Philippines Eases Household Burden with VAT Exemption on System Loss Charges

The Philippines is set to ease the burden on household electricity bills with the exemption of value-added tax (VAT) on "system loss charges." This move, outlined in Bureau of Internal Revenue (BIR) Revenue Memorandum Circular (RMC) No. 97-2026, aims to provide tangible relief to consumers facing rising energy costs. System loss refers to electricity that is generated and paid for but lost before reaching consumers. This can be technical, due to grid inefficiencies, or non-technical, stemming from pilferage and illegal connections. The Energy Regulatory Commission (ERC) permits distribution utilities (DUs) to recover a portion of these losses from consumers, but within prescribed caps. Losses exceeding these limits must be absorbed by the DUs themselves. RMC No. 97-2026, aligning with the ERC's stance, clarifies that allowable system loss charges, within the ERC-approved cap, are considered "pass-through costs" rather than income for power generation companies and transmission operators. Consequently, these costs are now excluded from the VAT base. For instance, a system loss charge of P190.26 previously included an associated VAT of approximately P18.38, which consumers had to bear. With the new circular, this VAT component will be removed, resulting in direct savings. The Department of Energy (DoE) estimates that an average household consuming around 200 kilowatt-hours per month could save at least P20.00 monthly. While seemingly small for an individual, the aggregate savings across millions of consumers are expected to be significant. This VAT relief also imposes compliance obligations on power companies, requiring them to clearly itemize system loss charges on billing statements. The ERC has subsequently issued Resolution No. 28, Series of 2026, mandating a revised billing format to facilitate the identification of these non-VATable pass-through charges. While the change will not drastically reduce electricity bills overnight, the removal of VAT on allowable system losses represents a deliberate effort to ensure that VAT is imposed only on amounts that constitute actual sales or income. This measure is part of a broader initiative to alleviate the financial pressure on Filipino households and businesses. Information Source: BusinessWorld Economy