Tax Updates June 2023 (SyCipLaw Tax Issues And Practical Solutions (T.I.P.S.) International Edition Vol. 9) – Sales Taxes: VAT, GST – Philippines

Tax Updates June 2023 (SyCipLaw Tax Issues And Practical Solutions (T.I.P.S.) International Edition Vol. 9) – Sales Taxes: VAT, GST – Philippines

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1. May a public utility treat corporate income taxes as
operating expenses for purposes of computing rates chargeable to

No. In Maynilad Water Services, Inc. v. National Water
Resources Board
(G.R. Nos.181764, 187380, 207444, 208207, 210147,
213227, 219362, and 239938, December 7,2021
), the Supreme Court
(“SC“) ruled that income tax paid by a
public utility is inconsistent with the nature of operating
expenses, which are limited to those expenses that contribute or
are attributable to the production of income or revenue and redound
to the benefit of consumers.

Maynilad Water Services, Inc.
(“Maynilad“) and Manila Water
Company, Inc. (“Manila Water“)
(collectively, the
Concessionaires“) separately
entered into a Concession Agreement with Metropolitan Water and
Sewerage Systems (“MWSS“) to
regularly supply water to the public in the Service Area West and
Service Area East, respectively. The Agreement allows the
Concessionaires to recover, by way of tariff, items of
expenditures, such as operating expenses and Philippine business
taxes, among others.

In 2002, during the first-rate rebasing exercise to adjust the
standard rates chargeable to consumers, the Concessionaires were
allowed to recover corporate income taxes as these were considered
as Philippine business taxes, hence, part of the operating expenses
that the Concessionaires may recover from the consumers. However,
in the same year, the SC promulgated Republic v. Meralco
(G.R. Nos. 141314 and 141369, November 15, 2002) where it held that
public utilities are prohibited from including income taxes as
operating expense for purposes of computing the rates chargeable to
consumers since income taxesare inconsistent with the nature of
operating expenses which are those expenses “which are
reasonably incurred in connection with business operations to yield
revenue or income.”

Citing the case of Meralco, the MWSS issued a Notice of
Extraordinary Price Adjustment to the Concessionaires. The
Concessionaires disputed said Notice, resulting in the creation of
the Technical Working Group by the MWSS. The Technical Working
Group concluded that the parties to the Agreement intended MWSS to
remain the public utility and for the Concessionaires to be its
agents and contractors. Hence, the Concessionaires were again
allowed to recover corporate income taxes by way of tariff for the
second-rate rebasing exercise in 2007 since they were not
considered public utilities.

In the third-rate rebasing exercise in 2013, the MWSS again took
the position that the Concessionaires were prohibited from
including their corporate income taxes as expenditures recoverable
from the consumers, which recommendation was adoptedby the MWSS
Board of Trustees.

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