BIR Ruling No. 323-2021

REPUBLIC OF THE PHILIDPINFS

DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE

Quezon City

Secs. 30. 33(A). 105. 237. Tax Code of 1997. as amended BIR Ruling No. 113-82 VAT Ruling No. 073-99 BIR Ruling No. 020-02

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9th Floor Robinson Equitable Tower. ADB Avenue INDEPENDENT ELECTRICITY MARKET OPERATOR Ortigas Center. Pasig City

Attention: Richard J. Nethercott

President and CEO

Gentlemen:

Operator (IEMOP)l. for confirmation of the following: This refers to your letter requesting, on behaif of Independent Electricty Market

4. The value-added tax (VAT) implications of the receipt of funds by 3. The liability of IEMOP, as employer. to fringe benefits tax: and 1. The tax implications of the funds received by IEMOP for its own 2 The withholding tax implication of income payments made by IEMOP: IEMOP. as operator of the Wholesale Electricity Spot Market (WESM). account and for remittance to other entities:

Background of WESM

(DOE) under Republic Act (RA) No. 9136. otherwise known as the "Flectric Power Industry Reform Act of 2001". or EPIRA Law. which states: WESM is defined as the electricity market established by the Department of Energy

electricity. vear from the effectivitv of this Act. the DO)E shall estahlish a wholesale electricity spot market composed of the wholesale electricity spot market participants. The market shall provide the mechanism for identifving and setting the price of actual vuriutions from the quuntitie's trunsacted under contracts hetween sellers and purchasers of "Sec. 30. Wholesale Electricity Spot Market.- Within one (1)

1 Previousiy, the Philippine Electricity Market Corporation or PEMC handfed the market operations of the Wholesale Electricity Spot Market or WESM. This market operations function has heen transferred to IEMOP on September 26, 2018. Thus, references to PEMC with respect to its previous market operations functions shall also refer to IEMOP in this Ruling. A

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level plaving field to all electric power industry participants. The rules rules shall also reflect accepted econonic principles and provide a shall provide, among others, procedures for: electricity not covered hy bilateral contracts hetween sellers umd purchasers of electricity users. The price determination methodology contained in said rules shall he subject to the approval of the ER(. Said Jointly with the electric power industr' purticipants. the DOE shall formulate the datailed rules for the wholesale_electricity spot market! Said rules shall provide the mechanism for determining the price of

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to and termination from the murket which includes security of rules and the formation _of the _wholesale electricin' spot_market performance bond reguirements. voting rights of the participants. governing body: " (Underscoring supplied) surveillance and assurance of compliance of the participants with the (c) Administering the market, including criteria for admission

reliable market for electricity where: The objectives of WESM are to establish a competitive. efficient. transparent and

3. 2. 1 A level playing field exists among WESM participants: Trading of electricity is facilitated among WESM participants within the spot Third parties are granted access to the power system in accordance with the Act market:

4 5 Efficiency is encouraged. Prices are governed as far as practicabie by commerccial and market forces: and (EPIRA Law):

to trace its flow. Because of the nature of the product and the pooling system within w'ESM. it is impossible for any particuiar sale of energy by one participant to be traced through a avaitable on demani. Its flow is determined by the laws of physics and it is thus not possible particular purchaser. This necessarily makes trading within the market an anonymous transaction as it is impossible to inake a physical matching of the generator to its consumer. market and the buyers of bulk electricity would have to compete for a share in the electricity pool provided therein. Electricity is a peculiar commodity which cannot be stored and must be The idea is that all the output from generators would be centrally coordinated within the

must register with the IEMOP in order to participate in the market. operator. network service provider. ancillary services provider and metering service provider The market participants - generating companies. customers, market operator. system

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Background of the Philippine Electricity Market Corporation (PEMC)

operation of the WESM for a period of 12 months from the spot market commencement date. initially under the administrative supervision of the National Transmission Corporation (TRANSCO)."* This AGMO constituted by the DOE is PEMC. electric industry participants formulated the WESM Rules and constituted the Autonomous Group Market Operator (AGMO) which "shall undertake the preparatory work and initial Tasked under the EPIRA Law to establish the W'ESM. the DOE together with the

(Batas Pambansa [BP] No. 68) as a non-stock. non-profit corporation whose primary purpose is as follows: PEMC was organized and established under the Corporation Code of the Philippines

respective amendments and such other taws, rules and regulations which may be enacted hereafter that shall govern the WESM." and reliable market for the wholesale and purchase of electricity and ancillary services in the Philippines (the Wholesale Electricity Spot Market or "WESM") in accordance with Republic Act (RA) No. 9136 (EPIRA). the rules promu(gated to govern the operation of the WESM (the "WESM Rules"). including their "Manage, govern and administer an efficient. competitive. transparent

XI of the Corporation Code. of PEMC's Articles of Incorporation that "no part of the income which the Corporation may by the Corporation as a result of its operation. whenever necessary or proper shall be used for obtain as in incident to its operation shall be distributed as dividends to its members. directors or officers subject to the provisions of the Corporation Code on dissolution. Any fund obtained the furtherance of the purposes enumerated in Article Second. subject to the provision of Title Furthermore, as a non-stock non-profit corporation. it is explicitly stated in Articie lo

manages. and administers the market. PEMC will not buy nor sell electricity for its own a buyer or seller of electricity through the market. in other words. since PEMC merely operates. acccunt. It must be emphasized that by administering WESM. PEMC does not thereby become

function has been transferred to IEMOP on Septemher 26, 2018. operator which is responsible for the operation thereof is PEMC. This market operations Thus. for a period of'one (1) year from the spot market commencement date. the market

Transaction Flow

follows: Under the current setup. a typical supply transaction within wESM is outlined as

2. IEMOP sends an electronic confirmation of receipt and acceptance of the 3. IEMOP matches supply with demand for that particular trading intervat: 1. A Generator submits an offer to supply electricity: to the market and/or a Customer submits a demand bid to purchase electricity from the market: offer or bid:

