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Tax impact of Meralco refund

Tax impact of Meralco refund


As soon as Meralco announced the distribution of refund to Phase IV customers pursuant to the Supreme Court Case G.R. No. 14814 of April 9, 2003, as approved by the Energy Regulatory Commission, the Bureau of Internal Revenue issued a regulations providing for the inclusion of the refund among the income payments subject to creditable withholding tax.  

Specifically, in Revenue Regulations No. 8-2005, BIR has ordered MERALCO to withhold a 25% creditable income tax on refunds for industrial and commercial customers with active accounts and 32% on refund for customers with terminated contracts.
However, the BIR, by way of rulings it recently issued to PEZA-registered companies, held that the refund of MERALCO payments which were incurred and paid during the time that the customer was on an income tax holiday or is exempt from the 32% regular corporate income tax shall not be taxable even if it is already liable to income tax at the time that it received the refund.

The rationale is that the customer did not derive any tax benefit when the expense was incurred, hence no tax should be imposed on the refund. Had Meralco not collected these excess utility payments from the company, the latter’s utility expenses would have been lower and consequently, its taxable income would have been higher. Nonetheless, the correct amount of utility expenses is immaterial since the company was on ITH and, thus, was exempted from paying income tax. BIR, however, held that the refund of the excess utility payments incurred after the expiration of the tax holiday (or during the 5% gross income tax regime) will form part of its gross income subject to the 5% preferential tax.
The same principle employed in making the conclusion that the refund is not taxable if incurred during ITH years may also be applicable to companies not otherwise enjoying any tax incentives.  That is, their Meralco refund should likewise be exempt from income tax if they can show that they incurred losses during the tax years when they paid these excess utility payments and that the reversal of said expenses would not have changed their tax position. Since the refund is tax-exempt, the same is likewise not subject to creditable withholding tax.

If BIR would accept this position, the burden of proving that its refund is tax-exempt will rest upon the customer. With respect to excess utility payments from 1994 to 1997, establishing that there was no tax benefit should relatively be easy as all the company needs to show are its income tax return(s) for the years from when the refund arise; the amount of refund due for that particular year and the resulting adjustment in the taxable loss or income if the amount of utility claimed as deduction is reduced by the excess utility payments.  

Establishing the absence of a tax benefit from 1998 onwards will present a bigger challenge since, beginning that year, losses can be carried forward. It would, thus, be relevant to show that the excess utility payments which formed part of the NOLCO carried forward to the succeeding years were not utilized.

The “tax benefit” principle may also be harnessed by companies subject to special taxes based on their gross revenues or gross sales, or some other tax basis where deductions for utility expenses are not allowed as deductions for tax purposes.  The refunds accruing to them should be tax-exempt and, thus, not be subjected to withholding tax by MERALCO.  Their business expenses like the charged utility expenses will not reduce the tax liability for the years when they were incurred. The excess utility expenses, if reversed, will therefore not give rise to higher taxable income. Taxpayers in this position will include the offshore banking units and contractors for petroleum operations as well as their subcontractors.

While you diligently comply with your tax obligations, you should not pass up opportunities to generat e tax savings or enjoy tax relief  which is rightfully yours.  You just need to prove your entitlement.

(The author is a tax partner at Punongbayan & Araullo, a member of Grant Thornton International.  For comments and inquiries, please e-mail the author or call 886-5511.)