RE company tax issues
By Atty. Euney Marie Mata-Perez on February 16, 2023
POWER costs in the Philippines are very high, affecting foreign direct investments into the country. During an economic briefing for members of the Management Association of the Philippines last Feb. 8, 2023, Albay Rep. Jose Maria Clemente “Joey” Salceda said that in the Asean region, Philippines power costs were next only to Singapore, which has no indigenous energy sources. To lower power costs, the Philippines needs to expand renewable sources and bring in foreign investors.
It is a good development that the Justice department has ruled that companies using kinetic energy (energy from water, marine current, wind, solar or the ocean) to generate power should not be subjected to the 40-percent foreign equity limitation under Section 2, Article 12 of the Constitution. However, it is also important that the government grant effective incentives to companies engaged in producing renewable energy.
Section 108 (B) (7) of the National Internal Revenue Code (Tax Code) provides that the sale of power generated through renewable sources of energy is zero-rated for VAT purposes. The Tax Code defines “renewable sources of energy” as including but not limited to biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy sources using technologies such as cells and hydrogen fuels.
Sales of power by renewable companies are also VAT zero-rated pursuant to Section 15 (g) of Republic Act 9513, or the “2008 Renewable Energy Act.” However, it took the Bureau of Internal Revenue 14 years — only on June 22, 2022 — to issue Revenue Regulations 07-2022 implementing the tax incentives under the RE Act.
Section 15 (g) of the RE Act provides that all renewable energy developers are also entitled to VAT zero-rating on purchases of local supplies of goods, properties and services needed for the development, construction and installation of facilities. Because sales of RE power are zero-rated for VAT purposes, it should follow that input VAT attributable to zero-rated sales can be subject to an application for tax refund or credit pursuant to Section 112 of the Tax Code. The ability to claim input VAT refunds, however, has been beset with issues.
RE enterprises are also entitled to duty-free importation of RE machinery, equipment and materials. They can also avail of an income tax holiday, special realty tax rates on equipment and machinery, a different net operating loss carry-over, a special corporate tax rate of 10 percent, accelerated depreciation in its tax books, cash incentives, tax exemption of carbon credits and tax credit on domestic capital equipment and services.
To avail of all incentives, RE companies must be duly certified by the Department of Energy (DoE) in consultation with the Board of Investments (BoI). The implementing rules and regulations (IRR) of the RE Act (Department Circular 2009-05-0008) prescribe that the following are needed for RE companies to avail of incentives under the law: a certificate of registration from the DoE, a certificate of registration from the BoI and a certificate of endorsement (CoE) from the DoE.
While the provisions of the Tax Code and RE Act seem to be straightforward, RE companies have faced issues regarding the availment of the VAT zero-rating and claims for input VAT refunds. In the recent case of Trans-Asia Renewable Energy Corporation v. Commissioner of Internal Revenue (CTA EB 2314 and 2347, Jan. 17, 2023), the Court of Tax Appeals en banc said that for a taxpayer to claim VAT zero-rating based on Section 108 (B) (7) of the Tax Code, in relation to Section 15 (g) of the RE Act for VAT periods covered by the 2009 IRR, a DoE-issued CoE was required.
But previously, in Philippine Geothermal Production Co. Inc. v. Commissioner of Internal Revenue (CTA EB. 2478, Dec. 13, 2022), the CTA en banc ruled that a DoE-issued CoE (on a per-transaction basis) is not required to claim VAT zero-rating based on Section 108 (B) (7) of the Tax Code in relation to Section 15 (g). It is only required for the availment of tax- and duty-free importation under Section 15 (b) of the RE Act. In this case, the CTA held that the DoE went beyond the language of the law in requiring a DoE-issued CoE. This was later reiterated in Philippine Geothermal Production Co. Inc. v. Commissioner of Internal Revenue (CTA EB 2455, Jan. 9, 2023).
Department Circular 2021-12-0042 dated Dec. 24, 2021, which amends the 2009 IRR, subsequently clarified that a DoE-issued CoE is only required to avail of the duty-free importation of RE machinery, equipment and materials under Section 15 (b) of the RE Act.
There are other issues affecting RE companies, especially on their ability to seek input VAT refund. We shall discuss these issues in our next article.
Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel).