Phase IV-B of the refund scheme, specially on the refund note mode.
On January 28, 2005, MERALCO filed its "Manifestation and Motion"
praying that the implementation of Phase IV-A of the refund scheme be deferred
in view of its receipt of a letter from the Bureau of Internal Revenue (BIR),
informing MERALCO of BIR's intent to impose a withholding tax on the amount
to be refunded to MERALCO's customers under Phase IV. MERALCO alleged
that for purposes of the orderly implementation of the refund, the issuance of the
BIR regulation on the withholding tax is necessary.
On February 13, 2005, the BIR issued Revenue Regulations No. 8-2005,
ordering MERALCO to withhold creditable income tax at the following rates: (1)
on gross amount of refund given by MERALCO to customers with active
contracts as classified by MERALCO twenty-five percent (25%); and (2) to
customers with terminal contracts thirty-two percent (32%). Consequently,
MERALCO filed on May 30, 2005 its "Submission of Amended Proposal on
Phase IV." In the said submission, MERALCO proposed the following:
1.
Terminated
Phase IV-B
Active Services :
Terminated
in equal amounts over a period of time through post-dated checks (PDC), fixed
credit to bills or cash. The registered customer must first submit the appropriate
Tax Identification Number (TIN) and all other required documents before the
refund can be released.
IV) That the refund scheme shall be as follows:
Active Services
1) For customers opting for the PDC mode six (6) PDCs
corresponding to the quarterly refundable amount shall be issued. The PDCs shall
have sequential quarterly maturity dates beginning on the first month of the
calendar quarter (5 quarters), maturity at the end of every quarter. The issuance of
the PDCs will be given at the latest, two (2) months after ERC approval of the
refund scheme to allow for the transmittal of the letters and give the customers
ample time to reply and inform MERALCO of their preferred option and comply
with the requirements. The PDCs are crossed checks for deposit to payee's account
upon maturity.
2) For customers not opting for the PDC made, the other options are
either fixed month credit to bill or claim in cash, except for the first month of
implementation when the refundable amount will be automatically credited to
bills.
Phase IV-B
Active Services
For customers not opting for the PDC mode, the other options are
either fixed monthly credit to bill or claim in cash, except for the first month of
implementation when the refundable amount will be automatically credited to
bills.
is more widely accepted in the commercial world than the new concept of refund
note; and (4) the objective of providing liquidity and flexibility to a holder could
be met by PDC through check discounting. MERALCO likewise conducted a
survey among its Phase IV customers with active accounts and it disclosed a fifty
percent (50%) acceptability of the PDC as a mode of refund.
The refund amount for Phase IV involves a significant sum of P18,491
Billion or sixty-two percent (62%) of the total P30,124 Billion. Thus, in
determining the period within which MERALCO should implement the refund,
the ERC, as in the past, considered MERALCO's cash flow. Relative thereto,
MERALCO submitted to ERC its projected cash flow, which showed
negative/low available cash for the years 2006-2008, with a negative cash flow
projected in the first seven (7) months of 2007.
On June 29, 2005, ERC issued an Order in ERC Case No. 2001-243,
finding the proposal of MERALCO to revise its refund period reasonable.
However, given that the refund has further been delayed. ERC finds it equitable to
increase the proposed GRA threshold for customers with active accounts under
Phase IV-A from "two thousand pesos (2,000) or less" to "five thousand pesos
(5,000) or less" to be entitled to a full refund at the start of the refund period.
Likewise, ERC finds its necessary to include all government accounts falling
under Phase IV-B within Phase IV-A, as the refund will be used for public
purpose.
With regard to the mode of refund, MERALCO abandoned its proposal to
issue refund notes to its eligible customers. In its stead, MERALCO now proposed
to issue PDC's for reasons already discussed. The PDCs shall be released to the
concerned customer at the start of the implementation of the refund phase bearing
maturity dates at the end of each quarter. ERC is of the opinion that the amended
proposal regarding mode of refund offers more flexibility in the manner in which
the options in claiming the refund amount is concerned. Customers may now
choose whatever mode is most convenient to them.
It is further represented that when MERALCO collected the higher amounts
authorized by the then Energy Regulatory Board from its customers in 1994 to
2003, these amounts were reported as part of the taxable income of MERALCO,
for which it paid the corporate income taxes based on its net taxable income
during the taxable periods. When the Supreme Court ordered in 2003 the refund of
the excess amounts in favor of the customers, MERALCO had no adequate funds
to comply with the immediate payment of the entire amount to the customers. At
that time, MERALCO made the following accounting entry:
Dr. Retained Earnings
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Cr. Cash
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On the other hand, "liability'' means the state of being bound or obliged in
law or justice to do, pay, or make good something; the state of one who is bound
in law and justice to do something which may be enforced by action (Black's Law
Dictionary, Henry Campbell Black, 5th ed., 1983).
It is true that Section 44 of the 1997 Tax Code provides that "the amount of
all items of gross income shall be included in the gross income for the taxable year
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the services provided and billed to the customer during the same year, in order to
comply also with the principle of matching revenues against expenses.
5. Further, in order that an income may be subject to income tax, such
income must be received or realized during the taxable year. This finds support
when the Tax Court ruled: "Under the realization principle, revenue is generally
recognized when both of the following conditions are met: (a) the earning is
complete or virtually complete; and (b) an exchange has taken place. This
principle requires that revenues must be earned before they are received. Amounts
received in advance are not treated as revenue of the period in which they are
received, but as revenue of the future period or period or periods in which they are
earned. These amounts are carried as unearned revenue, that is, liabilities to
transfer goods or render services in the future until the earning process is
complete." 2(2)
Exchange (or exchange transaction) is a reciprocal transfer between an
enterprise and another entity that results in the enterprise's acquiring assets or
services or satisfying liabilities by surrendering other assets or services or
incurring other obligations. 3(3)
Thus, "exchange" as a requisite element of recognizing income requires
passage of title or its approximation, not merely a contract to exchange. Hence, if a
contract is made to purchase widgets (executory contract) for the buyer's inventory
for a price of $1000, no book entry is made despite the existence of a legally
enforceable right and a legally enforceable obligation. Instead, an entry is made on
the passage of title. In many commonplace situations, a purchaser may be required
to make a deposit or other advance payment on a purchase contract. However, the
executory contract is still not recorded, and the recording of the advance cash
payment is merely a provisional recording pending completion of the transaction.
6. Further still, three (3) factors have generally been considered
significant in the realization of income. These are:
a.
b.
c.
b.
c.
d.
e.
Based on the foregoing, this Office hereby opines that the income is
deemed realized by MERALCO only when the service has been provided to the
customer and a bill is issued during the month. The subsequent offsetting of the
payable and receivable by MERALCO to effect payment of the income is only a
mode of payment, which has no significance for the accrual of income, for income
tax purposes.
For value added tax purposes, this Office is of the opinion as it hereby rules
that the instruction to offset the receivables against future electric bills does not
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Endnotes
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1.
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2.
Manila Mandarin Hotels vs. Commissioner, CTA Case No. 5046, Mar. 24, 1997.
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3.
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4.
AAA, 1964 Concepts and Standards Research Study Committee, The Realization
Concept, 40 Acctg. Rev. 312, 314 (1965).
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5.
6 (Popup - Popup)
6.
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