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MWSS rejects tax plea

Water firms ordered to recompute rate hikes Regulators on Friday stood firm on their decision to bar the government’s two private water concessionaires from passing on their income tax and other expenses to consumers through their monthly bills. The Metropolitan Waterworks and Sewerage System’s Regulatory Office also ordered the two companies to recompute the rate increases they are seeking, based on a zero pass-on charge for their income taxes. The Manila Water Company, Inc. and Maynilad Water Services, Inc. are now considered “operators” of a public utility and should not consider their income tax as part of expenditures that need to be recovered from consumers, the MWSS-RO said. The two firms earlier warned they would seek arbitration if the regulatory office refused to withdraw its ruling. MWSS-RO acting chief regulator Emmanuel Caparas said the agency gave a “resounding no” to the two firms’ assertion that they were allowed to pass on to consumers their income tax and operating expenses. In a letter to Manila Water president Gerardo Ablaza and Maynilad president Victorico Vargas, Caparas said the MWSS was only trying to “uphold the intent and spirit of the concession agreement consistent with Philippine Laws.” “For purposes of rate-fixing, Philippine law provides that income taxes paid by a public utility or the operators of a public utility, who are the recipients of the income, cannot pass on the same to consumers in form of operating expenses,” Caparas told Ablaza and Vargas. “This rule applies with equal force whether the utility or the operator of the utility is a public or a private company,” Caparas said. Caparas said the prohibition on passing on the income tax has been in existence even before the ratification of the 1987 Constitution. “Under the 1985 State Audit Manual, the Commission on Audit mandates all regulatory offices, during a rate audit, to disallow [the passing on of] income taxes paid by public utilities or operators of public utilities,” Caparas said. The disallowances, he said, include income tax since “this is a tax on the net profit of operators who are the recipient of the income or profits realized by the utility and therefore should not be passed on to the ratepayers in the form of operating expenses.” “Simply stated, even before the Supreme Court decided the case Republic v. Meralco, the rule has consistently been applied by COA and the Energy Regulatory Board. The ruling in Meralco merely confirms that rule and expounds on the rationale for such prohibition,” Caparas said. “We maintain our position that the concession agreement excludes income tax payments from the allowable expenditures that may be recovered,” he said. He also said in the enumeration of the expenditures that may be recovered, the term Philippine business taxes is segregated from the term operating expenditures. “This only means that the framers of the concession agreement intended to restrict to Philippine business taxes the type of taxes that may be recovered by the concessionaires through the tariff,” Caparas said. Caparas said the concessionaires insisted that the concession agreement is the law between the parties. However, Caparas said the provisions of any contract that contravene law or public policy are void. Caparas also said that as asserted by Manila Water, no vested rights had been violated by the agency and that there was no impairment of obligations and contracts when the Regulatory Office issued the ruling. A vested right, he said, is defined as “property which has become fixed and established, and is no longer open to doubt or controversy, an immediately fixed right of present or future enjoyment as distinguished from an expectant or contingent right.” “It is to be noted that the issue on the passing on of income tax has not been squarely ventilated in any forum—certainly not in a judicial forum,” Caparas said. Caparas furnished and sent copies of his letter to Public Works and Highways Secretary Rogelio Singson, MWSS chairman Ramon Alikpala, the MWSS Board of Trustees, MWSS administrator Gerardo Esquivel and Justice Raoul Creencia, chief of the Office of the Government Corporate Counsel. In Congress, a ranking administration lawmaker cautioned against the immediate abrogation of the MWSS contract with the two private concessionaires. Incoming House Majority Leader and Mandaluyong Rep. Neptali Gonzales II also said the examination of the issues should be done objectively and dispassionately. “These issues cannot be oversimplified since these essentially involve the question of what was the financial return agreed upon by the government with the concessionaires at the time the concession agreements were entered into 16 years ago,” Gonzales told reporters. “Private investors made huge investments and assumed significant risks based on an understanding of the resulting financial return to them. We have to remember that not even government can unilaterally vary the financial terms of its contracts without violating the non-impairment clause provided by the Constitution,” he said. Gonzales also said the current concessionaire system was “widely recognized internationally as one of the few successful cases of water privatization in developing countries.” With Maricel V. Cruz
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