Excluding system losses from VAT base
By: Atty. Euney Marie J. Mata-Perez on August 20, 2026
RECENTLY, there has been a clamor to exclude “system losses” from the electricity rates of distribution utilities (DUs) for purposes of value-added tax (VAT).
Under the National Internal Revenue Code, as amended (Tax Code), gross receipts derived from the “sales of electricity by generation companies, transmission and distribution companies” are subject to 12-percent VAT. Also, under current laws, DUs are allowed to include a component of system losses in the electricity prices they charge to consumers. Thus, unavoidably, the system loss component forms part of the VAT base.
It has been argued that system losses do not represent compensation for services or the price of the electricity purchased, and thus should not form part of the consideration for electricity used by consumers. However, losses are costs which taxpayers generally account for and recover in the pricing mechanism of their products. Thus, including losses in electricity pricing of DUs is not exceptional.
While it is understandable that system losses should be part of the pricing calculation of electricity, whether subjecting such losses to 12-percent VAT is another issue.
Defining system loss
Legally, a system loss is defined under existing regulations as the difference between kilowatt-hour (kWh) purchased and/or generated and kWh sold by an electricity DU, expressed as a percentage of kWh purchased and/or generated. It is the difference between the electricity entering a power network and the amount eventually measured and billed to customers. It accounts for electricity lost due to technical and nontechnical factors, which include power lost due to theft.
Technical losses may be a consequence of physics. Small amounts of power are lost in transmission as electric current encounters resistance when it passes through wires, converting part of the energy into heat. Also, transformers and other equipment consume or dissipate small amounts of power.
Nontechnical losses can arise from a number of reasons, foremost of which is theft.
Section 43(f) of Republic Act (RA) 9136, or the Electric Power Industry Reform Act of 2001 (Epira), as amended, authorizes the Energy Regulatory Commission (ERC) to fix and determine caps on system losses that DUs and electric cooperatives can recover from end-consumers.
In addition, Section 25 of the Epira provides the retail rates and unbundled pricing mechanisms allowed to be set by DUs where these pass-through costs are integrated. Under existing ERC regulations, DUs calculate a system loss rate each month and also bill its customers using such monthly system loss rate.
RA 7832, or the Anti-Pilferage of Electricity and Theft of Electric Transmission Lines/Materials Act of 1994, specifically allows DUs to recover a portion of losses arising from pilferage from end-consumers through a system loss charge reflected in monthly electricity bills.
Because system losses are part, and thus a component of the pricing mechanism which DUs are allowed to bill to its customers, they form part of the gross electricity charges or compensation for the sale of electricity which are subject to the 12-percent VAT under what is now Section 109 of the Tax Code.
It should be recalled that electricity charges became subject to VAT when RA 9337, or the E-VAT Law, was passed in 2005. RA 9337 amended the Tax Code to expand the definition of “sale or exchange of services” for VAT purposes (which means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration) to include those arising from “sales of electricity by generation companies, transmission and distribution companies.”
In any case, removing the VAT on the system loss component of electricity rates will lower power costs of Filipino consumers.
The 12-percent Philippine VAT rate is the highest among Asean countries. Singapore, Cambodia, Laos, Thailand, Vietnam and Indonesia also impose a similar tax on sales of electricity, but at lower rates.
Cambodia, Indonesia and Laos impose a 10-percent VAT and Thailand, the lowest rate of 7 percent. Vietnam, on the other hand, has two-tiered VAT rates. Singapore collects a GST with a rate of 7 percent.
Also, it has been confirmed by Energy Undersecretary Rowena Cristina Guevara that, in June, the Philippines had an average electricity rate of P12.43 per kWh, a rate higher than Singapore by less than a centavo.
The Philippines is unique because power rates are required to be unbundled, and DUs are required to explicitly set “system loss” as a distinct charge, making the charge visibly subject to the 12-percent VAT. In most other countries, power transmission and distribution losses are simply absorbed into a single, aggregated per-kWh utility rate and are not so apparent in the charges.
Removing system loss in the power charge subject to VAT will reduce power cost and make the Philippines more competitive. However, because of its inclusion in the electricity rate calculation, as mandated by law, it will require legislation to exclude it from the VAT system.
Several bills have been filed in Congress and Senate to exclude the system loss component from the VAT tax base of DUs. This is a welcome development to the public.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Vice Chair of the Tax Committee of the Management Association of the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on August 20, 2026. Please see this link.