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4 IEMOP submits the dispatch schedule to the System Operator (SO): 5 The SO implements the dispatch schedule, which means to say that the

to every Market Participant are paid out. electricity purchased by the Customer through the market is delivered to identified points of supply by way of the network: IEMOP implements the settlement process by which the amounts due to IEMOP from every Market Participant and the amounts due from IEMOP

may be categorized as either for its own account. or on behalf of the other entities. viz: The various funds received or handled by IEMOP in the operation of the spot market

6. Other Service Fees 8. Funds from Contributions. 2. Metering Fees T. Registration Fees 3. Billing and Settlement Fees 4. Administration Fees 5. Costs I Special Assessments Donations Type of Fund - IEMOP - IEMOP - IEMOP - JEMOP - IEMOP - IEMOP - IEMOP - IEMOP For the Account of

II. Transmission Tariff 10. Ancillary Services Fee 9. Energy Fee - Network Service Provider - Ancitlary Service Provider - Generator

Funds Received by IEMOP for its own account

The EPIRA Law provides:

filed with and approved by the ER(. market shall be recovered hy the market operator through u churge imposed to all market members: Provided, that such charge shall he "The cost of administering and operating the wholesale spot

order to continue administering and operating the market. the MO must be able to cover its operating the market. This is based on the logical presumption that the MO will not have any other source of funds except these charges on its members and thus. for its survival. and in costs. The law mandates the Market Operator (MO) to recover its costs for administering and

shall charge the members of the market ("Market Fees") which include: Thus. in compiiance with the EPIRA Law and WESM Ruies. the IEMOP. as the MO.

1 Registration fees. comprising of annual fee payable by each WESM

registration process. which includes expenses for evaluation of the Member for the category or categories in which they are registered: the registration fee is intended to defray the cost of the IEMOP in the

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participant and its technical facilities to determine its qualifications to

certificates, the production of information materials and other related participate in WESM as well as expenses for training. digital

expenses:

2 Metering Fees, to recover the IEMOP's budgeted revenue requirements

for providing the billing and settlements services provided to the Members:

3 Billing and Settlement Fees, to recover the IEMOP's budgeted revenue

to the Members: requirements for providing the billing and settlements service provided

4 Administration Fees, to recover the remainder of the IEMOP's budgeted revenue requirements not covered by the membership fees. membership dues, metering and Billing and Settlement Fees:

5 Costs reasonably incurred by the Board and the Committees and

WESM rules: and working groups that the Board may create under the By-laws and the

Other Service Fees which the Board may impose such as Reserve Cost Recovery Charges and information dissemination charges.

administrator and operator of WESM are based on budgeted requirements. administering and operating the market. Therefore. the Market Fees charged by IEMOP as The Market Fees are intended to defray the costs that will be incurred by the MO in

account when setting the allowable charges under any regulatory instruments applying to charged from a Customer takes into account system losses and the additional costs arising from Financial Transmission Rights. In all instances. it shall be clearly accounted for and taken into IEMOP. market. IEMOP may in some instances realize Net Settlement Surplus which is the amount IEMOP pays the Generator. Such Net Settlement Surplus may be utilized by IEMOP to: I) remaining after all the market transactions have been accounted for. Because the energy price line congestion. the amount paid by a Customer would typically be higher than that which the fund deficits. 2) flowed hack to Market Participants. 3) to establish and support the market for In the fulfllment of its primary purpose of managing. administering and governing the

Funds Received by IEMOP for other Entities

particular Customer. The amounts due from each Customer to the Generators couid only he coordinated. it is not possible to trace which Gienerator produced the electricity consumed by a coursed through the market. Since the electricity supplied within the market is "pooled" together and centrally

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IEMOP performs the function of settling the amounts payable by or to any Market Participant and in the course thereof. receives various funds actually meant for other participants in the market.

In view of the foregoing. you now request for confirmation of the following opinions:

I. The Market Fees/Net Settlement Surplus/Membership Dues and Fees

received by IEMOP for its own account. are not subject to corporate income tax and consequently. exempt from withholding tax:

2 The income of IEMOP from its properties and for activities conducted for profit is subject to income tax and consequently. to withhotding tax:

3. The payments received by IEMOP as operator of the market. but which are earmarked for other entities. are not part of IEMOP's gross income. and consequently, are not subject to income tax in the hands of IEMOP:

2 IEMOP, as income payer, is constituted as withholding agent which shali be

liable to withhoid the appropriate withholding tax on its income payments as prescribed in Revenue Regulations (RR) No. 2-98. as amended:

5 IEMOP shall be designated as a withholding tax agent for WESM transactions and shall be responsibie for withholding and remitting withholding taxes and issuing the requisite withhoiding tax certificates.

1 IEMOP. as empioyer is subject to final tax imposed on the grossed-up

monetary vatue of fringe benefit furnished to its employees. except rank and file cmployees:

All funds received by IEMOP for its own account as a result of its administration and operation of WESM. and which funds are held in trust for and on behalf of the WESM members. are not subject to VA'T:

8. All funds received by IEMOP as MO. hut which are intended. and actually hence not subject to VAT in the hands of IEMOP: earmarked, for other entities. are not included in iEMOP's gross receipt.

Transactions for the supply of energy and ancillary services made through the Internal Revenue Code of 1997 (Tax Code). as amended. subject to adequate procedures and documentation: WESM shall be exempt from the requirements of Section 237 of the National

10. HFMOP may be passed on with VAT by its suppliers of goods and services. cost of goods and services purchased. and may be liable for VAT on its importations. which shall form part of its

I l. The use of a generation mix ratio (GMR). calculated as the ratio of the T'otal VATable (l2%) Spot Market Sales over the Total Spot Market Sales. will

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properly account for the zero-rated sales of generation companies generating power from renewable energy (RE) resources.

