BIR clarifies VAT treatment of allowable system loss charges

On 14 September 2026, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 097-2026, circularizing Energy Regulatory Commission (ERC) Resolution No. 26, Series of 2026, and clarifying that allowable system loss charges are government-mandated pass-through charges and should not form part of the gross sales of generation companies (GenCos), the National Grid Corporation of the Philippines (NGCP), and distribution utilities (DUs) for Value-Added Tax (VAT) purposes.

What are System Loss and System Loss Charges?

System loss refers to electricity that is lost during the transmission and distribution of power from generators to end-users. System losses generally arise from:

• Technical losses resulting from the normal operation of power lines, transformers, substations, and other electrical equipment; and,
• Non-technical losses resulting from unauthorized consumption such as power theft, illegal connections, and meter tampering.

To recover the cost of allowable system losses incurred in delivering electricity, the ERC authorizes DUs to collect a corresponding charge from consumers. The collected amounts are subsequently remitted to the appropriate generation companies or the NGCP.

Since DUs merely collect and remit the allowable system loss charge in accordance with ERC regulations, the charge is considered a government-mandated pass-through cost rather than income earned by the collecting entity. Any system loss in excess of the allowable ERC-prescribed cap is borne by the DUs and cannot be passed on to consumers.

What is the tax implication?

Under the Tax Code, as amended, VAT is generally imposed on the gross selling price or gross receipts received from the sale of goods or services.

Consistent with ERC Resolution No. 26, Series of 2026, the BIR confirmed that the allowable system loss charge is not part of the gross sales of GenCos, NGCP, and DUs because it represents a government-mandated pass-through charge rather than consideration for the sale of goods or services. Accordingly:

• The allowable system loss charge is excluded from the VAT base;
• The corresponding creditable withholding VAT (CWVAT) does not apply to the excluded amount; and,
• The exclusion applies only when the allowable system loss charge is separately identified in the billing statement, invoice, or similar document.

What is the impact on consumers?

The exclusion of the allowable system loss charge from the VAT base may reduce the VAT component of electricity bills, resulting in lower electricity costs for consumers.

When is it effective?

RMC No. 097-2026 took effect immediately and applies prospectively.

Source:  

P&A Grant Thornton  

Certified Public Accountants  

P&A Grant Thornton is the Philippine member firm of Grant Thornton International Ltd

As published in SunStar Cebu, dated 23 September 2026