Geothermal plant operators not always subject to local franchise taxes–CTA

Business Mirror

19 Feb 2014 

 

Written by David Cagahastian

The Court of Tax Appeals (CTA) has ruled that local government units (LGUs) cannot impose local franchise taxes on operators of geothermal power plants unless such operators are shown to have been granted a “franchise” to exploit geothermal resources as defined in pertinent laws. 

The CTA said the operation of geothermal power plants is not necessarily a “franchise” for which a franchise tax can be imposed by a LGU.

Under the Supreme Court ruling in National Power Corp. (Napocor) City of Cabanatuan, a franchise tax is defined as “a tax on the privilege of transacting business in the state and existing corporate franchises granted by the state. It is not levied on the corporation simply for existing as a corporation, but on its exercise of the rights or privileges granted to it by the government.”

In the case of CE Cebu Geothermal Power Co. Inc. and Visayas Geothermal Power Co. (VGPC) Province of Leyte promulgated last January 24, the CTA ruled that such geothermal power plant operators must be shown to be generating power under a franchise to exploit geothermal resources before they can be imposed local franchise taxes by the province of Leyte.

CE Cebu and VGPC executed separate contracts with the Philippine National Oil Co.-Energy Development Corp. (PNOC-EDC) wherein the petitioners will takeover from the original proponents contracted by PNOC-EDC to construct and operate geothermal power plants under build-operate-transfer (BOT) schemes.

The CTA found that the contracts between PNOC-EDC and the original proponents—which were later assumed by the petitioners so that the arrangements would pertain to PNOC-EDC and themselves—only provide that the PNOC-EDC shall be the one operating the franchise to exploit geothermal resources in Leyte.

The original proponents and the petitioners, which act as their successors-in-interest, shall only finance, construct and operate the power plants.

“In other words, PNOC-EDC was the one to explore, supply, and deliver all geothermal requirements of the power plants. In return, petitioners shall convert the geothermal fluid by the PNOC-EDC into electricity and deliver the same to the Napocor, in behalf of PNOC-EDC,” the CTA said in its factual findings on the contracts executed between the parties involved.

The CTA interpreted such arrangements between PNOC-EDC and the petitioners as not constituting a franchise to exploit geothermal resources in Leyte for which the province may be able to impose local franchise taxes.

“Evident from the foregoing that what PNOC-EDC and its counter-parties had was a contractual arrangement, where the operators, in consideration for the services rendered, i.e., supply of electricity and energy to NPC, receive ‘energy fee’ as payment from PNOC-EDC. Thus, petitioners were into generation and supply of geothermal power, in behalf of PNOC-EDC, to deliver the same exclusively to Napocor by virtue of the BOT agreement,” the CTA said.

“The said contractual arrangement was private in nature which did not require a franchise from the government, since petitioners only sell the electricity they produce to NPC and none other. It is PNOC-EDC which had a geothermal service contract with the Republic of the Philippines and not petitioners,” the decision said.

For lack of factual and legal basis to classify the operations of the petitioners as a franchise, the franchise tax assessments issued by the Province of Leyte against the petitioners, amounting to P130 million for CE Cebu from 2000 to 2006, and P214 million for VGPC for the same period, were canceled by the CTA.   source