or services subject to the twelv p rcent (12% VAT under Sections 106 and 108 of the Tax Code Considering tht the transaction between PPGI and NPC does not fall within the

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and the disbursem nt~ of ME Subsidy by: NPC to PPGI is not NPC's own purchase of goods or services I ecause it is a mere administrator of the distribution of the missionary that NPC is not re juired to withhold the five percent (5%) VAT thereon.Thus, PPGI shall have to issue a VAT-exempt receipt to NPC with respect to the ME Subsidy. In addition. PPGI sh uld maintain subjecting the Electricity Fee, which is part of the ME Subsidy. to income ta' and VAT. electrification fund. it follows that the ME Subsidy should rot be subject to the VAT and

However. if upon i ve stigation. it will be ascertained that the facts are different. then this ruling shall be con: idered null and void. This ruling is being issued on the basis of the foregoing facts as represented.

Very truly yours.

Ao ax'a

Commis sioner of Internal Revenue CAESAR R.DULAY 052190

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