RMC No. 97-2026 Worked Example: How Much VAT You Actually Save on the Electricity System Loss Charge

BIR Revenue Memorandum Circular (RMC) No. 97-2026, issued September 14, 2026, confirms that the allowable system loss charge on an electricity bill — within the cap set by ERC Resolution No. 26, s. 2026 — is excluded from output VAT and creditable withholding VAT, provided it is separately identified on the billing statement. This guide walks through an exact peso worked example of the savings, and the three conditions that determine whether they apply to your bill.

What RMC No. 97-2026 actually confirms #

RMC No. 97-2026 formally recognizes the allowable system loss charge, within the cap approved by the Energy Regulatory Commission (ERC), as a government-mandated pass-through cost that does not form part of the gross sales of generation companies, the National Grid Corporation of the Philippines (NGCP), or distribution utilities for VAT purposes. That reclassification is what removes the charge from the VAT base these entities use to compute output VAT, per reporting from BusinessWorld and Philstar on the circular’s September 14, 2026 issuance. The circular was issued by BIR Commissioner Charlito Martin R. Mendoza, the same official who had earlier committed to this change following ERC Resolution No. 26 — covered in our earlier post, BIR to Remove 12% VAT on the Electricity System Loss Charge, written before the RMC existed. That post is now superseded on the “is this final” question: as of this circular, it is.

As BusinessWorld quoted Commissioner Mendoza explaining the practical effect for ratepayers:

“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.”

Importantly, RMC No. 97-2026 does not zero out the system loss charge itself — only the VAT computed on top of it. Consumers still pay the ERC-allowed system loss amount; what disappears is the 12% VAT layer that used to sit on that specific line.

Worked example: computing the exact VAT savings on a sample bill #

A generic distribution-utility residential bill for 300 kWh of consumption in a given month shows a system loss charge as its own line item, separate from generation, transmission, and distribution charges — applying RMC No. 97-2026 removes VAT from only that one line, not the whole bill. The figures below are an illustrative, fictional example built to show the mechanics, not a quote of any specific utility’s published rate schedule.

The system loss charge here is ₱270.00 — a realistic figure for 300 kWh at an illustrative system loss rate of ₱0.90/kWh, well within the range our earlier post cited from Meralco’s own disclosed system loss rate. Before RMC No. 97-2026, that ₱270.00 line carried the standard 12% VAT, adding ₱32.40. After the circular takes effect, that ₱32.40 is the exact amount that disappears from the bill — the customer still pays the ₱270.00 system loss charge itself, and VAT continues to apply normally to generation, transmission, distribution, and other taxable charges. The saving scales directly with whatever system loss charge actually appears on a given bill: it is always 12% of that one line, nothing more.

The billing requirement: why “separately identified” matters #

The VAT exclusion under RMC No. 97-2026 is conditional, not automatic — the allowable system loss charge must be separately identified in the billing statement, invoice, or similar document to qualify. Reporting on the circular confirms the BIR directed generation companies, NGCP, and distribution utilities to break out the system loss amount as its own distinct entry rather than folding it into another charge. If a utility’s bill still bundles system loss into a combined “other charges” figure instead of showing it as its own line — the way the worked example above does — that unidentified portion does not qualify for the exclusion, and VAT would continue to apply to it by default. Practically, this means a business or household checking whether the new treatment actually applies to its bill should first confirm the system loss amount appears as its own labeled line item, not assume the exclusion applies just because the RMC exists.

What the exclusion does not cover: income tax and its withholding #

RMC No. 97-2026’s exclusion is narrow by design — it removes the system loss charge from output VAT and creditable withholding tax on VAT, but it does not extend to income tax or the corresponding creditable withholding tax on income payments. This distinction matters for any business reconciling its own books against a counterparty’s system loss pass-through: the same peso amount that is now VAT-exempt on the VAT side is still treated as ordinary income (and subject to the normal income tax withholding rules that would otherwise apply to that payment) for income tax purposes. In other words, a generation company, NGCP, or distribution utility collecting the system loss charge gets relief from output VAT on that amount, but its income tax treatment of the same amount is unaffected by this circular. For background on how output VAT and creditable withholding VAT interact more generally, see Input VAT vs. Output VAT: How BIR VAT Credits Work in the Philippines.

