No pass-on provision on VAT may lead to financial debacle — Drilon

Boracay Island, Aklan – The congressional bicameral committee, which will start to tackle the final version of the expanded value-added tax (VAT), should carefully study the "no pass-on provision" as this may lead to another financial debacle for the National Government, a top legislator said yesterday.

Senate President Franklin Drilon, who attended the ceremonial switch-on of the 7.5-megawatt Nabas power plant of Mirant Global, admitted that the Senate version of the VAT bill which carries the "no pass through provision" may need further review.

"The Senate version prohibits a pass-on of the VAT to both the residential and commercial users. This must be carefully discussed in the bicam because of the provision of the contracts of the IPPs (independent power producers) that all taxes will be to the account of Napocor (National Power Corp.) This is an obligation which is in the contract between the Napocor and the IPPs. Questions have been raised on the no pass-on provision which is in both the Senate and House version," he said.

"I would strongly suggest that a legal study must be done taking into account the constitutional provision which prohibits the enactment of laws which will constitute a breach of contracts," Drilon added.

Power industry stakeholders have been trying to convince Congress to look carefully on the proposed VAT on power.

Ernesto B. Pantangco, president of the Philippine Independent Power Producers Association (PIPPA), said if the "change of material circumstance" clause will be invoked by the IPPs and their lenders, all loans due to their projects shall become due and demandable.

This means the P1.5 trillion obligations of the Philippine government to the IPPs would need to be settled immediately. Industry estimates show that the buy-out cost for the top 10 IPPs would run up to $20 billion; and the remaining 14 contracts would have a value of $500 million each, for a total of $27 billion.

Drilon admitted that the National Government has "no money" and is not ready to pay for this huge IPP obligation.

"Whether or not it is a material change in the contract is a matter that can be determined, should be determined first by the Supreme Court because it involves a constitutional issue worth $27 billion," he said.

The Senate president, however, is optimistic that the bicam would come up with a "better version and would not resort to any legal battle. "The bicam will have to come up with a version which will be a compromise between the two diverging versions."