Implementation of VAT Law in Electric Power

Legal basis and coverage

The resolution implements Sections 4, 6, 15 and 24 of Republic Act No. 9337, affecting the electric power industry.
The resolution is anchored on the ERC’s authority to determine, fix and regulate the rates charged by electric distribution utilities (DUs), the National Power Corporation (NPC), and the National Transmission Corporation (TRANSCO) under Republic Act No. 9136 and Section 18 of Republic Act No. 7638.
The resolution operates in alignment with Bureau of Internal Revenue (BIR) Revenue Memorandum Circular No. 61-2005, which clarified implementations of the VAT rules affecting generation, transmission, and distribution companies and electric cooperatives effective November 1, 2005.
The resolution applies to Generation Companies (GCs), TRANSCO (and its buyer or concessionaire), and all Distribution Utilities (DUs).
The resolution treats billing and VAT recovery in the electric power supply chain from GC → TRANSCO → DU → end-user.

VAT replacement and general principles

The resolution provides that VAT imposition shall be based on Gross Receipts (GR) of the concerned GC, TRANSCO, and DUs.
The resolution requires that VAT imposition must be reflected as a separate item in individual billing statements to customers in an ERC-approved format (with ERC-approved billing format and sample billing statements referenced as Annex “A”, Annex “A-1”, and Annex “A-2”).
The resolution provides that VAT imposition replaces payment of the National Franchise Tax.
The resolution sets the default VAT rate used in this implementation at ten percent (10%), unless the President increases it to twelve percent (12%), or unless a zero percent (0%) rate applies in appropriate cases.
The resolution defines GR computation rules, requiring that:
- GR must be computed excluding the Energy Tax under Batas Pambansa 36, excluding Universal Charges implemented under Republic Act No. 9136, excluding Benefits to Host Communities under Energy Regulation 1-94, and excluding security deposit for metering machines including interests—but excluding items become VATable when applied to the consumer’s liability.
- GR must be net of all discounts and gross of penalties.
The resolution provides rules for VAT withholding on sales of electricity to the government:
- The five percent (5%) final VAT withholding rate represents the net VAT payable of the seller.
- The remaining five percent (5%) accounts for standard input VAT on sales to government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, in lieu of actual or apportioned input VAT.
- Withholding is made when payments were actually or constructively made.
- The VAT withheld must be remitted to the BIR within ten (10) days following the end of the month the withholding was made.
The resolution establishes VAT “accrual/zero-rated” timing rules:
- Electricity sold, transmitted, and distributed on or before October 31, 2005 but collected on or after November 1, 2005 is treated as accrued as VAT zero rated, provided it is billed by November 30, 2005.
- “Deferred Charges” such as Generation Rate Adjustment Mechanism (GRAM) and Incremental Currency Exchange Rate Adjustment (ICERA) incurred on or before October 31, 2005 but billed and collected later remain VAT zero rated; an inventory must be submitted to the BIR by November 30, 2005.
- Generation rate and foreign exchange rate adjustments to electricity sold on or before October 31, 2005 remain VAT zero-rated, even if billed and collected later.
The resolution prohibits passing certain VAT-related charges to customers:
- Penalties, including the corresponding VAT imposed on DUs due to their fault or negligence, must not be passed on to DUs’ customers.

Billing chain and VAT allocation rules

The resolution provides that GC and TRANSCO bill the end-user through the DUs for the sale and transmission of electricity and ancillary services, including VAT.
The resolution states that amounts collected from the end-user for such charges do not form part of the DUs’ GR and are not claimed by DUs as input tax.
The resolution states that amounts collected from the end-user as payment for generation and transmission charges, including VAT, form part of the GR and output VAT of the GC or TRANSCO, as applicable.
The resolution allows DUs to advance payments:
- DUs may advance the generation and transmission charges exclusive of the corresponding VAT to GC and TRANSCO, respectively.
- Upon collection from the end-user, the DUs remit only the VAT portion to GC and TRANSCO.
- The reckoning of the sale subject to VAT between the GC and TRANSCO to the end-user is upon collection on the billing made by the DUs.
The resolution includes VAT computation timing based on GC billing periods and DU billing cycles:
- GC and TRANSCO whose billing periods start on the 26th day of each month must calculate VAT on a pro rata basis for electricity consumption beginning November 1, 2005.
- DUs with billing cycles not starting on the 1st day of each month must compute VAT on a pro-rata basis applied to the distribution component for consumption beginning November 1, 2005, while generation and transmission components are billed upon receipt of power bills from GC/TRANSCO.
- Sample computations are referenced as Annex “B” (GC pro rata), and Annex “C” (DU distribution component pro rata).

Zero-rated and special transaction treatment

The resolution provides that, pursuant to Revenue Memorandum Circular No. 61-2005, sales of electricity by GC, TRANSCO, and DUs to PEZA or SBMA registered enterprises are effectively subject to the zero percent (0%) VAT rate.
The resolution provides that GC VAT rate classification must be based on the renewable vs. non-renewable generation mix rules stated in the GC section.

