Incentives and privileges under the Renewable Energy Act of 2008

By Genevieve M. Limbo, 18 June 2009

In accordance with its commitment to help combat global warming and to reduce its dependence on fossil fuels, the government enacted Republic Act No. 9531, better known as the Renewable Energy (RE) Act of 2008. The said law was signed on December 16, 2008 and took effect on January 30, 2009, while its implementing rules and regulations (IRR) took effect last June 12.

The RE Act, among others, seeks to promote the development and commercialization of renewable energy resources, encourages the sustainable development and utilization of RE resources to reduce harmful emissions, and aims to achieve high reliance on energy supply and availability.

Sources of renewable energy include biomass, solar, wind, hydropower, geothermal and ocean energy sources, including hybrid systems.

To help achieve the objectives of the RE Act, a host of incentives, both fiscal and non-fiscal, as well as other privileges are made available to investors in this sector.

Existing and new Department of Energy (DoE)-certified developers of RE facilities, i.e., renewable energy projects and activities (REPA), including hybrid systems, shall enjoy the following fiscal and non-fiscal incentives:

1.    Income tax holiday (ITH)

• For existing RE projects (except projects already in commercial operation for more than seven years upon effectivity of the RE Act), ITH period shall be seven years from the start of commercial operations.
• For new investments in RE Resources, which may include discovery and development of new RE resource distinct from the RE developer’s registered operations, ITH period shall be seven years from the start of commercial operation resulting from new investments.
• For additional investment in the RE Project, ITH shall not be more than three times the period of the initial availment by the existing or new RE project. In other words, the maximum period of ITH availment of a REPA developer shall be 21 years, inclusive of the initial seven-year ITH for its new and additional investments in a specific RE facility.

2.    Duty-free importation of machinery and equipment and related materials within the first 10 years from the issuance of the REPA Developer’s Certificate of Registration, subject to certain conditions.

3. Real property tax of 1.5% on the original cost, less accumulated normal depreciation or net book value of equipment, machinery, and other improvements actually used in the RE facilities. In the case of integrated RE resource development and generation facility, this tax will be imposed only on the power plant.

4. Net operating loss incurred by the REPA developer within the first three years from the start of commercial operation which had not been previously offset as deduction from gross income may be carried over as a deduction from its gross income for the next seven consecutive taxable years immediately following the year of such loss.

5. Preferential corporate income tax rate of 10% on net income after the lapse of the ITH period. REPA developers already in commercial operation for more than seven years may avail of this incentive upon registration with the DoE.

6. Accelerated depreciation on plant, machinery and equipment actually used for REPA Development subject to certain conditions.

7. Zero-rated value-added tax (VAT) on certain REPA transactions, e.g., sale of fuel or power generated from renewable sources of energy, purchase of local goods/services needed for the development of the RE plant facilities, exploration and development of RE sources up to their conversion into power and the services of subcontractors and contractors.

8. Tax exemption on sale of carbon credits.

9. Tax credit on domestic capital equipment and services equivalent to 100% of the value of the VAT and custom duties that would have been paid had the REPA machinery, equipment, material and parts been imported, subject to certain conditions.

RE developers involved in hybrid and co-generation systems utilizing RE sources and conventional energy are also entitled to the same tax exemption and incentives granted to REPA developers, but only in respect to the equipment and machinery and/or devices utilizing RE resources.

Manufacturers, fabricators and suppliers of locally produced RE equipment and components will be entitled to certain privileges such as tax and duty-free importation (subject to certain conditions); tax credit equivalent to 100% of the amount of VAT and customs duties that would have been paid on domestic capital components had they been imported; ITH of seven years starting from the date of their DoE accreditation on their net income derived only from the sale of RE equipment and services; and 0% rated VAT on transactions with local suppliers of goods and services.

Individual farmers and entities engaged in the plantation of biomass resources will be entitled to duty free importation and VAT exemption on all types of agricultural inputs, equipment within 10 years from the effectivity of the RE Act subject to certain conditions.

In addition, other incentives and privileges are also available in the form of tax rebates for the tax paid for the purchase of RE components; exemption from universal charge under certain circumstances; cash incentive for missionary electrification; and payment of transmission fees based on kilowatt hour rate generated for missionary electrifications.

Indeed, the RE Act brings a lot of promise and hope to the country. With the rising and volatile fuel costs and the global financial crisis, we do have something good to look forward to.

Let’s just hope that the Bureau of Internal Revenue will soon release the revenue rules and regulations implementing the RE Act’s fiscal incentives provisions and that politics and other pre-election bickerings will not derail its implementation.