Dominguez advice to Bongbong Marcos: Keep oil taxes

MANILA, Philippines—President Rodrigo Duterte’s chief economic manager on Thursday clarified to the incoming administration of Ferdinand “Bongbong” Marcos Jr. that the power sector is not being slapped with value-added tax (VAT) twice while advising the President-elect to keep taxes being levied on oil products despite elevated global prices spilling over locally.

“There is no double taxation in the electric power industry. Because the Electric Power Industry Reform Act (Epira) law has unbundled the pricing at each stage of electricity production, VAT is imposed separately in each stage of the production,” said Finance Secretary Carlos Dominguez III in a statement.

“But at the end of the day, if you look at the total bill, the entire electricity service is charged 12-percent VAT on the side of the consumer,” Dominguez said.

Dominguez was reacting to pronouncements made by Energy Regulatory Commission (ERC) Chair Agnes Devanadera, who last month proposed to the next administration the removal of VAT on generation charges, claiming that the levy must apply only to distribution charges.

“For double taxation to exist, two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character,” Dominguez pointed out.

In the case of Epira, Dominguez said the law had mandated disintegrated or unbundled electricity pricing.

“With this unbundled pricing mechanism, VAT is imposed on every level of the value chain and not integrated vertically like other sectors, which means the VAT paid on the distribution charge only accounts for the value-added in distributing the electricity and does not include the generation and transmission of power,” Dominguez said.

The finance chief also addressed the claims of disparity between taxes on power distribution utilities and generation firms. “Like any producer of goods or services, the VAT paid on inputs can be offset against the output VAT imposed on the sale of electricity to consumers,” he said.

“VAT exemption is not the solution. If the intention is to unburden consumers, the next administration needs to review the existing policies on power generation pricing,” Dominguez said, warning that “removing VAT will not necessarily translate into a 12-percent reduction in prices.”

“VAT-exempt businesses do not charge output VAT and also could not recover the VAT they pay on their own inputs. Thus, this input VAT becomes an additional cost to them and to recover this, it is passed on to the consumers,” Dominguez said, adding that “the price of electricity in the country remains high compared to other Asean countries because of the high costs associated with power generation.”

Manila Electric Co.’s (Meralco) report for the first quarter of 2022 showed that “generation charge is the largest component of an electric bill across all customer classes” at the start of the year, Dominguez noted. “In the first quarter of this year, the levy should be applied only on the distribution charge to avoid the supposed double taxation at around 59 percent of the total average bill at P5.24 per kilowatt-hour (kWh), while taxes comprised only about 11 percent.”

For Dominguez, “we cannot afford to give another VAT exemption as this leads to distortionary and less equitable tax systems.”

“VAT exemption creates discrimination among similar businesses. Thus, it should remain broad-based and allow for few exemptions,” Dominguez said.

The proposed fiscal consolidation plan to repay pandemic-induced record debts and narrow the record-high budget deficit, pitched by Duterte’s economic team to Marcos included repealing VAT exemptions beginning 2023, while retaining VAT exemptions for some sectors such as agricultural products, education, raw food, health, and the financial sector. This will generate P142.5 billion in additional tax revenues per year, DOF estimates had shown. But legislators shot down attempts by the DOF under the Duterte administration to remove more VAT exemptions through the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

Dominguez also cautioned President-elect Ferdinand “Bongbong” Marcos Jr. against giving in to calls to suspend the excise on oil products under the TRAIN law, amid skyrocketing global prices wrought by Russia’s prolonged invasion of Ukraine.

“The better and more equitable way to address the impact of the increasing fuel prices is to provide swift and targeted support to the vulnerable sectors. A suspension will reduce government revenues by P105.9 billion or 0.5 percent of gross domestic product (GDP) in 2022, resulting in a higher deficit and debt for the government,” Dominguez said.

“An increase in deficit and debt, in turn, will potentially raise interest rates on government debt, thereby reducing much-needed fiscal space for funding crucial social and economic programs, more so now when the government needs to sustain and even boost the domestic economy’s recovery from the lingering pandemic and Russia-Ukraine conflict,” Dominguez added.

“The suspension of the imposition of excise taxes on petroleum is also extremely regressive and primarily benefits higher-income households. We will just be subsidizing the top 10 percent of Filipino households who consume about 50 percent of total fuel in 2022. This means that the larger financial benefits of the suspension will not go to the poor, but to higher-income households,” according to Dominguez.

Earlier this month, the DOF’s chief economist and retired undersecretary Gil Beltran said that had Duterte allowed more untargeted dole outs to be given amid the prolonged pandemic while scrapping oil taxes when global prices jumped to record-highs, the Philippines’ public debt would have jumped to a much-bigger P15.4 trillion by this year’s year than the projected over P13-trillion.

TSB

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