BIR Removes VAT on System Loss Charges in Power Bills

MANILA, Philippines — Electricity consumers will no longer pay the 12% value-added tax on allowable system loss charges, after the Bureau of Internal Revenue excluded the charge from the VAT base of power companies. Under Revenue Memorandum Circular No. 97-2026 issued Monday, September 14, the BIR recognized allowable system loss as a government-mandated pass-through cost rather than part of the gross sales of generation companies, the National Grid Corp. of the Philippines and distribution utilities. This means the allowable system loss charge, within the cap set by the ERC, will no longer be subject to the 12% VAT. "Every peso saved by consumers counts. This may be one part of a broader effort to bring down electricity costs, but it is a relief that can be implemented under existing law," BIR Commissioner Charlito Martin Mendoza said. The circular confirms an ERC resolution approved August 26 declaring allowable system loss a government-mandated pass-through cost that should not form part of power companies' gross sales for VAT purposes. The ERC said the exclusion would apply prospectively once its resolution was published and the BIR issued the corresponding tax guidance. System loss refers to electricity that is generated and paid for but is lost before reaching consumers, including technical losses in power lines and equipment and non-technical losses such as pilferage and illegal connections. The BIR's relief does not remove the system loss charge itself. Consumers will continue to pay the portion of electricity losses that utilities are allowed to recover under Energy Regulatory Commission rules, as well as VAT on other taxable components of their electricity bills. Utilities may recover only system losses within limits prescribed by the ERC. Losses beyond those caps cannot be passed on to consumers and must be absorbed by the distribution utility. Under the new tax treatment, consumers will continue paying the allowable system loss charge itself, but the additional 12% VAT previously imposed on that portion of the bill will be removed. VAT will continue to apply to taxable generation, transmission and distribution charges. But, Mendoza said, this "means a lower amount will be passed on to consumers on covered billings and transactions." The BIR directed generation companies, NGCP and distribution utilities to separately identify allowable system loss charges in billing and related documents. The change addresses only the VAT imposed on system loss charges, falling short of President Ferdinand Marcos Jr.'s broader call to remove the system loss charge itself from consumers' bills. During his fifth State of the Nation Address in July, Marcos urged Congress to amend the Electric Power Industry Reform Act, or EPIRA, to prohibit utilities from passing system losses, including the corresponding VAT, on to consumers. "Pinapasa ito sa consumer at kinakarga sa bill na pinapatungan pa ng value-added tax. Hindi naman kasalanan ng consumer kung bakit nagkaroon ng system loss," Marcos said. ("It is passed on to consumers and included in their bills, where it is also subjected to value-added tax. Consumers are not responsible for the system loss.") Removing the underlying system loss charge would require broader changes to the existing regulatory framework. For now, consumers will still shoulder allowable system losses but without the VAT previously added to them.