Business Mirror

Atty. Irwin Nidea Jr. discusses the tax incentives of developing energy from renewable and sustainable resources such as the sun, wind, and ocean and why local suppliers of renewable energy developers should step up and make themselves competitive in this critical curve towards sustainable energy.

Sun Wind Ocean

By Atty. Irwin C. Nidea Jr.

The sun, wind and ocean are inexhaustible. So, no matter how many times you utilize their energy, they will never be diminished nor contained. This is why the Department of Justice (DOJ) and the Department of Energy (DOE) rising to the call for clean energy and as a positive response to fight climate change, have resolved to interpret Section 2, Article 12 of the 1987 Constitution in favor of our one and only planet Earth.

The DOJ has opined that exploration, development, and utilization of inexhaustible renewable sources, which includes the sun, wind and ocean, are not subject to the limitations of foreign ownership to 40% as prescribed under Section 2, Article 12 of the 1987 Constitution. In the said opinion, the DOJ ruled that the limitations of foreign ownership only apply to matters that are “susceptible to appropriation,” that would include coal deposits and waters, direct from the source.

According to the DOJ, what the Constitution seeks to preserve are the country’s “limited and exhaustible resources.” The phrase "all forces of potential energy" as stated in the Constitution does not include kinetic energy, such as the sun, wind and ocean.

The government is consciously bringing its acts together to develop a healthy fiscal and non-fiscal incentives for foreign investors. The tax incentives of RE developers have been amended and clarified in Revenue Regulations (RR) No. 7-2022. The said RR mandates that local supplier of goods, properties, and services must only require from the RE Developer a copy of the latter's BOI Registration and DOE Registration for VAT zero-rating to apply. Thus, local suppliers/sellers of goods, properties, and services of duly registered RE developers are not allowed to pass on the 12% VAT on the latter's purchases of goods, properties and services that will be used for the development, construction and installation of their power plant facilities. This includes the whole process of exploring and developing renewable energy services up to its conversion into power, including but not limited to the services performed by subcontractors and contractors.

All manufacturers, fabricators, and suppliers of locally produced RE equipment are also subject to zero-rated VAT on their transactions with local suppliers of goods, properties, and services needed in the manufacture/fabrication of RE equipment. They must only show their BOI and DOE certifications as well as the BOI and DOE certifications of the RE developers.

Local purchases are zero-rated. Importation of equipment necessary for the exploration and development of the facilities on the other hand, is vat exempt. But these equipment must among others, be proven as not having been manufactured domestically in reasonable quantity and quality at competitive prices, as certified by the Department of Trade and Industry (DTI). This policy aims to protect the local industry.

With the opening of the renewable industry to 100% foreign ownership, should this protection given to local suppliers be scrapped If the country is committed to encourage foreign investments in RE, it is better to set the tone with not many pre-conditions and red tape, and allow these foreign investors to bring their own technology and equipment, tax free. On the other hand, our local industry must be encouraged to grow and cope up with its more advanced foreign competitors. An economist would say that if our local industry cannot match the price and quality of foreign equipment, then they should close and look for an industry where they can be competitive. But a politician will of course have a different view.

The opening up of the RE industry to 100% foreign ownership is a first big leap that can pave the way to review this policy, and many others. But DOJ opinion remains as that – an opinion. The implementing rules of the Renewable Energy Act of 2008 must be amended to reflect this new direction. It is also an opportunity to review all other policies that may dampen foreign investor’s appetite.

The tax incentives given to renewable energy developers are substantial and at some point, are even more generous as compared to other industries. I hope that foreign investors will see this and be encouraged to help tap our vast oceans and tropical climate into clean energy. This will not only boost our economy but also help heal our planet.