System Loss Charge Excluded from VAT Gross Sales: BIR RMC No. 097-2026
A definitive visual guide and regulatory breakdown of the landmark Bureau of Internal Revenue (BIR) circular declaring the allowable System Loss Charge as a non-taxable government-mandated pass-through cost for Generation Companies, the National Grid Corporation of the Philippines (NGCP), and Distribution Utilities.
Executive Briefing
1. The Landmark Ruling at a Glance
The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 097-2026, circularizing Energy Regulatory Commission (ERC) Resolution No. 26, Series of 2026. This circular formalizes an essential tax relief and structural realignment across the Philippine power sector:
The allowable System Loss Charge—provided it is within the cap approved by the ERC—is officially recognized as a government-mandated pass-through cost that does not form part of the Gross Sales of:
- Generation Companies (GenCos)
- National Grid Corporation of the Philippines (NGCP)
- Distribution Utilities (DUs), including private utilities (e.g., Meralco) and provincial Electric Cooperatives (ECs)
Previous Treatment (RMC 116-2024)
Taxable Gross Sales- System loss charges were frequently bundled into taxable gross billings.
- Imposed 12% Output VAT on the pass-through system loss line.
- Subject to Creditable Withholding on VAT (CWT-VAT) by corporate and government customers.
- Inflated final electricity costs for industrial, commercial, and residential consumers.
Under RMC 097-2026 & ERC Res. 26-2026
Excluded Pass-Through- Classified as a Government-Mandated Pass-Through Cost under Section 108 of the Tax Code.
- Excluded from Gross Sales for VAT computation.
- 0% Output VAT and NO CWT-VAT.
- Must be separately stated on billing statements/invoices and within the ERC cap.
The Power Supply Chain
2. How the Pass-Through Flow Operates
Under Section 108 of the Tax Code, gross sales from the sale or exchange of services excludes amounts "earmarked for payment to third (3rd) party or received as reimbursement for payment on behalf of another which do not redound to the benefit of the seller." The circular aligns electricity taxation with this statutory bedrock across the entire grid:
Generates power. Power dissipated in transformation before the grid connection constitutes generator system loss.
Wheels electricity across the high-voltage grid. Technical transmission loss occurs across long-distance lines.
Distributes electricity to end-users. Incurs technical line losses and regulated non-technical losses.
Receives final monthly power bill. No longer pays 12% Output VAT on top of the ERC-approved system loss line.
Critical Tax Distinction
3. The Asymmetry: VAT Exclusion Does NOT Equal Income Tax Exemption
The most crucial technical detail for corporate controllers, CPAs, and billing departments is the explicit limitation contained in paragraph 4 of RMC No. 097-2026:
"This exclusion, however, shall not extend to income tax and the corresponding creditable withholding tax."
| Tax Dimension | Value-Added Tax (VAT) | Income Tax & Withholding Tax |
|---|---|---|
| Inclusion in Gross Sales | EXCLUDED (Does not form part of VAT Gross Sales) | INCLUDED (Treated under standard corporate income tax rules) |
| Output Tax Rate | 0% OUTPUT VAT (Excluded from 12% calculation base) | N/A (Governed by Corporate Income Tax rate of 20% or 25%) |
| Creditable Withholding (CWT) | NO CWT-VAT (No withholding of 5% or 2% VAT) | SUBJECT TO CWT (Top withholding agents still withhold income tax CWT) |
| Billing Requirements | Must be separately identified on the official invoice/bill | Reported in gross income subject to allowable pass-through deductions |
Sample Bill Architecture
4. How an Compliant Power Bill Looks Under RMC 097-2026
To qualify for the VAT exclusion, the utility’s billing statement or computerized electronic invoice must clearly itemize the pass-through system loss line separate from the VATable service charges:
VAT Registered TIN: 000-123-456-00000 · Statement of Account
Interactive Tax Modeling
5. System Loss VAT Savings Estimator
Estimate the direct 12% Output VAT reduction for your commercial facility, factory, or corporate account under RMC 097-2026:
Implementation Checklist
6. Mandatory Conditions for Power Sector Compliance
To sustain the VAT exclusion upon audit by the Bureau of Internal Revenue, affected taxpayers must fulfill four strict criteria:
1. Separate Identification
The System Loss Charge must be explicitly stated as a separate line item on customer billing statements, computerized invoices, and electronic receipts. Bundling it into other service fees forfeits the exclusion.
2. Within the ERC Cap
Only system loss charges within the maximum regulatory cap set by the Energy Regulatory Commission qualify. Any excess or unapproved losses absorbed or charged beyond the cap remain fully taxable.
3. Billing Engine Reconfiguration
Enterprise Resource Planning (ERP) and Computerized Accounting Systems (CAS) used by GenCos, NGCP, and DUs must adjust their tax formula so 12% Output VAT is not automatically applied to the pass-through component.
4. Prospective Enforcement
The circular applies prospectively from the effectivity of RMC 097-2026 and ERC Res. No. 26-2026. Power sector taxpayers should avoid unauthorized retroactive adjustments without prior BIR clearance.
Key Takeaways for Energy CFOs & Corporate Controllers
- Audit Readiness: Verify that your CAS/e-invoicing templates generate distinct VATable vs. Non-VAT Pass-Through line items that match monthly BIR Form 2550Q declarations.
- Corporate Withholding Verification: Corporate power consumers that are designated Top Withholding Agents (TWAs) must adjust their creditable withholding schedules (Form 1606 / 2307) so CWT-VAT is not erroneously withheld from the system loss portion.
- Income Tax Consistency: Ensure your tax accounting reconciles the difference between VAT gross sales and Income Tax gross revenues on your Annual Income Tax Return (AITR / Form 1702-RT).
Specialized Tax Advisory
Need Guidance Aligning Your Utility Accounting or CAS with BIR Mandates?
From reconfiguring Computerized Accounting Systems (CAS) and Electronic Invoicing (EIS) to defending pass-through deductions during BIR tax examinations, our practice delivers precise, data-driven counsel.