ERC comments on Franchise Tax

The Energy Regulatory Commission (ERC) recently submitted to the Department of Finance (DOF) its comment on the position paper prepared by Manila Electric Company (Meralco) regarding the interpretation of Section 4 (q), Rule 7 of the Implementing Rules and Regulations (IRR) of Republic Act No. 9136 otherwise known as the Electric Power Industry Reform Act.

The said provision states that “a distribution utility shall pay a franchise tax only on its distribution wheeling and captive market supply revenues”.

Meralco is of the opinion that the provision is applicable only to those charges expressly enumerated: the distribution wheeling charge and supply charge of Distribution Utilities. Thus, other charges - generation, transmission, and systems loss charges—not being mentioned, are excluded in computing the franchise tax. The ERC substantially agrees with Meralco’s position except that with respect to the systems loss charge, much will depend on whether the mechanism which ERC will eventually adopt treats systems loss as a mere pass through charge or not.

ERC Chairman Rodolfo B. Albano, Jr. emphasized that “the franchise tax, being a mere pass through charge, should neither earn any additional revenue nor incur any additional cost from the imposition of these taxes.”

The provision also provides that the franchise tax should be imposed only on “revenues”. Rulings of the Bureau of Internal Revenue (BIR) are to the effect that the gross receipts of a taxpayer, for purposes of determining the franchise tax, do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit. The Commission recognizes the fact that the transmission and generation charges cannot be considered as the utility’s revenue as the same are automatically remitted to the transmission and generation companies.

“The exclusion of generation, transmission and systems loss charge will lower the base for the computation of franchise tax. A lower franchise tax translates to reduction in rates and reduction in rates means lesser burden to the consuming public” says ERC Chairman Rodolfo B. Albano, Jr.

The foregoing comment of the Commission will be considered by the DOF which is mandated by the IRR to draft the guidelines on franchise tax.

March 09, 2004