WIPUBLIC OF THE 1' 1111- H) PINLS

T DEPARTMENT OF FINANCE
a
r
BUREAU OF INTERNAL REVENUE
m

Quezon City
ni.
i r1NF

13i1reotl 111 111( crulll 1"' eventre !:

tlllllp

RA 9136; RA ODU- UU 020- 2002 Person to Cul tacl: Chief, Law Division
6395
32( B)( 7)( b); 196; Tel. Nos. 926- 55- 36 / 927- 09- 63

198

IIny 13, 2002

Date:

l' oIver Sector Assets & Liabilities

management Corporation

Energy Center, Ivierrit Roar]

Fort Bonifhcio, Taguig
Metro Manila

Attention: ! jqj1erdo NI. DO Fonso

President

Gentlemen:

Phis refers to your letters elated November 12 and 20, 2001 and February 8, 2002
requesting fur confirmation of your understanding of the tax consequences arising from
or incidclital to the privatization of tile. National Powcr Corporation ( NPC) and taxation
of the entities created pursuant to Republic Act ( R. A.) No. 9136, also known as the

Electric Power Industry Reform AtA of 2001".

1. MATTER" ON W111CII ARUL1NG IS REQUESTED

A. On th,• Ivansfer ol' assets and liabilities of the NPC:

1) NPC, ; r. a public utility, is not liable to income tax on the transfer of

its as:;: s and liabilities to PSALM and TRANSCO;

2) The tr mslcr of NPC' s assets to PSALM and TRANSCC is not

subj' :, to franchise tax or VAT pursuant to the NPC Charter;

3) The U • inslbr of NPC' s real properties is not subject to ducunicnlary

stamt.- lax ( DST);

rElvL=n JUL G ' z 2002

 2002 v 13, 2002
020-
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4) Since the transfer of NPC liabilities to PSALM does not involve

renewal or continuance of NYC' s debts, the S, 1111C is 1101 Subject to
DST iulposed under SCCt1011 193 ol' llle Tax Code of 1997;

B. On the operation of the transferred assets during; the transition period:

I) ' Pile income of PSALM arises From the exercise of essential

governmental function, and is, thus exempt from income tax pursuant
to Section 32( B)( 7)(b) of the Tax Code of 1997;

2) Tile sale of generated power by PSALM is subject to zero percent

iu) VAT;

3) The transfer of NYC' s li-anchise necessarily entails the transfer of the

privileges that NPC enjoys in relation to the operation oh the
transmission system; hence, since TRANSCO is the trans[ dee of the
transmission and sub- transmission facilities of NPC, including all

other assets related thereto, it should be taxed in the saute manner as

NPC; accordingly, the income of TRANSCO is excluded Isom gross
income for purposes of computing its income lax pursuant to Section
32( B)( 7)( b) of the Tax Code; and just like NPC, TRANSCO will be
exempt loom all forms of taxes, including rranchise tax, in

accordance with P. D. No. 933, as amended;

4) NPC is not liable to income tax oil its income arising From the service
agreement with PSALM and TRANSCO, as well as to VAT;

C. Oil the privatization ofNPC assets:

1) Gail Icon( the sale by PSALM of lilt generation facilities to qualified

buyers is not subject to income lax;

2) The privatization ofassets by PSALM is not subject to VAT;

3) The sale, however, of said real property by PSALM is subject to DST;

4) The consideration received by TRANSCO from the sale of the

transmission facilities or grant of concession contract is not subject to
income tax;

5) Likewise, the concession fee and rental to be received by TRANSCO

or proceeds from the sale of the transmission facilities are not subjccl
to VAT;
 020- 2002 ay 13, 2002

11: 19c 3 of 32

D. The Universal Charge collceted by the distribution utilities is not

hart of their respective taxable revenues nor will it lorm part of their gross receipts
for purposes of determining their Franchise lax liability; likewise, the collection of
said Universal Charge by PSALM will iiol be considered as taxable income nor
will it lorm part of its gross receipts for VAT purposes; and

L. The interest arising From NPC loans translcrred to PSALM remains

exempt From income tax.

H. LEGAL REFERENCES

III this ruling, the following terms shall be used in reference to the relevant legislations:
EPIRA - Republic Act No. 9136, otherwise known as the " 13-lectric Power

Industry Itelorm Act of2001."

11M— RUIcs and Regulations to Implement Republic Act No. 9136.

Tax Code of 1997— Section 3 of Republic Act. No. 8, 121, otherwise known as the
National hrternal Revenue Code of 1997."

NPC Charter- Republic Act No. 6395, as amended, otherwise known as " Ali Act
Revising the Charter of the National Power Corporation."

111. BACKGROUND

The Facts as represented by you areas follows:

h pursuaucc of tlic constitutional mandatc, particularly Section 1, Article XI1 of

the 1987 Constitution, the EPIRA cane into law oil June 26, 2001. Tire EPIRA aims to

provide a Framework for the restructuring of the electric power industry, including the
privatization of the assets of NPC, the transition to the desired competitive s ructure, and
the definition of the responsibilities of the various government agencies and private
entities.

To lend substance to the staled Declaration of Policy of the EPIRA the Ll' IRA
provides for the creation of two govemruent- owned corporations. nanrcl; the Power

Sector Assets and Liabilities Nlanagemcrrt Corporation (" PSALM") and to National

Transmission Corporation (` TRANSCO").

PSALM shall primarily manage the orderly sale, disposition, and priviAizalion of
NPC generation assets, real estate and other disposable assets, and Independent Power
Producer ( HIT) contracts with the objective of liquidating all NPC financial obligations,

stranded contract costs and stranded debts in an optimal manner. On the otl cr( rand
 lay 15, 2002
0201- 2002

11age 4 of 32
S

TRANSCO, which is to be wholly- owned by PSALM, is mandated to assume the

electrical transmission Function of the NPC, anong others. It shall assume the autllulrity
and responsibility of NPC for the planning, construction and centralized operation and
maintenance of its high voltage transmission lacililies, including grid interconnections
and ancillary services. It will likewise be responsible For the operation of the
transmission and sub- transmission assets until their disposal to distribution utilities
qualified to take over the responsibility for operating, maintaining, upgrading and

expanding said assets.

The EPIRA has also highlighted the importance of ensuring the reliability,
of lire of electric power to end- users. In several
security and arfordabilily supply
I 2,
provisions of the law, specifically Sections 47( a) and 51( m) it is repeatedly provided
disposition of NPC assets mush be undcrtakcn ill a
that the sale, privatization or

manner that would optimize the value and sale prices of said assets. You state that this

objective must be achieved since the proceeds from the privatization of NPC assets will
be utilized by PSALM to liquidate debts of NPC, as any stranded debt will Form part of
the basis Regulatory Commission (" ERC") in the determination of the
of the Energy and
3;
Charge that be imposed oil all sold to end- users ( Sections 4( vv)
Universal will electricity
4; 5,
34( x) 51( d) EPIRA). hi short, the value of the proceeds from the NPC

SEC. 47. NPC Privatization.— Except for the assets of SPUG, the generation assets, real estate,
and other disposable assets as well as 11' 1' contracts of NPC shall be privatized in accordance with this Act.
Within six ( 6) months from the clTectivity of this Act, the PSALM Corp. stiall submit a plan for the
endorsculcllt by We Joint Congressional Power Colllllllsslon and the approval of the President of the
Philippines, oil the total privatization of the generation assets, real estate, other disposable assets as well as
existing 11, 11 contracts of NPC and thereafter, implement the same, in accordance with the Following
guidelines, except as provided for in Paragraph( 1) herein:

a)' rl e privatization value to the National Government of the NPC generation assets, real estate,
other disposable assets as well as 11' 1, contracts shall be optimized;"

Z
SEC. 51. Powers. — 171e PSALM Corp. shall, in the performance of its functions and for the
attainment of its objective, have the following powers:

xxx xxx xxx

ill) To structure the sale, privatization or disposition of NPC assets and 11P contracts and/ or their
energy output based on such terns and conditions which shall optimize the value and sale prices of said
assets."

vv) Stranded Debts of NPC" refer to any unpaid financial obligations of N11C which have not
been liquidated by the proceeds from the sales and privatization of NPC assets;"
4
SEC 34. Universal Charge. - Within one ( 1) year from tic ofrcctivily of this Act, a universal
charge to be determined, fixed and approved by the ERC, shall be imposed oil all electricity end- users for
the following purposes:

J
 I

020- 2002 May 13, 2002

11-

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0

privatization will deterillille the amount of Universal Charge that consulners will havc to
bear.

I' hc process of privatizing the assets of NPC will involve three phases, to wit:

a. Please I will entail the lrausfcr of all existing NPC generation assets, real
estate and other assets, liabilities and 1PP contracts to PSALIVI within 180 clays
from the of the L'P1RA`'. Within the same period of time, the
effectivity
transmission and sub- transmission facilities of NPC and all other assets related to
transmission operations, including the nationwide Franchise of NPC for the
operation of [ lie transmission system and the grid, shall be lransicrred to
TRANSCO. The transmission and sub- transmission related liabilities ol' NPC are
PSALNL7

to be translcrrcd to and assumed

by

a) Payment far the stranded debts in excess of dic amount assumed by the Natiunal Goverment
and stranded contract costs of I•JI' C and as well as qualified stranded contract costs of distribution utilities
resulting troll, the restructuring of ilie industry;"

Sl? C 51. Poicels. - The PSALM Corp. shall, is the performance of its functions and fur the
attainment of its objective, havc the following powers:

xxx xxx xxx

d) Tu calculate the amount of the stranded debts and stranded costs of r-ivc which shall rums the
basis for LItC in the dcterminatiun of the universal charge;'

e
Assets Liabilities Afanagement Cutimi- There is
of Pviver Sector
ation. -
SEC. 49. Creation and

hereby created a government-owned and- controlled corporation to be loiown as the" Power Sector Assets
and Liabilities and Ivlanagement Corporation", hereinafter referred to as the" PSALM Corp.", which shall

take ownership of all existing NI' C generation assets, liabilities, 1PP contracts, real estate and all other

disposable assets. All outstanding obligations of the NPC arising from loans, issuances of bonds, securities
and other instruments of indebtedness shall be transferred to and assured by the I' SALNI Corp. within one
hundred eighty( 180) days From the approval of this Act."