12. The transfer of market infrastucture, other personal and real properties. cash and PSALM loan and loan repayment funds from PEMC to IEMOP is not subject to income tax. VAT, documentary stamp tax (DST). and donor's tax.

In repiy- please be infomed as follows:

INCOME TAX

1. Market Fees/Net Settlement Surplus/ Membership Dues and Fees

and PEMC. now IEMOP, was set up by the DOE, along with other electric industry participants. operation of the WESM for twelve (12) months from the spot market commencement date. As in the Philippines. as the AGMO which. pursuant to the EPIRA Law. is to undertake preparatory work and initial such. IEMOP was organized for the purpose of managing. governing and administering an efficient. competitive. transparent and reliable market for the wholesale purchase of electricity There is no doubt that WESM is the market where trading of electricity will be made

be treated as a business ieague under Section 30 (F) of the Tax Code. as amended. The pertinent provision states: IEMOP, which is organized as a non-stock, non profit corporation. claims that it should

organizations shall not he taxed under this Title in respect to income received by them as such. "Sec. 30. Exenmption from Tax on Corporation. The following

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not organized for profit and no part of the net income of which inures to the benefit of anv private stockholder or individual: (F) Business league, chamher of comnerce. or hourd of trade

Section 3 1 of RR No. 02-40. however. defines a "business league" as follows:

"SECTION 31. Business leagues. --- A business league_is an of trade. If it engages in a regular business of a kind ordinarity carried basis or produces only sufficient income to be seif-sustaining.is not ground_.forexemption. information to prospective investors. to enable them to make sound association of persons having some common business interest. which limits its activities to work for such cominon interest and does not Its work need not be similar to that of a chamber of commerce or board on for profit, the fact that the business is conducted on a cooperative engage in a regular business of a kind ordinarily carried on for.profit. Anassociation engaged in furnishing

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stated. xxx xxx xxx." (Underscoring supplied) investments. is not exempt. since its members have no common business interest, even though all of its income is devoted to the purpose

Services are ordinarily subject to applicable taxes under the Tax Code. cannot qualify as such considering the nature and purposes of its incorporation. The various business interest with IEMOP since the reason for their membership is to enable them to participate in the trading and not to further IEMOP's purposes. Moreover. its activity as a market operator of WESM, for which it receives market/service fees from its trading participants for the availment of its services. is a regular business of a kind ordinarily carried on for profit. It is similar to other oniine platforms whose income for the provision of online market participants, although registered as members of WESM. cannot be said to he of common From the definition of a "business league". IEMOP, as the market operator of WESM.

income tax by then Manila Stock Exchange. which was organized as a non-stock non-profit corporation. the BIR opined that: In BIR Ruling No. 113-82 dated April 15. 1982. upon the request for exemption from

a limited class. it is not an exempt business league. Thus a stock or commodity exchange is not a business league. {34 Am. Jur.2d p. 687 provide services or facitities for transaction business to individuals or (l976 ed] ""It has been held that if the organization's primary purpose is to

considered an exempt business league within the purview of Section 27(f) of the Tax Code. Consequentty. it should file an income tax return and pay income tax on its net income" In review thereof. the Manila Stock Exchange. cannot be

construed by Section 30 of the Tax Code. as amended. Accordingly. IEMOP is subject to corporate income tax under Section 27 of the Tax Code. as amended. and consequently to witholding tax pursuant to Section 57 of the same Tax Code. Based on the foregoing. IEMOP cannot be considered an exempt business league as

broad sense. means all wealth which flows into the taxpayer other than mere return of capital.? received by IEMOP are subject to income tax, it is a principle of taxation that income, in the On the issue of whether or not Market Fees/Net Settlement Surplus/Membership fees

Under WESM Rules. Market Fees3 are imposed by IEMOP such that -

shall be filed by the market operator with the ERC' for approval." recovered by the Market Operator through a charge imposed on a!l WESM Members or WESM transactions. provided that such charge -The cost of administering and operating the WESM shall be

4 2.10.1, WESM Rules Section 36, RR No. 02-40 3 2.10, WESM Ruies

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operator shall take into consideration the manner in which it intends to of WESM member in the spot market. charge each category of WESM members. and whether that charging proposal is reasonable given the relative involvement of each category "In developing the structure and level of market fees. the market

paid for by the WESM members for its administration and operation. settlement fees. administration fees and other costs, as represented. In short. this is the amount Market fees is a collective term that includes registration fees, metering fees, billing and

is assumed to be attributable to economic rentals arising from other binding constraints" settlement surplus remaining after all market transaction have been accounted for. including the assignment of transmission line rentals to the Network Service Providers. This remainder On the other hand. "Net Settlement Surplus" is defined in WESM Rules as "the

"3.14.16 of the WESM Rules provides for the treatment of Remaining Settlement Surplus as follows:

3.13.16.1 3.13.155. in aggregate. result in a surplus or deficit surplus. remaining. this will be known as the net settlement If the transactions required by clauses 3.13.144 and

3.13.16.2 The net settlement surpius:

(a) May be retained by the Market Operator. or paid to the System

Operator. according to a formula to be developed by the Market Operator subject to approval of the PEM Board: and

(b) Shall be ciearly accounted for and taken into account when

setting the allowable charges under any regulatory instruments applying to the Market Operator and the System Operator. "

sha!l be part of the corporation's gross income subject to income tax. the corporation and having the discretion on how to apply the net settlement surplus. they Considering that these monies flow into IEMOP as part of its operations. benefiting

2. Income of IEMOP from its properties and for activities conducted for profit is subject to income tax

Moreover. its interest income derived from Phitippine currency hank deposits and yield or any real or personal or from any of its activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under the Tax Code. as amended Section 30 of the Tax Code. as amended. Hence. its income derived fron any of its properties. As previously discussed. IEMOP does not qualify as a tax-exempt organization under

5 2.10.2.2 WESM Rules

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other monetary benefits from deposit substitute instruments are subject to the 20% final witholding tax pursuant to Section 27(D)(1). in relation to Section 57(A). both of the Tax Code. as amended.

