BIR readies VAT removal from electricity system loss charges

By Francis Allan L. Angelo

The Bureau of Internal Revenue is preparing to remove value-added tax from the allowable system loss charge in electricity bills following President Ferdinand R. Marcos Jr.’s directive to review tax rules that could provide immediate consumer relief.

The change would reduce electricity bills by eliminating the 12% VAT imposed on the allowable system loss component, but it would not cut a consumer’s entire bill by 12%.

The distinction matters to households and businesses because the relief applies to electricity generated and paid for but lost before reaching customers.

BIR Commissioner Charlito Martin R. Mendoza said the agency would issue a Revenue Memorandum Circular after the required 15-day period following the publication of Energy Regulatory Commission Resolution No. 26, Series of 2026.

The ERC published the resolution on Aug. 28, 2026, meaning the tax relief still requires the BIR circular before it can be implemented.

“As Finance Secretary Frederick Go has consistently guided us, our reforms should deliver results that people can immediately feel. When there is a clear basis under the law to provide tax relief, we should act on it. We are preparing the BIR issuance now so that after the required period has lapsed, we can immediately implement the VAT removal and pass the benefit on to electricity consumers,” Commissioner Mendoza said.

ERC Resolution No. 26 classifies the allowable system loss charge as a government-mandated pass-through cost rather than income earned by generation companies, the National Grid Corporation of the Philippines and distribution utilities.

System loss refers to electricity lost while passing through conductors, transformers and other parts of the transmission or distribution network before reaching consumers.

Non-technical losses can also result from electricity theft, illegal connections and meter tampering.

Only losses within ERC-prescribed limits may be recovered from consumers, while amounts exceeding those caps must be absorbed by the distribution utility.

“In simple terms, consumers should not be paying VAT on electricity that never actually reaches their homes or businesses. A pass-through charge is a cost collected from consumers and passed on to the proper recipient. Removing VAT from that charge means a lower amount will be passed on to electricity consumers,” Commissioner Mendoza said.

Under the ERC resolution, distribution utilities must revise their billing formats within 60 days of its effectivity to present the system loss charge separately as a government-mandated item not subject to VAT, according to earlier Daily Guardian reporting.

The forthcoming circular expands the BIR’s earlier clarification of the tax treatment of government-mandated electricity charges.

Revenue Memorandum Circular No. 60-2026, issued in June, declared that the Lifeline Subsidy, Green Energy Auction Allowance and other specified government-mandated charges are not subject to output VAT and related creditable withholding taxes.

The system loss charge was not covered by RMC No. 60-2026, making another BIR issuance necessary before the benefit can be passed on to consumers.

“We will continue reviewing our tax rules for areas where their proper application can provide practical relief to taxpayers. Where the law allows it, we want that relief to be clear, immediate, and felt by our people,” Commissioner Mendoza said.