VAT imposition—GC, TRANSCO, and DUs

Generation Companies (GCs)
- The resolution defines GC GR as the total amount paid by the end-user through DUs to the GC for the sale of electricity and related ancillary services, where billing/collection is performed by the transmission company and remitted to the concerned GC.
- For GC power sourced purely from non-renewable sources, GR means the total amount paid for the electricity sold.
- For GC power sourced purely from renewable sources, GR is subject to zero percent (0%) VAT rate.
- For GC power sourced from a mixture of non-renewable and renewable sources, GR means the total amount paid for the electricity sold from non-renewable energy sources.
- At VAT implementation, GC must impose ten percent (10%) VAT on the current billing based on the non-renewable energy portion of the prior month’s generation mix, and the GC must conduct an annual true up.
TRANSCO, its buyer or concessionaire
- The resolution defines TRANSCO GR as the total amount paid by the end-user through the DU to TRANSCO for transmission of electricity and related electric services.
- TRANSCO GR includes power service delivery, system operations, supply and metering services, and intra-grid cross-subsidy and/or revenue components consistent with Open Access Transmission Service (OATS) Rules and as defined under Transmission Wheeling Rates Guidelines (TWRG).
- TRANSCO must charge VAT on ancillary services and must impose ten percent (10%) VAT on the non-renewable energy portion of the total ancillary service amount for the current billing period based on the generation mix when the ancillary service rates were set.
- TRANSCO must remit the ancillary service charge inclusive of the corresponding VAT to the concerned GC, and GC is responsible for the tax due to BIR.
Distribution Utilities (DUs)
- DUs must bill the end-user for VAT on the sale and transmission of electricity, and the VAT is neither part of the DUs’ GR nor input VAT.
- DUs must ensure the VAT is revenue-neutral in their collection.
- DUs must bill VAT on the current month’s sale and transmission on the next billing cycle.
- DUs must compute VAT on allowable system loss using a proportionate share of transmission component and generation share from non-renewable sources.
- VAT on system loss above the allowed cap must be shouldered by the DU.
- The resolution provides that the VAT collected by the DU on generation, transmission, and system loss must be remitted to the concerned GC and TRANSCO, which are responsible for taxes due to BIR.
- The resolution defines DUs’ GR as the total amount paid to DUs (including electric cooperatives) for distribution of electricity and related electric services, including the following listed components:
  - Distribution charge
  - Metering charge
    - Retail customer charge
    - Metering system charge
  - Supply charge
  - Lifeline rate subsidy
  - Inter-class cross-subsidy
  - Power Act Reduction
  - Rate Reduction Due To Loan Condonation
  - Currency Exchange Rate Adjustment
  - Local Franchise Tax
- DUs must impose VAT on the above GR charges as approved by the Commission.

Confirmatory and reporting obligations

The resolution requires that the ERC perform a confirmatory process on the VAT imposed by the generation, transmission, and distribution utilities.
The resolution requires monthly submissions by the following entities on or before the 10th day of each month following the effectivity of the resolution:
- For Generation Companies (GCs):
  - A certification under oath of the Monthly Generation Mix (Non Renewable to Total Mix) per Grid, supported by monthly kWh generation sales per plant type.
  - A certification under oath of the Summary of Monthly Invoices and official receipts issued to DUs, supported by a copy of invoices and official receipts per DU.
  - A Certificate of VAT Remittance from BIR.
  - Other documents that may be needed by the Commission in the course of confirmation.
- For TRANSCO, its Buyer or Concessionaire:
  - A Certificate of VAT remittance from BIR.
  - Other documents that may be needed by the Commission in the course of confirmation.
- For Distribution Utilities (DUs):
  - The DUs must submit, in addition to requirements under Guideline for the Automatic Adjustment of Generation Rate and System Loss Rates by Distribution Utilities (AGRA) and Guideline for the Adjustment of Transmission Rates by Distribution Utilities (TRAM):
    - A Certificate of VAT remittance from BIR.
    - A certification under oath of the Monthly Generation Mix (Non Renewable to Total Mix) of the power source/s for DUs sourcing electricity requirements from NPC and/or IPPs and/or own generation, supported by monthly kWh generation sales per plant type.
    - Other documents that may be needed by the Commission in the course of confirmation.

Revocation, separability, and implementation mechanics

The resolution revokes the authority granted to all private DUs to collect National Franchise Taxes from consumers.
The resolution directs that copies be furnished to the relevant DUs for posting in bulletin boards within their franchise areas.
The resolution provides for copies to be furnished to major stakeholders and government agencies listed in the adoption/implementation section for information and guidance.
The resolution states that the VAT implementation of this scheme is made by allowing GCs, TRANSCO and all DUs to impose the appropriate VAT rate subject to the general principles and the detailed VAT imposition rules stated in the resolution.