Incentives for Renewable Energy Developers in the Philippine Setting

In the Philippines, fiscal incentives are granted to qualified registered renewable energy (RE) developers under two different laws: (i) the country’s internal revenue code with its recent amendments providing for a framework for tax and customs duty incentives to qualified businesses or projects in general (referred to as the “CREATE”), and (ii) a special law providing the framework for RE development, the Renewable Energy Act of 2008 (“RE Law”). Under recent guidelines issued by the country’s Department of Energy (DOE), an RE developer is required to elect which incentive scheme it intends to avail of at the time that the DOE issues to the RE developer its certificate of registration. The elected incentive scheme will apply, and the RE developer is disqualified from availing of the incentives granted under the other scheme. If no election is made, the RE developer will be considered as availing of the RE Law incentives.

Although there are incentives that are the same under both laws, certain incentives are available only under either CREATE or the RE Law. The common incentives also have nuances as to the application thereof for either incentive scheme. Accordingly, RE developers should determine which incentive scheme would be more beneficial to them considering their particular circumstances to be able to make the proper election at the required time.

Common Incentives

In general, the following incentives are available to RE developers under both CREATE and the RE Law incentive schemes:

• income tax holiday;
• customs duty exemption on importation;
• value-added tax (VAT) zero-rating on local purchases; and
• net operating loss carry-over.

As mentioned, the laws applicable each have specific conditions for the applicability of the common incentive to the RE developer.

Income tax holiday

Both incentive schemes allow a certain period when the RE developer shall be fully exempt from income taxes levied by the national government, or an income tax holiday (ITH). Currently, the regular income tax rate for domestic corporations is 25% of their net taxable income.

Under the RE Law, the ITH is granted for the first seven years of commercial operations of the RE developer – ie, from the time its project has been issued a Certificate of Compliance by the DOE and is ready to inject power into the grid. The RE developer will also be entitled to an additional seven-year ITH for any income attributable to additional investments in an existing RE project. The discovery and development of a new RE resource shall be treated as new investment and shall be entitled to a fresh package of incentives. In both cases, the RE developer shall only be entitled to a maximum 21-year ITH.

On the other hand, the ITH period under CREATE is determined based on a combination of (i) a tier system according to the industry as identified under a Strategic Investment Priority Plan (SIPP), and (ii) the location of the project. Under the current 2022 SIPP, the renewable energy industry is under Tier II. Under such Tier II, a RE developer may avail of the ITH for the following periods:

• five years, if the project is located in the National Capital Region (NCR);
• six years, if the project is located in other metropolitan areas or in areas contiguous and adjacent to the NCR; and
• seven years, if located in all other areas.

Thus, it may be more advantageous to the RE developer to elect the RE Law incentive scheme if its project is located within, contiguous or adjacent to the NCR, or in other metropolitan areas as it will be entitled to a longer ITH period.

Customs duty exemption on importation

Both incentive schemes provide an exemption from tariff duties on the importation of capital equipment, raw materials and spare parts, subject to certain conditions.

Under the RE Law, the duty exemption is available within the first ten years from the issuance of the Certificate of Registration to an RE developer. The exemption is subject to the following conditions:

• The machinery and equipment are directly and actually needed and will be used exclusively in the RE facilities for the transformation and delivery of energy to the point of use.
• The importation of materials and spare parts shall be restricted only to component materials and parts for the specific machinery and/or equipment authorised to be imported.
• The kind of capital machinery and equipment to be imported must be in accordance with the approved work and financial programme of the RE facilities.
• Such importation shall be covered by shipping documents in the name of the duly registered RE developer to whom the shipment will be directly delivered by customs authorities.

Under CREATE, the customs duty exemption is subject to the following conditions: direct and exclusive use in the registered project of the RE developer and non-availability of locally manufactured equipment, raw materials and spare parts in sufficient quantity and reasonable prices.

While there is no VAT exemption for importation of capital equipment, raw materials and spare parts under both schemes, given that under the internal revenue code, the sale of power/energy by the RE developer is subject to zero-rated VAT,  the RE developer may claim a refund of the input VAT it incurred that is attributable to its zero-rated sales of power.

VAT zero-rating on local purchases

Under Philippine tax laws, the sale or exchange of all goods, properties and services is generally subject to VAT at the rate of 12%. The VAT is payable by the seller or importer of the goods or services, but is usually passed on to the buyer by the seller.

Under the RE Law incentive scheme, RE developers are entitled to a 0% VAT rate on their purchases from local suppliers/sellers of goods, properties and services needed for the development, construction and installation of their plant facilities. As such, local suppliers/sellers of goods and services cannot impose and collect the 12% VAT on the goods and services that will be supplied to the RE developer-buyer. The zero-rated VAT is also applicable to purchases of local supply of goods, properties and services needed for “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.” Thus, there is a wider group from whom RE developers may claim entitlement to the VAT zero rate. This will lower the cash outlay by RE developers by 12%.

Under CREATE, the zero-rated VAT is applicable on local purchases of goods and services “directly and exclusively used” in the registered project or activity, but only for manufacturers, fabricators, and suppliers of locally-produced RE equipment and components that are registered as export enterprises, not RE developers.

