BIR Removes 12% VAT on the Electricity System Loss Charge: RMC No. 97-2026, Explained

Update (September 14, 2026): The BIR has now issued RMC No. 97-2026, formally removing 12% VAT on the electricity system loss charge. ERC Resolution No. 26, Series of 2026 had already reclassified the charge as a government-mandated pass-through cost, and RMC No. 97-2026 confirms that reclassification for tax purposes — excluding the allowable system loss charge from output VAT and creditable withholding VAT, provided it is separately identified on the billing statement. This guide, originally published while the circular was still pending, now explains what RMC No. 97-2026 actually says. For a peso-level worked example of the savings, see RMC No. 97-2026 Worked Example: How Much VAT You Actually Save on the Electricity System Loss Charge.

What is the system loss charge, and why does it appear on your bill? #

The system loss charge is the line item that recovers the cost of electricity lost between the point of generation and the point where it reaches a customer’s meter. No electricity network is perfectly efficient — some power dissipates as heat in transmission lines and transformers (technical loss), and some is lost to theft, illegal connections, or metering and billing errors (non-technical loss). Because distribution utilities like Meralco and the National Grid Corporation of the Philippines (NGCP) do not generate or consume that lost electricity themselves, they pass an allowable portion of the cost through to customers as a distinct charge rather than absorbing it as an operating expense. Meralco has stated that system loss typically accounts for roughly 5% of a residential customer’s total bill, and its own reported system loss rate stood at 5.72% in the first quarter of 2026 — below the regulatory cap set for the utility.

Why was the system loss charge subject to 12% VAT in the first place? #

VAT applies to the gross receipts or gross selling price a seller earns from a sale of goods, properties, or services, and the system loss charge had historically been bundled into that receipts base for generation companies, NGCP, and distribution utilities. Because the charge appeared as part of the amount these entities collected from customers for delivering electricity, it was taxed the same way as the generation and transmission charges around it — at the standard 12% rate. Critics of this treatment, including some lawmakers who have filed bills to address it directly, argued this meant consumers paid VAT on electricity that was lost in the network and never actually delivered to their homes or businesses. For background on how output VAT is computed and accrued on a sale generally, see Input VAT vs. Output VAT: How BIR VAT Credits Work in the Philippines.

What did ERC Resolution No. 26, s. 2026 actually change? #

ERC Resolution No. 26, Series of 2026 — approved by the Energy Regulatory Commission on August 26, 2026 and published August 28, 2026 — reclassifies the allowable system loss charge as a government-mandated pass-through cost, rather than income the generation companies, NGCP, and distribution utilities earn from selling electricity. That distinction matters because a genuine pass-through cost — money collected from one party and remitted to another on a regulator’s instruction, without markup or profit to the collecting entity — does not belong in the collecting entity’s own gross receipts for VAT purposes. By formally reclassifying the charge this way, the ERC gave the BIR the regulatory basis it needed to exclude the system loss charge from the VAT base of the utilities that collect it.

This builds on an earlier, narrower move by the BIR. In June 2026, RMC No. 60-2026 had already clarified that the Lifeline Subsidy, the Green Energy Auction Allowance, and certain other specified government-mandated charges on electricity bills are not subject to output VAT or related creditable withholding taxes. The system loss charge is a larger, more visible line item than either of those, which is part of why its treatment has drawn wider public attention.

What does RMC No. 97-2026 actually say, now that it’s issued? #

RMC No. 97-2026, issued by the BIR on September 14, 2026 under Commissioner Charlito Martin R. Mendoza, formally excludes the allowable system loss charge — within the cap approved by the ERC — from gross sales for output VAT and creditable withholding VAT purposes. The circular follows through on the commitment reported by BusinessWorld, Philstar, GMA News, and Manila Bulletin in early September 2026, but adds conditions that weren’t settled until the circular itself was published: the charge must be separately identified in the billing statement, invoice, or similar document to qualify for the exclusion, and the exclusion is limited to VAT — it does not extend to income tax or the creditable withholding tax on income. As BusinessWorld reported, quoting the BIR’s own framing of the practical effect:

“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.”

The exclusion applies prospectively, in line with the effectivity of ERC Resolution No. 26, s. 2026 — it does not refund VAT already charged on past bills.

