VAT Exemption on Power Charges Act

Senate Office of the Secretarp TWENTIETH CONGRESS OF THE) REPUBLIC OF THE PHILIPPINES ) 26 MAY -6 A10:09 First Regular Session SENATE 2111 S.B. No. _ RECEIVED BY: Introduced by SENATOR IMEE R. MARCOS AN ACT EXCLUDING SYSTEMS LOSS CHARGES, UNIVERSAL CHARGES, AND CROSS SUBSIDIES, FROM THE VALUE-ADDED TAX (VAT) BASE ON POWER SALES, AMENDING FOR THE PURPOSE SECTION 108 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES EXPLANATORY NOTE Electricity is an essential utility that bolsters economic activity and directly affects the welfare of Filipino households. However, the current application of the value-added tax (VAT) on power sales results in the taxation of charges that do not constitute value added by power industry participants. Under the current tax framework, the Value-Added Tax (VAT) is imposed on the gross receipts from the sale of electricity. This includes not only the actual costs of generation, transmission, and distribution, but also pass-through charges such as: • Systems loss charges, representing technical and non-technical losses in electricity delivery; • Universal charges, which fund policy-driven obligations such as stranded debts, missionary electrification, and environmental programs; and • Cross subsidies, which are regulatory mechanisms designed to equalize rates among customer classes or geographic areas. These charges do not constitute income or value added by distribution utilities or generation companies. Rather, they are regulatory impositions or cost recoveries passed directly to consumers. Imposing VAT on these components effectively results in a "tax on a tax" or a tax on non-value-added items, contrary to the fundamental principle of VAT as a tax on value addition. The continued inclusion of systems loss charges, universal charges, and cross subsidies in the VAT base artificially increases electricity costs, disproportionately burdens low-income households, and undermines industrial competitiveness. Accordingly, this measure seeks to amend Section 108 of the National Internal Revenue Code of 1997, as amended, by expressly excluding systems loss charges,

universal charges, and cross subsidies from the VAT base on electricity sales. This reform will ensure that VAT is applied strictly to value-added components, improve transparency in electricity billing, and contribute to the reduction of electricity costs for consumers. In view of the foregoing, the immediate passage of this bill is earnestly sought Free h. Marca MEER. MARÇOS

Senate Office of the Secretary TWENTIETH CONGRESS OF THE REPUBLIC OF THE PHILIPPINES ) 26 MAY -6 A10:09 First Regular Session SENATE S.B. No. 2111 RECEIVED BY: Introduced by SENATOR IMEE R. MARCOS AN ACT EXCLUDING SYSTEMS LOSS CHARGES, UNIVERSAL CHARGES, AND CROSS SUBSIDIES, FROM THE VALUE-ADDED TAX (VAT) BASE ON POWER SALES, AMENDING FOR THE PURPOSE SECTION 108 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES Be it enacted by the Senate and the House of Representatives of the Philippines in Congress assembled.

Section 1. Section 108 of the National Internal Revenue Code of 1997, as

amended, is hereby further amended to read as follows: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of the gross sales derived from the sale or exchange of services, including digital services, and the use or lease of properties. XXX XXX XXX PROVIDED, THAT IN THE CASE OF THE SALE OF ELECTRICITY AND RELATED SERVICES BY GENERATION COMPANIES, TRANSMISSION PROVIDERS, DISTRIBUTION UTILITIES, ELECTRIC COOPERATIVES, AND OTHER ENTITIES ENGAGED IN THE ELECTRIC POWER INDUSTRY, THE VAT BASE SHALL EXCLUDE AMOUNTS THAT ARE COLLECTED ON BEHALF OF, GROSS RECEIPTS REPRESENTING CONSIDERATION FOR THE SALE OF GOODS OR SERVICES BY SUCH ENTITIES, INCLUDING BUT NOT LIMITED TO: (1) SYSTEM LOSS CHARGES;

(2) UNIVERSAL CHARGES AS PROVIDED UNDER REPUBLIC ACT NO. 9136, OTHERWISE KNOWN AS THE ELECTRIC POWER INDUSTRY REFORM ACT (EPIRA); AND (3) CROSS SUBSIDIES AND OTHER SIMILAR REGULATORY ADJUSTMENTS MANDATED BY LAW OR BY THE ENERGY REGULATORY COMMISSION: PROVIDED, FURTHER, THAT ONLY CHARGES REPRESENTING THE CONSIDERATION FOR THE ACTUAL SUPPLY OF ELECTRICITY AND SERVICES RENDERED BY SUCH ENTITIES, INCLUDING MARGINS, FEES, AND OTHER AMOUNTS ACCRUING TO THEM AS INCOME, SHALL BE SUBJECT TO VALUE-ADDED TAX." XXX

Sec. 2. Implementing Rules and Regulations. - Within sixty (60) days from

the effectivity of this Act, the Department of Finance, the Bureau of Internal Revenue, and the Energy Regulatory Commission shall jointly promulgate the necessary rules and regulations for the effective implementation of this Act.

Sec. 3. Separability Clause. - If any provision or part hereof is declared

unconstitutional, the other provisions not affected thereby shall remain in full force and effect.

Sec. 4. Repealing Clause. - All laws, decrees, orders, rules and regulations or

parts thereof inconsistent with this Act are hereby repealed or modified accordingly.

Sec. 5. Effectivity. - This Act shall take effect fifteen (15) days after its

publication in the Official Gazette or in at least two (2) newspapers of general circulation. Approved,