Electricity consumers are set to receive a modest reduction
in their power bills after the Bureau of Internal Revenue ruled that allowable
system loss charges should no longer be included in the value-added tax base of
power companies.
The new tax treatment takes effect under Revenue Memorandum
Circular No. 97-2026, issued on September 14. It covers allowable system loss
charges incurred by generation companies, the National Grid Corporation of the
Philippines, and distribution utilities, provided these remain within the
limits established by the Energy Regulatory Commission.
The ruling does not eliminate system loss charges from
electricity bills. Instead, it removes the additional 12% VAT that was
previously imposed on the amount consumers pay for allowable losses.
In practical terms, the change separates two issues that are
often treated as one. Consumers will still shoulder system losses that
utilities are legally permitted to recover, but those charges will no longer
carry an additional VAT burden.
System loss remains, but its tax treatment changes
System loss represents electricity that is purchased or
generated but does not ultimately reach the customer. Part of it results from
technical losses in power lines, transformers and other equipment. Another
portion can arise from non-technical losses, including electricity pilferage
and illegal connections.
The ERC sets a ceiling on how much of these losses utilities
may recover from consumers. Any amount exceeding the regulatory limit cannot
simply be transferred to customers and must instead be absorbed by the
distribution utility.
What the BIR has now changed is the tax treatment of the
allowable portion.
The system loss charge itself remains payable. However, the
12% VAT previously added to that charge will no longer be collected. VAT will
continue to apply to other taxable components of electricity bills, including
applicable generation, transmission and distribution charges.
BIR Commissioner Charlito Martin Mendoza said the measure
provides immediate relief within the existing legal framework, emphasizing that
even a small reduction matters when households and businesses are facing high
electricity costs.
The BIR has also instructed generation companies, NGCP and
distribution utilities to identify allowable system loss charges separately in
their billing statements and related documents. This requirement is intended to
make the affected amount distinguishable from other taxable electricity
charges.
ERC decision paved the way for the BIR ruling
The tax adjustment follows an ERC resolution approved on
August 26. The regulator determined that allowable system loss constitutes a
government-mandated pass-through cost rather than revenue belonging to power
companies.
That distinction is central to the BIR's decision.
Because the allowable system loss amount is treated as a
pass-through cost, it should not form part of a power company's gross sales for
VAT purposes. The BIR subsequently issued the tax guidance needed to implement
that interpretation.
The exclusion applies prospectively following the
publication of the ERC resolution and the issuance of the corresponding BIR
circular.
For consumers, the result is straightforward: the portion of
the bill attributable to allowable system loss will no longer receive an
additional 12% tax charge.
Relief falls short of the proposed end to system loss
charges
The BIR action addresses only the taxation of system loss
and does not fulfill the broader proposal to remove the charge itself from
consumers' electricity bills.
President Ferdinand Marcos Jr. called for a more extensive
change during his fifth State of the Nation Address in July, urging Congress to
amend the Electric Power Industry Reform Act, or EPIRA.
The President argued that consumers should not be made
responsible for system losses that occur within the electricity supply and
distribution system. His proposal included ending the practice of passing
system loss charges, along with the associated VAT, to electricity customers.
Achieving that objective would require legislative and
regulatory changes beyond the scope of the latest BIR circular.
For now, the government has taken a narrower step. Consumers
will continue to pay allowable system losses under existing ERC rules, but the
tax previously attached to those charges has been removed.
The measure therefore offers immediate savings without changing the underlying mechanism that allows utilities to recover regulated system losses from consumers.
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