As the world grapples with the urgent need to combat climate change, renewable energy (RE) investments have become a critical focus for many countries. Currently, the RE share in the Philippines’ power generation mix is at 22%. By 2030, the Philippines targets an RE share of 35%, 50% by 2040, and more than 50% by 2050. To reach these ambitious goals, substantial investments in RE capacity are necessary.

For investors, this raises the question: Is investing in RE in the Philippines a worthwhile venture?

TAX INCENTIVES
From a taxation perspective, the Philippines offers numerous incentives that make RE investments highly attractive. Under Republic Act (RA) No. 9513, also known as the Renewable Energy Act of 2008, and as further detailed in Revenue Regulations No. 7-2022, the following are some of the tax incentives available to new and existing RE developers:

• Income tax holiday (ITH) for the first seven years, and a 10% corporate tax rate after the ITH period;

• Net operating loss carryover (NOLCO) of the RE Developer during the first three years for the next seven consecutive taxable years;

• 10 years of duty−free imports of RE machinery, equipment, and materials directly and exclusively used in the RE activities;

• Special realty tax rates not exceeding 1.5% on equipment and machinery, and other improvements;

• Accelerated depreciation of plant, machinery, and equipment, in lieu of ITH;

• 0% Value−Added Tax (VAT) on the sale of fuel or power generated from RE sources and purchases of local supply of goods, property, and services;

• Tax exemption of carbon credits;

• Cash incentive for missionary electrification equivalent to 50% of the universal charge;

• 100% tax credit on domestic capital equipment and services on the value of the VAT and customs duties;

• Exemption from the universal charge on the sale of power and electricity; and

• Incentives for hybrid and cogeneration systems based on the RE component.

Alternatively, RE industry participants, who are assumed to be domestic market enterprises for purposes of this article, may opt to avail of the following incentives under the National Internal Revenue Code of the Philippines, as amended by RA No. 12066, otherwise known as the CREATE MORE Act, which was signed into law on Nov. 11:

• ITH of 4-7 years, depending on the location and tier category;

• Duty-free imports of capital equipment, raw materials, spare parts, and accessories directly and exclusively used in the registered activities;

• 0% VAT on the sale of fuel or power generated from RE sources

• VAT exemption on imports and 0% VAT on local purchases of goods and services directly attributable to the registered activities (for high-value domestic market enterprises);

• Enhanced Deduction (ED) for a maximum of 20 years after the ITH, or for a total maximum period of 27 years from the start of commercial operations if the registrant opts to forgo the ITH period. For this purpose, ED may include the following additional deductions:

i. 100% of R&D;

ii. 50% of labor expense;

iii. 100% of training expenses (Filipino employees);

iv. 50% of domestic input expense;

v. 100% of power expense;

vi. Up to 50% of reinvestment allowance for manufacturers;

vii. 10% and 20% of the depreciable cost of building and machinery, respectively, acquired for the entity’s production of goods and services;

viii. NOLCO incurred for the first three years to be carried over within the next five consecutive taxable years immediately following the last year of ITH; and

ix. 50% of trade fairs and exhibition expenses.

• 20% corporate income tax after ITH; and

• Local tax of up to a maximum of 2% of gross income in lieu of all other local taxes and fees, for companies enjoying ITH or ED.

Manufacturers, fabricators, and suppliers of locally produced RE equipment and components, as well as entities engaged in planting crops and trees used as biomass resources, who are duly accredited/certified by the Department of Energy (DoE), may also avail of certain incentives under the above laws, subject to meeting certain requirements.

SIMPLIFIED REGISTRATION
With the signing of the Ease of Paying Taxes Act or RA No. 11976 early this year, along with the Bureau of Internal Revenue’s implementation of digital services, registration and paying taxes in the Philippines has become relatively straightforward. Effective Nov. 25, the DoE will also resume acceptance and processing of RE contract applications through its Energy Virtual One-Stop Shop System, which aims to centralize and simplify the application process for RE projects.

GOVERNMENT SUPPORT
Recognizing the importance of transitioning to cleaner, more resilient, and sustainable energy systems, the Philippines has introduced various policies and mechanisms, such as renewable energy portfolio standards, net metering, green energy option/auction programs, feed-in-tariffs, and an RE market trading system, to encourage broader participation in the RE sector.

The removal of foreign ownership restrictions in 2022 for the exploration, development, and utilization of solar, wind, hydro, and ocean or tidal projects also sparked an inflow of  additional investments in RE. The signing of CREATE MORE this year also expanded the available incentives for businesses and addressed some of the complexities of Philippine tax compliance.

THE WAY FORWARD
In the 2023 climate report of BloombergNEF, the Philippines ranked number four out of 110 emerging economies with the most attractive markets for investing in the power sector. With the country’s vast solar and geothermal capacity, potential for harnessing onshore and offshore wind resources, availability of tax incentives, and strong government support for RE projects, the Philippines stands out as a prime destination for RE investment. Case in point, from January to mid-September of this year, the BoI approved $24.29 billion worth of investments, of which $23.2 billion, or 95% are for RE projects.

The government’s proactive engagement in advancing a low-carbon energy future is commendable. While progress is ongoing, capitalizing on RE and green investments is a significant step in the right direction. With ample incentives and adequate support, I firmly believe that for investors, aligning with this vision promises not only substantial returns but also a pivotal role in fostering a sustainable and resilient future.

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.

Emmanuel Jime Fernandez is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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emmanuel.jime.fernandez@pwc.com