SI; C. 8. 0-cation of the National

Trcuislilissioll Cungmny. - ' There is hereby created a National
Transmission Corporation, hereinafter referred to as ' fRANSCO, which shall assume the electrical
transmission function of the National Power Corporation ( Nl' C), and have the powers and functions

hereinafter granted. The TRANSCO shall assume[ lie authority and responsibility of NPC for the planning,
construction and centralized operation and maintenance of its high voltage transmission facilities, Ir

including grid interconnections and ancillary services.

Within six ( G) months from the effectivity of this Act, the transmission and subtiansmissioll

facilities of NPC and all other assets neluding tlic nationwide franchise
related to transmission operations,-[

of NPC for the operation of the transmission system and the grid, sliall be transferred to the TRANSCO.
The TRANSCO shall be wholly owned by the Power Sector- Assets and Liabilities Managcmen
Corporation( PSALM Corp.)

The subtrausmission func( ivns and assets sliall be segregated 11rom the transmission functions,
assets and liabilities for transparency and disposal: Provided, That the subtrausmission assets- shall be
TRANSCO their disposal to qualified distribution utilities which are in a
operated and maintained by until
 riajr 1), 4uvt
020- 2002

1° agc G of 32
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b. Phase 11 will cover the administration and operation of the tranSFerred

PSALM TRANSCO to the privatization thercol. Until these
assets
by and prior

assets are privatized, PSALM will be selling power rrom the transferred
generation assets and thus, wider the 1RR of the 13,111RA, PSALM will be

considered a generation company with respect to its sale of generated powers

Considering that the E1311: A provides that PSALM call only hire its own
personnel only when absolutely necessary and should avail of itself of lire services
of personnel From other government agcncic?, PSALM will be entering into an
Operations and Management Agreement ( herein referred to For brevity as " O& M
10
Agreement") with NPC For the latter to operate and maintain the generation

position to take over the responsibility For operating, maintaining, upgrading, and expanding said assets.
All transmission and subtransmission related liabilities of NPC shall I; c. transferred to and assumed by the
PSALA-I Corp.

TRANSCO shall negotiate with and thereafter transfer such Functions, assets, and associated

liabilities to the qualified distribution utility or utilities connected to such subtransmission facilities not later
than two ( 2) years rfom the clfectivily of this Act or the start of open access, whichever conies earlier:
Provided, That in the case of electric cooperatives, the TRANSCO shall grant concession financing over
it period of twenty ( 20) years: Provided, however, That the installment payments to TRANSCO for the
acquisition of subt ansmissiou facilities shall be given first priority by the electric cooperatives out of the
net income derived from such facilities. The TRANSCO shall determine the disposal value of the
subtnansmission assets based on the revenue potential of' such assets.

xxx xxx xxx"

K
See. 5. Powers.- PSALM Corp. sl all, in the perlormauce of its functions and For the attainment
of its objectives, have the following powers:

xxx xxx xxx

q)To operate the generation assets, directly or through NPC, prior to Privatization of such assels.
Towards this end, while PSALNI operates the generatiun assets, it shall be considered a Generation
Company;

xxx xxx xxx" ( Rule 21, 1RR)

9
SEC. 51. Powers. - The PSALM Corp. shall, in the performance of its functions and for the
attainment of its objective, have the following powers:

xxx xxx xxx

it) To appoint or hire, transfer, remove and fix the compensation of its personnel and advisors or
other Persons as may be necessary in the sale, Privatization and disposiliou of NPC assets and 1PP
contracts; Provided, however, That the PSALM shall hire its own personuiel only it' absolutely necessary,
and as far as practicable, shall avail itself of the services of personnel detailed from other government
agcneics;"

10
See. 5. Powers. - The PSALM Corp. shall, in the performance of its functions and fur tl c
attainment of its objectives, have the following powers:

xxx xxx xxx

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Illage 7
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lacilitics prior to their sale to the qualified buyers. Spccilically, the O& NI will
cover the comprehensive operation and maintenance services to PSALM ill
respect of PSALNI' s generation assets, iucludiug tlicrnlal, diesel, gcotllcrntal and
hydroelectric power plants; Fuel procurement For independent power projects;
marketing activities relating to the sale of' the generation companies, including
transition Supply contracts; and selected legal services, among
renegotiating
others. TRANSCO, oil the other hand, will act as the system operator of' the

nationwide electrical transmission and sub- transmission system to be transferred

by NPC. For this reason, the EPIRA provides For the transfer of the nationwide
li•anchise of NPC For the operation of the transmission system and the grid". To

operate the system, TRANSCO will likewise be entering into an Operations &
Nlanagemenl Agreement, ( herein referred also as O& NI Agreement) with NPC For
the latter to assign to TRANSCO its employees presently involved it) the

operation and management of the litcilitics.

C. Phase III involves the total privatization of the transmission and

generation assets, real estate, and other disposable assets as well as existing IN,
contracts of NPC, except For the Power Utilities Group
assets of' Small

SPUG"). PSALNI will structure the sale, privatization ur disposition of NPC

assets and IPP contracts and/ or their cncrgy Output based On 12such terms and
conditions to optimize the value and sale prices of said assets. On the other
hand, the transmission Facilities, iucludiug grid interconnections and

ancillary services, may be awarded to the whining qualified bidder through all
outright sale or a concession contract, (" Concession Contract"). The award should
result in nnaxinuuu present value of proceeds to the National Government. hr case
a Concession Contract is awarded, the Concessionaire shall have a contract. period

b) To take title to possession of, administer and conserve the assets trausfcrred to it, including
the execution of bilateral contracts to sell poker from undisposed assets and contracts transferral by NPC;

xxx xxx xxx

q) To operate the generation assets, directly or through NPC, prior to Privatization of such assets.
Towards this end, while PSALM operates the generation assets, it shall be considered a Generation
Company."( Mule 21, IRR)

11 Sce Footnote No. 7.

12
SEC. The PSALM Cuip. shall, in the performance
5. Powers. - of its Functions mid fur the
attainmcut of its objectives, have the Following powers:

xxx xxx xxx

o)' ro structure the sale, Privatization or dispusitiun of NPC assets and IPP contracts and/ or their
cncrgy output based on such terrtls and conditions which shall optimize the value and sale prces of said
assets."( Rule 21, llUt)
 GVVL
may ,,
02U- 2oU2

age 8 of 32
LI S, 1LitI

of lwcnly- live ( 25) years, Subject to review and renewal R) r it n axinrunr periud ul'
another twenty- live ( 25) ycars. 13 TRANSCO will negotiate with and transfer [ lie
sub- transmission facilities and associated liabilities to the qualified distribution
utility or utilities connected to such sub- lr'allSIr118Si011 facilities not later than two
2) years from the effectivity of the EPIRA or the start of* open access, whichever
14
curates earlier. The plans for file privatization uf' NPC assets are contained in
lie Privatization Plan that PSALM submitted to the Joint Congressional Powcr
Commission (" JCPC") For endurscment of approval to the President of the
Philippines. Upon approval ul' the privatization plan, PSALM will implement the
same.

It is lurtlicr explained that within a year from the elTeclivity of the EPIRA, a
Universal Charge to be determined, fixed and approved by the LRC will be imposed on
electricity end- users for the following purposes:

L Payment for the stranded debts ill excess of tllc anwunt assumed by the National
Government and stranded contract cost of NPC as well as qualified stranded
contract cost of distribution utilities resulting from the restructuring of( lie industry;

2. Missionary cleclrificaliun;

3. The equalization of the taxes and royalties applied to indigenous or renewable

sources of energy vis- a- vis imported energy fuels;

4. An environmeulal charge equivaleul to one—fourth of out centavo per kilowatt-

liour ( 11. 0025/ kwh), which accrues to all euviroruneutal feud to be used solely For
watershed rehabilitation and management; and

5. A charge to account for all furors of truss- subsidies for a Imiod nut exceeding
three( 3) years.

that the EPIRA provides that the Universal Charge is a iron- bypassable charge, which

shall be passed oil and collected from the end- users oil a monthly basis by the distribution
that collections of the Universal Charge by the distribution utilities and the
utilities;

TRANSCO in any given month shall be remitted to PSALM on or before the liltecnth
15th) of' the succeeding niontli, net of any amount due to the distribution utility; that

13
SEC. 21. TRANSCO Prirutizution. . — within six( G) nnonths firoar the effectivity of this Act, the
PSALM Corp. shall submit a plan for the endorsement by the Joint Power Commission and tic approval of
the President of the Philippines. The Presideat of the Philippiucs tl c eafter shall direct PSALM Corp. to
award, in open competitive bidding, the transmissiou facilities, including grid irrtercouucclious and
services to a qualified party either through all outright sale or a concession contract. The
ancillary
buyer/ concessionaire shall be responsible for tine improve ueat, expansion, operation, and/ or maintenance
of its transmission assets and the operation of any related business. The award shall result in maximum
present value of proceeds to the national government. In case a concession contract is awarded, the

concessionaire shall have a contract period of twenty- five ( 25) years, subject to review and renewal for a
maximum period of another twenty- five( 25) years.

xxx xxx xxx"( EPIRA)

14
See Footnote No. 7.
 020,r2002 y 1 3, 2002

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PSALM will create a Special ' Trust Fund to be disbursed only liar the purposes specilled
in Section 3415 or the EPIRA, in an open and transparent manner; and that all anwunts
collected for the Universal Charge shall be distributed to the respective bcnel iciaries
within a reasonable period to be provided by the EEC.

F urtltcrtnore, it is also represented that the EPI A mandates the transfer to

PSALM or all outstanding obligations or NPC arising from loans, issuances or17 bonds,
16;
securities and other instruments or indebtedness and that under Section 5 10) or the

15
SEC. 34. Universal Charge. - Within one ( 1) year from the effectivity of this Act, a universal
charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity cud- users fur
the Following purposes:

a) Payment for the stranded debts in excess of the amount assumed by the National
Government and stranded contract costs of NI' C and as well as qualified
stranded contract costs of distribution utilities resulting from the restructuring of
the industry;

b) Missionary clectilicalion;

c) The equalization of taxes and royalties applied to indigenous or renewable

sour-.-
r:of energy vis- a- vis imported cucrgy fuels;

d) An er ironuicatal charge equivalent to one- fourth or one centavo per kilowatt-

hour ( 00. QQ25/ kWh), which shall accrue to all cnvionmmntal fund to be used
solel) for watershed rehabilitation and management. Said fund shall be
nr^ , bed by NPC under existing arrangcm cr ts; and

e) A ch • rge to account for al, forms of cross- subsidies for a period not exceeding
thre .( 3) years.

