Philippines BIR exempts allowable system loss charges from VAT

The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular No. 97-2026, removing the Value-Added Tax (VAT) on allowable system loss charges. This charge, which must fall within the cap approved by the Energy Regulatory Commission (ERC), is now recognized as a government-mandated pass-through cost and is excluded from gross sales for VAT purposes.

This change is expected to lower electricity costs for consumers as the covered system loss portion of bills will no longer be subject to output VAT or creditable withholding tax. The measure applies prospectively based on the effectivity of ERC Resolution No. 26, Series of 2026. Affected entities, including generation companies, the National Grid Corporation of the Philippines (NGCP), and distribution utilities, must separately identify these charges in their billing statements.

Senator Loren Legarda noted that the move follows her previous legislative efforts and inquiries into the VAT treatment of electricity charges. While the exemption provides relief on VAT, BIR Commissioner Charlito Martin R. Mendoza clarified that the exclusion does not extend to income tax or corresponding creditable withholding tax.