3. The payments received by IEMOP which.

part of IEMOP's gross income are earmarked for other entities are not

of other entities such as energy fee. ancillary services fee and transmission tariff. As represented, IEMOP receives various funds either for its own account or on behalf

Liabilities Management Corporation (PSALM) confirming the latter's opinion that collection of universal charge will not be considered as taxabte income, this Office ruled that: In BIR Ruling No. 020-02 dated May 13, 2002 issued to the Power Sector Assets &

salaries. wages. or compensation for personal services of whatever kind property: also from interest, rents. dividends. securities. or transactions or any business carried on for gain or profits. and income derived from Regulations). The Universal Charge is not a flow of wealth to PSALM as it would not accrue to its benefit but would be remitted to the Special Code of 1997, which includes gains. profits. and income derived from and in whatever form paid, or from professions. vocations, trades. business, commerce, sales. or dealings in property, whether real or any source whatever. Income, in a broad sense. means all wealth that flows into the taxpayer other than as a mere return of capital. (Section 36, Revenue Regulations No. 2. otherwise known as the Income Tax Trust Fund. as provided under the EPIRA. will not be in the nature of income as defined in Sec. 32(A) of the Tax personal. growing out of the ownership or use of or interest in such "On the other hand, the Universal Charge received by PSALM

redound to the benefit of IEMOP. but are earmarked and actually remitted to the said participants in the market and therefore. not in the nature of income. nor a flow of wealth to Ancillary Service Provider and transmission tariff for the Network Service Provider. will not IEMOP. IEMOP's receipt of the energy fee for the Generator. ancillary services fee for the

earmarked for other entities. are not part of IEMOP's gross income. and consequently, are not subject to income tax in the hands of IEMOP. Therefore. the payments received by IEMOP as operator of the market. but which are

4. IEMOP, as income payer, is constituted as withholding agent

it pursuant to Sections 2.57 of RR No. 2-98. as amended. IEMOP is required to impose withholding taxes on certain income payments made by

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IEMOP. as employer is constituted as withholding agent of the government when its

amended, or if it makes income payments to individuals or corporations subject to the expanded implemended by RR No. 2-98, as amended. employees receive compensation income subject to the withholding tax under Section 79(A). Chapter XIII. Title II of the Tax Code. as amended. as implemented by RR No. 2-98. as withholding tax provided for in Section 57(B) of the Tax Code. as amended. also as

5. The Customer/Buyer shall be the withholding tax while both the Customer/Buver and Generator/Seller agent for energy sold and paid through the WESM

shall be the withholding tax agents for the Market Fees collected by IEMOP.

no important characteristics that identify it as coming from a particular supplier."6. and WESM electricity customer to identify the electricity it purchased as coming from a particular which are identical with others of the same nature, such as grain and oil; a product which has considering further the gross pool nature of the WESM as a market. it will be impossible for a WESM electricity seller. Considering that electricity is of the nature of "fungible" goods. defined as "(g)oods

as well as all the customers and their particular purchases. the role of the MO is therefore key in matching the transactions, as only the MO knows who the actual customers and sellers are. Since the MO has a view of all the electricity generated for sale and by which company

to the Generators/Sellers and the "settlement statements of energy purchased (broken down hy seller)"" to the Customers/Buyers. and provides copies of the "settiement statements of energy sold (broken down by customer)* Thus. after the sale of energy. the MO prepares a "transaction summary of energy sold"

and the Generators/Sellers in the WESM are properly credited with the taxes withheld. under the names of the Customers/Buyers based on the settiement statements and This arrangement shall ensure that the withholding taxes are properly withheld and remitted. the purchase of energy, through the MO's payment facility using the "settlement statements" as bases. The MO payment facility then proceeds to transmit payment to the Generator/Seller upon the MO's payment instructions. The Generator/Seller then issues the Official Receipts payments/remittances made by the MO payment facility. The Customer/Buyer in turn issues the BIR Form No. 23077 to the Generators/Sellers. The Customers/Buyers shall then remit to the BIR the taxes withheld from the payments for electricity purchased through the WESM. The Customer/Buyer can then proceed to remit payment. net of withholding taxes. for

withholding tax agents for the market fees charged by and paid to IMEOP. IEMOP bills the Customer/Buyer pays IEMOP the market fees net of withholding tax and shall remit the Generator/Seller and the Customer/Buyer for the corresponding market fees. The withholding tax to the BiR. Prior to remitting the amount on the sale of electricity to the On the other hand. both the Generator/Seller and the Customer/Buyer are designated as

& Black's Law Dictionary, Sixth Edition. ' Certificate of Creditable Tax Withheld at Source. L

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the amount, together with the withholding tax on the market fees,to the Generator/Seller. The Generator/Seller and the Customer/Buyer shall issue BIR Form No.2307 to the MO for the taxes they withheld on the payment of Market Fees. Generator/Seller.IEMOPshall deduct and keep its market fees net of withholding tax and remit Generator/Seller then shall remit the withholding tax on the market fees to the BIR. Both the

seller to the generation company: and (2 the sale from the generation company to the for the sale transaction between the seller and the generation company. while the aggregator shall be the designated withholding tax agent for the transaction between the generation company and the aggregator. generation company, two separate transactions shall be considered, to wit: (1) the sale from the aggregator. In such cases, the generation company shall be the designated withholding tax agent In cases where an aggregator buys electricity from a seller in WESM through a

6. IEMOP, as employer, is subject to final tax imposed on fringe benefits furnished to its employees

treatment of fringe benefits. to wit: Section 33A of the Tax Code,as amended by RA No.10963.provides for the special

