Income tax holiday for RE developers

On 14 December 2022, the Bureau of Internal Revenue released BIR Ruling 404-2019 in favor of EDC Burgos Wind Power Corporation, a registered renewable energy developer in Ilocos Norte.

Under Section 15 of Republic Act 9513, otherwise known as the Renewable Energy Act of 2008, renewable energy developers enjoy incentives, including an Income Tax Holiday or ITH for the first seven years of commercial operations. For EDC, its income tax holiday was from 11 November 2014 to 10 November 2021.

Being a renewable energy developer, EDC qualified for the Fixed Tariff or FIT System under Section 7 of RA 9513, which is implemented by the Energy Regulatory Commission. The FIT System determines the fixed tariff to be paid for electricity produced from each type of emerging renewable energy. EDS is, therefore, entitled to receive payment in Philippine pesos per kilowatt hour for electricity generated from its renewable technology and actually delivered to the transmission and/or distribution network.

The FIT is disbursed to RE developers by the National Transmission Corporation or TransCo, which is the administrator of the fund established for the FIT allowance collected from electricity consumers.

In this case, ERC adjusted the billing schedule of FIT participants. This change of schedule created a situation where the electricity generated during the Income Tax Holiday was being billed and paid after the lapse of the income tax holiday of EDC.

This resulted in Transco withholding taxes on payments it made to EDC even though those payments were for the period of generation during EDC’s ITH. Thus, EDC was forced to request a ruling.

The BIR, in applying Section 2.57.5 of Revenue Regulation 2-98, as amended, held that:

The “income” exempt from withholding taxes pertains to income generated by a corporation within the period it is actually enjoying exemption from payment of income taxes. Thus, regardless of when such income is actually received by a corporation, as long as the same is generated within the period a corporation is enjoying income tax exemption, such income shall be exempt from withholding tax.

The BIR further ruled that: Such being the case, this Office confirms that all income payments received or to be received by EDC relating to transactions that occurred during the ITH period, or from 11 November 2014 to 10 November 2021, in connection with the Burgos Wind Project, are exempt from income tax, and consequently, from withholding tax. It bears emphasis, however, that the said exemption covers that income that is directly attributable to the revenues generated from sales of electricity.

Regarding the FIT billings of EDC to Transco, please note that the Feed-in Tariff refers to a renewable energy policy that offers guaranteed payments on a fixed rate per kilowatt-hour for emerging renewable energy sources, excluding any generation for own use. This policy was adopted to accelerate the development of emerging RE resources through a fixed tariff mechanism. The FIT system is mandated for wind, solar, ocean, run-of-river hydropower, and biomass energy resources.

ERC is the government agency directed to formulate and promulgate FIT system rules. In addition, ERC is obliged to adjust the FIT annually for the entire period of its applicability to allow pass-through of local inflation and foreign exchange rate variations.

Considering the nature of FIT rate adjustments, it is indisputable that the same is considered income on the part of participating RE developers that is directly attributable to the revenues generated from the sale of electricity.

ERC is obliged to adjust the FIT annually for the entire period of its applicability to allow pass-through of local inflation and foreign exchange rate variations.

This ruling shows that the BIR is not all about collecting taxes but it also encourages the development of renewable energy, as mandated by law.


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