Presidential condonation of real property taxes claimed against IPPs

One of the long standing battles between local government units (LGUs) and independent power producers (IPPs) relates to the issue of whether the LGU can collect real property tax (RPT) against the IPP where another government entity (such as the National Power Corporation or NPC) contractually assumed the payment of the RPT.  There is also the issue of what assessment level should be applied for purposes of calculating the RPT.  In this regard, it is not unusual for an LGU to threaten an IPP with the auction of the power plant should the IPP refuse to pay the RPT being collected by the LGU.  For instance, the province of Quezon threatened to auction the Pagbilao power plant to enforce collection of over PhP6 billion in alleged RPT payable to the province.

The Office of the President recently took a position regarding this matter.  Through Executive Order No. 27 (dated 28 February 2011), the President, under the power given to him by Section 227 of the Local Government Code, reduced and condoned the RPT (including penalties and surcharges) payable in Quezon by IPPs under build-operate-transfer contracts with government owned and controlled corporations (GOCCs).  Section 1 of the Executive Order No. 27 provides:

All liabilities for real property tax on property, machinery and equipment (including any special levies accruing to the Special Education Fund) actually and directly used by IPPs for the production of electricity under Build-Operate-Transfer Contracts (whether denominated Power Purchase Agreements, Energy Conversion Agreements or other contractual agreements) with GOCCs, particularly the NPC and PSALM, assessed by the Province of Quezon for all years up to 2011, are hereby reduced to an amount equivalent to the tax due if computed based on an assessment level of fifteen percent (15%) of the fair market value of said property, machinery and equipment depreciated at the rate of two percent (2%) per annum, less any amounts already paid by the IPPs. All fines, penalties and interest on such deficiency real property tax liabilities are also hereby condoned and the concerned IPPs are relieved from payment thereof.

The President justified the condonation and reduction of the RPT payable on the following grounds:

1.   the payment of the RPT by the affected IPPs, the obligation to pay some of which have been contractually assumed by the GOCCs and/or the National Government, threatens the financial stability of the GOCCs, the government’s fiscal consolidation efforts, and the stability of energy prices;  and

2.   the forcible collection of the subject real property taxes by the LGUs concerned will trigger massive direct liabilities on the part of NPC/PSALM, increase the cost of electricity, and may trigger further cross-defaults, and colossal economic losses across all sectors.

It can be expected that with Executive Order No. 27, IPPs in other provinces will also make a clamor for a condonation or reduction of the RPT payable in those provinces.  It is noteworthy, however, that Executive Order No. 27 covers RPT payable for “all years up to 2011”.  It is not clear what will happen beginning 2012.  For example, will the 15% assessment level still apply?  We have to wait to found out.

It would be great if the President can find a long-lasting solution to this issue, which affects the attractiveness of the Philippines as a destination for foreign investments in the power and energy sector.

(A copy of E.O. No. 27 can be found here.)

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