"SEC. 33. Special Treatment of Fringe Benefit.

the actual monetary value of the fringe benefit by sixty-five percent to employees and taxable under Subsections (B.(C.D) and (E of benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent onwards, a final tax of thirty-five percent (35%) is hereby imposed on employer, whether an individual or a corporation (unless the fringe or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer.The tax herein imposed is provided for under Section 57 A of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing 65% effective January 1,1998; sixty-seven percent (67%) effective January 1, 1999: and sixty-eight percent (68% effective January 1. 2000 and thereafter: Provided, however. That fringe benefit furnished Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -up monetary value of the fringe 100%) and the applicable rates of income tax under Subsections (B C.D and(E of Section 25. the grossed-up monetary value of fringe benefit furnished or granted to the employee except rank and file employees defined herein by the benefit is required by the nature of. or necessary to the trade. business payable by the employer which tax shall be paid in the same manner as A Imposition of Tax.-Effective January1.2018 and

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Hence, if IEMOP furnishes or grants any goods. service, or benefit in cash or in kind to its employees, except rank and file. it is subject to a final tax of 35%* of the grossed-up monetary value of the fringe benefit. However, if benefit furnished or granted is required by the nature or. or necessary to the conduct of business of IEMOP's activities. or when the fringe benefit is for the convenience or advantage of lEMOP as employer, it is not subject to said tax.

33(B)(6) of the Tax Code. as amended. social and athletic clubs or other similar organizations are fringe benefits under Section Membership fees. dues and other expenses borne by the employer for the empioyee in

are regularly received by the employees as part of their monthly compensation income shali not be treated as taxable fringe benefits but the same shall be treated as allowances which shall However. transportation and representation allowances that are fixed in amounts and

form part of their taxable compensation income subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code. as amended.1

VALUE ADDED TAX

Section 105 of the Tax Code. as amended. provides for the persons liable for VAT. to wit:

his trade or business, sells.barters, exchanges or leases goods or properties, or renders services, and any person who inports goods. shall be liable to value-added tax (VAT) imposed in Sections. 106 to I08 of this (ode. : "SEC. 105 Persons Liable. -- Anv person who. in the course of

XXX XXX XXX

private organication (irrespective of the disposition of its net income including transactions incidental thereto. hy anv person regurdless of and whether or not it sells exclusively to memhers or their guestst. or government entity. whether or not the person engaged therein is u mon-stock. nonprofir regular conduct or pursuit of a commercial or an econonic activity: The phrase "in the course of trade or husiness " means the

a non-stock. non-profit organization or government entity is liable to pay VAT on the sale of Commonwealth Management and Services Corporation". the Supreme Court held that even goods or services. thus: In the case of Commissioner of Internal Revenue vs. Court of Appeals and

clarifies that even a non-stock. non-profit organization or government Contrary to COMASERC()'s contention the above provision

11 G.R No. 125355, March 30, 2000 BIR Ruling No. 025-2001 dated June 13, 2001. 8 The rate was increased from 32% to 35% effective January1. 2018 by RA No. 10963 10 (bid

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entitv. is liahle to pav VAT on the sale of goods or services. YAT is a tax on transactions imposed at every stage of the distribution process on the. sale, barter_exchange of goods_or_property, and on_the performance of services._even in the absence_of profit attributable thereto. The term "in the course of trade or husiness " requires the regular conduct or pursuit of commercial or un economic activity. regardless or whether or not the entity is profit-oriented.

person who, in the course of trade or husiness. sells. harters on present law merely stresses that incorporated in the present lav applies to all transactions even to those made prior to its enactment. Executive Order No. 2-3 stated that am exchanges goods and services. was alread liahle to pa: FAT. The organization or government entity is liable to pay I AT for the sule of The definition of the term "in the course of trade or husiness evenanonstock. nomprof

goods and ser'ices.

the phrase "sale of services" as the "performance of all kinds of Sec. 108 of the National Internal Revenue (ode of 199? defines

services for others for a fee. remuneration or consideration." It includes "the supply of technical adv'ice. assistance or services rendered in connection with technical management or udministration of any scientific. industrial or commercial undertaking or project. "

reimburesment-of-cost hasis, without any intention of reulizing profit. was subject to IAT on services rendered. In fact. even if such activities w'as subject to income tax. issued BIR Ruling No. 010-98 emphasizing that a domestic corporation that provided technical. research. mamagement amd technical corporation was organized without amy intention of realizing profit. any income or profit generated hy the entin' in the conduct of its assistance to its affiliated companies and received pavments. on u On February 5, 1998. the Commissioner of Internal Revenue

corporation indicates tha it receives payments for services rendered to its affiliates on a reimbursement-of-cost basis only without realizing or consideration, then the srvice rendered is subject to FAT profit. for purposes_of determining liability for_VAT on services rendered. As long as the entity provides service for a fee, remuneration Hence, it is immaterial whether the primary_purpose of a

the grantee and liherally in favor of the govermment. Otherwise stated. of VAT. Section 109. Republic Act X424 cleurly enumerates the the nation. statutes that allow exemptions are construed stricthy against amy exemption from the payment of a tax must be clearly' stuted in the Ianguage of the laov: it cannot he merely implied therefron. In the cuse At any rate, it is a rule that because taxes ure the lifehlood of

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transactions exempted from WAT. The serices rendered hy (OMASERCO do not full within the exemptions.

