Guidelines Governing the Powers of LGUs to Impose Taxes, Fees and Charges on ECs Registered, Supervised and Controlled by the NEA

June 28, 2007 DOF LOCAL FINANCE CIRCULAR NO. 001-07 SUBJECT : Prescribing the Guidelines Governing the Powers of Local Government Units to Impose Taxes, Fees and Charges on Electric Cooperatives (ECs) Registered, Supervised and Controlled by the National Electrification Administration (NEA) TO : All Regional Directors, Bureau of Local Government Finance; Treasurers and Assessors of Metropolitan Manila; Provincial, City and Municipal Treasurers, Assessors, and Others Concerned Pursuant to the provisions of Sections 137, 143 and 232 of Republic Act No. 7160, otherwise known as the Local Government Code (LGC) of 1991, in relation to Section 133 (n) of the same Code, provinces, cities and municipalities may impose franchise, business and real property taxes on electric cooperatives registered, supervised and controlled by the National Electrification Administration (NEA). Accordingly, the following guidelines are hereby issued in accordance with Article 287 of the Implementing Rules and Regulations (IRR), prescribing the limitations, manner and procedures for the imposition of taxes, fees and charges on the subject electric cooperatives and to supplement Articles 226, 232 and 323 of the IRR, with a view of further clarifying the implementation of said provisions consistent with Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA) and other related laws and national policies. SECTION 1. Coverage . This Circular prescribes the guidelines governing the taxing powers of provinces, cities and municipalities on electric cooperatives as provided for under Sections 137, 143 and 232 of the LGC. SECTION 2. Definition of Terms . When used herein the term: a. Ancillary Services refer to those services that are necessary to support the transmission of capacity and energy from resources to loads while maintaining reliable operation of the transmission system in accordance with good utility practice and the Grid Code to be adopted in accordance with the Act [Section 4 (a), EPIRA Law] . b. Appraisal is the act or process of determining the value of a property as of a specific date for a specific purpose. It may also be defined as the act of estimating the value of property. It is an estimate or opinion of value, usually market value or value as defined by the appraiser. It is a conclusion which results from a logical and orderly analysis of facts. (Manual on Real Property Appraisal and Assessment Operations, BLGF, January 2006) cSEDTC c. Assessment is the act or process of determining the value of a property or proportion thereof subject to tax, including the discovery, listing, classification and appraisal of properties. (Manual on Real Property Appraisal and Assessment Operations, BLGF, January 2006) d. Assessment Level is the percentage applied to the market value to determine the taxable value of the property. (Manual on Real Property Appraisal and Assessment Operations, BLGF, January 2006) e. Assessment Value is the market value of the property multiplied by the assessment level. It is synonymous to taxable value. (Manual on Real Property Appraisal and Assessment Operations, BLGF, January 2006) f. Business means trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit [Section 131 (d) of the Local Government Code of 1991 (LGC)] . g. Distribution Wheeling Charges refer to the regulated costs or charges for the use of a distribution system and/or the availment of regulated services [Section 4 (p), EPIRA Law] . h. Electric Cooperative refers to a non-stock, non-profit membership corporation heretofore formed or organized for the purpose of supplying, promoting, and encouraging the fullest use of electric service on an area coverage based at the lowest cost consistent with sound economy and the prudent management of the business of such corporation (Chapter 3, Section 15, PD 269) . i. Fair Market Value (FMV) is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy. (Manual on Real Property Appraisal and Assessment Operations, BLGF, January 2006) j. Franchise is a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of public welfare, security, and safety [Section 131 (m) of the Local Government Code of 1991 (LGC)] . k. Franchise Area refers to a geographical area exclusively assigned or granted to a distribution utility for distribution of electricity [Section 4 (w), EPIRA Law] . l. 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). m. Gross Sales or Receipts include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT) [Section 131 (n) of the Local Government Code of 1991 (LGC)] . n. Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled, and those not permanently attached to the real property which are actually, directly and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes, without which such industry or facility cannot function. (Manual on Real Property Appraisal and Assessment Operations, BLGF, January 2006) o. Reinvestment Fund refers to the ERC approved costs or charges imposed on all the electric cooperatives consumers to finance the expansion and rehabilitation/upgrading of their existing electric power system (ERC) . p. Stranded Contract Costs of Eligible Contracts of Distribution Utilities refer to the excess of the contracted cost of electricity under eligible contracts of Distribution Utilities over the actual selling price of the contracted energy output of such contracts that would be incurred upon Retail Competition and Open Access. For this purpose, "eligible contracts" are contracts which have been approved by the ERB (now ERC) as of 31 December 2000 [Rule 4 (ffff), IRR of EPIRA Law] . q. Stranded Contracts of NPC refer to the excess of the contracted cost of electricity under eligible contracts of NPC over the actual selling price of the contracted energy output of such contracts in the market. Such contracts shall have been approved by the ERB (now ERC) as of 31 December 2000 [Rule 4 (gggg), IRR of EPIRA Law] . r. Transmission Charge refers to the regulated costs or charges for the use of a transmission system which may include the availment of ancillary services [Section 4 (aaa), EPIRA Law] . SDAaTC s. Universal Charge refers to the charge, if any, imposed for the recovery of the Stranded Debts, Stranded Contract Costs of NPC, and Stranded Contract Cost of Eligible Contracts of Distribution Utilities and other purposes pursuant to Section 34 of the R.A. 9136, its Implementing Rules and Regulations (IRR). The universal charge is imposed on all electricity end-users for the following purposes: i. Payment for the stranded debts in excess of the amount assumed by the National Government and stranded contract costs of distribution utilities resulting from the restructuring of the industry; ii. Missionary electrification; iii. The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis--vis imported energy