System Loss Charge May Soon Be Exempt From 12% VAT
- September 2, 2026
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The Energy Regulatory Commission (ERC) has approved a resolution excluding the allowable system loss charge from the 12-percent value-added tax (VAT) base, a move that could lower electricity bills once it is confirmed by the Bureau of Internal Revenue (BIR).
Under ERC Resolution No. 26, Series of 2026, approved on August 26, the allowable system loss charge was declared 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 (NGCP), and distribution utilities (DUs) for VAT purposes.
The exclusion will apply prospectively only after the resolution is published and a confirmatory issuance from the BIR takes effect.
The ERC said the move would remove the VAT currently imposed on the allowable system loss component of electricity bills. However, it stressed that this would not mean a 12-percent reduction in a consumer’s total power bill, as the benefit would apply only to the VAT charged on the system loss component.
“We are clarifying the nature of the allowable system loss charge as a government-mandated pass-through cost,” ERC Chairperson and Chief Executive Officer Atty. Francis Saturnino C. Juan said.
“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,” he added.
Not Part Of Gross Sales
System loss refers to electricity that has already been generated and paid for but is physically lost while being transmitted or distributed through the power network before reaching end-users.
These losses include technical losses in conductors, transformers, and other distribution equipment. They also include non-technical losses arising from electricity pilferage, illegal connections, and meter tampering.
Under existing regulations, consumers may only be charged for system losses that fall within caps prescribed by the ERC. Distribution utilities are allowed to recover these costs through the system loss charge reflected in electricity bills.
Losses that exceed the approved caps cannot be passed on to consumers and must be absorbed exclusively by the distribution utilities concerned.
The ERC regulates the recovery of allowable losses through the System Loss Rate adjustment mechanism and applicable system loss caps.
According to the commission, the allowable system loss charge represents the recovery of regulated costs associated with electricity losses, rather than income earned by power companies from selling electricity or providing services.
Because of this distinction, the ERC ruled that the charge should not be included in gross sales subject to the 12-percent VAT under the National Internal Revenue Code of 1997, as amended.
BIR Action Still Needed
The BIR’s confirmation remains necessary before consumers can benefit from the proposed tax relief.
The latest ERC action follows Revenue Memorandum Circular No. 60-2026, issued in June, which excluded several government-mandated electricity charges from output VAT and applicable withholding taxes.
These include 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.
System loss was not included in the circular, prompting the ERC to seek further action to establish its VAT treatment.
The commission began the rulemaking process earlier in August following a government directive aimed at easing electricity costs.
The ERC 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, a day before the commission approved the final measure.
The resolution was later announced by the regulator on August 28.
Clearer Billing For Consumers
Aside from the proposed VAT exclusion, the resolution requires distribution utilities to make the system loss charge more visible on consumers’ electricity bills.
Within 60 days from the resolution’s effectivity, all DUs must revise their billing formats to separately and distinctly show system loss as a government-mandated line item that is not subject to VAT.
The separate presentation is intended to improve transparency by allowing consumers to determine how much they pay for allowable electricity losses and verify that no VAT is being imposed on the charge once the BIR confirms the exclusion.
Source:
https://tribune.net.ph/2026/08/29/erc-ruling-puts-system-loss-outside-vat-net
https://www.dailyguardian.com.ph/blog/erc-approves-vat-free-system-loss-awaits-bir
