Tax Articles

Electric Tax

By: Atty. Irwin C. Nidea, Jr.

Irwin C. Nidea Jr. Senior Partner   +632 8403-2001 loc.330 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

We need electricity in almost everything that we do, from lighting up our Christmas trees to powering our cars. Electricity is a necessity that every one of us depends on. That is why the government encourages communities to organize and establish electric cooperatives. In this way, more households will enjoy the benefits of electricity

Currently, however, there are conflicting decisions on the treatment of electric cooperatives, for income tax purposes. One decision maintains that non-stock, non-profit electric cooperatives that are registered with the National Electrification Administration (NEA) but are not registered with the Cooperative Development Authority (CDA) are exempt from income tax. Another decision opines that the grant of income tax exemption has already been repealed.

In the case of Misamis Oriental II Rural Electric Service Cooperative, Inc. (MORESCO-II), vs. CIR (CTA Case No. 10145), the Court of Tax Appeals (CTA) has confirmed that an electric cooperative that is registered as a non-stock non-profit, registered with NEA but is not registered with CDA is permanently exempt from income tax.

The Court in this case discussed that there are two types of benefits given on this type of electric cooperative under PD 269 (Presidential Decree Creating the NEA). First, it is entitled to a permanent exemption from payment of income taxes during its existence. Second, it is exempt from payment of all national and local taxes, fees, charges, or costs involved in any court or administrative proceeding in which it may be a party, as well as duties or imposts on importation of materials for its operations.

In the same case, it was ruled that Republic Act (RA) 10531 (An Act Strengthening the NEA) gives an electric cooperative the option to remain as a non-stock, non-profit cooperative and it will be governed by the provisions of PD 269, as amended by RA 10531. The CTA ruled that the law gives an electric cooperative three options as regards registration. First, it may choose to remain as a nonstock, non-profit cooperative. Second, it may convert itself into a stock cooperative and register under the CDA. Third, it may convert itself into a stock corporation registered under the Securities and Exchange Commission (SEC). Each choice shall equally carry with it certain consequences.

According to the Court, if an electric cooperative elects the first option, it may remain a non-stock, nonprofit entity governed by the provisions of PD 269, as amended by RA 10531. However, it will not be entitled to the incentives under RA 6939 (An Act Creating the CDA). The said law provides that all other laws inconsistent with its provisions are considered repealed and that nothing in its provisions shall constitute a repeal or amendment of PD 269.

The Court also emphasized that RA 10531 is essentially an amendment of the provisions of PD 269. Although several amendments were made to PD 269, Section 39 of the decree which granted income tax exemption to electric cooperatives was retained. Considering the above repeals, the conditional restoration of an electric cooperative’s income tax exemption made by Fiscal Incentive Review Board (FIRB) Resolution No. 24-87 was already disregarded in favor of fully restoring the benefits of electric cooperatives under PD 269.

The Court further ruled that RA 10531 is essentially an amendment of the provisions of PD 269. It emphasized that although several amendments were made to PD 269, Section 39 of the decree which granted income tax exemption to electric cooperatives was retained. Thus, electric cooperatives that are registered with it are still exempt permanently from the payment of income taxes.

The case of Zambales Electric Cooperative vs. CIR (CTA Case No. 10165) on the other hand, opposes the ruling laid down in the Moresco Case. In this case, the CTA ruled that FIRB Resolution No. 24-87 categorically states that income from electric service operations and other sources including the interest income from bank deposits and yield or other monetary benefit from bank deposits and yield and other similar arrangements shall remain taxable. Pursuant to the authority granted to it under EO No. 93, the FIRB restored the tax and duty exemption privileges of electric cooperatives granted under the terms and conditions of PD No. 269, as amended, but revised the scope and coverage of the privileges that have been restored, by stating that the “income from electric service operations and other sources shall remain taxable".

The Court cited the case of Davao Oriental Electric Cooperative, Inc. v. The Province of Davao Oriental (GR 17090), where the Supreme Court recognized the validity of FIRB Resolution No. 24-87 and applied it to said case, although it involved an assessment of real property tax.

According to the CTA, there is nothing in RA No. 10531 which states that the income tax exemption of electric cooperatives under PD No. 269, as amended, has been totally reverted or restored. Thus, electric cooperatives registered with the NEA are subject to income tax with respect to income derived from (1) electric service operations; and (2) other sources.

Between these two conflicting decisions by the CTA, one will ultimately prevail when the cases reach the Supreme Court. Ultimately, however, it is we, the consumers and clients of these electric cooperatives that will bear the burden of tax or enjoy the relief of tax exemption. It is thus important that Congress intervenes and clarify the law for it may take years of motions and appeals to the courts before these cases are decided with finality by the Supreme Court.