BIR removes VAT on system loss charge

Electricity consumers are set to get a small but direct reduction in their power bills after the Bureau of Internal Revenue removed the 12% value-added tax on the allowable system loss charge.

Under Revenue Memorandum Circular No. 97-2026 issued Sept. 14, the BIR classified the allowable system loss within the Energy Regulatory Commission-approved cap as a government-mandated pass-through cost, meaning it will no longer form part of gross sales subject to VAT.

The change applies prospectively once the new rules take effect. It does not eliminate the system loss charge itself. Consumers will continue paying the allowable cost of electricity lost in the power system, but the additional VAT previously imposed on that portion of the bill will be removed.

System loss refers to electricity that is generated and paid for but does not reach consumers because of losses along the power system. These include technical losses in conductors, transformers and other equipment, as well as non-technical losses such as electricity pilferage, illegal connections and meter tampering.

Only losses within limits allowed by the ERC may be passed on to consumers. Losses above the applicable regulatory cap cannot be recovered from customers and must instead be absorbed by the distribution utility.

“For consumers, the practical effect is straightforward: once the new rules become effective, VAT will no longer be imposed on the allowable system loss portion of the electricity bill. That means a lower amount will be passed on to consumers on covered billings and transactions,” BIR Commissioner Charlito Martin R. Mendoza said.

The relief applies only to the VAT attached to system loss, not the 12% VAT imposed on every other taxable component of an electricity bill. The actual peso savings will therefore depend on a consumer’s electricity use and the system loss charge of the utility serving the area.

The BIR action completes a regulatory process started by the ERC in August. The commission approved Resolution No. 26, Series of 2026 on Aug. 26, declaring allowable system loss a government-mandated pass-through cost rather than revenue earned by generators, the National Grid Corp. of the Philippines or distribution utilities.

The ERC said the change addresses what it described as a layered burden on consumers: paying for allowable electricity losses and then paying VAT on that charge. Its resolution required BIR confirmation before the VAT exclusion could be implemented.

Utilities must separately identify the allowable system loss charge in electricity bills, invoices or similar documents for the VAT exemption to apply.

Generation companies, NGCP, distribution utilities and electric cooperatives are also required to properly account for and report the charge under ERC and tax rules.

The exemption does not extend to income tax and the corresponding creditable withholding tax.

RMC No. 97-2026 follows earlier BIR action exempting several other government-mandated electricity charges from output VAT, including the Lifeline Subsidy and Green Energy Auction Allowance. Other recognized charges include the Universal Charge, Feed-in Tariff Allowance, energy tax and certain franchise and real property taxes.

“Every peso saved by consumers counts,” Mendoza said. “This may be one part of a broader effort to bring down electricity costs, but it is relief that can be implemented under existing law.”

The measure will reduce electricity bills, but only by the VAT previously collected on the system loss component. It does not address the larger drivers of power rates such as generation, transmission, distribution and other pass-through charges.