Tax Articles

Tax Incentives of Renewable Energy

By Atty. Irwin C. Nidea Jr.

The Industrial Revolution occurred more than a century ago, yet the anchor of development remains the same. At the surface, we have come a long way. Transportation has reached new height, communication has connected continents, and technology has evolved multiple folds. However, at the interior of all this innovation, we will find ourselves energized by same source energy (gas, oil, or coal) which fueled the Industrial Revolution.

There is no doubt that the Industrial Revolution has catapulted the advancement of society but in the process, it has also accelerated climate change.

The United Nations (“UN”) has explained that “Climate change” refers to the long-term shifts in temperatures and weather patterns. These shifts may be natural, such as through variations in the solar cycle. But since the 1800s, human activities have been the main driver of climate change, primarily due to burning fossil fuels like coal, oil and gas. To avoid the worst impacts of climate change, emissions need to be cut by nearly half by 2030. To achieve this goal, we would need to steer development towards a greener future. Focus should be geared towards Renewable Energy (RE) sources instead of reliance in fossil fuels.

Sadly, for years, there seemed to be a disconnect between the intended direction of our policy makers and how our laws are framed, as far as tax incentives for RE is concerned.

For one, there are CTA decisions that deny an RE developer’s claim for VAT refund on the ground that it failed to produce the DOE Certificate of Endorsement (COE) relative to its sale of renewable energy as required in the RE Law’s implementing rules. RE developers are being required to produce not only the DOE Certificate of Registration and BOI Registration but also a COE from the DOE for every sale of renewable energy. This requirement is cumbersome if not impossible to comply.

The RE Law is clear that the VAT zero-rating incentive on sale of fuel or power generated from renewable sources of energy by RE developers does not require the presentation of the COE. The RE Law never mentioned of the requirement of a COE before availing the said incentive. It only requires registration with the DOE and the BOI before an RE Developer can enjoy the VAT zero-rating incentive on sale of fuel or power generated from renewable sources of energy.

There are many claims for refund that were denied just because the IRR of a law stated a requirement that the law itself does not mandate.

In January 2022, the IRR of the RE Law was amended by Department Circular No. DC2021-12-0042. It now provides that an RE Developer shall be AUTOMATICALLY qualified to avail of the incentives provided in the RE Law after securing a Certificate of Registration from the DOE. The IRR has been amended. It has been clarified that an RE Developer is not required to submit a COE to avail the VAT zero-rating incentive.

Damage has been done not only to the investors of renewable energy but to the environment as well. Some investors may have been turned off when they realize that our law, particularly the old IRR, empowers the government to hold on to their money that is supposed to be returned to them, by requiring the impossible. It bears stressing that the issuance of the COE is not included as one of the functions of the Renewable Energy Management Bureau (REMB) of the DOE. Given that the old IRR specifically states that it is the REMB which shall issue the COE but the said office does not issue the same will leave anyone dumbfounded. A claim for refund is being denied because of a requirement that is not being processed by the government agency that is allegedly mandated to produce it.

The government is now trying to make amends with the issuance of the new IRR and with the issuance of Revenue Regulations (RR) No. 7-2022, dated June 30, 2022. The said RR provides that local supplier of goods, properties, and services shall require from the RE Developer only a copy of the latter's BOI Registration and DOE Registration for VAT zero-rating purposes. Accordingly, local suppliers/sellers of goods, properties, and services of duly registered RE developers should not pass on the 12% VAT on the latter's purchases of goods, properties and services that will be used for the development, construction and installation of their power plant facilities. This includes the whole process of exploring and developing renewable energy services up to its conversion into power, including but not limited to the services performed by subcontractors and contractors.

The VAT zero-rating incentive does not stop to the local purchases by RE developers. All manufacturers, fabricators, and suppliers of locally produced RE equipment are also subject to zero-rated VAT on their transactions with local suppliers of goods, properties, and services needed in the manufacture/fabrication of RE equipment. They just must only show their BOI and DOE certifications as well as the BOI and DOE certifications of the RE developers.

Based on these recent issuances, it can be seen, that there is now a conscious effort by the government to show that a COE is no longer a requirement to avail of the VAT zero-rating incentive. Unfortunately, damage has been done.

We need to pivot to renewable energy and shy away from carbon and fossil fuels. These sources of energy may have catapulted us to where we are now. But are they sustainable? We all know that we are killing our planet with carbon emissions and is bringing about climate change.

Climate change is slowly becoming apparent. We are now experiencing record-breaking temperatures and stronger typhoons. The policy direction of our government to renewable energy must be crystal clear. Our laws, including tax incentives given to RE, must not be equivocal. RE developers must be given what is due them and they must be allowed to grow and be more.