The univel ; a barge shall be a non- bypassable charge which shall be passed on, and collected
from all end- users c 1:
i ondily basis by the distributiun utilities. Collcctiuns by the distribution utilities
and the TRANSCU u . my given mouth sl all be remitted to ( lie PSALhI Corp. o or before tl e fifteenth
1511i)

or the sum n mould, net of any amount due to the distribution utility. Any cord- user or sell-
generating nnected to a distribution
entity not • utility shall remit its corresponding universal charge
directly to the TRANS °).

Tl e
orp., as administrator of the Find, shall create a Special Trust Fund which sl all be
PSALid -

disbursed only for; hl rurposes specified herein ii all open and trausparent mauncr. All autounts collected
for the universal r' a ; c sl all be distributed to the respective beneficiaries within, a reasonable period to be
provided by tl e EI

16 See Footnote 144 . 1

17
SEC. : . .' mvenv. — The PSALM Corp. shall, in, the perfo maim of its functions and for the
attainn cni of its, i • ctive, have( lie following powers:

xxx xxx xxx

6) 1 borrow noney and hour such liabilities, as may be required to service all obligations
trausfcrred from •' C and loans from ECs assumed from NEA in, accordance with the relevant s. ctious of
these Rulcs, iw u ling the issuance of bonds, securities or other evidences of indebtedness utilizing it.

C
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Page 10 of 32
PSAL111

1311IRA, PSALM was granted power to borrow money and incur such liabilities, including
the issuance of bonds, securities or other indebtednCSS utilizing its assets as collateral
and/ or through the guarantees of the National Government, provided, however, all such
borrowings be off or settled before the end of its corporate lire. In
debts or should paid

the meantime, you also represented that, NPC' s foreign obligations that will be
translerrcd to PSALM may be grouped into throe categories, namely:

a) Loans extended by foreign governments, financing institutions owned or controlled

or enjoying finm cing from foreign governments, or international or regional rinancial
institutions established by foreign governments;

b) Commercial loans; and

c) Bonds.

Finally, you represented that with respect to the mode by which PSALM may
privatize the transmission facilities, including grid interconnections and ancillary services,
of NPC, the then on-going discussions of the Joint Congress Power Commission ( JCPC)
that was constituted under the law to review and approve the IRR implementing the
CP1RA indicate that there is a growing consensus that a concession arrangement is the
prelcrrcd approach; that PSALM is inclined to privatize the transmission facilities
through a concession arrangement; that while the concession approach is still subject to
approval of the President of the Philippines, together with other issues contained in tlic
Privatization flan, you believe that the discussions of the JCPC will be given due
consideration; that in the meantime, you need a 1318 ruling on the tax implication of the
award by the TRANSCO to a qualified party of a Concession Contract for the operation
and management of tlrc transmission facilities; and that in the event, however, that the
President decides to pursue the outright sale option, you shall request an opinion on the

tax implication thcreol.

1V. DISCUSSION

A. Transfer of assets and liabilities of NPC- Phase 1

1) To PSALM

Section
5118

in relation to Section 49 9 of the EPIRA maudates that PSALM, a

wholly government- owned and—controlled corporation shall take title to and possession

assets as collateral and/ or through the guarantees of the National GunninienC Provided, That all such
debts or borrowings shall have been paid off before the end of its corporate life;"

18
SEC. 51. Powers. — The PSALM Corp. shall, in the performance of its functions and fur the

attainment of its objective, have the following powers:

XXX XXX XXX

fi
loge I 1 of 32
PSALil f

and conserve all the NI' C gelleration assets, liabilities, IPP

of', administer- existing
contracts, real estate and all other disposable assets transferred to it. Likewise, all
outstanding obligations of the NPC arising from loans, issuances of bonds, securities alld
WIWI- iustruuiertts of indebtedness shall be transferred to and assumed by PSALM within
one hundred eighty ( 180) days from the approval of the 13PUA.

Furthermore, Paragraph 3 of Section 8 20 01' the LP1RA provides that all

transmission and subtrausmission related liabilities of NPC shall be transferred to and
assumed by the PSALM.

2) To TRANSCO

With respect, however, to the electrical transmission activities of the NPC, the
saute Section 8 of the EP IRA created the, rRANSCO to assume such functions, to wit:

xxx xxx
xxx

Within six nloutths from the effectivity of this Act, the transmission and
subtrausmission facilities of NPC and all other assets related to transmission operations,
including the nationwide franchise of NI' C for the operation of the transmission system
and grid, shall be transfcrrcd to the TRANSCO. The TRANSCO shall be wholly
owucd by the Power Sector Assets and Liabilities Management Corporatiou ( PSALM
Corp.)

xxx xxx„
X! C

2 Rule 22 the IRR cnumerales " all other assets" related to

Section of of

transmission and subtrausmission facilities, to include, but not limited to the following:

b) Tu take title to and possession of, administer and conserve the assets transferred to it; to sell or
dispose of the same at such price and under such terms and conditions as it may deem necessary or proper,
subject to applicable laws, rules and regulations;

c) To take title to and possession of the NPC IPP contracts and to appoint, after public bidding in
transparcut and open manner, qualified independent entities who shall act as the 1111' Administrators in
accordance with this Act;

xxx xxx xxx

resn ucture existing luaus of NPC;

xxx xxx xxx„

See footnote No. G.

241
Sec footnote No. 7.
 vw--avv 110, wvL
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PSALA1

1. System operations Facilities such as lelecon t uu ications and Supervisory

Control and Data
Acyuisitiun ( SCADA) systems including offices and
laboratory buildings I ousiug llicsc ccluipnlcnt; and

2 TRANSCO offices and real estate properties, vehicles, laboratory and lest
cduipuicrlt, spare parts and other physical structures.

B. Operation of the transferred assets duritlg the transition period ( alter

translcr of assets but prior to privatization)— Phase II

Z1
Pursuant to Section 470) in relation to the assets transferred to PSALM, NPC
may generate and sell electricity only from lire undisposed generating assets and 111'
contracts of PSALM Corp. and shall riot incur any new obligations to purchase power
through bilateral contracts with generation corripariies or other suppliers during the
transition period.

In respect of the sublrarisrllission Functions and asscls, pursuant to Paragraph 3

also of the same Section 3 of the EP1RA, the same shall be segregated rroln the

transmission Functions, assets and liabilities for transparency and disposal: l'ruviclecl, that
the subtransmission assets shall be operated and maintained by TRANSCO until their
disposal to qualified distribution utilities which are in a position to take over the
responsibility for operating, maintaining, upgrading, and expanding said assets.
1322

Moreover, of the EP1RA, the net profit, it' ally, of TRANSCO

under Section

shall be remitted to the PSALM not later than ninety ( 90) days after the immediately
preceding quarter.

C. Oil the privatization of' NPC' s asscls - Phase 111

1. Generation assets, real estate and other dispusable assets as well as 1PP
contracts.

21
SEC. 47. NPC Privalizution. - Except for the assets of SPUG, the generation assets, real estate,
and other disposable assets as well as HIP coatracls of NPC sliall be privatized in accordance with this Act.
within six ( G) mouilis from the effectivity of this Act, the PSALM Cuip shall submit a plan for the
endorsement by the Joint Congressional Power Commission aad the approval of the President of the
Philippines, on the total privatization of die generation assets, real estate, and other disposable assets as
well as existing PPP contracts of NPC and thereafter, implement in the same, in accordance with the
Following guidelines, except as provided for in Paragraph( t) herein:

Xxx XXx Xxx

6) NPC may generate and sell electricity only from the umdispuscd generating assets and 1111'
contracts of PSALM Corp. and shall not incur any new obligations to purchase power through bilateral
contracts with generation companies or other suppliers."

22
SEC. 13. PruTls. — The net profit, if any, of TRANSCO sliall be remitted to the PSALNI Corp.
not later than ninety( 90) days the immediately preceding quarter."
after
j
X020» 2002 lay 13, 2002

1f gc 13 of 32
PSiI/. 11

Pursuant to Scction, 17of( lie EPIKA, except for the assets of Small Power Utilities
Group ( SPUG), the generation assets, real estate, and other disposable assets, as well as
the 1131' contracts ol' NPC, shall be within six ( 6) monll s from the effectivity
privatized;

of' the LPIKA, PSALM shall submit a plan for the endorsement by the Joint
Congressional Power Commission ( JCPC) and the approval of' the President of' the
Philippines, on the total privalization of llre generation assets, real estate, other disposable
assets, as well as existing IPP contracts of NPC, and thereafter, mnplenrenl the same, in
accordance, with the f011owing guidelines, among others, to wit:

aj The privatization value to the National Government of the generation

assets, real estate, other disposable assets as well as 1PP contracts shall be
optimized [ Sec. 47( a), LP1RA] ;

b) The NPC plants and/ or its 1PP contracts assigned to 1P13 Administrators,
its related assets and assigned liabilities, if any, shall be grouped in a nramrcr
which shall promote the viability of the resulting Generation Companies, ensure
economic cllicicncy, encourage competition, foster reasonable electricity rates
and create market appeal to optimize returns to the govcninienl from the sale and
disposition ol' such assets in a manner consistent with the objectives of this Act. x
x x [ Sec. 47( c), Ibici];

C) All assets of N1' C shall be sold in an open and transparent uranner through
public bidding, and the same shall apply to the disposition of 1PP contracts [ Sec.
47( d), Ibis!];

d) The Agus and the Pulaugui complexes in Mindanao shall be excluded

Ironi among the generation companies that will be initially privatized. The

ownership shall be transferred to PSALM and both shall continue to be operated

the NPC. Said may be than ten ( 10) years
by complexes privatized not earlier

from the efl'celivily of this Act, and except for Agus 111, shall not be subject to
Build- Operatc- Transfer ( B- O- f), Build- l)%
clrabilitalc- Operatc=[ rauslcr ( B- R- O= f)
and other variations tlicreof pursuant to Republic Act No. 6957 ( BOT Law),
as annended by Republic Act No. 7713. The privatization of Agus and Pulaugui
complexes shall be left to the discretion of PSALM in consultation with Congress.
Sec. 47( f), Ibi(l];

e) Tic steamf eld assets and generating plants of each geothermal complex shall
not be
sold separately. They shall be combined and each geothermal complex
shall be sold as one package through public bidding. The geothermal complexes

covered by this requirement include, but are not limited lo, Tiwi- Makban, Leyte A
and B, Tongonan, Palinpinon, and Mt. Apo. [ Sec. 47( g), Ibicl]; and

i) 1'hc ownership of tlrc Cal iraya- Bolokan- Kalayaan ( CBK) pun p sto agc shat l
be transferred to PSALM. [ Sec. 47( b), Ibir(].
iFi1020- 2002 lay 15, 2002

l6agc 14 of 32
PSALM)

