Bureau of Local Government Finance Opinion

April 20, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to Mr. GILBERT B. GUMABAY, OIC-Regional Director, Bureau of Local Government Finance, Region X, Cagayan de Oro City, the herein 1st Indorsement dated February 24, 2015, relative to the letter dated January 30, 2015 of Ms. ANELIE T. SALVADOR, Municipal Treasurer of Gitagum, Misamis Oriental, requesting clarification on the taxability of electric cooperative (EC), particularly the allowable deductions on the Gross Sales or Receipts of Misamis Oriental Rural Electric Service Cooperative, Inc. (MORESCO-I) in relation to the Department of Finance (DOF) Local Finance Circular No. 1-07 dated June 28, 2007. In a letter dated January 26, 2015 of Mr. EUGENE L. VELASCO, Finance Services Department Manager of MORESCO-I, addressed to Ms. Salvador, it was submitted that the declared gross receipts of MORESCO-I is as follows: Net Energy Sales Power Purchases Net Income P13,811,115.20 P9,985,535.38 P3,825,579.84 Clearly, it is the position of MORESCO-I, based on the representation above, that the taxable amount of its operation is the "NET INCOME". In this connection, it may be worth mentioning that as far as local business taxation is concerned, local taxes are primarily based on gross sales or receipts excluding 1) discount, if determinable at the time of sale; 2) Sales return; 3) Excise tax; and 4) Value-added Tax (VAT). [Section 131 (n), Local Government Code of 1991] However, pursuant to Section 43 (f) of Republic Act No. 9136, Otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), the Energy Regulatory Commission (ERC) issued ERC Case No. 2005-18 RM, entitled "GUIDELINES PRESCRIBING THE TAX RECOVERY ADJUSTMENT MECHANISM FORMULAE IN THE RATES OF ELECTRIC COOPERATIVES (ECs)", which provides that gross receipts of ECs are as follows: "Gross Receipts The total amount paid for the distribution charges. For purposes of these guidelines, gross receipts shall refer to the total amount representing the distribution charges from the time the unbundled rates were approved. Otherwise, gross receipt shall refer to the total customer's bill excluding receipts from NPC/TransCo and universal charges." In view of the immediate preceding Guidelines, the Department of Finance (DOF) issued Local Finance Circular No. 1-07, Section 3 (b) (2) of which provides that upon the effectivity of the EPIRA Law, the basis on the computation of business tax is as follows: ATICcS "Gross Receipts Less: NPC Charges TransCo Charges Reinvestment Fund Universal Charges" On the other hand, Section 2, par. (l) of the LFC 1-07 provides that " Generation Charges refer to the costs or charges associated with the acquisition of purchased power. General costs include only those costs that are reasonable, prudently incurred and are eligible for recovery pursuant to the provisions of Republic Act No. 9136 (EPIRA Law)". It may be worth noting the "Generation Charges", being associated with the acquisition of purchased power, is among the allowable deductions in the determination of the taxable amount of gross receipts of ECs. For further information, enclosed is our letter dated November 28, 2014 addressed to Mr. WENDELL B. BALLESTEROS, General Manager, Philippine Rural Electric Cooperative Association, Inc., the pertinent portion is quoted hereunder: "In view of the new set-up and for purpose of uniformity, the charges collected for the generation of power and the charges collected for the transmission of power should be universally termed as generation charges and transmission charges, respectively. These generation and transmission charges do not form part of the gross receipts of ECs, which is in conformity with the provisions of Section 4(q), Rule 7, of the Implementing Rules and Regulations (IRR) implementing R.A. No. 9136 which states that 'Distribution Utility shall pay a franchise tax only on its distribution wheeling and Captive Market supply revenues. . . . .'" It is hoped that this will help clarify matters. (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director