Turning crisis into policy opportunity

The Philippines once again finds itself exposed to the consequences of global geopolitics. Since late February, hostilities involving the US and Israel against Iran have disrupted global energy markets, particularly following restrictions in the Strait of Hormuz — a strategic chokepoint through which roughly one‑fifth of global oil supply flows. Crude oil prices surged past the $100‑per‑barrel mark, triggering sharp fuel price increases across Asia, with the Philippines among the most vulnerable. The gravity of the situation prompted President Ferdinand R. Marcos, Jr. to declare a state of emergency to address the fuel supply and price crisis, underscoring the extraordinary strain placed on transport, power generation, and household consumption. Far from being merely cyclical, the current oil shock has once again laid bare the country’s structural dependence on imported energy.

For an economy that imports nearly 90% of its petroleum requirements from the Middle East, the transmission of global price shocks has been swift and punishing. Pump prices have breached historic highs; public transport groups have staged nationwide protests; and rising fuel costs are expected to spill over into food prices and broader inflation. Emergency measures (such as fuel subsidies, tax suspensions, and even the temporary reintroduction of cheaper, lower‑grade fuels) offer short‑term relief, but they also highlight the limitations of purely reactive policy. Last year, the Philippine Natural Gas Industry Development Act (Republic Act No. 12120) became law. While it was not enacted in response to the current turmoil, the law deserves renewed attention as it offers a medium- to long-term solution by promoting the development and use of indigenous natural gas. In doing so, the law aims to reduce the country’s long-term vulnerability to global oil volatility and better position the Philippines to withstand similar crises in the future.

WHAT RA NO. 12120 COVERS AND WHY IT MATTERS
RA No. 12120 establishes a comprehensive legal framework for the Philippine Downstream Natural Gas Industry (PDNGI), with fiscal incentives as a central policy tool. The law expressly prioritizes indigenous natural gas — defined as gas produced from fields within Philippine territorial jurisdiction — over imported liquefied natural gas, and anchors this preference on fiscal incentives intended to accelerate domestic gas development, strengthen energy security, and moderate price volatility. With the expected decline in the Malampaya gas field’s output over the next few years, the law helps translate this priority into fiscal incentives.

To give effect to this incentive‑driven structure, the law regulates the entire downstream value chain, covering the siting, construction, operation, expansion, rehabilitation, and decommissioning of PDNGI facilities, as well as the purchase, aggregation, supply, and resale of natural gas. It likewise applies to generation facilities that utilize indigenous or aggregated gas in producing electricity and ancillary services and to authorized market participants engaged in purchasing and selling such power.

This breadth is designed to allow fiscal incentives to cascade across the value chain, lowering costs at multiple points and potentially, the country’s ability to manage supply disruptions and price swings. However, while the law clearly established the incentives at the statutory level, their operational effect depended on detailed implementing rules — a gap that remained until the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 2‑2026 earlier this month.

TRANSLATING LAW INTO TAX RELIEF
On March 17, the BIR issued RR No. 2‑2026, providing the long‑awaited guidelines for availing of the fiscal incentives. Section 38 of RA No. 12120 exempts the following transactions from the 12% value‑added tax (VAT):

1. The purchase and sale of indigenous natural gas and aggregated gas (only to the extent of indigenous natural gas attributable to be in the aggregated gas) by an aggregator, reseller, supplier, person authorized by the Energy Regulatory Commission (ERC) to operate facilities used in electricity generation, or an end-user;

2. The purchase and sale of electricity and ancillary services by generation facilities using indigenous or aggregated gas by authorized persons.

These VAT‑exempt transactions may be through power supply agreements, through duly authorized markets such as the Wholesale Electricity Spot Market (WESM) or ancillary reserves market, financial gas contracts or other modes. In effect, the VAT exemption attaches not merely to the taxpayer, but to the source of the fuel used. By removing VAT from transactions involving domestic gas, the commercial viability of indigenous supply relative to imported Liquefied Natural Gas (LNG) improves.

CONDITIONS, CERTIFICATIONS, AND COMPLIANCE
RR No. 2‑2026 makes it clear that VAT exemption is not automatic. Availment is subject to specific certification and documentation requirements, primarily involving the Department of Energy (DoE).

Participants — including gas suppliers and aggregators — must obtain an endorsement from the DoE’s Oil Industry Management Bureau (OIMB) confirming their engagement in the sale of indigenous natural gas, together with an OIMB certification indicating the volume and percentage of indigenous gas sold for the taxable quarter.

Similarly, generation facilities seeking VAT exemptions on electricity sales must secure an endorsement from the DoE’s Electric Power Industry Management Bureau (EPIMB) confirming the use of indigenous or aggregated gas in the generation process, as well as an EPIMB certification specifying the electricity generated from indigenous natural gas for the taxable quarter.

In both cases, a Certified True Copy of the DoE permit must be attached to the DoE endorsement. Taxpayers are further required to properly disclose the legal basis for their VAT exemption (i.e., Section 38 of RA No. 12120) in Field Item Number 14A of their Quarterly VAT Declarations.

RR 2‑2026 also introduces a safeguard: no double availment of incentives. Entities that have already claimed fiscal incentives under Title XIII of the Tax Code — such as income tax holidays or enhanced deductions granted through registration with the Board of Investments — are disqualified from claiming similar incentives under RA No. 12120 for the same activity.

LESSONS FROM OUR ASEAN NEIGHBOR
A brief regional comparison further underscores the importance of policy timing. Thailand offers a useful contrast. As early as 2024, Thai authorities had reinforced legal and fiscal support for domestic natural gas production, particularly from offshore fields in the Gulf of Thailand, alongside measures to moderate reliance on imported LNG. When global oil prices spiked amid renewed Middle East fighting, Thailand was not immune to cost pressures, but the domestic gas framework it has earlier set up gave policymakers greater flexibility to soften price pass‑through to the power sector.

While Thailand did not completely avoid the shock, the earlier legislative preparation reduced its severity. This is the policy space the Philippines is only now entering through RA No. 12120 and RR No. 2‑2026 — later in the cycle, but still critically necessary.

A TIMELY, THOUGH INCOMPLETE, RESPONSE
Natural gas is not a cure‑all nor a substitute for long‑term renewable energy development. But as a transition fuel, supported by clear fiscal and regulatory incentives, it represents a practical response that is preferable to perpetual import dependence or emergency recourse to lower‑quality fuels. This strategy, however, also underscores the importance of safeguarding access to indigenous resources, particularly as significant natural gas deposits lie within the contested areas of the West Philippine Sea. Ensuring energy security, therefore, is inseparable from the need to consistently assert the country’s lawful rights to explore and develop the resources within its territory.

The conflict in the Middle East reminds us of the imperative of shifting from reactive crisis management to structural preparedness and confirms the necessity of RA No. 12120. The effectiveness of the law and RR No. 2‑2026 will ultimately depend on execution: regulatory coordination between the DoE and the BIR, investor confidence in the stability of the incentive regime, and disciplined taxpayer compliance. Future disruptions may, hopefully, be less destabilizing once the law is fully implemented.

In periods of global uncertainty, good legislation cannot prevent shocks; but when tax policy aligns with energy strategy, it can ensure the country is better equipped to endure them and, eventually, to outgrow them.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Lois Ann Caroline Sarajan is an assistant manager at the Tax department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network.

lois.ann.caroline.sarajan@pwc.com