PE2 asks TRAIN-2 bill authors and DOF for special incentives for EE projects

PE2 asks TRAIN-2 bill authors and DOF for special incentives for EE projects

HOUSE OF REPRESENTATIVES, QUEZON CITY, 9 May 2018 -- The Philippine Energy Efficiency Alliance (PE2) officially submitted today its position letter which forwards recommendations on special incentives for energy efficiency and conservation (EE&C) projects to the principal authors of the “TRAIN-2” bill in the House of Representatives and the top officials of the Department of Finance (DOF) supporting this follow-up policy measure relating to Government’s tax reform acceleration and inclusion program.

The "TRAIN-2" bill is the unnumbered House Bill introduced by Representatives Dakila Carlo E. Cua, Aurelio D. Gonzales, Jr., and Raneo E. Abu, formally known as an “Act Amending Sections 20, 22, 27, 28, 34, 40, 50, 73, 112, 119, 203, 204, 220, 222, 228, 237, 237A, 248, 254, 255, 256, 257, 258, 259, 260, 261, 262, 263, 264, 265, 266, 275, 290, 291, 292 and Adding Sections 293, 294, 295, 296, 297, 298, 298-A, 299, 300, 301, 302, 303, 304, 305, and 306 under Chapters I, II, III, IV, V and VI, all under the National Internal Revenue Code of 1997, as Amended, and for other Purposes.” Among the multiple purposes of the pending bill is the rationalization of fiscal incentives across parallel laws and several Investment Promotion Agencies (IPA), such as the Board of Investments (BOI), the Philippine Economic Zone Authority (PEZA) and the various special economic zone authorities created by law. In this bill, one of the DOF recommendations is to limit the availment period for income tax holidays to three (3) years.

Reviewed by PE2 officers and legal team, and served by PE2 president Alexander Ablaza, the PE2 position letter of 9 May 2018 set the following premises as bases of its policy recommendations:

  1. EE&C should be treated as the “first fuel” of the economy, being the cheapest, fastest and most untapped energy resource in our energy mix to slow down the rise in energy prices by deferring some 45,900 MW of energy infrastructure upgrades (power and non-power) through 2040. Consistent with the Department of Energy’s (DOE) approved Energy Efficiency & Conservation Roadmap for 2017-2040, PE2 believes that the economy will have to proactively shave off at least 182 Mtoe in energy demand in the next 22 years to meet the 2040 targets and save our economy some PHP 36 trillion in energy purchases, grow GDP incrementally, create green jobs, increase tax revenues from energy savings, reduce dependence on imported fossil fuels, and contribute significantly to the regional energy intensity reduction targets of ASEAN and APEC, as well as our country’s greenhouse gas reduction obligations under the Paris climate agreement.
  2. The Philippines is believed to be the only ASEAN country without a mandatory EE&C policy framework or mainstreamed fiscal incentives for EE&C investments. PE2 also believes that the Philippines may be the only country in the world which has fiscal incentives for renewable energy, but no fiscal incentives perpetuated by law for EE&C projects. While the Alliance remains thankful that the Board of Investments (BOI) has published approved specific guidelines for energy efficiency projects on 8 March 2018, and that a pending EE&C bill is being deliberated upon by the House Committee on Ways & Means (after approvals by the House Committees on Energy and Appropriations, and final reading of the counterpart measure in the Senate), much work remains to be done to ensure that incentives are effectively able to catalyze capital flows toward EE&C projects over the long haul.
  3. For the Philippines to meet DOE’s 2040 annual savings target of 10,000 ktoe under its approved 2017-2040 EE&C Roadmap, an estimated PHP 12 trillion in investments will have to be realized in EE&C technology deployment across end-use sectors. Almost two-thirds of this capital requirement will have to be financed from third-party sources such as energy service companies (ESCO), public-private partnerships (PPP), equity vehicles, and development or climate funds. Private sector capital investments will need to be made commercial-grade by increasing equity returns through “TRAIN-friendly” fiscal incentives. The full suite of tax-based fiscal incentives renders off-balance sheet EE&C investments commercially viable – raising average after-tax internal rate of return from 5.9% to 14.6%. Without the full suite of tax-based fiscal incentives (that is, duty-free importation, six-year income tax holiday and zero-rated VAT), an estimated maximum of 34% of the capital requirement through 2030, or no more than PHP 4 trillion, can be mobilized through the business-as-usual self-financed and debt-financed mechanisms for the energy end-use sectors to comply with the enforced energy efficiency market regulation.
  4. Every PHP 1.00 that the Government invests through tax-based fiscal incentives for off-balance sheet EE&C investments can flow back to the National Treasury as PHP 2.31 in additional tax revenues. Conservatively excluding the social, economic and environmental benefits just for this analysis, a portfolio-based financial model confirms that every peso in tax expenditures through a package of tax-based fiscal incentives which includes duty/tax-free importation of capital equipment, zero-rated valued added tax and six-year income tax holiday, can be fully recovered and multiplied by 231% through the economic life of the EE&C equipment assets.
  5. EE&C is a new project type, economic activity or asset class that has not yet benefited from Government fiscal incentives and should therefore not be subject to Government’s incentive rationalization efforts. Although the Alliance is now in discussions with Congress and BOI to expand the incentive package in addition to the BOI guidelines published on 8 March 2018, it can be clearly said that EE&C investors or developers have not yet meaningfully tapped incentives to mobilize third party capital investments in EE&C projects.