2. TRANSCO Privatization

23 months From its

Section 21 of the liPMA provides that " within six ( G)

effectivity, the PSALM Corp. shall Subnnil a Ulan for the cndurscrllcnl by the Joint Power
Commission and the approval of the President of' the Philippines who shall thereafter
direct PSALM Corp. to award, in open competitive bidding, the transmission facilities,
including grid interconnections and ancillary services to a qualified party either through
all outright sale or a concession contract. The buyer/ concessionairc shall be responsible
fur the Mill),*ovclllcllt, expansion, operation, and/ or maintc mace of its tlallslllission assets
and the operation of any related business."
24
Under Section 11( a) of Rule 22 of the 1RR, PSALM and TRANSCO shall
Securc a nationwide franchise to the Buyer/ Conccssiouaire for the operation of the
transmission systcln and grid. The award is expected to result in lllaxinlum present value
of proceeds to the National Government, hl case a Concession Contract is awarded, the
concessionaire shall have a contract period of twenty- live ( 25) years Subjccl to review
and renewal for a lnaxilnunl period of another 25 years. Upon the expiration or

termination of the Concession Contract, the trillsllllssloll facilities and assets, including
the nationwide franchise for the operation of the transmission system and grid shall revcrl
to TRANSCO.

Paragraph 4 of Section 8 of LP1RA defines the manner and terms under which the
alorenlcntioned transmission systems and facilities shall be transferred, to wit:

TRANSCO shall negotiate with and thereafter transfer such functions, assets,
and associated liabilities to the qualified distribution utility or utilities connected to such
subtraus uission facilities not later than two( 2) years from the effectivity of the Act or
the start of the open access, whichever comes earlier: Provided, That in the case of

electric cooperatives, the TRANSCO shall grant conecssional financing over a period of
twenty( 20) years: Provided, however, "flat the installment payments to TRANSCO for

23 See Footnote No. 13.

zA
Sec. 11. TRANSCO Privatization.

a) Within six ( G) nnonths from ile effectivity of the Act, tine PSALIVI shall submit a Privatization
Plan for endorsenncnt by the Power Commmissiou mad the approval of the President of the I' llilippimcs. The
President of the Philippines thereafter shall direct PSALM to award, im open competitive bidding, the
transmission facilities, including grid interconnections and Ancillary Services to a qualified party eider
through all outright sale, a Concession Contract or any other nneans not inconsistent with the objectives of
the Act. The Buyer or Concessionaire or any other successor- iii- interest to TRAN' CO shall be responsible
for the improvement, expansion, operation or Maintenance of tine transmission assets and the operation of
any related businesses. PSALM and TRANSCO stall secure a nationwide franchise for and in behalf of the
Buyer or Concessionaire. The award sl all result in maximum present value of proceeds to tie National
Government. In case a Concession Contract is awarded, the Concessionaire stall have a contract period of
twenty- five ( 25) years, subject to review and renewal for a maximum period of another twenty- five ( 25)
years. Upon the expiration or termination of tic Concession Contract, the transmission facilities and assets,
including the nationwide franchise for the operation of the transmission system and Grid shall revert to
TRANSCO."
 020- 2002 Mloy 1 '>, 2002

Page 15 of 32
PS 1/, its

the aceµ iSitiou ul' subnansn ission Facilities shall be given first priority by File electric
couperalivcs out of the net income derived From such facilities. The TRANSCO shall
determine the disposal value of the sublransmission assets based on the revenue potential
of such assets."

Consistent therewith, paragraphs 8 and 9 of Scction S of the ETIRA respectively

provide that:

Aside from IISALM Corp., TRANSCO and connected distribution utilities, no

third party shall be allowed ownership or mana gcment Larticiyation, ill whole or in part,
in such subtrausmission cutity.

fthe TRANSCO may exercise the power of eminent domain subject to the
requirements of the Constitution and existing laws. Except as provided I erein, no person,
company or entity other than TRANSCO sliall own ally transu ission facilities."

considering the restriction imposed with respect to the ownership of-

Thus,
management participation, ill whule or in part, over the subtransutissiun entity, it has
been discussed and agreed, as represented, that TRANSCO will cuter into a concession
contract to implement the mandated privatization of N1' C' s assets.

V. REQUEs, rED RULING

In reply, please be informed that the transactions arising From or relating to the
privatization of NPC will be taxed in the manner described below. hi this connection, it
is to be noted that this ruling; sliall apply only to the facts as represented, ill connection
with the applicable provisions of( lie EPIRA, [ lie IRR, the ' fax Code of 1997 and related

laws existing as of the dale of this ruling.

A. Transfer of assets anti liabilities of NIT

1. NPC is not liable to income tax on the,. transfer of its assets to PSALM and
TRANSCO.

Under the NPC Charter, NPC enjoys exemption from all furors of taxes, direct or
indirect. I-Iowcvcr, such tax exemption privileges of NPC were repealed by PD 1177.
Section 23 of said PD 1177 allows organizations otherwise exempted by law from
payment of internal revenue taxes to ask for subsidy from the General Fund in the exact
amount of taxes/ duties due, which sliall be automatically considered as both revenue and
expenditure in the General Fund. As cited by the Supreme Court in Rlacecla vs.
Macamig, Jr. ( 233 SCRA 217), there was reason to believe that NPC availed of
the subsidy granted to tax exempt GOCCs. Thereafter, L.O. 93, series of 1987, was
promulgated specifically to correct the presidential restoration of the grant of tax
exemption to some government and private entities pursuant to PD 1931, without the

benefit of review by the F1RB, thus, all tax and duly incentives granted to the government
and private entities were withdrawn except, among others, those covered by the non-
impairment clause of the Constitution.
1020- 2002 May 13, 2002

Page 16 of 32
LPS 1L

As a rule, contractual cxculhtions which are granted pursuant to it contract entered

into by the taxing authority under an enabling law falls within the purview oh the non-
itnpairntcut clause of the Constitution. > cti_sllould_.liot,_hQ.weycr, be con('used with
exemptions granted under franchises. ( Cogti an Electric Co. vs. CIR, G. R. L-601026,
25 September 1955). A franchise is it special privilege conferred by governmental
authority, acting as such ou an undertaking that is within the scope of governmental
1 unctions.

Maintaining the tax- exempt status of NPC pursuant, to its charter and its availntcm[
of tlic tax subsidy under PD 1 177, the F1RB issued on June 24, 1957, Resolution No.

17- 57, which clarified the coverage of the exemption under Sec. 5( b), CA No. 120

later, Section 13 of RA 6395) and restored the lax and duty exemption privileges of the
NPC, but excluded certain transactions from [ lie coverage, to wit:

1. Importation of fuel( crude equivalent to coal);

2. Commercially- fu ded importaliom;( i. e., importaliuns which include but are

financed NPUs internal funds domestic
limited to thuse by the own

borrowings G- onn any source whatsoever; borrowings Frou Foreign based

Financial institutions, ctc.); and

3. Interest income derived from any source.

Thereafter, the income tax exemption of NPC was repealed with the amendments
introduced RA 5424. Consistent Section 7( B) RA 5424, Section 27( C) of tllc
by with of

Tax Code of' 1997 provides that-

C) Government- owned or Controlled Corporations, Agencies or

Instrumentalities. - The provisions of existing special or general laws to the contrary

notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by
the Government, except the Government Service Insurance System( GSIS), the Social
System ( SSS), the Philippine Health Insurance Corporation ( PHIC), the
Security
Philippine Charity Sweepstakes ( PCSO) and the Philippine Amusement and Gaming
Corporation ( PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in a similar business,
industry, or activity."

Considering that NYC is not among the government corporations enumerated, its
exemption from income tax was deemed repealed. However, in BIR Ruling No. 15- 00

dated January 20, 2000, the BIR clarified that the income of' NPC from the operation of a
public utility is excluded from gross income pursuant to Section 32( B)( 7)( b) of the Tax
Code of 1997, which reads:

13) Exclusions fi-onr Gross Income. - The following items snail not be
included in gross income and shall be exempt from taxation under this Title:

7) xxx xxx xxx i

 13, 2002
x'020- 2002
Page 17 of 32
L)ISALdl

the Government its Potiticat Subdivisions. - Income

b) Income derived hj, or

derived firom any public utility or 110111 die exercise of any essc tial govcrwue tat
Function accruing to ( lie Govcrmucnt of tl e 1' 11ilippincs or to any political subdivisiun
tl crcol:

Oil the basis of said ruling, NPC is not paying income taxes on its income arising
Froul its operation as a public utility.

Tile exemption of NPC is not lintitcd only to the sale and transmission of
geicrated power, but includes transactions incidental to and necessarily connected with
the of the
operations public utility, such as a sale or transfer on an isolated basis of
transaction is not conducted as a separate business. ( Ra( flo
its assets, which

Communications vs. Court of Tai . lppeals, G. R. No. 60547, July 11, 1935; Phil. Power
Development Co. vs. Commissioner, CTA Case No. 1152, Oct. 13, 1965). " Where

something is done as a mere incident to, or as a necessary consequence of, the principal
business, it is not ordinarily taxed ilsclf.
as an independent business in What, is usually
in the taxpayer is engaged. All the various
taken as essential is the main activity wiliclr

transactions tending to better accomplisli the principal end in vices Must be treated as
merely incidental." ( De la Rama Stecuirship Co. vs. Comm. of Internal Revenue, CTA
Case No. 1499, March 5, 1967). Thus, the incouic, if any, 1roin the sale or transfer of
NPC' s assets is not incoilic from other business activities conducted by NPC but rather
earnings and profits realized in connection with the business conducted in accordance
with the fianchise, and thus covered by lire exemptions provided for ill Section
32( B)( 7)( b) of the Tax Code of 1997.

