Uniform Franchise Tax on Distribution Utilities

Senate Bill No. 3147: Uniform Franchise Tax on Distribution Utilities

By: Catherine C. Quilantang

Several economic indicators all point to a recession throughout the industrialized world. Contributors to this downturn include high oil and food prices, and a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in many nations around the world. This crisis has led to increased unemployment and other signs of contemporaneous economic downturns in major economies of the world.

The Philippine government has taken concrete steps to cushion the impact of the economic crisis on local businesses.  The Board of Investments (BOI), for one, has structured the 2009 Investments Priorities Plan to cover companies that continue to invest and conduct business despite the economic downturn.  The implementation of existing incentives under both the BOI and the Philippine Economic Zone Authority (PEZA) has also been fine-tuned to give allowances for the crisis years.

Likewise, the Congress has also made a number of initiatives to help businesses.  Among them is a pending bill in the Senate that targets the reduction of electricity rates in the Philippines. It is believed that with the passage of this bill, Philippine companies will become more competitive in the local or foreign market and help them survive the current economic downturn. Since electricity is one of the significant costs of doing business, the reduction of this expense will not only boost net income, but also provide consumers more purchasing power that will soften the impact of unemployment and retrenchment.

Senate Bill (SB) No. 3147 proposes to impose a three percent franchise tax on distribution utilities based on their gross distribution income. However, uniform franchise tax will not apply to universal charges, transmission and generation charges on the distributed electricity which are passed on to the consumers, and other charges determined by the Energy Regulatory Commission (ERC). 

The three percent franchise tax will be in lieu of all taxes and charges, whether national internal revenue taxes or local taxes. These include corporate income tax, value-added tax (VAT), local business taxes and any other taxes, licenses, duties, fees and charges collected on its franchise, revenues and profits. The distribution companies will not also be exempt from real property taxes and other charges on its real and personal properties actually used or intended to be used to provide electric power distribution services to the consumers. 

The uniform franchise tax will be applicable only on the total amount charged by distribution companies and electric cooperatives for distribution and supply of electricity, and related electric service. The amounts charged by generation and transmission companies for the sale and transmission of electricity, respectively, and its related ancillary services will still be subject to 12 percent VAT. 

Currently, distribution companies/utilities are subject to national internal revenue taxes—such as the 30 percent regular corporate income tax and 12 percent VAT—and to the local franchise tax on its gross receipts. The 12 percent VAT on generation, transmission and distribution charged is passed on to the consumers. Also, the cost of paying the direct taxes is normally passed on indirectly to the consumers forming part of the selling price of sold goods or services. All these result in the consumers paying a higher electricity cost. 

If SB No. 3147 is passed into law, consumers will no longer shoulder the burden of paying for additional pass on charges as a result of the imposition of the 12 percent VAT, 30 percent corporate income tax and three percent local franchise tax in the current tax system.  

As the reduced cost of electricity will be affected by reducing the tax revenue flow to the government, it is expected that the government will have to replace the revenues that will be foregone if it were to maintai n its current and projected levels of expenditure.  The BIR on its part will be expected to embark on more aggressive tax collection measures. 

This and other proposals to promote the survival and growth of businesses in the Philippines should therefore be subjected to thorough evaluation to determine which measures, whether singly or in combination with other measures, would generate the desired balance in the economy.