Tough love? MWSS, water firms
clash over taxes, disallowed costs

WATER IS LIFE, indeed, but it is not cheap, not free.

Water is a story that has hogged the headlines in recent weeks. And that is all because of a new petition to adjust water service fees, amid a new round of rate rebasing talks between the government and the two water firms in Metro Manila, to the vigorous protest of consumer groups.

Water, indeed, is about big money and big players that had been allowed by government to pass on to consumers the big amounts of income taxes due from their operations.

This time, however, the government regulator, the Metropolitan Waterworks and Sewerage System (MWSS), seems poised to do its job — regulate the water firms.

The MWSS has asked for the financial records and documents of the water firms, issued disallowance notices for some of their expenses and donations to charity, and questioned the fat salaries of their executives.

Most important of all, in an apparent show of tough love, the MWSS seems ready to stop the water firms from billing their income taxes as operations costs — billions of pesos that they have been passing on to consumers since 2007.

This report by PCIJ Fellow Roel Landingin comes with two data graphics, and a sidebar about what rate rebasing is.

Read our latest report:

* Tough love: MWSS, water firms clash over taxes, disallowed expenses

* Sidebar: What is rate rebasing?

Manila Water, whose income tax holiday ended in 2006, has effectively been passing on its income taxes to consumers from 2007 to 2012, said water regulators. Its total provision for income taxes during the six-year period was P7.3 billion, according to the company’s annual reports submitted to the Philippine Stock Exchange.

Maynilad, which was losing money for a number of years, enjoys an income tax holiday until 2016. The rates approved for Maynilad, however, included a provision for income taxes as its income tax holiday was approved after the rates were set in 2008. Its provision for income taxes amounted to only P1.7 billion from 2007 to 2011, the latest available filed with the Securities and Exchange Commission.

This month the MWSS is expected to announce water rate adjustments. The new rates are supposed to take effect next month. Consumer groups have asked the Supreme Court to freeze water rates, with a plea for a temporary restraining order, but the tribunal has not acted on their plea.

And while the MWSS resolution on income taxes will cut water rate adjustments, regulators cannot yet say if it is big enough to actually lower prevailing rates or may simply temper tariff increases.

The regulators also have to adjust the applied discount rate (ADR), the guaranteed return that water companies are allowed to earn, to take into account the change in the water firms’ tax status. This could partially offset the rate-lowering effect of disallowing them from passing on income taxes to customers.