Philippine Supreme Court rules that public utilities cannot treat corporate income taxes as operating expenses

By Benedicto P. Panigbatan

August 25, 2023

In Maynilad Water Services, Inc v National Water Resources Board,(1) the Supreme Court (SC) ruled that income tax paid by a public utility is inconsistent with the nature of operating expenses, which are limited to those expenses that contribute or are attributable to the production of income or revenue and redound to the benefit of consumers. Consequently, public utilities are prohibited from treating corporate income taxes as operating expenditures for purposes of computing rates chargeable to consumers. The SC declared that this prohibition applies to Maynilad and Manila Water, since they are public utilities which regularly provide the public with clean and reasonably priced water, a business imbued with public interest. Even assuming that they are not public utilities, the SC ruled that Maynilad and Manila Water cannot recover income taxes because they are not business taxes under Philippine law.

Facts

Maynilad Water Services, Inc (Maynilad) and Manila Water Company, Inc (Manila Water) (collectively, the Concessionaires) separately entered into a concession agreement with Metropolitan Water and Sewerage Systems (MWSS) to regularly supply water to the public in the Service Area West and Service Area East, respectively. The agreement allows the concessionaires to recover, by way of tariff, items of expenditures, such as operating expenses and Philippine business taxes, among others.

In 2002, during the first-rate rebasing exercise to adjust the standard rates chargeable to consumers, the Concessionaires were allowed to recover corporate income taxes as these were considered as Philippine business taxes, and thus, part of the operating expenses that the concessionaires may recover from consumers. However, in the same year, the case of Republic v Meralco(2) was promulgated where the SC held that public utilities are prohibited from including income taxes as operating expense for purposes of computing the rates chargeable to consumers since income taxes are inconsistent with the nature of operating expenses which are those expenses ". . . reasonably incurred in connection with business operations to yield revenue or income."

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Originally published by the International Law Office on Lexology.