Evolving VAT challenges of Renewable Energy Developers

By Francis Baybay

Renewable energy (RE) is essential to strengthening energy security and reducing emissions from conventional energy sources. Recognizing its importance, Congress passed Republic Act (RA) 9513, or the Renewable Energy Law (RE law), to create fiscal incentives to encourage the utilization of renewable resources such as biomass, solar, wind, geothermal, ocean energy and hydropower.

One of the most significant incentives that the RE law offers to encourage RE development is the value-added tax (VAT) zero-rating privilege extended to RE developers registered with the Department of Energy (DOE) and the Board of Investments (BOI).

This is only applicable to qualified local purchases (QLP) of goods, properties and services needed for the development, construction and installation of RE plant facilities, including the whole process of exploration and development of RE sources up to its conversion into power, and the sale of fuel or power generated from renewables.

These privileges were designed to make RE utilization financially attractive by sparing RE developers’ QLP from the 12-percent VAT and allowing them to refund any input VAT attributable to zero-rated RE sales. However, nearly two decades after the RE law’s enactment, RE developers have encountered persistent challenges in availing themselves of these benefits.

Previously, they could not enjoy VAT zero-rating on QLP unless they secured a certificate of endorsement (COE) from the DOE on a per transaction basis and Bureau of Internal Revenue (BIR)-approved VAT zero-rating applications from local suppliers. Fortunately, relief came when the Supreme Court ruled that a COE is not required to avail of VAT zero-rating incentives (Maibarara Geothermal Inc. vs. Commissioner of Internal Revenue, GR No. 256720, 7 August 2024). In addition, Revenue Memorandum Circular 80-2023 removed the need for local suppliers to file VAT zero-rating applications for sales to entities with VAT zero-rating incentives.

Today, RE developers need only present their DOE, BOI and BIR registration certificates to local suppliers to have their QLP subjected to zero-percent VAT.

RE developers, however, face formidable and enduring challenges in their VAT refund applications.

While the Tax Code allows the refund of input VAT attributable to zero-rated RE sales, claims by many RE developers used to be denied for various reasons, including the absence of a COE from the DOE or a certificate of compliance (COC) from the Energy Regulatory Commission. Thankfully, case law in the past few years has eased these requirements. The Supreme Court confirmed in the Maibarara case that a COE was not a prerequisite for VAT refund claims. Likewise, it ruled that a COC was not required for VAT refunds not based on RA 9136; thus, RE developers claiming refunds under the RE law need not submit COCs (CIR v. Team Energy Corp., GR No. 230412, 27 March 2019).

Despite these favorable developments, RE developers continue to encounter huge setbacks in their VAT refund applications. These are routinely denied when they fail to prove that zero-rated RE sales occurred in the same period when the input VAT being refunded was paid or incurred (Maibarara case) and when the input VAT arose from QLP, which should not have been subjected to 12-percent VAT in the first place. In the latter case, RE developers were advised not to claim refunds from the government but seek reimbursement from local suppliers who erroneously passed on output VAT. (Hedcor Inc. v. CIR, GR No. 250313, 22 July 2024)

Based on current rules, RE developers should keep the following in mind:

• First, they must ensure that their DOE, BOI, and BIR registrations are complete to enjoy zero-percent VAT on QLP. No additional documentation should be required. If RE developers allow local suppliers to impose 12-percent VAT on these purchases, they cannot recover these taxes from the government. They should therefore implement contractual mechanisms that, alongside legal remedies, will allow them to recoup VAT from local suppliers.
• Second, they may still refund input VAT paid on importations and local purchases that are not considered QLP, provided these are attributable to zero-rated RE sales. Notably, these sales must be made in the same period when the relevant input VAT was paid or incurred. As with all VAT refund claims, strict compliance with the standard refund requirements remains essential.

RE developers would have certainly benefited from clearer rules on VAT zero-rating consistently applied from the RE law’s enactment. However, evolving administrative regulations and judicial interpretations have shaped, and continue to shape, VAT zero-rating entitlements. They should therefore closely monitor legal developments and align their transactions and compliance practices to optimize this tax benefit.

Francis Baybay is a Tax and Legal Director at Deloitte Philippines, a member firm of the Deloitte network.