Metro Manila, Philippines – The Bureau of Internal Revenue has removed the 12 percent value-added tax on the allowable system loss charge in electricity bills, a move projected to result in savings to consumers of about ₱6 billion a year.
For a typical household consuming 200 kilowatt-hours a month, this could translate to around ₱21 in monthly savings, according to an earlier estimate from the Energy Regulatory Commission (ERC).
Under Revenue Memorandum Circular 97-2026 issued on Sept. 14, the allowable system loss charge within the ERC-approved cap will be treated as a government-mandated pass-through cost and excluded from the gross sales of power companies for VAT purposes.
The system loss charge itself is not being removed. The new policy eliminates the VAT imposed on the allowable portion of the charge.
System loss refers to electricity that has been generated and paid for but is lost before reaching consumers because of technical losses in the power network or non-technical losses such as pilferage and illegal connections.
Only losses within ERC-prescribed caps may be passed on to consumers, while excess losses must be absorbed by distribution utilities.
“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 Mendoza said in a statement.
The BIR circular states that it takes effect immediately and will apply prospectively in accordance with the effectiveness of ERC Resolution 26, Series of 2026.
Distribution utilities are also required to modify their billing formats within 60 days from the effectiveness of the ERC resolution to separately show the system loss charge as a government-mandated item not subject to VAT.
“Every peso saved by consumers counts. This may be one part of a broader effort to bring down electricity costs, but it is a relief that can be implemented under existing law,” Mendoza said.
“While Congress continues to consider wider reforms on electricity charges and taxes, the BIR is acting on the measures within its authority that can reduce the burden on consumers,” he added.
For VAT purposes, the allowable system loss charge must be separately identified in the billing statement, invoice or similar document. Generation companies, the National Grid Corporation of the Philippines, distribution utilities and electric cooperatives must also properly account for and separately report the charge.
The VAT exclusion does not extend to income tax and the corresponding creditable withholding tax.
The BIR earlier clarified the tax treatment of other government-mandated electricity charges, including the lifeline subsidy – a rate discount and social protection program in the Philippines for marginalized and low-income households – and green energy auction allowance, which funds new renewable energy projects like solar, wind, and hydro.
President Ferdinand Marcos Jr., in his fifth State of the Nation Address, called for the removal of system loss charges.