fuels; iv. An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour P0.0025/kWh, which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management; and v. A charge to account for all forms of cross-subsidies for period of not exceeding three (3) years. t. System Loss Charge refers to the cost or charge to recover the costs of allowable systems loss as allowed and/or approved by the Energy Regulatory Commission. SECTION 3. Tax on Gross Receipts of ECs. a) The tax on ECs may be levied on their gross receipts for the preceding calendar year, as follows: 1) Franchise tax by provinces and cities at the rate imposed under their enabling tax ordinance; 2) Business tax by municipalities as distributor at the rate imposed under their enabling tax ordinance. For purposes of assessing the electric cooperatives of business tax and for the equitable distribution of its benefits derived therefrom, the gross receipts shall be based on the sales made to end-users within the respective jurisdiction of each local government unit (LGU). b) For this purpose the franchise and business taxes shall be based on ECs' gross receipts as follows: 1) Before the effectivity of the EPIRA Law (1997-2001), franchise and business taxes shall be based on the total gross receipts pursuant to Section 131 (n) of the LGC; 2) Upon the effectivity of the EPIRA Law (2002), the basis shall be as follows: Gross receipts: Less: NPC Charges TransCo Charges Reinvestment Fund Universal Charges 3) On the charges being remitted by ECs to NPC and TransCo the local government units may impose local taxes considering that both Companies are Government-owned and Controlled Corporations (GOCCs), whose tax exemptions have been withdrawn under Section 193 of the LGC. Said charges pertain to their gross receipts and therefore, the LGUs concerned may directly bill said Corporation for taxation purposes. SECTION 4. Imposition of Real Property Taxes on ECs . (1) Provinces, Cities, and Municipalities within Metropolitan Manila Area may impose real property taxes an all ECs' real properties beginning 1998, subject to the applicable assessment level fixed by the sanggunian concerned for "Commercial'' properties but not exceeding the assessment level provided for under Section 218 of the Code. However, other machinery/equipment, including air conditioning units (window and package types), small generating sets and other mechanical devices of the same nature which are considered falling under the category of machinery of general purpose should not be considered real properties in line with Article 290 (o) of the Implementing Rules and Regulations (IRR) of RA 7160. (2) ECs are not covered by the exemption proviso under Section 234 (c) of the LGC granting exemption to NEA's machineries and equipment in view of the fact that these are not GOCCs but Cooperatives which are governed by R.A. 6938. (3) ECs are not considered as falling under "Special Classes" of real properties provided under Section 216 of the same Code. acEHCD (4) The appraisal of real properties of ECs shall be subject to the applicable Schedule of Market Values (SMV) in force during the period of delinquency, if any. (5) All taxable real properties such as land, buildings and other improvements owned by NPC, which were transferred to PSALM and TRANSCO, are subject to the real property tax, with an assessment level fixed by an Ordinance, of not exceeding ten percent (10%). SECTION 5. Exemption from Local Taxation . All ECs registered, supervised and controlled by the NEA shall be: (1) Exempt from the payment of franchise business and real property taxes prior to the effectivity of the LGC. (2) Exempt from the payment of said local taxes for the period of their Provisional Registration with the Cooperative Development Authority (CDA). [1993/1994-May 4, 1997] The real properties, specifically the machinery and equipment owned by NPC, which were transferred to PSALM and TRANSCO by virtue of EPIRA Law, are exempt from the payment of real property tax, for so long as these machinery and equipment are actually, directly and exclusively used in the generation and transmission of electric power, and the ownership of which, remains with a GOCC (such as PSALM and TRANSCO), as mandated under Sec. 234 (c) of R.A. No. 7160. SECTION 6. Penalties, Surcharges and Interest . a) No surcharges and interests shall be imposed on the tax liabilities of electric cooperatives during the period covered by the TRO issued by the Supreme Court in the case of PHILRECA, et al. vs. The Secretary of DILG and the Secretary of Finance , G.R. No. 143076. b) ECs shall be subject to a maximum interest of up to thirty-six (36) months or seventy-two percent (72%) of the taxes on its real property tax delinquencies. c) The sanggunian may impose a surcharge not exceeding twenty-five percent (25%) of the amount of taxes, fees and charges not paid on time and an interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed thirty-six (36) months. (Sec. 168, LGC) SECTION 7. Mayor's Permit Fee and Other Regulatory Fees . a) Local government units are authorized to collect the Mayor's permit fee and other regulatory fees and charges from the head office and sub-stations of ECs. b) No such fee or charge shall be based on capital investment or gross sales or receipts of the person or business liable therefor. SECTION 8. Examination of Books of Accounts . a) The Treasurer of the LGU concerned or through any of his deputies duly authorized in writing may examine the books of accounts and other pertinent records of ECs in order to ascertain, assess, and collect the correct amount of the tax due. b) The examination shall be made during regular office hours not oftener than once a year for every tax period and shall be limited to verifying the summary of transactions of ECs being examined/audited, upon which the declaration of gross receipts for the preceding calendar year has been based and the tax paid thereon. Such certification shall be made of record in the books of accounts of the ECs. SECTION 9. Conflicting Resolution . In case of conflict between an electric cooperative and a local government unit, the issue shall be submitted to the Department of Finance (DOF) through the Bureau of Local Government Finance (BLGF) for resolution. SECTION 10. Repealing Clause . All rules, regulations, orders and/or circulars previously issued by this Department which are contrary to, or inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly. SECTION 11. Effectivity . This Circular shall take effect immediately. The Regional Directors of the Bureau of Local Government Finance are hereby instructed to disseminate the contents of this Circular to all Provincial, City and Municipal Treasurers and Assessors within their respective jurisdictions for their information and guidance. The Treasurers and Assessors of Metropolitan Manila are hereby also informed accordingly. (SGD.) MARGARITO B. TEVES Secretary