Philippines: VAT zero rating incentive for the renewable energy sector

Philippines: VAT zero rating incentive for the renewable energy sector

Due to the pressing concern of climate change, investments in renewable
energy (RE) is now an ever-growing opportunity in the Philippines.
Activities under the Renewable Energy Act are regularly included in the
country's Investment Priorities Plan for entitlement to benefits and
privileges.

Some fiscal incentives of RE projects include income tax holiday, exemption
from duties and zero percent value-added tax (VAT) rate, among others. But
while guaranteed under the law, procedures for claiming the incentives are
not without any challenges.

The recent case of CBK Power Company Limited vs. Commissioner of Internal
Revenue (CTA Case No. 8784, Feb. 23), ("CBK Case") is instructive in this
light. In this case, the Court of Tax Appeals (CTA) First Division, through
Associate Justice Cielito Mindaro-Grulla discussed a notable point on
claiming VAT refund by RE developers for their sales of electricity
generated through hydropower. The petitioner in the case is a special
purpose entity engaged in the operation, maintenance, management and
ownership of the hydroelectric power plant. A claim for refund of unutilized
or excess creditable input taxes was filed by the petitioner, attributing
the same to its zero-rated sales of electricity generated through hydropower
and its purchase of local supply of goods, properties and services needed
for the development, construction and installation of its plant facilities.

In resolving the issue, the CTA discussed in detail the entitlement of an RE
developer to a zero percent VAT by applying the pertinent provisions of the
National Internal Revenue Code (NIRC) in relation to the Renewable Energy
(RE) Act and its Implementing Rules and Regulations (IRR). The NIRC provides
that sale of power or fuel generated through renewable sources of energy is
among the transactions subject to zero percent VAT. As to petitioner's
purchase of local supply of goods, properties and services needed for the
development, construction and installation of its plant facilities, the CTA
ruled that such transactions are likewise zero-rated pursuant to the general
incentives granted under the RE Act and its IRR.

The CTA disallowed the refund and explained that the petitioner's claim for
input VAT refund against the BIR is not the proper recourse of an RE
developer. This is due to the fact that a zero-rated transaction depicts
that no output VAT will be passed on to and paid by the RE developer,
therefore, the RE developer is not entitled to refund, or issuance of tax
credit certificate from the said purchases. Instead, the RE developer, who
is also the buyer in a zero-rated sale, can seek reimbursement of the VAT
paid from its supplier. In other words, the proper recourse of an entity
entitled to a zero-rated transaction is not against the government, but
against the seller who shifted to it the output VAT. To hold otherwise can
result in undue enrichment at the expense of the government.

Entitlement of RE developers to VAT zero-rating and other fiscal incentives
is a procedural consideration as much as it is a substantive concern. As a
substantive matter, RE developers must meet the definition provided under
the Renewable Energy Act which states that an RE developer must be an
individual/group of individuals, formed in accordance with existing
Philippine Laws, engaged in the exploration, development and utilization of
RE resources and actual operation of RE systems/facilities. The IRR of the
RE Act further qualifies an RE developer to include entities engaged in the
exploration, development and/or utilization of RE resources, or the
generation of electricity from RE resources, or both. To be entitled to
fiscal incentives such as VAT zero-rating, an RE developer must be able to
prove that a particular activity or transaction falls under the relevant
provisions of the law. The recognized activities for VAT zero-rating
include:

1.) Sale of fuel from RE sources or power generated from renewable sources
of energy.

2.) The whole process of development of RE sources up to its conversion into
power, including, but not limited to services performed by subcontractors
and/or contractors.

3.) The RE developer's purchase of the local goods, properties and services
needed for the development, construction and installation of the plant
facilities of the RE developer.

Note that it is important to prove that the purchases are to be used for the
development, construction and installation of the RE developer's plant
facilities, otherwise, there can be no entitlement to incentives under the
law.

As regards procedural aspects, the RE developer must comply with certain
conditions in order to avail of incentives and other privileges. This means
that RE developers, as well as manufacturers, fabricators and suppliers of
locally-produced RE equipment must first be registered with the Department
of Energy (DOE) through the Renewable Energy Management Bureau (REMB) to
avail of the incentives granted by law. Other conditions mentioned are
registration with the Board of Investments (BOI) and securing a Certificate
of Endorsement from the DOE on a per transaction basis. Other government
agencies, such as the Bureau of Internal Revenue (BIR), may also promulgate
revenue regulations to facilitate the procedure in availing VAT zero-rating
incentives. As of the moment, however, registrations with the BOI and DOE,
and the issuance of the aforementioned certifications are the only
requirements that are clearly prescribed under the law.

Although entitlement of RE developers to incentives is guaranteed under
pertinent laws and regulations, it appears that the procedure in fully
availing of the privileges necessitates more than just a substantive
requirement. In all cases, issuing well-defined procedures by all concerned
government agencies can create a more welcoming opportunity that will
attract potential investors.

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

Link to Original Article:
http://www.philstar.com/business/2017/08/29/1733578/vat-zero-rating-incentiv
e-renewable-energy-sector

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com