BIR Removes VAT On System Loss Charges, But Economists Seek Deeper Power Reforms

The Bureau of Internal Revenue (BIR) has removed the 12% value-added tax (VAT) on allowable system loss charges in electricity bills, a measure expected to provide modest savings to consumers. Economists stress, however, that it does not address the deeper factors behind the country’s high power costs.

Under Revenue Memorandum Circular No. 97-2026, issued on Sept. 14, the BIR recognized the allowable system loss charge within the cap approved by the Energy Regulatory Commission (ERC) as a government-mandated pass-through charge excluded from gross sales for VAT purposes.

The exclusion will apply prospectively based on the effectivity of ERC Resolution No. 26, Series of 2026.

“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 government estimates that the measure could generate around ₱6 billion in annual savings for power consumers, while resulting in about ₱10 billion in foregone government revenue.

Under the circular, the allowable system loss charge will not be subject to output VAT and creditable withholding on VAT. The exclusion does not cover income tax and the corresponding creditable withholding tax.

For the VAT treatment to apply, the 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, electric cooperatives and other affected taxpayers are required to comply with applicable ERC and tax rules on billing, accounting, reporting, and separate identification of the charge.

Limited Impact

Former Finance Secretary Margarito B. Teves described the measure as a “small win” for consumers, particularly households and small businesses dealing with elevated inflation.

“This would provide modest financial relief to Filipino households and small businesses in a time of elevated inflation,” Teves said.

However, he said the government would have to manage the fiscal impact of the measure without adding to debt or cutting productive spending. He also called for the Executive branch and Congress to identify revenue-generating measures to offset the revenue foregone.

Teves said removing VAT on system losses does not resolve the broader issues behind high electricity costs, which he described as a major deterrent to businesses investing in the Philippines.

He urged distribution utilities and electric cooperatives to reduce operational inefficiencies and invest in infrastructure upgrades, including smart meters and digital technologies to detect electricity pilferage and illegal connections.

He also called for a review of provisions of the 25-year-old Electric Power Industry Reform Act and measures to address bureaucratic delays affecting generation and transmission projects.

Peter Lee U, associate professor and dean of the School of Economics at the University of Asia and the Pacific, said the immediate effect of the VAT removal would likely be limited because system losses account for only a fraction of a typical electricity bill.

“I don’t recall the exact figure, but I think system losses are only a small portion of the bill. About 5.7% only of my last bill. Generation is largest at about 58%,” Lee U said.

He also noted that the ERC sets a ceiling on the system losses that distribution utilities can pass on to consumers. Because some level of system loss is physically unavoidable, he said there is a limit to how much this component can be reduced.

Lee U said policymakers should instead focus more heavily on encouraging investment in power generation and transmission.

“The more urgent battle seems to be how to incentivize generation and transmission investment,” he said.

Broader Reforms Sought

IBON Foundation Executive Director Jose Enrique A. Africa said the projected ₱6 billion in consumer savings was welcome but would provide only limited relief.

“Removing VAT on system loss charges provides limited relief at the margins but doesn’t really address why Philippine electricity is so expensive in the first place,” Africa said.

He said the savings should not distract from problems involving power generation, transmission and distribution. Africa also questioned whether households and small businesses would receive most of the benefits or whether larger commercial and industrial consumers would capture a greater share.

The BIR said the measure forms part of its broader treatment of government-mandated electricity charges. Under RMC No. 60-2026, the agency had earlier clarified the tax treatment of the Lifeline Subsidy, Green Energy Auction Allowance and other specified charges.

Mendoza said the latest issuance represents relief that can be implemented under existing law while Congress considers broader reforms.

“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.”

Source:

https://tribune.net.ph/2026/09/14/bir-removes-vat-from-system-loss-charge

https://www.philstar.com/headlines/2026/09/15/2556340/bir-scraps-vat-system-loss-charge

https://bworldonline.com/economy/2026/09/16/777910/system-loss-vat-relief-seen-limited-d