REVENUE MEMORANDUM CIRCULAR NO. 11-2012 issued on March 22, 2012 clarifies the tax consequences of Power Sector Assets and Liabilities Management Corporation (PSALM) transactions.
         The Electric Power Industry Reform Act of 2001 (EPIRA), particularly Section 50 thereof, provides that the proceeds from the sale of the National Power Corporation (NPC) generation assets and other real properties and all its liabilities outstanding upon the expiration of its term of existence shall revert to and be assumed by the National Government.                                              
       Based from the foregoing, PSALM will not derive gain from the said sale of the NPC generation assets and other real properties. Accordingly, no Income Tax and consequently withholding tax is due from PSALM on its sale of the NPC generation assets and other real properties.
         The enactment of Republic Act (RA) No. 9337 on July 1, 2005 placed the electric power industry in the Value-Added Tax (VAT) System. Particularly, the amendment included the sale of electricity by generation companies, transmission and distributions companies, to sales subject to VAT. Moreover, Revenue Regulations (RR) No. 16-2005 was accordingly amended by RR No. 4-2007 and subjected the sale of real properties not primarily held for sale or for lease, but used in business, to VAT.
         Considering that the sale of electricity is now subject to VAT, the real properties sold by PSALM are regarded as real properties used in the trade or business. While it is clear under the Tax Code of 1997 that such sale is not subject to Income Tax, there is no provision under the same Code that exempts it from VAT nor subject it to VAT at zero rate. Section 106 of the Tax Code of 1997 imposes VAT on “all kinds of goods and properties” sold in the Philippines, with the term “goods and properties” given an allencompassing meaning by Congress. Thus, any goods and properties sold should be deemed included unless some provisions of law especially exclude it. The sale of the generation assets, real properties and other disposable assets by PSALM are no different from the goods and properties provided under Section 106 of the Tax Code of 1997. It is
to be noted, however, that the VAT imposed on the sale of the transferred assets may be utilized by the buyer as creditable input VAT.
            Pursuant to Section 196 of the Tax Code of 1997, the sale of real properties by PSALM will be subject to Documentary Stamp Tax (DST) at the rate of P15.00 for every P 1,000 based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) thereof, whichever is higher. When one of the contracting parties is the Government, the tax to be imposed shall be based on the actual consideration subject to the proviso that, where one party to the transaction is exempt, the other party shall pay the tax.
         Accordingly, the sale of the NPC generation assets and other real properties by PSALM pursuant to the privatization will be subject to DST based on the fair market value or the actual consideration that PSALM will receive, whichever is higher.
          After the transfer of the NPC generation assets and other real properties to PSALM but prior to the privatization, PSALM enters into contracts of lease with private entities where the subject of the lease are the NPC generation assets and other real properties transferred to PSALM. The income received by PSALM from the lease is subject to corporate Income Tax provided under Section 27(A) of the Tax Code of 1997.
           While no Income Tax is due on PSALM on its mandate to sell the NPC generation assets and other real properties to winning bidders, revenues derived by PSALM from its
leasing activities are nevertheless subject to Income Tax.
          Moreover, gross receipts of PSALM from the lease of NPC transferred assets and other assets are deemed in the ordinary course of trade or business, hence, subject to VAT under the Tax Code of 1997.
            The operation by PSALM of the NPC assets transferred to it is not its principal purpose but only incidental to its mandate to privatize the generating plants of NPC in order to avoid a massive interruption in the supply of electricity. In this regard, any income derived therefrom is subject to Income Tax imposed under Section 27(A) and (E) of the Tax Code of 1997.
         Since the sale of the electricity and sale of service by PSALM are deemed made in the course of its business, the same is subject to VAT under Section 108 of the Tax Code of 1997 (as amended by RA No. 9337). However, pursuant to Section 108(B)(7) of the Tax Code of 1997, as amended by RA No. 9337, sale of power generated though renewable sources of energy is subject to VAT at zero percent.
            Other income/receipts derived by PSALM from miscellaneous activities such as forfeiture of performance bonds, interest income from persons other than the winning bidders, and from other activities not related with its mandate are subject to all applicable taxes under the Tax Code of 1997.