VAT Treatment of Socialized Electricity Subsidies and Statutory Charges

Senate Office of the Scoretary 26 MAR 11 P2:50 TWENTIETH CONGRESS OF THE REPUBLIC OF THE PHILIPPINES First Regular Session RECEIVED BY: SENATE S. No. 1963 Introduced by Senator Loren Legarda AN ACT CLARIFYING THE VALUE-ADDED TAX TREATMENT OF SOCIALIZED ELECTRICITY SUBSIDIES AND STATUTORY CHARGES UNDER REPUBLIC ACT NO. 9136, OTHERWISE KNOWN AS THE "ELECTRIC POWER INDUSTRY REFORM ACT OF 2001," AMENDING FOR THE PURPOSE SECTION 108 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES EXPLANATORY NOTE

Section 2 of Republic Act No. 9136, otherwise known as the Electric Power

Industry Reform Act of 2001 (EPIRA), declares it the policy of the State to ensure that electricity prices are transparent and reasonable. The law seeks to promote free and fair competition, operational efficiency, and accountability, while protecting the public interest in electric utility rates and services.

Section 25 of the EPIRA provides that retail electricity rates for the supply of

captive market and charged by distribution utilities must be regulated by the Energy Regulatory Commission (ERC) and based on the full recovery of prudent and reasonable economic costs. To promote transparency, every distribution utility is required to clearly identify and separate the components of retail rates in customer bills. Meanwhile,

Section 3 of the same law defines the retail rate as the total price paid by customers,

which includes generation, transmission, related ancillary services, distribution, supply, and other related charges for electric service.

Section 108 of the National Internal Revenue Code (NIRC) of 1997, as amended,

imposes a value-added tax (VAT) on gross receipts derived from the sale or exchange of services, including electricity sales by generation, transmission, and distribution companies. To operationalize this in the power sector, the ERC issued Resolution No. 20, Series of 2005, which allows generation companies, transmission utilities, and distribution utilities to impose VAT based on their gross receipts and to present VAT as a separate item on electricity bills. Further, pursuant to Section 37 of the EPIRA, the Department of Energy (DOE) issued Department Circular No. DC2018-09-0026, adopting a uniform monthly electricity bill format to ensure transparency in billing and compliance with regulatory policies. However, under the current ERC-prescribed billing format, certain consumer-provided subsidies are inadvertently included in the VAT base used by distribution utilities and electric cooperatives. These include the Lifeline Subsidy, Senior Citizen Subsidy, and other members' contributions for electric cooperatives. These subsidies are collected from all consumers but are not revenues that redound to the benefit of either the utilities or the paying consumers; rather, they are funds used to support other qualified customers or cooperative capital improvements. The Supreme Court, in Commissioner of Internal Revenue v. Tours Specialists, Inc. and the Court of Tax Appeals (G.R. No. L-66416, March 21, 1990), ruled that "gross receipts subject to tax do not include money or receipts entrusted to the taxpayer which do not belong to them and do not benefit the taxpayer." Applying this doctrine, consumer-provided subsidies should be excluded from VAT computation since they are not consideration for any sale or service and do not accrue to the benefit of the distribution utilities. These amounts are merely held in trust by distribution utilities (DUs) and electric cooperatives (ECs), which are required by law and by Energy Regulatory Commission (ERC) rules to collect and subsequently remit them to the appropriate government

entity-such as the National Transmission Corporation (TransCo) for the Feed-in Tariff Allowance (FiT-All), the Reinvestment Fund for Sustainable Capital Expenditure (RFSC), Systems Loss, Green Energy Auction Allowance (GEA-All), or to other beneficiaries under the lifeline and senior-citizen programs. Because these funds are entrusted, not earned, they do not redound to the benefit of the DUs or ECs, and consistent with the Court's doctrine, should not form part of their VAT-able gross receipts. In light of persistent public concern over high electricity costs, this measure offers a practical, lawful, and immediately actionable reform that will relieve consumers of unjustified VAT burdens while maintaining the fiscal integrity of the government and the efficiency of the power sector's regulatory framework. In view of the foregoing, the urgent passage of this bill is sought. LOREN LEGARDA