2. NPC is not liable to fianchise tax or VAT on the transfer of its assets to
PSALM and TRANSCO.

Section 27( c) of the Tax Code of 1997 repealed only the income tax excerptions
is controlling franchise lax. As above
of NPC. Hence, the NPC Charter as regards

stated, the use of the please " all forms of taxes" in PD 935, which is ail amendment
of the NPC Chartcr, evinces a clear legislative intention to exempt NPC from any kind
Jr.. 223 SCIUk 217). Accordingly, the tianslcr of assets
of tax. ( Alace(la vs. Alacaraig,
by NPC to PSALM and TRANSCO is not subject to lianchise tax.
Moreover, since NPC is not a VAT- taxable culily and the transfcr of its assets is
not necessary to carry out its primary function as a utility and ncitlier is it done in the
course of its trade or business, such
transfer

shall not be subject to VAT. ( B1R Ruling No.

113- 93 dated July 23, 1995).

The transfer of real properties from NPC to PSALM and TRANSCO is not
3.
subject to Documentary Stamp Taxes ( DST) under Section 196 of the Tax Code of 1997.

Scclioii 196 of the Tax Code provides that DST " shall be imposed on all

conveyances, deeds, instruirrells, or writings other than grants, patents or original

certificates of adjudication issued by the Government, whereby any land, teriencnt or

sold shall be granted, assigned, tra lsfcrred or otherwise conveyed to the
other realty
i
 buoy 1; P, GVUL
402O-
ft- 2002

Age 18 of 32
PSALM

Purchaser or purchasers, or to any other person or persons designated by such purchaser

or purchasers. The DS' f will be computed at the rate of 1115. 00 for every P1, 000, based
on the consideration contracted to be paid for such realty or its fair market value
determined in accordance with Section 6( E) of this Code, whichever is higher. When one
of the contracting parties is the Government, the tax herein imposed shall be based oil the
actual considcration, xxx xxx :. xx.

Based on the foregoing, DST under Section 196 of the Tax Code of 1997 is
impgscd on all conveyances, deeds, inslrumcuts, or writings involving the sale of laud,
tenement or other realty, computcd based on the consideration contacted to be paid Ior
such really or its fair market value determined in accordance with Section 6( E) of the Tax
Code, wlrcrr one of the parties is the government, on the actual
or contracting
consideration.

As to whether or not the transfer of NPC' s assets to PSALM or TRANSCO, as the

fall squarely the sale", reference to the
may be, within concept of "
case will very
provision of Article 1155 of' the Civil Code must be mach This law provides I01. the
lullowing essential requisites to a contract of sale, viz:

1. Consent of the contracting parties by virtue of which the vendor obligates himself to
transfer the ownership of and to deliver a determinate thing, and the vendee obligates
himself to pay therefor a price certain in money or its equivalent.

2. Object certain which is the subject matter of the contract.

3. Cause of the obligation which is established. The cause as far as the vendor is
concerned is the acquisition of the price certain in money or its equivalent, while the
cause as far as the vendee is concerned is the acquisition of the thing which. is the
object of the contract.

Tints, the contract of sale is characterized as consensual, bilateral and reciprocal,

principal, onerous, commutative, and nominate.

In this case, the transfer of NPC' s generatiuu assets and liabilities to PSALM, as
well as of the transmission and subtransmission assets and systems to TRANSCO, all of
which are government- owned and - controlled corporations is mandated by law. There is
no positive offer to sell and buy the aforesaid NPC properties. Moreover, consideration,

which should be the prime reason for the transfer of abovenrerrtioncd assets, is not
in lire transfer the NPC assets. Although it has
availing to the parties of aforementioned

been staled earlier, it should bear stressing that this is a transaction between and among
government- owned and - controlled corporations pursuant to a law calling for the
reorganization of NPC' s assets.

Consideration is dclincd as the inducement to a contract. It is the reason or

material cause of a contract. It is some fight, interest, profit, or bcaclil accruing to one
party. ( Black' s Law Dictionary, 6th Edition)
 U2U- 2uu2 13, 2002

Page 19 of 32
PSALAf

In the case of PSALNI, its assumption of NPC' s liabilities is mandated by law.

Normally, the transfer of property by a person ( transferor) to another person ( transferee)
in exchange for the assumption by said person of the translcror' s liability will be
considered a sale, where the assumption of liability constitutes a consideration for [ lie
assets. l7ie train, it' ally, From the transfer is the dillcrence between the higher u1' llie
consideration received or zonal value, if. ipplicable, and the value of the assets given up.
The aniount of the liabilities transferred is treated as part of the consideration.

Likewise, the taking of title over the assets of NPC by PSALM for the purpose of
the LPIRA. Unlike
selling or disposing them, is consistent with the guidelines set under

in all ordinary business transaction, PSALM, as the entity assuming the obligation, does
not exercise any discretion whether to accept the assets and liabilities to be transferred
nor does it play any role in [ lie determination of the anluunl of the liabilities that it will
assume.

Accordingly, the transfer of owiicrsliip over NPC properties to PSALM is not a

transaction contemplated within Section 196 of the Tax Code, and therefore neither NPC,
PSALM nor TRANSCO is subject to DST under the said section. Tile notarial

certification, is however, subject to the DST of fifteen pesos ( P15. 00) imposed under

Section 188 of tlic Tax Code of' 1997.

4. The transfer of liabilities of NPC to PSALM is not subject to DST imposed

under Section 194 of the Tax Code of 1997.

Pursuant to Section 198 of the Tax Code, DST is imposed on every renewal or
continuance of any agreement, contract or any evidence of obligation or indebtedness at
the same rate as that imposed oil the original instrument.

Pursuant to Article 1291 of the Civil Code, obligations may be modified by,
substituting the person of the debtor. Novation is a juridical act with a
among others,
dual function: it extinguishes all obligation and creates a new one. Manresa says that

novation is the exlinguislunent of an obligation by the substitution or change of the

obligation by a subsequent one which extinguishes or modifies the first either by

changing the object or principal conditions, or by substituting the person of the debtor or
creditor ( 4 Tolenlino, Civil Code 352;
subrogating a third person to the rights of the
Joven de Corles v. Venturanza, 79 SCRA 709, 722; Peterson v. Azada, 3 Phil. 432).

Tile four essential requisites of novation are: ( 1) previous valid obligation; ( 2)

the agreement of all parties to the new contract, ( 3) the extinguishment of' the old
contract, and ( 4) the validity of the new one. ( Tin Siuco v. Habana, 45 Phil. 707, 712)

In the instant case, there is an existing valid obligation entered into by NPC. As
LPIRA, PSALM lake the liabilities of NPC, thereby
mandated by the sliall over

subrogating the latter as debtor with respcct to stick obligations. Both NPC and PSALM
are wholly owned by the National Gove riunent, which acts as guarantor of the luaus,
regardless of whether NPC or PSALM is tiie debtor. Also, to comply with the pruvisioms
i/020- 2002 y 13, 2002

gage 20 of 32
PSALA- 1

of LPIRA, NPC is discussing With its various creditors the possible assumption by
PSALM of these obligations. The process would, by novation, completely create a new
obligation between the original NPC creditors and PSALM, thereby ! ailing within the
purview ol' Arlicle 1291 of the Civil Code.

It should, however, be noted that Use transfer of NPC' s obligations is by operation

of law, with the intent of preserving the NPC loans for the bench! of the NPC creditors.
The intention of the law is to allow for the restructuring of the electric power industry,
Which includes the privatization of the assets of the NlIC25 and the translcr of its
liabilities to
PSALM26,

which PSALM is mandated to restructure and liquidate. 27 1n this

particular instance, the transfer of the loans is actually a transfer of such loans from one
government vehicle ( that is, NPC) to another ( that is, PSALM) both of which share the
same objective and governmental purpose of ensuring supply of electricity to the country.
It is also to be noted, that in the case of foreign loans, Section 8( b) of the NPC Charter
provides that the National Government guarantees the same absolutely and

unconditionally as a primary obligor and not merely as a surety. Considering that both
entities serve similar purposes, and that they are both vehicles used by the National
Government to achieve the identical objective of providing electrification to the country,
the transfer of the NPC loans does not give rise in this case to a new obligation, as
the National Government remains the guarantor for the original loans even after they are
transferred to PSALM. Accordingly, no DST under Section 180 of the Tax Code of 1997
should be imposed on the translcr of the NPC loans to PSALM.

25
SE-C. 3. Scope. — This Act shall provide a Framework for the restructuring of the electric power
industry, including the privatization of the assets of NPC, the transition to the desired competitive structure,
and the definition of tilc responsibilities of the various government ageucics and private entities."

26 Section, 19, LPIRA. See Footnote No. G.

27 The principal purpose of the

SEC. 511. Pinpose and Objective, Domicile and' ferns uJExistence.—

PSALM Corp. is to manage the orderly sale, disposition, and privatization of NPC generation assets, real
estate mud other disposable assets, aad 1111' co thracts with the objective of liquidating all NPC financial
obligations and stranded contract costs in au optimal manner.

The PSALM Corp. shall have its principal oflice and place of business within Metro Manila.

The PSALM Corp. shall exist for a period of twenty live( 25) years from the effectivity of this Act,
unless otherwise provided by law, and all assets field by it, all moneys arid properties beloagiug to it, and
all its liabilities outstanding upon the expiraliou of its term of existence shall revert to aad be assumed by
the National Government."

SEC. 51. Powers. — ' Fite PSALM Corp. shall, in tile. performance of its Functions and For the
attainment of its objective, have the following powers:

xxx xxx xxx

i

Fe.)' 1' o restructure existing loans of the NYC;

xxx xxx xxx"( EPIRA)

a
1' age 21 of 32
L'Sil LA1

It has also been ascertained with the Department of finance, Corporate Affairs
subjected to Mortgage. ThuS, neither
Division, that NPC' s real assets were never any

shall DST under Section 193 in relation to Section 195 of [ lie Tax Code of 1997 be
imposed.

B. operation of rile transferred assets during; the transition period ( after

ti-misfer of assets but prior to privatization)

I. Income of PSALNI arises from the exercise of csscutial gover-nnlent 11111 ion
1111d llluS, exempt Irom tax.

The mandate of PSALM under Section

5028

of the LPIRA is to manage the

orderly sale, disposition, and privatization of NPC generation assets, real estate and other
disposable assets, and IPP contracts; and, to liquidate the NPC stranded debts and
stranded costs by utilizing the proceeds frunl the privatization and other property
From the Universal Charge. Although the
contributed to it, including the proceeds

operation by PSALM of the NPC assets transferred to it, is not its principal purpose,
nonetheless, because of the provisions of LPIRA mandating the transfer of the assets
of NPC, PSALM is required to continue to operate the generation assets of NPC until
the sane are eventually sold/ privatized. 29 Otherwise, there would be massive interruption
in file supply of cicelricity, which is contrary to the goal of the LPIRA of ensuring the
duality, reliability, security and affordability of the supply of electric power.

