The Renewable Energy Law has been passed in the Philippines which encourages stakeholders to develop and build facilities that will produce renewable energy...
Many people are now aware of the catastrophic effects of climate change, and proactive steps are being taken by many states to steer the future away from disaster. One such step is the revolution against non-renewable sources of energy, like coal, that contribute to the destruction of the environment. This has paved the way for nations to tap the unlimited resources of renewable energy ("RE") – sun, wind, and water.
The Philippines, being located in the ring of fire is predicted to be adversely affected by climate change, and has recognized the need to give priority to renewable energy. Thus, the Renewable Energy Law ("RE Law") was passed. It aims to encourage stakeholders to develop and build facilities that will produce renewable energy by giving them fiscal and tax incentives.
When a RE developer sells fuel or power generated from renewable sources of energy, zero per cent VAT is imposed on the sale. Also, zero per cent VAT is imposed on purchases of local supply of goods, properties and services related to development construction and installation of power facilities.
But import of equipment is not given the same incentive because only local purchases that will be used for the construction and development of RE facilities are given that privilege. But the input VAT arising from import can be refunded.
Since sale of RE is zero-rated, it follows that all input VAT derived from import is attributable to such zero-rated sale. There is no output VAT from which the input VAT derived from import can be offset. It must follow that the input VAT is refundable, including all input VAT derived from import.
There are questions though on the timing and qualifications of a refund claim by a RE developer: a) Should a RE developer first engage in sale of renewable energy before it can ask for refund of its input VAT?; b) Does the phrase "attributable to" mean that only input VAT from purchases that are "directly" used for the production of renewable energy is refundable?
Should a RE developer first engage in sale of renewable energy before it can claim refund of its input VAT?
One school of thought is that a RE developer must have already declared a sale of renewable energy before it can avail of the refund mechanism. In other words, if a RE developer is still building the facilities and is not yet operational, all input VAT derived from its import and other sources can never be refunded. This is based on the premise that the input VAT must be "attributable" to a zero-rated sale. Since the RE developer is still in its pre-operation stage, there is no zero-rated sale from which the input VAT may be "attributable" to.
The second school of thought on the other hand, which is being advocated by many, argues that all future sale of a RE developer is zero-rated VAT anyway. As long as it is shown that there is a sale of renewable energy, albeit not in the same period that the input VAT was incurred, it must follow that the input VAT incurred and paid by a RE developer is attributable to the sale of renewable energy. A RE developer has no other objective but to engage in zero-rated sales, i.e., sale of fuel or power generated from renewable energy. Thus, all input VAT incurred from pre-operation stage is refundable.
It is better for a RE developer to wait for its first sale before it files a claim for refund of all input VAT incurred in the present and prior years. For example, if the building of facilities happened from 2016 to 2018 and the first sale happened in 2019, it is better to file the refund claim of the input VAT incurred from 2016 to 2018, in 2019 at the earliest. That is, when the first sale happened.
What does "attributable to" mean?
What is your purpose?
This is a fundamental question not just in life, but also in the struggle to find meaning to the phrase "attributable to". What is the purpose of the pen and the paper that were used by a RE developer to order the machines needed to operate a solar panel? They only have one purpose – to harness solar energy.
Who is to say what is "directly" attributable to zero-rated sales and what is not?
The school of thought that is being maintained by the majority argues that it will result in subjective judgment per item of purchase, with no clear and legal guidelines other than the vague parameter of the word "directly". As long as it can be proven that a RE developer sells power that is derived from renewable energy, then all input VAT incurred by it is considered directly "attributable to" the sale of renewable energy.
RE developers have no other objective but to engage in zerorated sales, i.e., sell power derived from renewable energy. If you say that the pen and the paper are not "directly" attributable to zero-rated sale, when there is no other purpose for the pen and the paper but such sale, you also have to say the same about the helmets of human beings who construct the buildings of a renewable energy facility. In other words, if you will conclude that the pen and the paper are not as important as the solar panel, you should also be ready to conclude that the helmets used by the workers to protect their heads are not as important as the same solar panel.
The second school of thought that is being espoused by a minority, on the other hand, believes that the law clearly wants to preserve or restrict the refund incentive only to those which are directly attributable to the zerorated sales – sale of renewable energy. For them, only input VAT derived from direct cost, e.g., wind turbines, solar panels, qualify for refund. What if the RE developer is only engaged in zero-rated sales (sale of renewable energy) and does not generate output taxes against which to offset the input taxes incurred outside of its zero-rated sales? It argues that refund is not an option while the business exists.
Tax on renewable energy evolves like any other law. But in the end, it will be interpreted according to its true purpose. The courts knows that the incentives given to RE developers is an investment in the future of our children. All interpretations must be biased for the grant of these incentives to the fullest.
Disclaimer – The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advise on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advise.
Irwin C. Nidea Jr.
Senior Partner, Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global