THE Department of Finance (DoF) said on Thursday that power consumers pay 12% value-added tax (VAT) only once, following remarks by the head of the Energy Regulatory Commission (ERC) that VAT should only be collected from power distributors.

“There is no double taxation in the electric power industry. Because the EPIRA (the Electric Power Industry Reform Act) Law has unbundled the pricing at each stage of the electricity production, the VAT is imposed separately in each stage of production,” Finance Secretary Carlos G. Dominguez III said in a statement. “But at the end of the day, if you look at the total bill, the entire electricity service is charged 12% VAT on the side of the consumer.”

ERC Chairperson and Chief Executive Officer Agnes VST Devanadera said last month that VAT should only be imposed on distribution utilities, instead of on power generation, transmission, and distribution.

Ms. Devanadera also proposed to remove the 12% VAT imposed on the generation charge.

Mr. Dominguez said that for double taxation to occur, the tax must be imposed twice for the same goods, for the same purpose, by the same taxing authority, and within the same jurisdiction.

Under EPIRA, the pricing of electricity has been unbundled, Mr. Dominguez said.

“With this unbundled pricing mechanism, VAT is imposed on every level of the value chain and not integrated vertically like other sectors,” Mr. Dominguez said. This means that “the VAT paid on the distribution charge only accounts for the value-added in distributing the electricity, and does not include the generation and transmission of power.”

He added that a VAT exemption on electricity is not the solution for reducing power bills.

“If the intention is to unburden consumers, the next administration needs to review the existing policies on power generation pricing,” Mr. Dominguez said, adding that removing the 12% VAT would not translate to a 12% reduction in prices.

He said that VAT-exempt businesses do not charge output VAT, and are unable to recover the VAT they pay on their inputs.

“Thus, this input VAT becomes an additional cost for them, and to recover this, it is passed on to the consumers.”

The DoF said that electricity costs in the Philippines are higher compared to its neighbors in the Association of Southeast Asian Nations (ASEAN), due to the higher cost of power generation.

Manila Electric Co. said last week that power rates will rise in June, with households consuming 200 kilowatt-hours (kWh) getting billed expecting to pay about P80 more. 

It said prices are climbing due to the higher usage of liquid fuel and coal prices that have risen by an average of 23%.

“We cannot afford to give another VAT exemption as this leads to distortionary and less equitable tax systems,” Mr. Dominguez said. “VAT exemption creates discrimination among similar businesses. Thus, it should remain broad-based and allow for few exemptions.”

The DoF also reiterated its opposition to the suspension of excise taxes, maintaining its view that the best way to respond to rising fuel prices is to continue with targeted subsidies to vulnerable sectors.

Ms. Devanadera said last month that the suspension of excise taxes on coal and petroleum would translate into a reduction of overall electricity costs.

The DoF said that suspending the excise tax on petroleum would mean reducing government revenue by P105.9 billion, equivalent to 0.5% of GDP. It added that this would result in higher debt and deficit levels, resulting in a potential rise in interest rates at a time when the economy is still recovering from the pandemic and the war in Ukraine.

“The suspension of excise taxes on petroleum is also extremely regressive and primarily benefits higher-income households,” the DoF said. “We will just be subsidizing the top 10% of Filipino households who consume about 50% of total fuel consumption in 2022. This means that the larger financial benefits of the suspension will not go to the poor, but to higher income households.” — Tobias Jared Tomas