The foregoing defined activities of PSALM are essentially governlllental

functions. Under Section 32( B)( 7)( b) of the Tax Code of 1997, income derived From the
exercise of any essential government Function accruing to lire Government of the
Philippines is excluded from gruss income.

On what constitutes " essential govermnent function," the Sllprcnlc Court, in the

case of 1' euple' s Homesite and Housing Coihotution vs. Court of Industrial Relations
G. R. No. L- 31890 dated May 29, 1937) expressed this view:

It has not always been easy determining which functions are governmental In
nature which
and are proprietary. The characterization of functions performed by ( lie
government has evolved liom the traditional " constituent- n inistraut" classilication [ as
enumerated in the case of Bacarii vs. National Coconut Corporation,( 110, Phil 463[ 19560]
to its disavowal ill the case of ACCFA v. CUGCO, et. al. ( GR No. L- 221434, November
29, 1969, 30 SCRA 649), where, considering the social justice provision of (lie 1936
Constitution, we said that 111c " constituent- ministrant" classification has become

t nrealistic, if not obsolete, ' There, we gave our assent to a socio- political philosophy

28 The Principal purpose of the

SEC. 50. Purpuse and Objective, Domicile a ul Tenn offxistelrce.-

PSAL141 Corp. is to manage the orderly sale, disposition, and privatization of NPC generation assets, real
estate and other disposable assets, and IPP contracts with the objective of liquidating all NPC financial
obligations and stranded contract costs ill all optimal mariner.

XXX XXX XXX"

29
See Footnote No. 13.
 ida, y 15, 2002
020- 2002

Page 22 of 32
1' S11 LM

espousing a great socialization of ceonon ic forces. we found nothing objectionable

in government underlakiug ill its sovereign capacity activities which, by the constitucnt-
ministrant test would have been considered as merely optional.

We, thus, ruled ill said case that the Agricultural Credit Administration, tasked
as it was with the implementation of the land rclorm program of the government was an
agency performing governmental functions. x x x."

Considering the foregoing, this 011icc opines that the activities undertaken by
PSALM pursuant to the provisions of tlne EPIRA arc essential government functions and
as such any income received by it arising li-orrr, or relating lo, such activities is dccrrred
income from the exercise o1' essential governnlernt function and therefore, excluded From
gross income pursuant to Section 32( B)( 7)( b) of the Tax Code of 1997. Furthermore, the
operation by PSALM of NPC' s generation assets, [ lie saute being consequential to its
mandate of holding/ administering NPC' s assets until the saute arc disposed or privatized,
is deemed included in its govcrulnenlal luuctiolr. Hence, income derived li-onn the

operation of such generation assets is exempt From income tax and nliuirruuu corporate
iconic lax Imposed 111 Scetlon 27( A) and Section 27 ( E) respectively, of the Tax Code of'
1997.

2. Sale of generated poNver by PSALM is subicct to zero percent ( 0%) VAT.

Section 102 of the Tax Code of 1997 imposes VAT equivalent to tcn percent
10%) of gross receipts derived Erom the sale or exchange or services in the course of
trade or business in the Philippines, provided the annual gross receipts exceed P550, 000.

Section G( b), Rule 5J0 of tine 1RR in relation to Section II( x) of' the EP1RA",
however, expressly provides that the sale of generatcd power by generation companics
shall, upon the of tine Act, be subject to zero percent ( 0%) VAT. Since
effectivity
PSALM, once registered with tile ERC will fall within the deCnilion of a Generation
Company under RIIIC 5 of the aforesaid IRR with respect to its sale of generated power,
we confirm your opinion that its sale of generated power will be subject to VAT at the
rate of zero percent( 0%).

3. TRANSCO shall be taxed in the same nnaurlcr as NPC.

3°
Section. G. Generation Charles and VAT.

xxx xxx xxx

b) Pursuant to the policy of reducing electricity rates to End- users, sales of generated power
by a Generation Company shall, tium the eflectivity of the Act, be zero- rated for the purpose of imposition
of value- added tax. Towards this end, the imposition of zero percent( 0%) VAT shall apply to We sale of
generated power by a Generation Company through all stages of sale until it reaches the End- user. The
DOC, through the 1318, shall issue the accessary revenue regulation within sixty ( 60) calendar days From
eflectivity of these Rulcs."

31
x) " Generation Company" refers to any person or entity authorized by the ERC to operate
facilities used in the generation of
electricity."( Sec. 4, GPIRA)
i'020- 2002 ay 13, 2002

Pap 23
I' S 1 Lill
of 32
0
Section 8 of the EPIRA provides that the transmission and sub- transmission
Facilities of NYC and all other assets related to transmission operation, including the
nationwide Franchise of NPC for the operation of the transmission system and the grid
shall be transferred to TRANSCO. The transfer of the franchise of NPC necessarily
entails also the transfer of the privileges that NPC enjoys ur der its charter in relation to
the operation of the transmission system in order for it to perforn the electrical

transmission functions of ( lie NPC. As previously ruled, the income of NPC morn the
operation of a public utility is excluded lcoln gross income. lu this regard, Sections 18

and, 55( l) of tlrc EP1RA state that " the net profit, if any, of TRANSCO shall be remitted
to the PSALIVI Corp. not later than ninety ( 9O) days allcr the immediately preceding
quarter" and" the following funds, assets, contributions and other property shall constitute
TRANSCO". As stated earlier,
the properly of the PSALM Corp.: xxx net profit of

PSALM will be wholly-owned by the National Government.

Thus, we confirm your opinion that TRANSCO should be taxed in the same
manner as NPC, to wit:

i) With respect to income tax, the income of TRANSCO is excluded Icon

gross income fur purposes of computing its illeomc lax pulsuaut to Section
32( 13)( 7)( b) of the' fax Code of 1997.

ii) On franchise tax, just like NPC, TRANSCO will be exempt. from all forms
of taxes, including liauchise tax, because the NPC franchise, including the
privileges related thereto, have been transferred by operation of law to
TRANSCO.

4. NPC' s tax liability- on- its income arising; from the service agreciucnls will,
PSALM and TRANSCO.

Aller the assets will have been transferred to PSALM, NPC will enter into an
O& M Agreement with PSALM so it call continue to operate the generation facilities and
behalf PSALM. In to the operations of the
sell power, for and on of respect

transmission system, TRANSCO will enter into an O& M Agreement with NPC
providing for the assignment of [ lie latter' s employees to T1tANSCO to render the
services required to be performed pursuant to the provisions of the EP1RA.

As discussed earlier, Section 832 of the EPIRA mandates, among others, the
transfer of NPC' s nationwide franchise to TRANSCO. The tax exemption privileges
NPC its franchise. When such franchise was
being enjoyed by were granted under

accordingly transferred to TRANSCO, NPC was automatically divested of the privileges

accruing to the franchise. It would have been different if what had been transferred to
TRANSCO were merely the NPC properties or facilities used in its operations

without the corresponding transfer of franchise. lu such a case, NPC would continue to

enjoy the privileges granted under the Ganchisc.

31
Sec Footnote No. 7.
 I° 1:), zuvz
020- 2002 lay

huge 24 of 32
1' Si1LA1

A legislative franchise is in the nature of a contract betwecn [ lie taxing authority

anti the grantee, thus, subject to tllc non- irrlpainnenl clause of the Constitution. Normally,
tax exemptions and privileges are granted to [ lie grantee/ holder its all incentive to the
performance of its Franchise. Suclr tax exemption privileges arc exclusive to the grantee;
once ( lie grantee is divested 01' such function and the lianchise is reproved, it can no
longer enjoy the privileges emanating therefrom. Furthermore, unless the law expressly
states, being exclusive in nature, such Franchise can never be shared by two entities Much
more, by the original Franchisee which has been stripped of such Franchise.
Undcr the foregoing circumstances, essential governmental functions have been
PSALM. In the of TRANSCO, as a public utility, it
translcrred and assumed by case

now enjoys the franchise of its predecessor, the NPC, pursuant to Section 8 of the CP1RA.
Following the foregoing, the categorical transfer of such functions and franchise will
necessarily entail the transfer of tax excrmption privileges granted thereunder, unless the
LPIRA declares otherwise. llowever, there is no provision in the LPIRA that
categorically allows sinnlltalreous enjoyment of the franchise by both TRANSCO and
NPC.

There is no tax by silence but, where the law levies a tax, so also must the tax
exemption be explicit in the law. Thus, as held ill the case Flora Cement vs. Golws7) e
presumed. Applying this in the case of NPC, it
200 SCRA 430), tax exemptions are not

can no longer invoke continuous enjoyment of tax exemption privileges granted under the
Franchise without a clear and specific provision raider the LPIRA. Oil the other hand,
while the LPIRA does provide for the withdrawal of NYC tax exemption privileges in
view of the transfer of its franchise to TRANSCO, it has been repeatedly held though
that there is, however, no Im-ohibilio n against the government tarring itself. (Bisaya
Land Transportation Co., Inc. vs. Collector of Internal Revenue, L- 11812, 29 May 1959).

Presently, the general rule on income taxation of govcrunlcllt- owned and/ or —

controlled corporations is embodied in Section 27( C) of the Tax Code of 1997: except for
government corporations specifically mentioned therein, all other government
Five ( 5)
and governincrlt- owned and— controlled corporations are now subject to income tax.

Since the service to be rendered by NPC to PSALM and TRANSCO under the
O& M Agreements will not be all activity essentially gomilinental in nature, any income
derived therefrom by NPC will not be covered by said provision and thus subject to
income lax and ininimum corporate income tax imposed under Section 27( A) and ( G),
respectively, of the Tax Code of 1997.

Moreover, services rendered

by NPC under the O& NI Agreement are deemed

rendered in the course of its business, hence, subject to VAT or the appropriate

percentage tax, as the case may be.

I
 May 1, 2UU2
020- 2002

P!4gc 25. of 32

In the meantime, under Section 7033 of the EPIRA, as implemented by Section 2

of Rule 3 of the IRR, NPC shall be responsible for providing power generation and its
associated power delivery systems in areas that are not connected to the transmission
system through SPUG. SPUG34 refers to the functional unit of NPC created to pursue
missionary electrification function to sonne areas in line country where lhet•c is nu
electricity and as provided.

