Tax Articles

Landmark Decision on Renewable Energy Tax Incentives

By Atty. Irwin C. Nidea Jr.

The critical role of renewable energy in humanity’s future is more pronounced more than ever. El Nino will be declared by PAG-ASA soon. The scorching heat has forced the Department of Education to consider shortening class hours. It is not an ordinary summer heat that we are experiencing right now. The sun is bringing something extra.

That is why the Supreme Court’s (SC) landmark decision (CBK Case, published in April 2023) clarifying the tax incentives available to Renewable Energy (RE) Developers is very timely. Some of the questions bugging the industry were answered, i.e., when does an RE Developer become entitled to tax incentives?; what documents and certifications should it secure to be entitled to 0% VAT?; can an RE Developer choose not to register with the Department of Energy (DOE) under the RE Law and still be entitled to 0% VAT?

As to whether an RE Developer's registration with the DOE is a pre-requisite for entitlement to the VAT incentive provided by the RE Law, the SC ruled that it is. Thus, an RE Developer’s decision not to register with the DOE means that its transactions will be subject to 12% VAT. How can an RE Developer that is not registered with the DOE recover the 12% VAT that was passed on to it by its suppliers? The SC held that sales of electricity generated through renewable energy are subject to 0% VAT in accordance with Section 108(B)(7) of the Tax Code. Thus, the input VAT that is attributable to the sale of electricity may be claimed as tax refund. Note that in this case, the RE Developer’s for refund must be anchored under the Tax Code and not under the RE Law.

How about the RE Developers that are duly certified by the DOE? Can they file a claim for VAT refund as well? As regards their local purchases of goods, properties and services that will be used for the development, construction and installation of their power plant facilities, they cannot claim for VAT refund since they must not have allowed VAT to be passed on to them, in the first place. This includes the whole process of exploring and developing renewable energy sources up to its conversion into power, including but not limited to the services performed by subcontractors and/or contractors.

According to the SC, the law provides that RE Developers, local manufacturers, fabricators, and suppliers of locally produced renewable energy equipment who register with the DOE shall be issued a certification by the Renewable Energy Management Bureau (REMB). This certification shall serve as basis for RE Developers to avail of the incentives identified, including VAT at zero rate. The SC added that the mere fact that an entity is an RE Developer does not automatically entitle such entity to the incentives provided in the RE Law. The law is clear that apart from the registration requirement imposed under Sections 15, 25, and 26, concerned government agencies tasked with administering the incentives provided under Republic Act No. 9513 can impose additional requirements. Unfortunately, the SC may not be aware that the REMB does not have a mechanism on how to issue the required certification.

The SC recognized that on June 22, 2022, the BIR promulgated Revenue Regulations No. 7-2022 on Tax Incentives Under the RE Law. The said RR mandates that RE developers and manufacturers, fabricators, and suppliers of locally produced RE equipment shall secure the following certifications/accreditations: DOE Certificate of Registration, DOE Certificate of Accreditation, Certificate of Endorsement by the DOE, Registration with the BOI, and Certificate of Income Tax Holiday Entitlement.

Moreover, the BIR clarifies the following in RR No. 7-2022: 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 sources up to its conversion into power, including but not limited to the services performed by subcontractors and/or contractors. The said RR only mandates that local suppliers of goods, properties, and services require from the RE Developer only a copy of the latter's BOI Registration and DOE Registration for purposes of availing the 0% VAT incentive. The REMB certification is not a requirement anymore to be qualified for 0% VAT.

It is important to emphasize that RE Developers are not covered by the “direct” and “exclusive” use for zero-rated activities limitation clause, by the CREATE Law. The RE Law stands on its own, including all the incentives that it promises.

This SC decision puts to rest all doubts as regards the incentives given to Renewable Energy Developers. It is a big step in our country’s quest to be carbon neutral as soon as possible.