Building on these arguments, the Alliance forwarded its recommendations on the “TRAIN-2” bill:

  1. EE&C projects will need at least six (6) years of income tax holiday (ITH) availment, based on the entire cost of the EE&C project (and not just a portion of the cost of capital equipment), and therefore excluded from the three (3) year ITH limit set in the proposed bill. (PE2 emphasized that renewable energy projects are entitled to 7 years in the Philippines, and that EE&C projects in Thailand are entitled to 8-year ITH.) Aside from the other tax incentives listed in the bill, EE&C projects shall be entitled to customs duty incentives and zero-rated valued added tax through the limited life of the energy services agreement, typically up to ten (10) years in contract term. The commercial viability of third-party capital flows toward EE&C projects remains critically dependent on this comprehensive tax-based incentive package.
  2. The Fiscal Incentives Review Board (FIRB) and the various Investment Promotion Agencies (IPAs) will need to expressly identify EE&C projects as an economic activity qualified in the Strategic Investments Priority Plan (SIPP) for a period no shorter than fifteen (15) years, to be able to jumpstart private sector capital flows through the next 22 years of EE&C roadmap implementation.
  3. Unlike Article 32 of E.O. 226, series of 1987, the TRAIN-2 bill should be clear in allowing up to 100% Filipino or foreign ownership of EE&C projects as registered enterprises eligible for fiscal incentives, especially because EE&C projects are, by nature, not public utilities.

As in the previous position letters, the Alliance offered to discuss this position with the bill authors and the DOF, as well as support the House deliberations on the “TRAIN-2” bill with respect to EE&C project incentives.

PE2 officially submitted its position letter which forwards recommendations on special incentives for energy efficiency and conservation (EEC) projects to authors of the TRAIN-2 bill

 

About PE2

Philippine Energy Efficiency Alliance Inc. (PE2), is a non-stock, non-profit organization of energy efficiency market stakeholders.

Learn More

Infographics

PE2 Infographics on Energy Efficiency and Conservation Roadmap Targets

Infographics on Roadmap Targets for Energy Efficiency and Conservation

» View | Download

Join PE2 Now!

We would love to have you on board

The Philippine Energy Efficiency Alliance, Inc. (PE2) is a non-stock, non-profit organization of energy efficiency market stakeholders.

Learn More

PE2 Secretariat

  • Philippine Energy Efficiency Alliance, Inc. (PE2)
    19/F Philippine AXA Life Centre 
    Senator Gil Puyat Avenue 
    corner Tindalo Street 
    Makati City, Metro Manila 
    Philippines 1200
  • +63 2 759 6680 (ext 231)
  • secretariat@pe2.org