The power crisis has been a recurring issue in the Philippines. Before the issuance of Executive Order No. 215 in 1987, power generation was a state monopoly. All generation and transmission of electricity was handled by the National Power Corporation (NPC). The elimination of this monopoly paved way to the entry of Independent Power Producers (IPPs).
As a step towards the privatization of the energy sector, these IPPs were allowed to build power plants and supply electricity to the NPC and other distributors in order to aid in alleviating the shortage of power supply. Their emergence allowed the government-owned and/or-Controlled corporations (GOCCs) to enter into Build-Operate-Transfer (BOT) contracts for their power generation facilities. Under such contracts, the IPPs are allowed to operate for a specified period of time. Thereafter, the ownership is transferred to the NPC.
With this kind of agreement, an uncertainty arose as to the taxability of the IPPs with regard their real property tax liabilities. Under the BOT contracts, the GOCCs assume the payment of the fixed capacity, operation and maintenance fees and variable energy fees which includes the real property tax liabilities of the IPPs.
The Local Government Code of 1991 (LGC) bestows upon the Local Government Units (LGUs) the primary responsibility to administer the real property tax in their respective territories. However, GOCCs engaged in the generation and transmission of electricity enjoy several privileges and tax exemptions with respect to real property taxes. The assessment level on all their lands, buildings, machineries and other improvements is granted a special classification with a rate of 10 percent. Moreover, they enjoy an exemption for all machinery, equipment that are actually, directly and exclusively used in the generation and transmission of electric power and machinery.
However, various LGUs took the stance that the different IPPs operating within their territories, which are not GOCCs, should not enjoy the above-mentioned privileges and exemption. In fact, the Court of Tax Appeals (CTA) En Banc promulgated a decision favoring the LGUs. As enunciated in the 2013 case of National Power Corporation v. The Province of Pangasinan and the Provincial Assessor of Pangasinan, the court held that the NPC did not have actual, direct, and exclusive use of the machinery and equipment under the BOT contracts. The real property taxes are charged directly to the taxable person who has actual and beneficial use of the machinery and equipment. Since the NPC’s use of the properties is merely contingent, it cannot claim exemption from payment of the real property tax liabilities.
In line with this, various LGUs have already threatened the IPPs of an enforcement action against their real property tax liabilities. Failure to pay the tax liabilities may result in the levy and sale at public auction of the affected properties. Such forced collection poses a threat not only to the financial stability of the GOCCs, but also to the government’s fiscal consolidation efforts. Moreover, the forcible collection of these real property tax liabilities may increase the costs of electricity and give rise to economic losses on different sectors.
In order to prevent the damaging effect of the forcible collection of the real property tax liabilities by the LGUs, the President invoked Section 277 of the LGC which gives him the power to, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila area. As a result thereof, Executive Order No. 173 (E.O. No. 173) was issued last Oct. 31, 2014.
Recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 6-2015 (RMC No. 6-2015) publishing the full text of Executive Order No. 173. The executive order reduces and condones the real property taxes and interest or penalties assessed on the power generation facilities of IPPs under BOT contracts with GOCCs.
In determining the amount of real property tax due, the tax base is the assessed value of the property which is the fair market value thereof multiplied by the prescribed assessment level. The assessment level varies based on the rates fixed by the respective Sanggunians. The assessed value is then multiplied by the tax rate. The LGU allows provinces to impose a rate not exceeding one percent of the assessed value while cities or municipalities within the Metropolitan Manila area may impose a rate not exceeding two percent of the assessed value.
Pursuant to Section 1 of E.O. No. 173, the IPPs’ real property tax liabilities on property, machinery and equipment actually and directly used for the production of electricity are reduced to an amount equivalent to the tax due if computed based on an assessment level of 15 percent of the fair market value of the property, machinery and equipment depreciated at the rate of two percent per annum. This reduction extends for all years up to 2014. Moreover, they are allowed to deduct the amount they previously paid to their total outstanding balance using this preferential rate.
In addition to the reduction of the amount of real property taxes due, all fines, penalties and interests on the tax liabilities were condoned and the concerned IPPs are relieved from payment thereof. Strict compliance with its provisions is ordered upon all concerned departments, agencies and instrumentalities of the government which includes the GOCCs and LGUs.
It may be noted that in 2011, President Aquino issued E.O. No. 27 which also reduced and condoned the real property tax liabilities of IPPs under BOT contracts with GOCCs in the province of Quezon. It applied the same assessment level of 15 percent to determine the assessed value of the real properties and condoned the fines, penalties and interests on the real property tax liabilities.
With the recent issuance, the reduction and condonation of real property tax liability is no longer limited in a certain province. IPPs in different localities may enjoy these tax incentives. As an effect, the burden contractually imposed upon the GOCCs is lessened. The threatened enforcement action against the IPPs’ assets may no longer push through. For now, the IPPs and the GOCCs can heave a sigh of relief. Hopefully, the public can also expect that there will be no increase in electricity charges anytime soon.
Maria Gracia D. Dyoco is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of 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 RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.
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