Thus, while power generation sliall no longer be considered a public utility

operation, lience, not required to secure it national franchise pursuant to Paragraph 3,
Section 6 of the EPIRA, it tray llowever, be considered an essential governmental
assets of SPUG is concerned. Such being
function insofar as the operation by NPC of the

the case, income derived therefrom will be excluded from gross income pursuant to
Tar. Code 1997. Moreover, sale of generated power
Section 32( B)( 7)( b) of the of

by NPC through SPUG shall be subject to the zero percent ( U`io) VAT pursuant to
Section 6( b), Rule 5 of the 1RR.
Section 6 of lie EP1RA, as implemented by

Accordingly, NPC will be subject to income lax and VAT and/ or perccmlage tax
oil its O& M intone; and 00/0 VAT oil its income from generating electricity through
SPUG.

C. Privatization of Assets.

As slated earlier, lice following ruling is based oil the law existing as of the date
of this ruling.

1. Gain from the sale by PSALM of the gemeratioll facilities to qualilicd buyers is
not subject to income tar.

The eventual sale, dispusilion or privatization of the generation assets, real estate
and outer disposable assets, and IPP contracts, will be a there incident to, or a necessary
consequence of, the generation activity that PSALM will undertake as discussed in B. l.,
therefore not be taxed as an independent business in itself. ( De Itt
above, which should

33
SEC. 70. Alissionaty Eiectriricatiort. — lgolwitltstamdiag the divestment or privatization of IQ C
assets, IPP contracts and spun- off curporations, NPC shall remain as a National Goverauteat- owned and—
controlled corporation to perform the missionary electrification fuactioa through the Small Power Utilities
Group ( SPUG) and shall be responsible for providing power generation and its associated power delivery
fine missionary electrification ( unction
to the transmission system. '
systems in areas Qnat are not connected

shall be funded Front the revenues front sales in missionary areas and front the uaivcrsal charge to be
collected from all electricity end- users as determined by the ERC."
34
SEC. 4. Definition of Terms.-

XXX XXX
XXX

a) " Small Power Utilities Group" or " SPUG" refers to the functional unit of NPC created to
pursue electrification function;"( EPIRA)
missionary
 nay i), ` we
020- 2002

rage 26 of 32
W LAI

Ruma Steamship Co. vs. Conan. (/' Internal Revenue, Ibid). Accordingly, any income that
PSALNI may derive from such sale will also not be subject to income tax.

2. Privatization ol' asscls by PSALM is not subiect to VAT.

Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997,
a value- added tax equivalent to tell percent( 10%) of the gross selling price or gross value
ill moucy of the goods, is collected frorn any person,' who, ill tine course of trade or

business, sells, barters, exchaugcs, leases goods or properties, which tax shall be paid by
the seller or trausfcror.

The phrase " in the course of trade or business" means the regular conduct or

pursuit of a commercial activity, including transactions incidental thereto.

Since ( lie disposition or sale of the assets is a consequence of PSALM' s mandate

to ensure the orderly sale or disposition of tine property and thereafter to liquidate the
outstanding loans and obligations of NPC, utilizing the proceeds from sales and other
property including the proceeds from the Universal Charge, and
contributed to it,
not conducted in pursuit of any commercial or profitable activity, including transactions
incidental thereto, line same will be considered all isolated transaction, which will

tlncrelorc not be subject to VAT. ( B1R Ruling No. 113- 93 dated July 23, 1993)

3. The sale of real property by PSALM is subject to DST.

Pursuant to Section the sale of real properties by

196 of lire Tax Code of 1997,

PSALM will be subject to DST at the rate of 1115. 00 for every P1, 000 based on the
consideration contracted to be paid for such really or its fair market value determined in
accordance with Section 6( C) thereof, whichever is higher.
When one of the contracting
parties is the goveriunent, the tax to be imposed shall be based oil the actual
consideration subject to the proviso that, where one party to the transaction is exempt,
the other party shall pay the tax. ( Section 173 of the Tax Code ol' 1997)

Accordingly, the sale of real property by PSALM pursuant to [ lie privatization of

the generation assets will be subject to DST based oil the actual consideration that
PSALM will receive from the qualified buyers.

This tax consequence is in contrast to ( lie Phase 1 transfer of NPC assets to

PSALM and TRANSCO, which is not subject to DST on the premise that the transaction
does not constitute a" sale" for reasons discussed in relevant sections of this ruling.

4 & 5. Tax Consequence of concession fee and rental to be received by

TRANSCO or proceeds from the award of concession to qualified concessionaire/ s or
sale of the transmission facilities.

As represented, line sale of the transmission Facilities or the award of concession

agreement and lease arrangement that TRANSCO will enter into with th e qualified
 12• evve
U2U- 2UU2 may

Page 27 of 32

I' Sll Lbl

concessionaires arc activities undertaken to iulplcmenl [ lie privatization of' the

2135

NPC Section the LP1RA. The award is

transmission system of as mandated
by of

expected to result in ( lie lnaxilnuln present value of the proceeds to the National
Government, [ lie reason being that, said proceeds will be remitted by TRANSCO to
PSALM, which the latter will utilize to liquidate the stranded debts ol' NPC.

While this office is being apprised of the Ibregoing plan to grant concession right
to private persons, for failure however, on your part to submit a copy of the Concession
Contract, the requested ruling is hereby deferred its the lax treatment of the concession
would depend oil the specillc tcrllls and conditions of said Concession CUlltrrtcl.

It should also be noted that TRANSCO' s franchise is not transferred to the

concessionaire since the concessionaire will have to secure its own Franchise through the
efforts of PSALM and TRANSCO. "

Willi respect however, to the sale arrangement, considering that TRANSCO will
retain its franchise, TRANSCO' s income front the sale will be excluded From gross
incor tc for purposes ol" computing its income tax pursuant to the provision of Section
32( B)( 7)( b) of the Tax Code of' 1997. Moreover, TRANSCO will be exempt, From all
taxes, except income laic, in accordance with the NPC Chafer, on Such sale. However, Ior

the salve reasons stated in the immediately preceding section, the transfer of real property
be to DST Section 196 of the Tax Code of 1997. Since
assets
by sale will subject under

TRANSCO is exempt from all taxes, including the DST under the said Section 196, the
qualified winning bidder shall be the one directly liable for the DST pursuant to Section
173 of tltc Tax Code of 1997.

D. Collection of Universal Charge by distribution utilities is not part of

their taxable revenues nor will it be part of their gross receipts for purposes of
determining Lilceivise, the collection of Universal Charge by
their franchise taxes.

PSALM will not be considered as taxable income nor will it form part of its gross
receipts for VA1' purposes.

The Universal Charge will be collected from all end- users by the distribution
utilities. These charges will be remitted to PSALM and will be used exclusively for the
liquidation of the stranded debts and stranded costs of NPC as well as qualified stranded
contract costs of distribution utilities resulting from the restructuring of
37
tic industry. The
CPIRA provides that the Universal Charge is a non- bypassable charge.

35 See Footnote No. 12.

36 See Footnote No. 24.

37
SEC. 34. Universal Cl n ge. - within one ( 1) year from tl e effectivity of this Act, a universal
charge to be cleternlined, fixed and approved by the ERC, shall be imposed oil all electricity end- users for
the following purposes:

a) Payment for the stranded debts in excess of the amount assumed by the National.
Government and stranded contract costs of NPC and as well as qualified
 may . 1 >, ; uuz
020- 2002

Page 23 of 32
PSI LA1

Accordingly, since the Universal Charges to be collected by the distribution

Utilities do not belong to thcin and therefore, would not redound to their benefit, the same
will not be considered in the nature of income. Neither will the same form Marl of the
gross receipts of the distribution utilities for purposes of determining their franchise tax
liability. Gross receipts of a taxpayer 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 it
is not necessary that there must be a law or regulation which would exempt
3' t
such ttlonics
and receipts within the meaning of gross receipts under the ' fax code. In another case,

the Supreme Court ruled that the gross receipts of a taxpayer should not include any
money which although delivered to it has been especially earmarked by law or regulation
39
for some person other than the taxpayer. However, we require that the Universal
Charge appear as a separate item in the bill.

On the the Universal Charge received by PSALM will not be subject

other liand,
to income lax since it will not be in [lie nature of income as defined in See. 32( A) of the
Tax Code of 1997, wlliclt includes gains, profits, and income derived from salaries,
wages, or compensation for personal services of whatever kind and in whatever form

stranded contract costs of distribulio i utilities resulting Froni the resltvcluring of

tlic industry;

b) A-lissiouary electrification;

c) Tlic equalization of taxes and royalties applied to indigenous or renewable

sources of energy vis-a- vis imported energy fuels;

d) An environmental charge equivalent to one- fourth of one centavo per kilowatt-

which shall accrue to an ci vironmeatal fund to be used
hour ( P0. 0025/ kWli),
for watershed rehabilitation and management. Said fund shall be
solely
maiiaged by NIT under existing arrangements; and

c) A charge to account for all fortes of cross- subsidies for a period not exceeding
three( 3) years.

The universal charge sliall be a non- bypassable charge which shall be passed on mud collected
from all end- users on a monthly basis by the distribution utilities. Collections by the distribution utilities
and the TRANSCO in any given mouth shall be remitted to the PSALM Corp. oil or before the fifteenth
i)
15" of the succeeding month, net of
any amount due to the distribution utility. Airy end- user or sell-
generating entity not connected to a distribution utility shall remit its corresponding universal charge
directly to the TRANSCO.

The PSALM Corp., as administrator of the rind shall create a Special Trust Fund which shall be
disbursed only for the purposes specified herein in an open and trausparcnt manner. All amounts collected
for ale universal charge sliall be distributed to the respective beneficiaries within a reasonable period to be
provided by are L'RC."
3"
Commissioner of Internal Revenue vs.' fours Specialists, hic. and the Court of Tax Appeals, G. R.
No. 66416, March 21, 1990.

