Tax Updates June 2023 (SyCipLaw Tax Issues And Practical Solutions (T.I.P.S.) International Edition Vol. 9)

• Published date: 08 August 2023
• Subject Matter: Tax, Energy and Natural Resources, Oil, Gas & Electricity, Income Tax, Corporate Tax, Sales Taxes: VAT, GST, Renewables, Water
• Law Firm: SyCip Salazar Hernandez & Gatmaitan
• Author: SyCip Salazar Hernandez & Gatmaitan

1. May a public utility treat corporate income taxes as operating expenses for purposes of computing rates chargeable to consumers?

No. In Maynilad Water Services, Inc. v. National Water Resources Board (G.R. Nos.181764, 187380, 207444, 208207, 210147, 213227, 219362, and 239938, December 7,2021), the Supreme Court ("SC") ruled that income tax paid by a public utility is inconsistent with the nature of operating expenses, which are limited to those expenses that contribute or are attributable to the production of income or revenue and redound to the benefit of consumers.

Maynilad Water Services, Inc. ("Maynilad") and Manila Water Company, Inc. ("Manila Water") (collectively, the "Concessionaires") separately entered into a Concession Agreement with Metropolitan Water and Sewerage Systems ("MWSS") to regularly supply water to the public in the Service Area West and Service Area East, respectively. The Agreement allows the Concessionaires to recover, by way of tariff, items of expenditures, such as operating expenses and Philippine business taxes, among others.

In 2002, during the first-rate rebasing exercise to adjust the standard rates chargeable to consumers, the Concessionaires were allowed to recover corporate income taxes as these were considered as Philippine business taxes, hence, part of the operating expenses that the Concessionaires may recover from the consumers. However, in the same year, the SC promulgated Republic v. Meralco (G.R. Nos. 141314 and 141369, November 15, 2002) where it held that public utilities are prohibited from including income taxes as operating expense for purposes of...