What would removing the VAT mean for a typical bill? #

Because system loss is a relatively small slice of a total electricity bill, removing 12% VAT from it produces a modest but real reduction, not a dramatic drop in the total amount due. For illustration only — using Meralco’s own estimate that system loss runs around 5% of a typical residential bill — a household with a system loss charge of roughly ₱150 in a given month would currently see about ₱18 in VAT computed on that specific line item. Once the RMC takes effect and distribution utilities adjust their billing systems, that ₱18 would no longer be added, leaving the ₱150 system loss charge itself unchanged but the VAT on it removed. These figures are a simplified illustration to show how the mechanics work, not a quote of any specific utility’s published rate — actual system loss charges vary by billing period and by distribution utility, within the caps their ERC-approved rate structures allow.

Even after the RMC is issued, the ERC still needs to direct distribution utilities to revise their billing formats and systems before the change is visible on an actual bill — reporting as of early September 2026 pointed to October or November 2026 as the earliest realistic timeline for that to show up, separate from when the BIR circular itself is signed.

Frequently asked questions #

What is the electricity system loss charge? #

The system loss charge is a line item on an electricity bill that recovers the cost of power lost as electricity travels from generation plants through transmission lines and distribution networks to a customer’s meter. Losses come from technical causes (resistance in wires, transformer heat) and non-technical causes (theft, meter errors, billing losses), and distribution utilities like Meralco pass the allowable portion of this cost through to customers rather than absorbing it as a business expense.

Why was the system loss charge subject to 12% VAT? #

Because it was historically treated as part of a distribution utility’s or generation company’s gross receipts from selling electricity, the same tax base used to compute output VAT on the rest of the bill. Since VAT applies to the gross selling price or gross receipts from a sale of goods or services, and the system loss charge was bundled into that receipts figure, it was taxed at the standard 12% rate along with generation, transmission, and other charges.

What does ERC Resolution No. 26, s. 2026 actually change? #

ERC Resolution No. 26, Series of 2026, approved by the Energy Regulatory Commission on August 26, 2026 and published August 28, 2026, reclassifies the allowable system loss charge as a government-mandated pass-through cost rather than income earned by generation companies, the National Grid Corporation of the Philippines (NGCP), or distribution utilities. That reclassification removes the charge from the gross receipts or gross selling price these entities use as their VAT base, which is the legal hook the BIR needs to exclude it from output VAT.

Has the BIR already issued the RMC removing VAT on the system loss charge? #

Yes. The BIR issued RMC No. 97-2026 on September 14, 2026, formally excluding the allowable system loss charge — within the ERC-approved cap — from gross sales for output VAT and creditable withholding VAT purposes, provided the charge is separately identified in the billing statement, invoice, or similar document. The exclusion does not extend to income tax or its corresponding creditable withholding tax, and it applies prospectively in line with the effectivity of ERC Resolution No. 26, s. 2026.

How much VAT would removing the charge actually save on a typical bill? #

System loss typically accounts for roughly 5% of a residential Meralco bill, and removing 12% VAT from just that portion is a modest but real saving — for illustration, on a system loss charge of around ₱150 in a given month, the 12% VAT on that amount is about ₱18, which would no longer appear on the bill once the RMC takes effect. The exact peso amount depends on a household’s consumption and the prevailing system loss rate, which distribution utilities adjust periodically within the cap set by their ERC-approved distribution rules.

When will the VAT actually disappear from electricity bills? #

Even after the BIR issues the RMC, distribution utilities still need to modify their billing systems and formats to stop applying VAT to the system loss line item, a step the ERC oversees. Reporting as of early September 2026 targeted the BIR issuance for mid-September, with distribution utilities implementing the change on customer bills as early as October or November 2026 — so there is expected to be a gap between the RMC’s issuance and when the lower charge actually shows up on a bill.

Summary #

ERC Resolution No. 26, s. 2026 reclassified the electricity system loss charge as a government-mandated pass-through cost, and the BIR has now followed through by issuing RMC No. 97-2026 on September 14, 2026, formally excluding the allowable system loss charge from output VAT and creditable withholding VAT — provided it is separately identified on the billing statement — while leaving income tax and its withholding untouched. For a peso-level worked example of what this saves on a typical bill, see RMC No. 97-2026 Worked Example: How Much VAT You Actually Save on the Electricity System Loss Charge. For how output VAT generally applies to a sale of goods or services, see Input VAT vs. Output VAT: How BIR VAT Credits Work in the Philippines, and for another recent BIR circular narrowing a VAT base, see RMC No. 87-2026: BIR’s Updated VAT-Exempt Drugs and Medicines List.