Net operating loss carry-over

Under current tax laws, a corporation that has a net operating loss for a taxable year immediately preceding the current taxable year – ie, one that has excess allowable deductions over gross income in that taxable year, may generally carry over such net operating loss (which has not previously been offset as deduction from gross income) as a deduction from gross income for the next three consecutive taxable years immediately following the year of such loss. The amount that will be carried over in the subsequent years is called the net operating loss carry-over (NOLCO). NOLCO lowers the taxable income of the RE developer, effectively lowering the income taxes payable by such RE developer.

The RE Law and CREATE both extend the period over which the net operating loss of the RE developer may be carried over. Under the RE Law, the net operating loss of the RE developer during the first three years from the start of commercial operations may be carried over as a deduction from its gross income for the next seven consecutive taxable years immediately following the year of such loss, provided:

• the NOLCO had not been previously offset as a deduction from its gross income; and
• the loss is a result from the operation of the RE developer, and not from the availment of incentives provided for in the RE Law.

The period to carry over the net operating loss pursuant to CREATE is shorter by two years – NOLCO incurred within the first three years of the commercial operation may be claimed as a deduction from the gross income of an RE developer for a period of five consecutive taxable years immediately following the year of such loss. 

From the foregoing, the NOLCO incentive under the RE Law is more beneficial to RE developers, as it extends the carry-over period for an additional two years.

Exclusive Incentives

Certain incentives are available only under either CREATE or the RE Law:

• enhanced deduction (CREATE);
• special corporate income tax (RE Law);
• accelerated depreciation (only when ITH is not availed of) (RE Law);
• special real property tax rate (RE Law);
• cash incentive of renewable energy developers for missionary electrification (RE Law);
• tax exemption of carbon credits (RE Law); and
• tax credit on domestic capital equipment and services (RE Law).

Special corporate income tax v enhanced deduction

Under the RE Law, after the ITH period expires, the RE developer will be subject to a special corporate income tax rate of 10% of its taxable income, instead of the current regular corporate income tax rate of 25%.

Instead of a special corporate income tax, under CREATE, the RE developer may be allowed to claim enhanced deductions in addition to the allowable ordinary and necessary deductions under the applicable tax regulations. This will thus lower the taxable income and effectively lower the income taxes to be paid by the RE developer. The enhanced deductions may be claimed for five years after expiration of the ITH period.

The kinds of expenses that may be claimed as additional deductions (subject to the conditions provided) and the maximum amount for each are as follows:

• depreciation for buildings: +10%;
• depreciation for machineries and equipment: 10%;
• labour expenses: 50%;
• research and development: 100%;
• domestic input expense: +50%;
• power expense: +50%; and
• reinvestment allowance: +50% within five years from the time of reinvestment.

Although both schemes will have the effect of lowering the income tax payable by the RE developer, the special corporate income tax incentive under the RE Law appears to be more advantageous for the RE developer as it translates into direct tax savings for the RE developer of 15%. The amount of income taxes saved by the enhanced deduction incentive will still ultimately depend on the amount of expenses incurred by the RE developer, and whether such expenses are of the kind that may be claimed as additional deductions. 

RE Law exclusive incentives

Although local government units are authorised to impose real property taxes of up to 2% on real properties and improvements thereon that are located within their respective jurisdictions, under RE Law, the real property tax rate on civil works, equipment, machinery, and other improvements of RE developers actually and exclusively used for RE facilities shall not exceed 1.5% of the original cost less accumulated normal depreciation or net book value. In the case of an integrated resource development and generation facility as provided under the Electric Power Industry Reform Act of 2001, the real property tax shall only be imposed on the power plant.

Should an RE developer purchase RE machinery, equipment, materials, and parts from a DOE-recognised/accredited domestic manufacturer, fabricator or supplier, it will be entitled to a tax credit of 100% of the VAT and custom duties that would have been paid for the purchase (importation). Note that the purchase of the domestic machinery and equipment should be made within the validity of the RE operating contract of the RE developer.

An RE developer is also entitled to a cash generation-based incentive per kilowatt-hour rate generated, equivalent to 50% of the universal charge for power needed to service missionary areas where it operates the same, to be chargeable against the universal charge for missionary electrification. Missionary electrification refers to the provision of basic electricity service in unviable areas with the aim of bringing the operations in these areas to viability levels.

RE developers shall be exempt from any and all taxes on all proceeds from their sale of carbon emission credits.

RE Law v CREATE incentives

From the foregoing, it appears that the RE developers will derive more benefit if they avail of the incentives under the RE Law. Aside from the income tax savings from the ITH being enjoyed for a longer period, after the applicable ITH period, the income tax savings from the special corporate income tax will likely translate to a higher value, being outright savings of 15%. As mentioned, whether the amount of income tax savings from the enhanced deduction under CREATE will be equal to or greater than the 15% tax savings under the RE Law will depend on the amount spent by the RE developer for the allowable expenses, entailing a high amount of expenses for the RE developer. On top of this, the RE developer can also enjoy the NOLCO incentive for a longer period, for more tax savings. The RE Law also grants more exclusive incentives to RE developers than CREATE. This can thus provide the RE developer with more avenues for additional tax savings.