THE Bureau of Internal Revenue (BIR) has removed the value-added tax (VAT) on the allowable system loss charge in electricity bills to provide relief to consumers by lowering the tax component of their power costs.
In Revenue Memorandum Circular (RMC) No. 97-2026 issued Monday, the BIR formally recognized the allowable system loss charge within the cap approved by the Energy Regulatory Commission (ERC) as a “government-mandated pass-through cost” that should be excluded from gross sales for VAT purposes.
This means the allowable system loss charge will no longer be subject to output VAT, reducing the amount that can be passed on to consumers in covered electricity billings.
“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,” BIR Commissioner Charlito Martin Mendoza said in a statement on Monday.
“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.
The ERC approved the resolution on Aug. 26, 2026, declaring that the allowable system loss charge does not form part of the gross sales of generation companies, the National Grid Corp. of the Philippines (NGCP) and distribution utilities for VAT purposes.
System loss refers to electricity that has already been generated and paid for but is lost before it reaches end-users through the distribution network. It can include technical losses from conductors, transformers and other distribution equipment, as well as nontechnical losses such as electricity pilferage, illegal connections, and meter tampering.
Under the ERC’s rules, however, only system losses within the regulator’s prescribed caps can be recovered from consumers through the system loss charge. Losses beyond the approved limits cannot be passed on to consumers and must instead be absorbed by the concerned distribution utility.
The BIR stressed that the measure does not remove VAT from the entire electricity bill. Rather, the tax relief applies only to the allowable system loss charge that is separately identified and covered by the ERC rules.
The charge must be separately identified in the billing statement, invoice or similar document to qualify for the VAT treatment.
“All concerned gen cos (generation companies), NGCP, DUs (distribution utilities), electric cooperatives, and other affected taxpayers shall ensure the proper billing, accounting, reporting, and separate identification of the allowable System Loss Charge in accordance with applicable ERC rules and regulations and the applicable provisions of the Tax Code and its implementing rules and regulations,” Mendoza said.
The ERC earlier said distribution utilities would be required to modify their billing formats to separately and distinctly reflect the system loss charge as a government-mandated line item that is not subject to VAT.
The BIR said the exclusion will apply prospectively in accordance with the effectivity of ERC Resolution No. 26, Series of 2026.
The bureau also clarified that the new treatment is limited to VAT purposes. The exclusion does not extend to income tax or the corresponding creditable withholding tax.
“Once the new rules become effective, VAT will no longer be imposed on the allowable system loss portion of the electricity bill,” Mendoza said.
“That means a lower amount will be passed on to consumers on covered billings and transactions,” he added.