39
Commissioner of Internal Revenue vs. Mauila Jockey Club, Inc.( 108 Phil. 821 11960]).
 4ay 13, 2002
020- 2002

Page 29 of 32

paid, or Troll] pl-olesslolls, vocations, trades, business, conimerce, sales, or dealings ill
property, whether real or personal, growing out of the ownersllip or use of or interest ill
such property; also front interests, rents, dividends, securities, or transactions or any
business carried on for gain or prints, and incxmlc dCr'ivcd front any source whatever.
Income, in a broad sense, means all wealth that flows into the taxpayer other than as it
mere return of capital. ( Section 36, Revenue Regulations No. 2, otherwise known us the
Income Tax 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 Trust Fund, as
provided under the LP1RA. PSALM is just the administrator of the fund, which shall be
beneficiaries for the following purposes: 1)
disbursed/ distributed to its respective only

payment For the stranded debts in excess of' the amounts assumed by the National
Government and stranded contract costs of NPC as well as qualified stranded contract
from the of the industry; 2)
costs of distribution utilities resulting restructuring

missionary
electrification; 3) [ lie equalization of the taxes and royalties applied to
sources of vis- a- vis imported energy fuels; 4) an
indigenous or renewable energy
cnvirounental charge oquivalcut to ouc- fourth of one centavo per kilowatt-lour
110. 0025/ kWh), which shall accrue to an environmental fund to be used solely for
watershed rehabilitation and managenlent ( this cuvironnlclltal rand will be managed by
NPC udder existing arrangements); 5) it charge to account fur all forms of cross- subsidies
40
for a period not exceeding three( 3) years.

Neither can the Universal Charge be deemed part of the gross receipts of PSALM
For VA' F purposes. The terns " gross receipts" means the total amount of lnoilcy or its
equivalent representing Tile contract price, compensation or service fee, including the
amount charged for materials supplied with the services and deposits or advance
payments actually or constructively received during the taxable quarter for the services
performed or to be performed for another person. The Universal Charge is not
compensation for services performed by PSALM. While it is authorized under th,,-
PIRA to receive said charges, it is earmarked to be utilized for purposes mentioned in
the iulnlcdiately preceding paragraph.

L. Interest arising from NPC loans transferred to PSALM is exempt

from income tax.

You represented that NYC' s foreign obligations that will be transferred to PSAI, Nt
may be grouped into three categories, namely:
1. Loans extended by forcigu govcrunnculs, financing i nslilutious owned or controlled or
enjoying finaaciug from foreign goverimiculs, or international or regional financial institutions
established by foreign governments;

2. Commercial loans; and

3. Donds,

and that NPC does not withhold tax on interest payments made in connection with these

40
Section 34, L•111RA.
x020- 2002 May 139 2002

Page 30 of 32
L'SALAI

uhli, ati ns.

Section S ol' NPC' s Charter, as amended by P. 0 1360, provides:

Incur Indebtedness Issue Bontiv; VIM- Conditions,

Sec. 3. Authoritr to and

Privileges and I rend ons; Sin4ini; Funds; Guarantee.-

a) Domestic Indebtedness. - Whenever the Board deems it necessary for the

Corporation to incur indebtedness by contracting loaris with domestic financial
institutions or to issue bonds to carry out the purpose for which the Corporation has been
organized, it shall, by resolution, approved by at least four members of the Board, so
declare and state the proposed debt is to be incurred and the conditions as it shall dee n
appropriate for the accomplishuicut of the said purpose; Provided, that in the case of

bond issues, the same shall be subject to the approval by the President of the Philippines
upon recommendation of file Secretary of Finance.

The bonds issued under the authority of this subsection shall be exempt Flom the
payment of all taxes by the Republic of tl e 1' I ilippines, or by ally authority, branch,
division or political subdivision thereof, which facts shall be slated upon the face of tl c
said bonds. Said bonds shall be receivables as security ill any transaction with tine
Govcrnn ellt ill which such security is required.

The Republic of the Philippines hereby guarantees the payment by file Corporation
of both the principal and interest of the bonds issued by said Corporation by virtue of this
Act, and shall pay such principal and interest ill case die Corporation fails to do so, and
Q cre are hereby appropriated, out of the general funds ill the National Treasury not
otlietwise appropriated, the sums necessary to make the payments guarautccd by this
Act; Provided, That the sum so paid by the Republic of lie Philippines shall be refunded
by the Corporation; Provided, further, That the Corporation shall set aside five per
cennun of its annual nct operating revenues before interests as a reserve or sinking fund
to answer for anrouuts advanced to it by the National Government for ally loan, credit and
indebtedness contracted by the former for which the latter shall be answerable as priiri ary
obligor or guarantor under the provisions of this Act; Provided, ficrthern ure, That the
setting aside of the amounts mentioned herein shall automatically cease the moment ( lie
accumulated sinking fund or reserve exceeds the amounts advanced to the Corporation by
the National GoverYrmcut under this Act; And, Provided, final/),, That the Corporation

may periodically make partial payments to the National Government out of the said
reserves.

b) Foreign The Corporation is hereby authorized to contract loans,

Loans. —

credits, ill ally convertible foreign currcmcy, ur capital goods, and indebtedness fiom tinte
to time from foreign or any international financial institution or fund
governments,

source, or to issue bonds, in such amount and in ally foreign currency oil such terms and
conditions as it sl all deem appropriate the accomplishment of its purposes and to cuter
into and execute agreements and other documents specifying such terms and conditions.

fire President of the Philippines, by himself, or through his duly authorized

representative, is hereby authorized to guarautcc, absolutely and unconditionally as
primary obligor and not as surety merely, in the name and on bel alf of the Republic of
the Philippines, the payment of the loans, credits, iudcbteduess and bonds issued up to the
amount herein authorized, which shall be over and above tie amount which the President
of the Philippines is authorized to guarantee under Republic Act Nuu bered Sixty- One
Ilumdred Forty- Two, as amended, as well as ( lie performance of all or any of lire
obligations undertaken by the Corporation in the territory of tic Republic of the
Philippines pursuant to the loan agreements entered into with foreign governments or
any'
 020- 2002

411age 31 of 32

L'SdLAi

international fivamcial institutions ur 1111LI sources.

In the contracting of any loan credit or indebtedness under this Act, the President
of the Philippines may, when necessary agree to waive or modify the application of any
law granting any prcicrcmccs or imposing lestricliuus on international competitive
bidding, including among others, Act Numbered Fuur Thousand Two Hundred Thirty-
Nine, Conmionwcalth Act Numbered One Hundred Thirty- Eigl l, the provisions of

Commonwealth Act Numbered Five Hundred Forty- One, Republic Act Numbered Five
Thousand One lluudred Eighty- Thrce, insofar as such provisions do not pertain to
constructions primarily for defense or security purposes; Provided, however, That as far
as practicable, utilizati on of the services of qualified domestic firms ii, ti e prosecution of
projects Financed uudcr this Act shall be encouraged; Provided, further, That in case

where international competitive bidding shall be conducted reference of least fifteen per
centum shall be grauted in favor of articles, materials or supplies of the growth

production of manufacture of the Philippines, Provided, finally, That the method and
procedure and the comparison of bids shall be the subject of agreentettl between the
Philippine Government and the lending institution.

The loans, credits and indebteducss contracted under this subsection and the
payment of the principal, interest and outer charges tl crcou, as well as the

importation of machinery, etluipmem, materials and supplies by the Corporatiou, paid

from the proceeds of any loan, credit or i tdebtedness incurred under this Act, shall also
be exempt from all ( axes, fees, imposts, other charges and res( riclions, including
import restrictions, by the Republic of the Philippines, or any of its ageucies and political
subdivisions."( Emphasis supplied)

Pursuant to the foregoing provision, interest on bonds under Section S( a) and

foreign loans incurred under Section 3( b) of tlic NPC Charter are exempt from income
tax. In the following discussion, the term " NYC luaus" refers to the bonds issued under
Section 3( a) and the foreign loans incurred under Section 3( b) of the NPC Charter, which
are exempt pursuant to the said provisions of the charter.

While the EPIRA does not provide for the same treatment of the NPC loans once
they are transferred to PSALM, the interest arising from these loans shall continue to be
exempt from income tax because the exemption in [ lie NPC Charter is granted not to
NPC, which is a borrower, but rather oil the loans, credits and indebtedness as well as on
the payment of the principal, interest and other charges. In effect, the exemption is

granted to the lender, which is the entity Sucli being the

earning the interest income.

case, interest payments on the aforementioned foreign loans originally incurred by NPC
under its charter, as aniended by PD No. 1360, and ' which will be transferred to and
assumed by PSALIVI, sllall i-cmaln exempt iroln tax.

On the other hand, foreign loans that PSALIVI may incur in the future in
connection with the perforuiauce of its Functions and for the attainment of' its
objective" shall no longer be covered by the foregoing tax cxemption provision of the

41
Seelion 5. Powers: x x x

k) To borrow uiattey and incur such liabilities, as may be required to service all obligatious
transferred from NYC and loans from ECs assumed from NEA in accordance with the relevant sections of
these Rules, including the issuance of bonds, securities or other evidence of iudcbtcduess utilizing it.
Age 32 o1` 32
11. d1

NPC Charter. ' I' I ey n, ay, huwcvcr, still be cxen pt Icon, incon c tax pursuant to Sectio
32( 13)( 7)( x) of llic Tax Code ul' 19) 7 pertinent portion of which provides as follows:
I' I e following items shall not be included
t3) Lxchisions from Gross Income. '

in the gross income and shall be exempt lioliCk atiun under this Title:
7) dliccellancois Items-

foreign Gorcrnment. - Income derived from

a) Income Derived by
invesuncnts ill the Philippines ill luaus, stocks, bonds or other domestic securities, or
ii) i) foreign guvermu cuts, (
Flom interest oil deposits ill banks in tl e 1' 11ilippines by (
from foreign
institutions owned, controlled, or enjoying relimamciug
limancing
governnemts, and ( iii) international or regional financial institutions established by
foreign governments."

Also, the interesl arising ( roll,

such luaus ( nay also be exempt icon, income tax
or be subject to a preferential tax rate if the creditor is a resident of a country with which
the Philippines liar, all existing ireaty, subject to the conditions staled in such treaty.
basis the luregoiug facts as represented.
r
This is being issued on the of
ruling
I lowever, if upon investigation, it shall be disclosed that [ lie (acts are different, then this
ruling shall be considered null and void.

Very truly yours,

1tL'1tIL ANLZ

Con, u, issiuncr ul' ht , a vcnuc

11- 1- WIC
nnnclt \ 9I36( PSALM3)

the paraulecs of the Nalionitl GoVer1t1t1cuL' 1' r

wided, ' Thal all such
assets as collateral and/ or througil
have been paid off or settled befo c the end of its corpoeale life;" ( Rule 21, IRR)
debts or borrowings shall