Tax issues related to RE
By Josenilo G. Mendoza
First Published in Business World (10/8/2012)
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More than three years since the effectivity of RA No. 9513, otherwise known as the Renewable Energy Act of 2008, we have yet to reach the level of renewable energy (RE) development that had been hoped for the country. RE resources include, among others, biomass, solar, wind, geothermal, ocean energy and hydropower that should conform to internationally accepted norms and standards on dams and other emerging RE technologies.
The Department of Energy (DoE) has issued Implementing Rules and Regulations (IRR) for the RE Act. However, there are provisions (especially those pertaining to tax incentives) that still need to be clarified in order to spur more investment in RE development. This is where the Department of Finance, through the Bureau of Internal Revenue (BIR), and the DoE in coordination with the ERC, can play important roles by issuing the IRR and the necessary technical studies to clarify some points under the RE Act, such as:
1. The mechanism to pass on the savings to end-users in the form of lower power rates – Under Section 15 (e) of the RE Act, an RE developer will pay a 10% corporate income tax instead of the normal 30% rate. This provision hinges on the assumption that RE developers will pass on the tax savings to the end-users in the form of lower power rates. However, since the mechanism for determining the amount of savings and how these savings should be passed on to the end-users has not yet been established, some RE developers are still unable to avail of this incentive.
The DoE, in coordination with the National Renewable Energy Board (NREB), can determine whether or not savings are actually realized with respect to each RE developer. The DoE and the RE developer may also provide for the appropriate mechanism to determine the savings in the RE Service/Operating Contract. The DoE and NREB can coordinate with the ERC for the purpose of implementing the applicable mechanism. The IRR issued by the BIR would be most helpful in ascertaining whether the RE developers who are using the 30% income tax rate, but are subsequently found to have been entitled to the 10% tax rate following the guidelines issued by the DoE and ERC, can claim a refund of the excess income tax paid in prior years.
2. The income attributable to the additional investment that is subject to Income Tax Holiday (ITH) – The income attributable to additional investments in an existing RE facility or project is entitled to ITH. Additional investments may cover investments for improvements, modernization, or rehabilitation of an RE facility registered with the DOE, which may or may not result in increased capacity. It includes improvements such as reduced production/operational costs, increased production /operational efficiency, and better product quality for RE developers.
If the additional investment results in an increase in capacity of an existing RE facility, then the additional income may be considered as the sale of energy resulting from the added capacity. However, an issue may arise regarding the computation of the additional income in instances when the additional investment does not result in increased capacity but has the effect of reducing production costs. In this case, additional income stems from lower production costs rather than increased sales. The question then arises whether the additional investment will be entitled to ITH, and also, how the additional income will be determined.
3. Payment of the 1% Government Share – The RE Act provides that the government’s share in existing and new RE development projects will be equal to 1% of the gross income of RE Developers. The gross income of RE developers will include, not just income from the sale of RE produced, but also incidental income arising from the generation, transmission, and sale of electric power. The “government share” is defined under the RE Act as the amount due to the National Government and local government units from the exploitation, development, and utilization of naturally-occurring RE resources, such as geothermal, wind, solar, ocean and hydro excluding biomass. Requiring the RE developers to pay the 1% government share based on gross income on top of the national and local taxes, effectively increases the amount paid by RE developers to the government. Moreover, the current rules are not clear if the 1% government share should be remitted to the national government alone or if a portion should be paid to the local government unit where the RE developer is located.
4. Tax exemption of the sale of carbon credits – Supposedly, all proceeds from the sale of carbon emission credits shall be exempt from any and all taxes. The literal interpretation of this is that the sale of carbon credits is not subject to national taxes such as income tax and VAT.
If the sale is made locally, issues may arise regarding the buyer’s obligation to withhold tax on the income payments to the seller and whether the rules on VAT-exempt transactions will apply to the sale of carbon credits.
Currently, there is no established market for the trading of carbon credits in the Philippines. Hence, the most probable buyers are the emission creators in developed countries such as the US and China. Consequently, the sale will most probably be foreign currency denominated. Therefore, an issue may arise on the taxability or deductibility for tax purposes of any foreign exchange gains or losses resulting from the sale of carbon credits.
These four tax concerns are not the only issues that should be resolved. The lack of public awareness of the benefits of RE projects, the absence of commercially viable markets for RE systems, and the relatively high costs of technology are other obstacles that should likewise be addressed.
Malacañang has included in the 2012 Investments Priorities Plan new activities such as new energy exploration, development, and/or utilization of energy sources adopting environmentally-friendly technologies. These signify Government’s intent to forge stronger investor partnerships in renewable energy.
If the BIR and the DoE will be able to address these issues by issuing the IRR or a technical study, then potential investors, current power generators and international financial institutions may find it more worthwhile to invest in developing RE sources in the Philippines.
Josenilo G. Mendoza is a Senior Tax Director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.