DOF: No double taxation in power rates

By Chino S. Leyco – June 16, 2022, 2:24 PM
from Manila Bulletin

The Department of Finance (DOF) has clarified that there is no double taxation in the imposition of value-added tax (VAT) in the electric power sector.

Reacting to recent statements made by the Energy Regulatory Commission (ERC), Finance Secretary Carlos G. Dominguez III explained that the Electric Power Industry Reform Act (EPIRA) Law has unbundled the pricing at each stage of electricity production.

For this reason, Dominguez said the VAT is imposed separately in each stage of the production.

“There is no double taxation in the electric power industry,” Dominguez said. “But at the end of the day, if you look at the total bill, the entire electricity service is charged 12 percent VAT on the side of the consumer.”

For double taxation to exist, two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character, Dominguez said.

This statement was issued in response to ERC Chair Agnes Devanadera’s proposal to the next administration to remove the 12-percent VAT imposed on the generation charge, saying that the levy should be applied only on the distribution charge to avoid the supposed double taxation.

Under the EPIRA Law, it is mandated that the pricing of electricity should be disintegrated or unbundled, Dominguez said.

“With this unbundled pricing mechanism, VAT is imposed on every level of the value chain and not integrated vertically like other sectors,” Dominguez said, which means “the VAT paid on the distribution charge only accounts for the value-added in distributing the electricity and does not include the generation and transmission of power.”

On the alleged disparity between the taxation of power distribution utilities and generation companies, Dominguez explained that, like any producer of goods or services, the VAT paid on inputs can be offset against the output VAT imposed on the sale of electricity to consumers.

“VAT exemption is not the solution. If the intention is to unburden consumers, the next administration needs to review the existing policies on power generation pricing,” he said.

According to Dominguez, removing the VAT will not necessarily translate into a 12-percent reduction in prices.

He explained that VAT-exempt businesses do not charge output VAT and also could not recover the VAT they pay on their own inputs. “Thus, this input VAT becomes an additional cost to them and to recover this, it is passed on to the consumers.”

The price of electricity in the country remains high compared to other ASEAN (Association of Southeast Asian) countries because of the high costs associated with power generation.

Manila Electric Co. or Meralco’s first-quarter 2022 report shows that generation charge is the largest component of an electric bill across all customer classes.

In the first quarter of this year, the levy should be applied only on the distribution charge to avoid the supposed double taxation at around 59 percent of the total average bill at P5.24 per kWh, while taxes comprised only about 11 percent.

“We cannot afford to give another VAT exemption as this leads to distortionary and less equitable tax systems,” Dominguez said. “VAT exemption creates discrimination among similar businesses. Thus, it should remain broad-based and allow for few exemptions.”