After years of it being charged to our monthly electric bills, the Bureau of Internal Revenue (BIR) has officially removed the value-added tax (VAT) on system loss charge of power utilities like the Manila Electric Co. (Meralco). The BIR officially issued Revenue Memorandum Circular (RMC) No. 97-2026, removing the 12 percent VAT on allowable system loss charges within the cap approved by the Energy Regulatory Commission (ERC).
System loss is the electricity lost as power travels from power plants to homes due to technical factors like heat in wires and transformers and non-technical issues like electricity theft and illegal connections.
“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,” BIR Commissioner Charlito Martin Mendoza announced last Monday.
The BIR’s RMC No. 97-2026 follows ERC Resolution No. 26, approved on Aug. 26, which declared that charge – within the ERC cap – a government-mandated pass-through cost. The charge is no longer part of the gross sales of generation companies, the National Grid Corporation of the Philippines (NGCP) and distribution utilities for VAT purposes. It takes effect immediately.
The VAT is a consumption tax. So why should we pay for systems losses when we did not even use the electricity?
For VAT purposes, the BIR explained the allowable system loss charge must be separately identified in the billing statement, invoice or similar document. Generation companies, transmission companies like NGCP, distribution utilities like Meralco, electric cooperatives and other affected utilities must also ensure proper billing, accounting, reporting and separate identification of the charge in accordance with applicable ERC rules and tax regulations, the BIR further instructed.
The BIR clearly stated though in its directive “allowable” because system loss charge is regulated by the government upon utility companies that deliver services like power and water to public. While it is an authorized pass-on charge to us customers, there is an allowed limit or cap set by law to ensure these public utilities do not abuse it. It is meant to prod these utilities to improve efficiency in their system of delivery of services, whether these losses such as leakages from theft, illegal connections or damages are minimized, if not totally avoided.
Finally, we can now see the light of the end of the tunnel metaphorically. This came about only after no less than President Ferdinand “Bongbong” Marcos Jr. (PBBM) gave the marching order in his penultimate State of the Nation Address (SONA) before the 20th Congress last July 27.
PBBM demanded that Congress immediately amend the 2001 Electric Power Industry Reform Act (EPIRA) that will henceforth prohibit the passing of system loss charges and their corresponding VAT to consumers. Speaking in Tagalog, PBBM made the dramatic policy direction that he vowed to see implemented before the end of his term in July, 2028.
“And if we are talking about lowering prices, I think it is time to remove the system loss that is passed on to the consumer.
It is not the consumer’s fault why there is a system loss. Therefore, we, their people, request – no, we demand – the immediate amendment of the EPIRA and to prohibit charging system loss against consumers, including the VAT thereon,” PBBM told lawmakers.
It was one of the most applauded portions of the President’s SONA at a time when Filipinos began reeling from the impact of the Middle East (ME) conflict between the US and Iran that erupted in February this year.
In the Philippines, we have laws like the EPIRA that mandated power rates to be fully unbundled. Under Republic Act (RA) No. 9136, or the EPIRA that took effect in June 2001, distribution utilities are legally allowed to pass a portion of these losses on to end-users through monthly electric bills of households and businesses. The higher VAT rate started being imposed and collected following the implementation of the Reformed Value-Added Tax (RVAT) law (RA No. 9337) in November 2005, with the 12 percent rate fully taking effect in February 2006.
That’s why through these years, the Philippines has the most expensive electricity rates and consequently losing its competitive advantage to our Southeast Asian neighbors. No less than the Department of Energy (DOE) conceded this fact as the biggest disincentive to prospective investors to locate and operate their manufacturing companies here in our country.
Incidentally, both the EPIRA and the RVAT were signed into law by former president and now still congresswoman of Pampanga, Gloria Macapagal-Arroyo. A former Arroyo Cabinet member and now Murang Kuryente party-list Rep. Arthur Yap hailed the speed by which the BIR chief “found the legal basis and used it” to implement PBBM’s policy directive to remove the VAT charge out of system losses.
Yap, vice chairman of the House energy committee, noted the DOE calculated removing the VAT charge to systems loss itself would cut bills by five to ten percent.
“Now the arithmetic…Meralco’s September rate is P14.7424 per kWh. So today’s relief is about six-tenths of one percent of the bill – P17 to P19 a month for a household using 200 kWh (kilowatthour),” Yap computed.
“Remove the system loss charge from consumer bills entirely – technical and non-technical losses, not just the tax on top,” Yap urged. “And only a law can undo a law… That is the benchmark, and Congress will be measured against it,” he pointed out.
The BIR chief hastily clarified the exclusion of the 12 percent VAT “will apply prospectively” in accordance with the effectivity of ERC Resolution 26, Series of 2026. Obviously, the BIR does not want refunds to be demanded from them. These VAT charges on system loss were collected from us taxpayers through our electric bills that Meralco et.al. collected for the government.
So we can only reasonably expect BIR to strongly lobby for Congress to make sure a “no refund” provision will be included in the pending bills to amend the EPIRA.