The Court of Tax Appeals (CTA) has formally decreed that the Independent Electricity Market Operator of the Philippines (IEMOP), as the duly authorized operating entity of the Wholesale Electricity Spot Market (WESM), is not exempt from paying income tax - and that effectively upheld an earlier ruling of the Bureau of the Internal Revenue (BIR) and the opinion rendered by the Department of Finance (DOF).

In particular, the tax court noted that even if IEMOP had been registered as a non-stock, non-profit corporation, it still cannot be classified as a tax-exempt entity because it fails to establish its stature as a ‘business league’ that shall be freed from paying taxes under the prescription of Section 30 (F) of the National Internal Revenue Code (NIRC) of 1997.

As defined, ‘business league’ refers to “an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit,” and the nature of its operations should have been similar to that of a chamber of commerce or board of trade.

“For failure to meet the statutory requirements and defining characteristics of a business league, petitioner (IEMOP) cannot be considered as such and is not entitled to income tax exemption under Section 30 (F) of the NIRC of 1997, as amended,” the CTA stressed.

The court further contended that “while petitioner (IEMOP) claims that WESM is akin to a business league with various electric power industry participants, petitioner is not the WESM itself. WESM is the market and petitioner is the market operator. Therefore, petitioner's assertion that it assumes the character of WESM simply by operating it is untenable, as they are distinct entities.”

Despite tightening the tax leash on IEMOP, however, the CTA ruled the market fees collected from WESM participants are not subject to income tax, as these are nothing more than cost reimbursements incurred in administering and operating the WESM.,” emphasizing that “these fees do not constitute income, as they are not made for profit or gain.”

Further, the CTA rendered that the net settlement surplus (NSS)—or the difference between the total amount payable to generation companies/sellers for electricity sold and the total amount received from customers/buyers for electricity bought through WESM – are not also subject subject to income tax, as the court finds that these do not accrue to actual gain or profit.

Circling back to the decision on IEMOP’s non-qualification as tax-exempt entity, the court highlighted that when it dissected the firm’s by-laws, the company failed to prove that it is being ‘operated as an association of persons having some common business interest,” and that in turn,” limits its activities to work for such common interest.

The court similarly flagged that IEMOP flunked the anti-inurement rule – which sets a strict no-benefit clause under Section 30 of the NIRC, and underpinned by Revenue Memorandum Order No. 38-2019; or the tax policies which entail that earnings or assets shall not benefit any of its trustees, organizers, officers, members or any specific person.

Conversely, the CTA established that IEMOP is being “authorized and empowered to: pay reasonable compensation for services rendered by (its) directors, officers or third persons as may be allowed by the members; and make payments and distributions” based on the provisions of its articles of incorporation.

“A corporation must still satisfy the conditions based on its stated purpose and actual operations under each item of the said Section 30 to be exempt. In the instant case, although petitioner (IEMOP) is registered as a non-stock, non-profit entity, it failed to prove that it falls within the purview of a tax-exempt business league under Section 30 (F) of the NIRC of 1997, as amended,” the court reiterated.