According to the National Mapping and Resource Information Authority (NAMRIA), the Philippines is made up of 7,641 islands contributing to the country’s vast natural resources. Despite the abundance of these resources, the country is still at the early stage of capitalizing on the use of these natural assets to produce renewable and sustainable energy. The limitation is caused mainly by the lack of investment due to the high cost of developing, producing, and sustaining renewable energy.
In his first State of the Nation Address, President Ferdinand “Bongbong” Marcos Jr. mentioned that the use of renewable energy is at the top of his climate agenda. The President said that the government will increase the country’s use of renewable energy sources such as hydropower, geothermal, solar, and wind. The push for the use of renewable energy will help expand the present power supply and increase the level of energy production.
To help increase the utilization of renewable energy (RE) resources, the Bureau of Internal Revenue (BIR) issued Revenue Regulation (RR) No. 7-2022 which provides guidelines for the availment of fiscal incentives under Republic Act (RA) No. 9513, otherwise known as the Renewable Energy Act of 2008.
The salient provisions of the RR are discussed below.
Certifications/accreditations from appropriate government agencies for the availment of the tax incentive
Existing and new RE Developers and manufacturers, fabricators, and suppliers of locally produced RE equipment shall register with the Department of Energy (DOE), through the Renewable Energy Management Bureau (REMB). They must secure and submit to the BIR the DOE Certificate of Registration or the DOE Certificate of Accreditation. Other certifications required to be secured are the Certificate of Endorsement (COE) by the DOE, Registration with the Board of Investments (BOI), and Certificate of Income Tax Holiday (ITH) Entitlement (CE).
Incentives for RE projects and activities
a. Income Tax holiday. ITH for seven (7) years from the start of commercial operations (SCO) shall be provided to existing RE Projects and New investment in RE Resources. RE Developers undertaking discovery and development of new RE resources distinct from their registered operations may qualify as new projects and shall set up a separate book of accounts to be registered with the BIR. In such case, a fresh set of ITH from start of commercial operations shall apply. For additional investments in RE projects, the ITH shall only be applied to the income attributable to the additional investment.
b. Corporate income tax of 10%. Following the expiration of the ITH, all registered RE Developers shall pay a corporate income tax of ten percent (10%) on their net taxable income: Provided, that the RE Developers shall pass on the savings to the end-users in the form of lower power rates.
To avail of this incentive, the RE Developer shall submit the following to the BIR:
- Copy of the Certificate of Endorsement issued by the DOE prior to the first year of its availment of the 10% corporate income tax rate;
- Valid and subsisting renewable energy service/operating contract and the corresponding Certificate of Registration; and
- Sworn Undertaking attached to its ITR stating that for the year of its availment of the 10% corporate income tax rate incentive, it has not been found to have breached its obligation under the renewable energy service/operating contact and that it shall pass on the savings derived from this incentive in the form of lower power rates.
The RE Developer shall also attach to its ITR and submit to the BIR proof of submission to the DOE and ERC of the report, supported by technical and financial documents, in the years succeeding its initial availment of the 10% incentive. To prove that savings derived from incentives during the previous year were passed on to end-users, the RE Developer shall submit to the BIR the rates approved by the ERC.
c. Net operating loss carry over. In addition to the above incentives, the net operating loss carry over (NOLCO) of RE Developers during the first three (3) years from the SCO shall be carried over as a deduction from gross income for the next seven (7) consecutive taxable years immediately following the year of such loss. Provided, that the NOLCO has not been previously offset as a deduction from gross income, and that the loss should be from the operation and not from the availment of incentives.
d. Accelerated Depreciation. If an RE project fails to receive an ITH before full operation, an RE Developer may apply for accelerated depreciation on its plant, machinery and equipment that are reasonably needed and used for the exploration, development and utilization of RE resources. Once applied, the project or its expansions shall no longer be eligible to avail of the ITH. The RE Developer shall inform the BIR of availment of accelerated depreciation instead of ITH.
e. Zero Percent VAT Rate. Sale of power or fuel generated through RE sources shall be subject to zero percent (0%) VAT. The local purchase by RE Developers of goods, properties, and services needed for the development, construction, and installation of power plant facilities, and the whole process of exploration and development of RE sources up to its conversion of power shall be subject to 0% VAT. Accordingly, local suppliers of goods, properties, and services of duly registered RE developers should not pass on the 12% VAT, provided, that the RE Developer shall provide a copy of its BOI and DOE registration to avail of the VAT incentive.
f. Tax exemption of carbon credits. All proceeds from the sale of carbon emission credits shall be exempt from any and all taxes.
Incentives for RE commercialization
Sale of locally produced RE equipment and components by accredited and registered DOE and BOI manufacturers, fabricators, and suppliers to RE Developers shall be subject to the following incentives:
- VAT-free importation of components, parts, and materials subject to conditions;
- ITH and exemption for seven (7) years starting from date of registration and accreditation with DOE and BOI; and
- VAT zero-rating on their transactions with local suppliers of goods, properties, and services needed in the manufacture/fabrication of RE equipment.
By creating policies and guidelines for availing of incentives, existing and new players in the RE industry are encouraged to invest more in the renewable energy market. Considering the uncertainties on prices of oil imports, the adverse impact of climate change, and the increasing demand for electricity, it is high time that the country shift its focus on maximizing the use of its natural resources to be self-reliant by utilizing renewable energy. Reliance on renewable energy will not only save the country billions of pesos; it can also save the country from the catastrophic effects of climate change.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 02 August 2022