DOF asked to review Meralco franchise tax for possible rate reduction

The Energy Regulatory Commission (ERC) has urged the Department of Finance (DOF) to carefully review the franchise tax by the Manila Electric Co. (Meralco) for a possible lowering of power rates for Meralco customers.

In its comment submitted to the DOF, the ERC said the provision of the Electric Power Industry Reform Act (EPIRA) states that "a distribution utility shall pay a franchise tax only on its distribution wheeling and captive market supply revenues".

A position paper submitted by Meralco said this particular provision is applicable only to those charges expressly enumerated: the distribution wheeling charge and supply charge of distribution utilities. Thus, other charges – generation, transmission, and systems loss charges – not being mentioned, are excluded in computing the franchise tax.

The ERC said it agreed with Meralco’s position except with respect to the systems loss charge, as much will depend on whether the mechanism which ERC will eventually adopt treats systems loss as a mere pass-through charge or not.

ERC Chairman Rodolfo B. Albano Jr. said "the franchise tax, being a mere pass-through charge, should neither earn any additional revenue nor incur any additional cost from the imposition of these taxes."

Albano noted that the EPIRA also provides that the franchise tax should be imposed only on "revenues".

"Rulings of the Bureau of Internal Revenue (BIR) are to the effect that the gross receipts of a taxpayer, for purposes of determining the franchise tax, do not include monies or receipts entrusted to the taxpayer who do not belong to them and do not redound to the taxpayer’s benefit," Albano said.

He said the commission also recognized the fact that the transmission and generation charges cannot be considered as the utility’s revenue as the same are automatically remitted to the transmission and generation companies.

"The exclusion of generation, transmission and systems loss charge will lower the base for the computation of franchise tax. A lower franchise tax translates to reduction in rates and reduction in rates means lesser burden to the consuming public,"Albano said.

The ERC’s comment is expected to be considered by the DOF, which is mandated by the EPIRA to draft the guidelines on franchise tax.