After more than 10 years, the Department of Finance has finally issued Revenue Regulations (RR) 7-2022, which provides "the policies and guidelines for the availment of tax incentives under the Renewable Energy Act of 2008".
Taxpayers entitled to tax incentives
The following taxpayers are entitled to tax incentives under the Renewable Energy Act 2008, as further detailed under RR 7-2022:
- renewable energy (RE) developers or individuals or judicial entities created, registered and/or authorised to operate in the Philippines in accordance with existing Philippine laws and engaged in the exploration, development and utilisation of RE resources and actual operation of RE systems or facilities;
- manufacturers, fabricators and suppliers of locally produced RE equipment (RE manufacturers); and
- purchasers of RE equipment.
How to take advantage of tax incentives
Existing and new RE developers and RE manufacturers must:
- register with the Department of Energy (DOE) through the Renewable Energy Management Bureau (REMB). They must secure one of the following certificates and submit them to the Bureau of Internal Revenue (BIR):
- a DOE certificate of registration – this is issued to RE developers that hold valid RE service or operating contracts; or
- a DOE certificate of accreditation – this is issued to RE manufacturers upon submission of necessary requirements;
- secure a certificate of endorsement from the DOE. RE developers must secure the certificate prior to the first year of availment of the 10% corporate income tax rate incentive. RE manufacturers that import components, parts and materials necessary for the manufacture and/or fabrication of RE equipment must secure the certificate through the REMB, on a per import basis; and
- register with the Board of Investments (BOI). The certificate of income tax holiday (ITH) entitlement (CE) issued by the BOI must be attached to the current annual income tax return (ITR) to be filed with the BIR. The ITH shall apply only to the registered activity indicated in the CE. Failure to attach the CE to the ITR may result to the forfeiture of the ITH incentive for the covered taxable year.
Fiscal incentives available to RE developers
Seven-year ITH
For existing RE projects and new investment in RE resources, the seven years shall commence from the start of commercial operations, which is when the RE project is:
- issued a certificate of compliance by the Energy Regulatory Commission (ERC); and
- ready to inject power to the grid.
However, RE developers with existing RE facilities that have been in operation for more than seven years shall not be entitled to ITH, except for additional investment in RE resources. RE developers undertaking discovery and development of new RE resources distinct from their registered operations may qualify as new projects, provided that they set up separate books of accounts that are registered and approved by the BIR office where the RE developer is required to be registered. In such cases, a fresh package of ITH from the start of commercial operations shall apply.
For additional investments in RE projects, the period of availment of ITH shall not exceed three times the period of the initial availment by the existing or new RE project or covering new or additional investments. ITH for additional investments in existing RE projects shall be applied only to the income attributable to the additional investment. Additional investments include improvements, modernisation or rehabilitation duly registered with the DOE, which may or may not result in increased capacity. The DOE and BOI shall issue a certification as to the amount or percentage of additional income generated by the additional investment in an existing project to be attached to the ITR filed with the BIR.
NOLCO
The net operating loss carry-over (NOLCO) during the first three years from the start of commercial operation shall be carried over as a deduction from gross income for the next seven 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;
- the NOLCO results from operations; and
- RR No. 14-2001, which implements provisions of the Tax Code relative to the allowance of NOLCO as a deduction from gross income, is strictly followed.
10% corporate tax rate
After availment of the ITH, registered RE developers shall be entitled to a lower corporate tax rate of 10% on their net taxable income, provided that they submit the following to the BIR:
- a certificate of endorsement by the DOE;
- a valid and subsisting RE service or operating contract; and
- a sworn undertaking stating that the RE developer:
- has not been found to have breached its obligations under the RE service or operating contract; and
- shall pass on the savings derived from the incentive in the form of lower power rates.
To further prove that the RE developer has, during the previous year, passed on the savings to end users in the form of lower power rates, the RE developer shall submit ERC-approved rates to the BIR.
Accelerated depreciation
If an RE project fails to receive an ITH before full operation, the RE developer may apply for accelerated depreciation in its tax books. However, if the RE developer applies for this incentive, the project or its expansions shall no longer be eligible for ITH.
Plant, machinery and equipment that are reasonably needed and actually used for the exploration, development and utilisation of RE resources may be depreciated using a rate not exceeding twice the rate that would have been used, using:
- the declining balance method; or
- the sum-of-the-years digit method.
0% VAT rate
Subject to compliance with the requirements set out in RR 7-2022, the following transactions are subject to zero-percent value-added tax (VAT):
- the sale of power or fuel generated through RE sources, including ancillary services or services necessary to support the transmission of capacity and energy from resources to loads while maintaining reliable operation of the transmission system in accordance with good utility practice and the Grid Code;
- the purchase by an RE developer of local goods, properties and services needed for the development, construction and installation of the plant facilities and the whole process of exploration and development of RE sources up to its conversion into power, including the services performed by subcontractors and/or contractors.
Tax exemption of carbon credits
All proceeds from the sale of carbon emission credits shall be exempt from all taxes.
Hybrid and cogeneration systems
The above fiscal incentives are also applicable to hybrid and cogeneration systems. A "hybrid system" is any power or energy generation facility that makes use of two or more types of technologies utilising both conventional and/or renewable fuel resources, while a "cogeneration system" is defined as a facility that produces electrical and/or mechanical energy and forms of useful thermal energy such as heat or steam, which are used for industrial, commercial heating or cooling purposes through the sequential use of energy. Fiscal incentives shall apply only in proportion to and to the extent of the RE component and/or only to the extent of equipment, machinery and/or devices utilising RE resources. Following this, the RE developer must secure a DOE certification to distinguish the equipment, machinery and/or devices utilising RE resources.
Tax incentives available to RE manufacturers upon sale of RE equipment to RE developers
VAT-free import of components, parts and materials
All shipments necessary for the manufacture and/or fabrication of RE equipment and components shall be exempt from VAT on import, provided that:
- such components are not manufactured domestically in reasonable quantity and quality at competitive prices;
- such components are directly and actually needed and shall be used exclusively in the manufacture/fabrication of RE equipment;
- such components are covered by shipping documents in the name of the duly registered manufacturer/fabricator to whom the shipment will be directly delivered by customs authorities; and
- prior approval of the DOE is obtained before import.
ITH and exemption
An RE manufacturer shall be fully exempt from income taxes levied by the government on net income derived from the sale of RE equipment, machinery, parts and services for seven years starting from the date of registration and accreditation with the appropriate government agencies.
Zero-Rated VAT on certain transactions
Subject to compliance with the requirements set out in RR 7-2022, the RE manufacturer shall enjoy zero-rated VAT on its transactions with local suppliers of goods, properties and services needed in the manufacture/fabrication of RE equipment.
Tax incentives available to purchasers of RE equipment for residential, industrial or community use
Purchasers of RE equipment shall be entitled to a rebate equivalent to the VAT passed on to such purchasers, provided that they are not VAT-registered. The rebate shall be in the form of a tax credit from the income tax liability during the year of purchase, provided that any unutilised rebate or tax credit shall be forfeited.
For further information on this topic please contact Carina C Laforteza at SyCip Salazar Hernandez & Gatmaitan (SyCipLaw) by telephone (+632 8982 3500, +632 8982 3600, +632 8982 3700) or email (cclaforteza@syciplaw.com). The SyCipLaw website can be accessed at www.syciplaw.com.
Reena Alekssandra M Acop, associate, assisted in the preparation of this article.
Originally published on Lexology.