When the lower VAT actually takes effect #

RMC No. 97-2026 applies the VAT exclusion prospectively, tied to the effectivity of ERC Resolution No. 26, Series of 2026 — not retroactively to VAT already billed and paid before that date. ERC Resolution No. 26 was approved on August 26, 2026 and published August 28, 2026, taking effect 15 days after publication under its own effectivity clause — a timeline our earlier post, RMC No. 60-2026: Lifeline Subsidy and Green Energy Auction Allowance VAT Exclusion, also touched on for the related pass-through charges the BIR excluded earlier in 2026. The table below summarizes the sequence of confirmed milestones as of this circular’s issuance.

Because the exclusion is prospective, a bill covering a billing period before ERC Resolution No. 26’s effectivity date would still show VAT on the system loss charge under the prior treatment, even though RMC No. 97-2026 has already been issued. Distribution utilities still need to update their billing systems to apply the new treatment going forward — a step separate from, and following, the circular’s own issuance date.

Frequently asked questions #

What is BIR RMC No. 97-2026? #

BIR Revenue Memorandum Circular No. 97-2026, issued September 14, 2026 by Commissioner Charlito Martin R. Mendoza, formally recognizes the allowable system loss charge on electricity bills — within the cap approved by the Energy Regulatory Commission (ERC) — as a government-mandated pass-through cost that does not form part of the gross sales of generation companies, the National Grid Corporation of the Philippines (NGCP), or distribution utilities for VAT purposes.

Does RMC No. 97-2026 remove the system loss charge from my electricity bill? #

No. RMC No. 97-2026 removes only the 12% VAT computed on the allowable system loss charge; it does not remove the charge itself. Consumers continue paying the system loss amount that distribution utilities are allowed to recover under ERC rules, and VAT continues to apply to the taxable generation, transmission, and distribution charges on the rest of the bill.

What condition must a distribution utility meet for the VAT exclusion to apply? #

The system loss charge must be separately identified in the billing statement, invoice, or similar document. If a distribution utility bundles the system loss amount into another line item instead of showing it as its own distinct entry, the exclusion does not apply to that unidentified amount.

Does the VAT exclusion under RMC No. 97-2026 also apply to income tax? #

No. RMC No. 97-2026 excludes the allowable system loss charge from output VAT and creditable withholding tax on VAT only. The exclusion does not extend to income tax or the corresponding creditable withholding tax on income payments, so the system loss amount remains part of the normal income tax base for the entities that collect it.

When does the VAT exclusion on the system loss charge take effect? #

RMC No. 97-2026 applies the exclusion prospectively, in accordance with the effectivity provisions of ERC Resolution No. 26, Series of 2026 — which the ERC approved on August 26, 2026 and published on August 28, 2026, taking effect 15 days after that publication. The exclusion does not apply retroactively to VAT already charged on system loss before that effectivity date.

How much VAT does RMC No. 97-2026 actually save on a typical bill? #

The exact peso savings depends on the system loss charge shown on a given bill, since the saving is simply 12% of that specific line item. For example, a bill with a ₱270.00 system loss charge would see ₱32.40 in VAT removed from that line, while the system loss charge itself and VAT on other taxable charges remain unchanged.

Summary #

RMC No. 97-2026 turns the previously “committed to” VAT removal on the electricity system loss charge into a settled rule: the allowable system loss charge, within the ERC-approved cap, is now excluded from output VAT and creditable withholding VAT as a government-mandated pass-through cost — but only when separately identified on the billing statement, only prospectively from ERC Resolution No. 26’s effectivity, and only for VAT, not income tax or its withholding. On the worked example above, that is a ₱32.40 saving on a ₱270.00 system loss charge — a modest but real reduction that scales with whatever system loss amount actually appears on a given bill. For the earlier, pre-RMC coverage of this same policy shift, see BIR to Remove 12% VAT on the Electricity System Loss Charge, and for the related exclusion of the Lifeline Subsidy and Green Energy Auction Allowance, see RMC No. 60-2026.