Senate Office of the sorcretary MAR 11 P2:50 TWENTIETH CONGRESS OF THE REPUBLIC OF THE PHILIPPINES First Regular Session RECEIVED BY: SENATE S. No. _ 1963 Introduced by Senator Loren Legarda AN ACT CLARIFYING THE VALUE-ADDED TAX TREATMENT OF SOCIALIZED ELECTRICITY SUBSIDIES AND STATUTORY CHARGES UNDER REPUBLIC ACT NO. 9136, OTHERWISE KNOWN AS THE "ELECTRIC POWER INDUSTRY REFORM ACT OF 2001," AMENDING FOR THE PURPOSE SECTION 108 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES Be it enacted by the Senate and the House of Representatives of the Philippines in Congress assembled

Section 1. Amendment of Section 108 of the National Internal Revenue Code of

2 1997, as amended. - "SEC. 108. Value-Added Tax on the Sale of Services, Including Digital Services, and the Use or Lease of Properties. — (A) Rate and Base of Tax. - XXX Provided, That for long-term contracts for a period of one (1) year or more, the invoice shall be issued in the month in which the service, or use or lease of properties, is rendered or supplied:

PROVIDED, FURTHER, THAT FOR PURPOSES OF THIS SECTION, THE TERM "GROSS RECEIPTS" FROM THE SALE OR SUPPLY OF ELECTRICITY SHALL EXCLUDE AMOUNTS COLLECTED FOR AND REMITTED TO GOVERNMENT ENTITIES PURSUANT TO REPUBLIC ACT NO. 9136, OTHERWISE KNOWN AS THE "ELECTRIC POWER INDUSTRY REFORM ACT OF 2001," AND OTHER RELATED LAWS, INCLUDING THE UNIVERSAL CHARGES, FEED-IN TARIFF ALLOWANCE (FIT-ALL), GREEN ENERGY AUCTION ALLOWANCE (GEA-ALL), REINVESTMENT FUND FOR SUSTAINABLE CAPITAL EXPENDITURE (RFSC), SYSTEMS LOSS, OTHER MEMBERS' CONTRIBUTIONS FOR ELECTRIC COOPERATIVES AUTHORIZED OR REQUIRED BY LAW OR ENERGY REGULATORY COMMISSION REGULATION, AND SIMILAR STATUTORY FUNDS, AS WELL AS SOCIALIZED SUBSIDIES SUCH AS THE LIFELINE-RATE AND SENIOR-CITIZEN DISCOUNTS MANDATED BY LAW OR ENERGY REGULATORY COMMISSION REGULATION, WHETHER COLLECTED, CHARGED, PASSED ON, OR DEDUCTED FROM CONSUMER BILLS, WHETHER SEPARATELY ITEMIZED OR EMBEDDED IN ERC-APPROVED RATE MECHANISMS, THESE BEING AMOUNTS THAT DO NOT REDOUND TO THE BENEFIT OF THE SELLER AND ARE THEREFORE NOT SUBJECT TO VALUE-ADDED TAX. XXX

Section 3. Implementing Rules and Regulations - Within thirty (30) working days

24 from the effectivity of this Act, the Department of Finance (DOF) and the Bureau of 25 Internal Revenue (BIR), in coordination with the Energy Regulatory Commission (ERC), 26 shall promulgate the necessary rules and regulations to implement the provisions of this 27 Act, including the standardized billing and reporting format that distinctly identifies 28 VAT-exempt and VAT-liable components of electricity charges.

Distribution utilities (DUs) and electric cooperatives (ECs) shall implement the prescribed billing adjustments and reporting requirements within the next billing cycle following the issuance of such implementing rules and regulations.

Section 4. Repealing Clause. - All laws, executive orders, rules and regulations

inconsistent herewith are repealed or modified accordingly.

Section 5. Effectivity. - This Act shall take effect fifteen (15) days after its

publication in the Official Gazette or in a newspaper of general circulation. Approved,