Both the Commissioner of Internal Revenue und the Court of Tax Appeals correctly ruled that the serices rendered hy COMASERCO to Philamlife and its affiliates are suhiect to VAT. .s pointed out by the Conmissioner. the performance of all kinds of services for others for a fee. remumeration or consideration is considered as a sale of services subject to VAT. .As the government agency charged with the enforcement of the liv, the opinion of the Commissioner of Internal Revenue. in the absence of amv showing that

quasi-judicial agencies, such as the (ourt of Tax Appeals which. hy the it is plainly wrong. is entitled to great weight. Also, it has heen the long standing policy and practice of this Court to respect the conclusions of

nature of its functions, is dedicated exclusively to the study: and consideration of tax cases and has necessarily developed an expertise of its authority. on the subject, unless there has been an abuse or improvident exercise

There is no merit to respondent 's contention that the (ourt of

payment of fixed and percentage taxes. hinds petitioner. The issue in COMASERCO as not engaged in husiness and not liable for the Tax Appeals' decision in CA-G.R. No. 3+0+2. declaring the

CA-G.R. No. 34042 is different from the present case, which imvolves COMASERCO's liability for VAT. s heretofore stated_every person who sells, harters, or exchanges goods and ser'ices. in the course of trade or husiness, as defined hy law, is suhject to VAT. " (Underscoring supp ied}

With the foregoing in mind, we rule as follows:

I. All the funds received by IEMOP for its own account as a result of its administration and operation of WESM are subject to VAT

wholesale spot market shall be recovered by the market operator (IEMOP) through a charge imposed to all market members. Section 30 of EPIRA Law provides that the cost of administering and operating the

Pursuant thereto, IEMOP charges several fees collectively referred to as "Market Fees

and working groups that the Board appoints under WESM Ruies as well as other service fees. the components of which are the following: registration fees. metering fee. billing and Settlement fees. administration fees. costs reasonably incurred by its Board and the committees

as the entity provides service for a fee. remuneration or consideration. the service rendered is immaterial whether the primary purpose of a corporation indicates that it receives payments for subject to VAT. In upholding the assessment of the BIR. the Supreme Court held that it is In the same vein as in the above-cited jurisprudence. it has been settled that for as long

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profit. for purposes of determining liability for VAT on services rendered. For as long as the entity provides service for a fee. remuneration or consideration. then the service rendered is services rendered to its affiliates on a reimbursement-in-cost basis only. without realizing Subject to VAT.

for which the market participants and members are charged market fees collected by IEMOP. said fees/payments, shall be subject to VAT. notwithstanding its status as a non-stock. non- profit organization. Hence. considering that IEMOP performs services as market operator of WESM and

VAT since these comprise fees intended to defray cost of registration and expenses incidental thereto.12 Registration or membership fees of the market participants. however. are exempt from

2. Funds received by IEMOP intended and actually earmarked for other entities are not included as part of IEMOP's gross receipts

Section 108 (A) of the Tax Code. as amended. states that:

Properties. - "SEC. 108. Value-added Tax on Sale of Ser'ices and {'se or Leuse of

from the sale or exchange of services, including the use or lease of properties. a value-added tax equivalent to twelve percent (12%) of gross receipis derived (A) Rate and Base of Tax. There shall he levied, assessed and collected.

xxXxXX XXX

equivalent representing the contract price. compensation, service fee. rental or rovalty. including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable guarter for the services performed or to he performed for umother person. excluding value-udded tax. The term "gross receipts" means the total amount of money or its

Viz: In relation thereto, Section 11 of RR No. 04-2007:3 dated February 7. 2007 provides

16-2005 is hereby amended to read as follows: "SECTION 11. Gross Receipts. - Sec. 4.108-4 of RR No.

receipts' refers to the total amount of money or its equivalent SEC. 4.108-4. Definition of Gross Receipts. Gross

12 BIR Ruling No. DA-(VAT-013} 275-08) dated October 5, 2008 13 Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005

*

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representing the contract price. compensation. service fee. rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT. except those amounts earmarked for payment to unrelated third (3rd)_party or received as reimhursement for...advance payment on behalf of another which do not redound to the benefit of the pavor.

A payment is a pavment to a third (3rd) partv if the same is

client. to the said third party. which obligation is evidenced hy the made to settle an obligation of another person. e.g.. custoner or

obligor/debtor"(e.g., customer or client of the pavor of the sales invoice'official receipt issued by said third party to the ohligation). " (Emphasis and underscoring supplied)

Supreme Court declared that: In the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc.14. the

Gross receipts subject to tax under the Tux Code, as amended.

it is not necessary that there must he a law or regulation which would exempt such monies and receipts within the meaning of gross receipts do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit: and under the Tax Code, as umended." (Emphasis and underscoring supplied}

Under the above-quoted provision, in relation to the said decision of the Supreme Court

reimbursement for advance payment on behalf of another which do not redound to the benefit it is clear that gross receipts do not include monies or receipts entrusted to the taxpayer and those amounts earmarked for payment to unrelated third (3rd) party or rcceived as

of the payor. Therefore, the energy fee for the Generator, ancillary services fee for the Ancillary Service Provider, and transmission tariff for the Network Service Provider. which will not redound to the benefit of IEMOP, but are only earmarked and actually remitted to the said participants in the market. should not be included as part of IEMOP's gross receipts.

3. Transactions for the supply of energy WESM shall be subject to the requirements of Section 237 of the Tax Code and ancillary services made through the

Section 237 of the Tax Code. as amended. provides:

14 G.R. No. 66416 dated March 21, 1990 citing the case of Commissioner of Internat Revenue vs. Manila Jockey Club, Inc., 108 Phil. 882

