BIR Scraps VAT on System Loss Charge in Electricity Bills

The Bureau of Internal Revenue (BIR) has formally removed the value-added tax (VAT) on the allowable system loss charge in electricity bills, a move seen to lower the amount passed on to consumers. In its Revenue Memorandum Circular (RMC) 97-2026, the BIR recognizes the allowable system loss charge within the cap approved by the Energy Regulatory Commission (ERC) as a government-mandated charge excluded from gross sales for VAT purposes. The BIR stated that the exclusion will apply prospectively in accordance with the effectivity of ERC Resolution 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,” said BIR Commissioner Charlito Martin Mendoza. This move comes as the Philippines has some of the most expensive electricity rates in Southeast Asia, according to the Department of Energy. The circular specifies that the charge will not be subject to output VAT and creditable withholding on VAT. However, the exclusion does not extend to income tax and the corresponding creditable withholding tax. For VAT purposes, the BIR requires that the allowable system loss charge be separately identified in the billing statement, invoice, or similar document. Generation companies, the National Grid Corp. of the Philippines, distribution utilities, electric cooperatives, and other affected taxpayers must ensure proper billing, accounting, reporting, and separate identification of the charge in accordance with applicable ERC rules and tax regulations. Mendoza highlighted that while the issuance may be a fraction of a broader push to reduce electricity costs, it provides relief that can be implemented under existing law. “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 issuance builds on the BIR’s earlier action to clarify the tax treatment of government-mandated electricity charges. Under RMC 60-2026, the agency had clarified the tax treatment of the Lifeline Subsidy, Green Energy Auction Allowance, and other specified government-mandated charges. Meanwhile, prices for gasoline, diesel, and kerosene are set to increase by as much as P5.68, P4.31, and P4.62 per liter, respectively, due to the surge in regional benchmark Dubai crude prices, which surpassed $100 a barrel to hit $116 last week. The Department of Energy has informed the Department of Finance of the breaching of the Dubai crude price threshold, which could trigger the suspension or reduction of fuel excise taxes under Republic Act 12316, should the President decide to act on it. Regasco is urging the DOE to recommend suspending the excise tax on diesel and gasoline, not just on liquefied petroleum gas (LPG). Regasco president Arnel Ty stated that suspending excise taxes on these widely used energy products would provide much-needed relief for consumers, especially as the "ber months" approach and considering geopolitical tensions affecting oil prices.