BIR set to cut VAT on system loss

CEBU, Philippines — The Bureau of Internal Revenue (BIR) is preparing an issuance that will remove the 12-percent value-added tax (VAT) on allowable system loss charges, a move expected to help lower electricity bills for consumers.

In a statement, the tax agency said it would issue a Revenue Memorandum Circular (RMC) after the lapse of 15 days from the publication of Energy Regulatory Commission (ERC) Resolution No. 26, which classifies the system loss charge as a government-mandated pass-through cost.

“When there is a clear basis under the law to provide tax relief, we should act on it," BIR Commissioner Charlito Martin Mendoza said, following public clamor to reduce the cost of electricity.

"We are preparing the BIR issuance now so that after the required period has lapsed, we can immediately implement the VAT removal and pass the benefit on to electricity consumers,” he added.

System loss refers to electricity that has been generated and paid for but is physically lost during transmission and distribution before reaching end-users.

These losses may result from technical factors involving conductors, transformers and other distribution equipment, as well as non-technical causes such as pilferage, illegal connections and meter tampering.

Finance Secretary Frederick Go earlier estimated that the removal of VAT from allowable system loss charges could cost the government about P10 billion annually in foregone revenues.

Under ERC Resolution No. 26, Series of 2026, the allowable system loss charge is treated as a cost recovered through electricity bills rather than income earned by generation companies, the National Grid Corporation of the Philippines (NGCP), and distribution utilities.

Mendoza said consumers should not be paying VAT on electricity that never actually reaches their homes or businesses.

“A pass-through charge is a cost collected from consumers and passed on to the proper recipient. Removing VAT from that charge means a lower amount will be passed on to electricity consumers,” he said.

The upcoming issuance follows an earlier BIR clarification on the tax treatment of government-mandated electricity charges.

Under RMC No. 60-2026, issued in June, the BIR clarified that the Lifeline Subsidy, Green Energy Auction Allowance and other specified government-mandated charges are not subject to output VAT and related creditable withholding taxes.

“We will continue reviewing our tax rules for areas where their proper application can provide practical relief to taxpayers. Where the law allows it, we want that relief to be clear, immediate and felt by our people,” Mendoza added. — Philippine Star News Service/FPL (FREEMAN)