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Invoices. "Section 237. Issuance of Receipts or Sales or (ommercial

or fees. receipts or invoices shall be issued which shall show the name. person. in addition to the information herein required. the imvoice or date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however. That where the receipt is issued to cover payment made as rentals, commisisions, compensutions business style, if any. and address of the purchaser, custoner or client: Provided, further, That where the purchaser is a VAT-registered receipt shall further show the Taxpaver Identification Numher (TIN) of shall. at the point of each sale and transter of merchandise or for services rendered valued at One hundred pesos(P100)15 or more_issue duly registered receipts or sule or commercial invoices. showing the the purchaser. (A) Issuance. - All persons subject to un internal revenue tux

of goods and services, taxpavers engaged in e-commerce, und electronic receipts or sales or commercial imvoices in lieu of manual establishment of a system capable of storing and processing the required data. the Bureau shall require taxpavers engaged in the export taxpavers under the jurisdiction of the Large Taxpavers Service to issue receipts or sales or commercial imoices. subject to the rules and regulations to he issued hy the Secretary of Finance upon recommendation of the (ommissioner and after a public hearing shall have heen held for this purpose: Provided. That taxpavers not covered by the mandate of this provision may issue electronic receipts or sales or commercial invoices. in lieu of mamual receipts. und sales and commercial invoices. Within five (5) vears from the effectivity of this Act and upon the

who, if engaged in business or in the exercise of profession, shall keep purchaser, customer or client at the time the transaction is effected. and preserve the same in his place of husiness for a period of three (3 ) years from the close of the taxable vear in which such invoice or receip! was issued. while the duplicate shall he kept and preser'ed by the in case of electronic receipts or sales or commercial im'oices. the client and the issuer for the same period ubove stated. issuer, also in his place of husiness. for a like period: Provided. Thut digital records of the same shall be kept by the purchaser. customer or The original of each receipt or im'oice shall he issued to the

provisions of this Section. person suhject to internal revenue tux from complianee with the The Conmissioner ma. in meritorious cases. exenpt am

15 RA 10963 increased the amount of sales requiring issuance of duly registered receipts or invoice from P25.00 to P100.00

|

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As defined in RR No. 12-98. the term "receipt(s)" means a written admission or acknowledgment of the fact of payment in money or other settlement hetween seller and buyer of goods. debtor or creditor, or persons rendering services and client or customers. Apparently. it is not merely an evidence of sale but necessarily an evidence of payment. This is obvious from the provisions of Section 237 to the effect that the issuance of an invoice is required the moment there is already a sale or transaction of merchandise or services rendered.

As aiready established. WESM is the market where the participants buy and sell their commodity which is electricity. Essentially, it is the market that receives the demand and matches the supply of electricity in accordance thereto since there is neither a specific customer from the point of view of the generators nor a specific generator from the point of view of the customers. Thus. in the sale of electricity by the Generators traded through WESM. the Generators cannot issue official receipts in the name of the particular buyer of electricity but can only bill/charge IEMOP for the value of the electricity supplied by it upon trading in the market.

Inasmuch as receipts are not only pieces of evidence of sale but also proof of payment

efectricity and ancillary services provided to the customers. as well as for the market fees it collects from trading participants. by the customers and end-users. the Generator/Seller and the MO cannot be exempted from issuing official receipts under Section 237 of the Tax Code. as amended. for the supply of

Revenue Memorandum Circular (RMC) No. 61-200516 was issued to clarify certain BIR issuances affecting generation, transmission, and distribution companies as weli as electric cooperatives as defined in RA No. 9136 (EPIRA Law) subject to the VAT as well as their suppliers and customers. In the main, the RMC states that generation. transmission. and distribution companies as well as eiectric cooperatives shall be subject to VAT on their sale of etectricity pursuant to the provisions of Section 108. in relation to Section 109. of the Tax Code as amended.

manner as that of the Distribution Utilities (DUs) which is a pass-through entity w ith respect It is argued that for uniformity of treatment. IEMOP should he treated in the same

to sale of electricity.

electricity which are not necessarily end-users. even similarly situated taking into account its role in the flow of transactions purchasing We disagree. IEMOP. as market operator. is not in the same category as the DUs or

As previously mentioned. the MO prepares the transaction summary of energy sold and

to the Customers/Buyers. The Customers/Buyers can then proceed to remit payments through the MO payment facility using the "settlement statements" as bases. The MO payment facitity Generators/Sellers and the settiement statements of energy purchased (broken down by seller) provides copies of the settlement statements of energy sold (broken down by custoiner) to the

then proceeds to transmit payments to Generators/Sellers. The Generators/Sellers. then issue

15 Clarifying the VAT Provisions of R.A. 9337 Applicable to the Power Industry

Wholesale Electricity Spot Market

Page 20 of 23 Philippine Electric Market Corporation

the Official Receipts under the names of the Customers/Buyers based on the settlement statements from the MO and the payments/remittances made by the MO payment facility.

Customers/Buyers for the income payments the MO receives on its own account (e.g.. Market The MO, on the other hand. issues the official receipts to the Generators/Sellers and the

Fees).

The sale of electricity covered by bilateral agreements and settled outside W'ESM shall be governed by existing rules and regulations regarding invoicing requirements.

Customer/Buyer. and another from the Generation Company to the Aggregator. Receipts shall be issued generation company. two separate transactions shall be considered. Thus. two separate Official For situations where an Aggregator buys electricity from a seller in WESM through a -- one from the WESM Seller to the Generation Company as

4. IEMOP is not exempt from pass-on VAT on its purchase of goods and services

by the purchaser of goods. renders services. and on any person who imports goods pursuant to Section 1o5 of the Tax Code. as amended. It should be noted that VAT is an indirect tax payable by the seller and not The V AT is.atax on the person who selts. barters. exchanges. leases goods or properties.

transferee or lessee of the goods. properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold. it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services.1? However. heing an indirect tax. it can be shifted or passed on to the buyer/purchaser.

the 12% VAT. which can be passed on to it by the seller as an indirect tax and shall form part of the invoice price thereof. !* law, its purchases of goods. properties or services from VAT registered entities are subject to Since there is no showing that IEMOP is exempt from indirect tax under any existing

5. The use of the GMR to account for the zero-rated sales is proper

rated sales of generation companies generating power from renewable energy (RE) resources. to wit: The GMR catculated as follows is proper and acceptabie to account for the VAT zero.

GMR= Total 12% VATable Spot Market Sales

Total Spot Market Sales

i7 VAT Ruling No. 073-99 dated July 27, 1999 13 BIR Ruling No. DA No. 454-03 dated December S, 2003.

