Upfront with VAT

It is often mentioned among business circles that the cost of power in the Philippines is among the highest in the region, The electric power industry in the Philippines, which consists of three principle processes – electricity generation, electric power transmission, and electricity distribution – is no doubt an important component in the Philippines’ drive to be a tiger economy. Electricity generation involves the conversion of other forms of energy into electric energy. Electric power transmission on the other hand is the bulk transfer of electricity from power plants to electrical substations. Lastly, electricity distribution is the delivery of electricity to end users.

Since 2005, the sale of electricity has been subject to VAT. Strictly speaking, the electricity produced by a generation company is consumed by the end-user. The transmission and distribution companies only assist in the delivery of the electricity from the source to the point of use. In recognition of this reality, the Bureau of Internal Revenue (BIR) in Revenue Memorandum Circular (RMC) No. 61-05 (dated 27 October  2005) implemented a “pass-through” system of charging, whereby distribution companies are treated as collection agents who collect the generation charges and transmission charges from the end-user on behalf of the generation and transmission companies.

Under this system, when the generation company sells electricity, the distribution company advances the generation fee to the generation company exclusive of the corresponding VAT. This VAT is remitted by the distribution company to the generation company only after the former has billed and collected the same from the end-user. As a mere collection agent, the distribution company cannot claim input taxes on such pass-though charges and the amount collected from the end-user for the generation and transmission charges do not form part of the gross receipts of the distribution company.

Now with the issuance by the BIR of RMC No. 62-2012 (dated 25 October 2012) the BIR seeks to address the problem where the distribution companies delay or fail to remit the VAT on the generation fee collected from the end-users to the generation company. This delay usually results in inefficiencies in regard to the collection of VAT.

To address this problem, RMC 62-2012 now requires that when the distribution company advances the generation fee to the generation company, the corresponding VAT thereon shall likewise be advanced. The amounts advanced by the distribution company, both the generation fee and the VAT thereon, will be offset against the eventual collections from the end-user. However, the distribution company still cannot claim input tax on these pass-through charges and the amount collected from the end-user for the generation and transmission charges is still excluded from its gross receipts.

The above RMC directly impacts the cash flow of distribution companies. Moreover, requiring distributions companies to advance the VAT before the end-user pays the same appears to be in conflict with the “pass-through” principle/system that the same RMC still claims to recognize. As a result, this RMC has given rise to a number of issues or question from the industry.  The BIR had recently released RMC No. 71-2012 which clarified the various issues that arose as a result of RMC 62-2012 such as: 

1. Generation companies shall not be liable to interest/penalties for the VAT not remitted to them by distribution companies prior August 2012. However, the deferred VAT prior to Aug. 25, 2012, already remitted by distribution companies to generation companies but not paid by the latter to the BIR shall be subject to surcharge, interest penalties.

2. Distribution companies will not be required to advance all the outstanding VAT on items that they can no longer collect from their customers, such as (a) VAT zero-rated sales to PEZA-registered enterprises, (b) five percent (5%) withholding VAT relating to sales to the government or GOCCs and (c) VAT of written-off delinquent accounts. The distribution utilities shall only be required to remit the VAT actually collected from the end-users. However, the distribution utilities will be subjected to an immediate audit to validate the reason for the remaining VAT account balance.

3. The VAT collected from the end-users shall be remitted by the distribution companies to the generation companies not later than the 10th day of the following month of the collection. The distribution companies are likewise required to provide generation companies a summary list of VAT collections from the end-users. This will be attached by the generation companies to their VAT Summary List of Sales.

4. The distribution companies shall allocate their zero-rated sales and other reconciling items to the generation companies proportionately based on kilowatt purchased.

5. For sales to the government and government-owned or controlled corporations (GOCCs) which is subject to the five percent withholding VAT, the distribution companies should provide government and GOCC customers the breakdown of its generation companies which will be used by the customers as reference for the issuance of a separate Certificate of Final Tax Withheld at Source (BIR Form 2306) for the generation and distribution costs. 

In addition, RMC 71-2012 also enumerates the procedures to be followed by the generation and distribution companies in order to transition to where the distribution companies will be required to advance the corresponding VAT on the generation fee under RMC 62-2012.  

One of the transitory procedures under RMC 71-2012 requires distribution companies to remit directly to the BIR, the outstanding deferred VAT accumulated prior to Aug. 25, 2012.  This is an amendment of a provision contained in RMC 62-2012 which required the distributions companies to remit the deferred VAT incurred prior Aug. 25, 2012, to the generation companies on or before Nov. 15, 2012. Other transitory provisions enumerated under RMC 71-2012 are as follows:

1. Generation companies are required to submit to the Office of the BIR Commissioner (hard copy and soft copy in CD form) an inventory as of  Sept. 30, 2012 of outstanding deferred VAT prior to August 25, 2012.

2. The distribution companies shall remit the deferred VAT, on behalf of each generation company thru manual filing/payment, on or before Nov. 26, 2012, using BIR Form No. 0605. The TIN of the generation companies shall be clearly indicated on the form and an “X” mark shall be indicated on the box for “Others (Specify)” with the description that the payment is for “DEFERRED VAT - RMC 71-2012.” Filing/Payment shall be made at the Revenue District Office (RDO) where the distribution companies are registered.

3. The distribution companies shall provide the Office of the BIR Commissioner (hard copy and soft copy in CD form) on Nov. 28, 2012, a Summary of Remittance of Deferred VAT, clearly indicating the name of Supplier, Address, TIN, RDO No, amount of VAT remitted, billing period, name of bank and date of remittance.

4. The distribution companies shall likewise provide the generation companies with copies of the duly-filed BIR Form No. 0605, together with the proof of payment, together with the proof of payment, within three days from the remittance to the BIR. The same shall be the basis of the generation companies to record the payment of deferred VAT.

Indeed, the tax collection procedures for the electric power industry are complicated because it is a complicated industry. Be that as it may, a balance must be set. A basic principle of a sound tax system is administrative feasibility. Tax laws and regulations must not only be clear and concise, it must also be capable of effective and efficient enforcement and convenient as to time and manner of payment so as not to obstruct business growth. On the other hand, the taxpayers must perform his/her duty to file and pay taxes in good faith. Both parties must work together to ensure that the government will have the resources required to fund national development.

Eric B. Javeloza is a supervisor from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), a Philippine independent member firm affiliated with KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].