VAT imposition may force IPPs to renegotiate their contracts

The country’s independent power producers (IPPs) may opt to renegotiate their contracts if lawmakers will insist on subjecting them to a 12-percent value-added tax (VAT).

In a forum on VAT sponsored by Polistrat International Inc. and Philippine Business Leaders Forum, an associate of Economist Corporate Network, Philippine Independent Power Producers Association (PIPPA) president Ernesto B. Pantangco said the proposed VAT and the "no pass-through provision" may force IPPs to seek amendments in their contracts with the National Power Corp. (Napocor).

"This could turn out disastrous and messy for the country’s sovereign rating because, this in effect, will be done unilaterally, as per mandate of a legislated policy," Pantangco said, adding that the Philippine government may face legal battle with the IPPs and their lenders in international courts.

According to Pantangco, this may also lead to IPPs using the buy-out clause in their contracts with Philippine government once they will be declared in default by their respective lenders.

"This may trigger a default situation, as creditors will likely seek for an event of default, and if arbitration is decided in favor of IPPs, because these are iron-clad contracts, then we are faced with very serious implications," he said.

Even the 1987 Philippine Constitution guarantees non-impairment of contracts, as provided under Article 3 Section 10. The tax privileges for IPPs, as embodied under their contracts, were also established in a Supreme Court ruling in Maceda versus Macaraig case; wherein it was provided that "the grant of tax exemptions to Napocor is predicated on the principle that people’s well-being is paramount."

Other foreign chambers who attended the forum, shared the same sentiment.

Japanese Chamber of Commerce president Ryukichi Kawaguchi said the Philippine government should study the implications of imposing VAT on electricity.

"This will not only serve as disincentive for the power industry; but will also eventually unduly burden electricity consumers," Kawagushi said.

Camarines Sur Rep. Arnulfo P. Fuentebella, pointed out that the government will be facing multinational power firms.

"The government should not just sweep the issues under the rug; because the IPPs have the capability to hire good lawyers; in case, arbitration would be taken by them as a last resort," Fuentebella said.

He said if the VAT for IPPs would pass in the Senate, the primary purpose of raising more revenues may be delayed as this objective will be dragged by the lawsuits that would be filed by the IPPs in the international courts.

"So, what’s the purpose of a law, when in the end it would not be enforceable, and at the same time, you are creating more serious problems for the country.