ERC approves VAT-free system loss, awaits BIR

PASIG CITY — The Energy Regulatory Commission approved on August 26, 2026, a resolution excluding the allowable system loss charge from the 12% value-added tax base, the regulator announced on August 28.

The measure could reduce electricity bills by removing VAT from power consumers never actually receive, but the savings will not take effect until the Bureau of Internal Revenue issues the required confirmation.

The exclusion will apply prospectively after the resolution is published and the BIR’s confirmatory issuance takes effect.

It would not reduce an entire electricity bill by 12%, as the benefit would apply only to the VAT currently imposed on the allowable system loss component.

The ERC declared system loss an inherent government-mandated pass-through cost that does not form part of the gross sales of generation companies, the National Grid Corporation of the Philippines and distribution utilities.

The charge will therefore be excluded from gross sales subject to the 12% VAT under the National Internal Revenue Code of 1997, as amended.

System loss refers to electricity that has been generated and paid for but is lost while being delivered through the distribution network before reaching end-users.

Technical system losses occur in conductors, transformers and other distribution equipment.

Non-technical losses include electricity pilferage, illegal connections and meter tampering.

Only system losses within ERC-prescribed caps may be recovered from consumers through the system loss charge appearing on electricity bills.

Losses exceeding the approved caps are non-recoverable and must be borne exclusively by the distribution utility concerned.

The ERC regulates cost recovery through its System Loss Rate adjustment mechanism and applicable system loss caps.

The commission said the allowable system loss charge represents the recovery of regulated costs rather than revenue from electricity sales or services.

“The allowable system loss charge is a government-mandated pass-through cost. It is therefore appropriate that it should not form part of the VAT base,” ERC Chairperson and CEO Atty. Francis Saturnino C. Juan said.

The proposed tax treatment would align system loss with other government-mandated electricity charges that the BIR already treats as pass-through collections rather than utility income.

Revenue Memorandum Circular No. 60-2026, issued in June 2026, excludes the energy tax, universal charges, benefits to host communities, feed-in tariff allowance, national and local franchise taxes, real property tax, lifeline subsidy and Green Energy Auction Allowance from output VAT and applicable withholding taxes.

System loss was not included in that circular, making further BIR action necessary before consumers can receive the proposed relief.

The ERC began the rulemaking process earlier in August following a government directive to ease electricity costs.

The commission approved the draft resolution for posting on August 10 and accepted stakeholder comments until August 18.

A public consultation involving power industry participants and consumers was held on August 25 before the ERC approved the final resolution the following day.

The final measure was issued as ERC Resolution No. 26, Series of 2026, amending relevant provisions of ERC Resolution No. 20, Series of 2005, and ERC Resolution No. 14, Series of 2022.

Within 60 days from the new resolution’s effectivity, all distribution utilities must revise their billing formats to show the system loss charge separately and distinctly as a government-mandated line item not subject to VAT.

The separate presentation is intended to help consumers determine how much they pay for allowable electricity losses and verify that no VAT is imposed once the BIR confirms the exclusion.