BIR removes VAT on system loss charge

MANILA, Philippines — The Bureau of Internal Revenue (BIR) has removed the value-added tax (VAT) on the allowable system loss charge within the cap approved by the Energy Regulatory Commission (ERC).

In Memorandum Circular No. 97-2026 issued Monday, the BIR circularized ERC Resolution No. 26 and formally recognized the allowable system loss charge within the ERC-approved cap as a government-mandated charge excluded from gross sales for VAT purposes.

The BIR said the charge is therefore not subject to output VAT and creditable withholding on VAT.

The exclusion, however, does not extend to income tax and the corresponding creditable withholding tax.

The BIR said the removal of VAT on the allowable system loss charge was in line with President Ferdinand Marcos Jr.’s directive to pursue measures that can provide practical relief to consumers.

“Every peso saved by consumers counts. This may be one part of a broader effort to bring down electricity costs, but it is relief that can be implemented under existing law,” BIR Commissioner Charlito Mendoza said in a statement.

“While Congress continues to consider wider reforms on electricity charges and taxes, the BIR is acting on the measures within its authority that can reduce the burden on consumers,” he added.

For VAT purposes, the allowable system loss charge must be separately identified in the billing statement, invoice or similar document.

The circular said all concerned generation companies, the National Grid Corporation of the Philippines, distribution utilities, electric cooperatives and other affected taxpayers must ensure the proper billing, accounting, reporting and separate identification of the charge under applicable ERC rules and tax regulations.

The circular takes effect immediately.

“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,” Mendoza said.

“That means a lower amount will be passed on to consumers on covered billings and transactions,” he added.

Mendoza said Marcos and Finance Secretary Frederick Go have emphasized that reforms should translate into benefits consumers can feel.

“This is the kind of reform we want to keep pursuing at the BIR: focused, lawful, and practical. No single measure will solve the entire cost of electricity, but where the tax rules allow us to reduce what consumers have to pay, we at the BIR will act,” Mendoza said. /dm