VAT compliance issues in the WESM

Among the significant developments in the Philippine energy market is the introduction of the Wholesale Electricity Spot Market (WESM). Created pursuant to Republic Act No. 9136, or the Electric Power Industry Reform Act of 2001, the WESM serves as the central market for trading electricity as a commodity, with the goal of promoting fair and competitive trading of electricity, with pricing dictated by commercial and market forces.

The Independent Electricity Market Operator of the Philippines (IEMOP) serves as the independent market operator of the WESM. Among the functions of the IEMOP are the matching of supply (through the generators’ supply offer) and demand (through the customers’ demand bid) for a particular trading interval and the implementation of the settlement process of the amounts owing to each trading participant.

WESM anonymity disrupts VAT invoicing

However, the same innovation introduced by the WESM exposes some incompatibility with traditional governance structures, particularly in taxation. In a prior ruling addressed to the IEMOP, the Bureau of Internal Revenue (BIR) recognised that due to the nature of the sale of electricity through the WESM in which electricity is pooled together and centrally co-ordinated, it is impossible to trace a particular sale of energy by the generating companies to a particular buyer of bulk electricity, effectively making the transaction anonymous.

From this viewpoint, it is apparent that compliance with the traditional value-added tax (VAT) paradigm under which a VAT-registered person is required to issue a VAT invoice for every sale, exchange or lease of goods or services is virtually impossible. This poses a significant issue in the renewable energy (RE) sector for its purchases of electricity, since a vast majority of the players naturally incur excess input VAT due to their entitlement to zero-rated VAT on their sale of power generated from renewable sources of energy.

To maximise the benefit, RE developers typically apply for VAT refund claims with the BIR, in the process of which RE developers bear the burden of proving their claim for a VAT refund by substantiating their sales and purchases with invoices fully compliant with the notoriously strict invoicing requirements of the BIR.

Monthly WESM billing aligns VAT

To reconcile the nature of the WESM with VAT invoicing requirements, the issuance of the invoices is done monthly following the WESM billing and settlement timetable, rather than on a per transaction basis. The IEMOP provides copies of the “settlement statements of energy sold (broken down by customer)” to the generators and the “settlement statements of energy purchased (broken down by seller)” to the customer, after which the settlement process will be done through the IEMOP’s payment facility. These settlement statements and the subsequent payment/remittance thereof serve as the basis for the issuance of invoices by the generators.

WESM volume overwhelms ATP invoices

Despite the efforts above, the impracticality of complying with the traditional VAT requirements is still apparent. Businesses are effectively allocated a limited “stock” of BIR-authorised invoices for a given period through the issuance of the Authority to Print (ATP) invoices, which ties the allowable invoices to a specific serial number range. While businesses can reapply for a new ATP once the serial range is used up, the process entails additional administrative costs, and businesses can easily run out of BIR-authorised invoices since the system is designed with the traditional volume of sales in mind. With the sheer volume of unique trading participants in the WESM, a business can easily go through its allocated ATP in a few billing periods.

Supplementary documents ease VAT burdens

A possible remedy for this issue is to allow the generators to issue supplementary documents for each billing period instead of the VAT invoice. These may be in the form of a credit memorandum or equivalent document, which can be used in the meantime for accounting purposes. The VAT invoice may then be issued on an annual basis, reflecting the consolidated sales for each customer for the year.

This is more in keeping with one of the canons of a sound tax system, administrative feasibility, under which efficient government collection of taxes must be done without unreasonable burden to taxpayers. This will also be consistent with recent government efforts to improve the efficiency of tax administration, particularly with the passage of the Ease of Paying Tax Act.

Deborah S Acosta-Cajustin is a senior partner and John Edcel Q Andes is an associate at PunoLaw in Manila

PunoLaw
33rd Floor, The Podium West Tower
12 ADB Avenue, Mandaluyong
Philippines, 1550
www.punolaw.com
Contact details:
T: +63 2 8631 1261
E: info@punolaw.com