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6. The transfer of assets and liabilities from PEMC to IEMOP is not subject to income tax, VAT, DST, and donor's tax

and PSALM loan and toan repayment funds from PEMC to IEMOP. BIR Ruliug No. (20-02 Regarding the transfer of market infrastucture. other personal and real properties. cash

dated Mav 13. 2002 issued to PSALM states:

subtransmission assets and systems to TRANSCO, all of which are Moreover,_consideration, which should be the prime reason for the liabilities to PSALM, as well as of the transmission and government-owned and -controlled corporations is_mandated by law transfer of abovementioned assets. is not availing to the parties in the transfer of the aforementioned NPC assets. AIthough it has been stated There is no positive offer to sell and buy the aforesaid NPC properties. "In this case. the.transfer of_NPC's_.generation assets and

earlier. it should bear stressing that this is a transaction between and

Iaw calling for the reorganization of NPC's assets. among government-owned and -controlled corporations pursuant to a

the reason or material cause of a contract. It is some right. interest! profit. or henefit accruing to one party. (Black's Law Dictionary. 6th Edition) Consideration is defined as the inducement to a contract. It is

assumption by said person of the transferor's liability will be considered mandated by law. Normally, the transfer of property hy a person (transferor) to another person (transferee) in exchange for the a sale, where the assumption of liabitity constitutes a consideration for the higher of the consideration received or zonal value. if applicable. and the vatue of the assets given up. The amount of the liabilities transferred is treated as part of the consideration. the assets. The gain. if any. from the transfer is the difference between In. the case of PSALM, its assumption of NPC's liabilities is

guidelines set under the EPIRA. Unlike in an ordinary business transaction, PSALM, as the entity assuming the obligation._.does not transferred nor does it play any role in the determination of the amount of the liabilities that it will assume." (Underscoring supplied) exercise any discretion whether to accept the assets and liabilities to be for the purpose of selling or disposing them. is consistent with the Likewise, the taking of title over the assets of NPC by PSALM

contemplated under Sections 196 and 198 of the Tax Code. as amended. the transfer is not the EPIRA Law. specifically RA No. 9136. thus. there is no consideration in the transfer of assets and liabilities. Therefore. such transfer is not subject to income tax or to the creditable withholding tax/capital gains tax. In the same manner. since the transfer is not a transaction In this case. the transfer of assets and liabilities from PEMC to IEMOP was pursuant to

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subject to documentary stamp tax (DST) under the said Sections. The notaria! certification is. however, subject to DST under Section 188 of the Tax Code. as amended.

VAT. In the case of PSALM vs. Commissioner of Internal Revemue the Supreme Court hetd: Moreover, the transfer of assets and liabilities from PEMC to IEMOP is not subject to

plants was transferred to PSALM for sale, disposition. and privatization Il case. the power plants in this case were not previously used in by NPC were transferred to PSALM for the specific purpose of privatizing such assets. The sale of the power plants cannot be considered as an incidental transaction made in the course of NPC's or PSALM's business. Therefore, the saie of the power plants should not PSALM's business. The power plants. which were previously owned in order to liquidate all NPC financial obligations. Unlike the Mindanao "xx xx xx Under the EPIRA faw, the ownership of these power

be subject to VAT."

assets and liabilities from PEMC to IEMOP. as follows: In the instant case, there was an express mandate by the EPIRA Law to transfer the

year_from the effectivity of_this Act, the DOE shall establish a wholesale electricity spot market composed of the wholesale electricity spot market participants. The market shall provide the mechanism for "SEC. 30. Wholesale Electricitv Spot Market. -- Within one (1)

identifying and setting the price of actual variations from the quantities transacted under contracts between sellers and purchasers of electricity.

XXX XXX XXX

the TRANSCO. The market operator shall undertake the preparatory later than one .(l) year.after the implementation of the wholesale a market operator in accordance with the wholesale electricity spot market rules. The market operator shall be an autonomous group- to be constituted by DOE. with equitable representation from electric power industry participants. initially under the administrative supervision of work and initial operation of the wholesale electricity spot market. Not The wholesale electricity spot market sha!! be implemented by

electricity spot market. an independent entity shall be formed and the

the electric power industry_participants. Thereafter, the administrative (Underscoring supplied) functions, assets and liabilities of. the market operator shall be transferred_to such entity with the joint endorsement of the DOE and supervision of theTRANSCO.over..such..entityshallcease.

trade or business that would make the transfer come under the purview of Section 105 of the Tax Code. as amended. Thus. such transfer of assets and liabiltiies is not subject to VAT. There was no sale. barter. exchange, or lease of goods or properties in the course of

19 G.R. No. 198146, August 8, 2017.

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Likewise. since the transfer was mandated by the EPIRA Law. there was no donative intent on the part of the transferor (PEMC). Neither did the transferee (IEMOP) exercise any discretion on whether to accept the assets and liabilities to be transferred, nor did IEMOP play any role in the determination of the amount of the liabilities that it will assume. Thus. such transfer of assets and liabilities is not subject to donor's tax.

7. The electricity purchased by Renewable Energy (RE) Developers through WESM, if any, that is subsequently sold in WESM shall be generally subject to VAT

subejct to zero percent (0%) VAT under Section 108(B)(7) of the Tax Code. power supply that is purchased through WESM by RE Developers and suhsequently sold therein shall not he entitled to the zero percent (0%) VAT unless it can be ascertained that the same is generated from a renewable source of energy as required under the Tax Code. While the sale of power or fuel generated through renewable sources of energy is

if upon investigation, it will be disclosed that the facts are different. then this ruling shall be considered nuil and void. This ruling is being issued on the basis of the foregoing facts as represented. However.

Very truly y ours.

As

Commissioner of Internal Revenue CAESAR R. DULAY

K-