VAT Exemption on System Loss Act for Residential Household Consumers

Senate TWENTIETH CONGRESS OF THE ) Office of the sortretarp REPUBLIC OF THE PHILIPPINES ) First Regular Session 26 MAY -7 P3:34 SENATE RECEIVED BY. S. No. 2124 Introduced by Senator FRANCIS N. PANGILINAN AN ACT EXCLUDING SYSTEM LOSS FROM VALUE-ADDED TAXES (VAT) IN THE SALE OF ELECTRICITY TO RESIDENTIAL HOUSEHOLD CONSUMERS EXPLANATORY NOTE Rising prices have made basic household expenses harder to manage. In April 2026, headline inflation rose to 7.2 percent, from 4.1 percent in March 2026 and 1.4 percent in April 2025. A major contributor was housing, water, electricity, gas, and other fuels, which accounted for 23.2 percent, or 1.7 percentage points, of headline inflation. This shows that utility-related costs, including electricity, continue to weigh heavily on household budgets. This burden is particularly important in the Philippines, where residential electricity prices remain among the highest in Southeast Asia. In 2021, the country's residential electricity rate was estimated at US$0.16/kWh, second only to Singapore and higher than Thailand, Indonesia, and Malaysia. For households, high electricity prices are further affected by bill components that do not directly correspond to electricity actually consumed. One such component is the System Loss Charge, which allows the recovery of costs associated with electricity lost due to technical and non-technical factors in the power system. Although the ERC sets caps on recoverable system losses, losses within the allowable cap may still form part of consumer bills. In a typical residential electricity bill, the System Loss Charge accounts for about 5% of total charges. ERC regulation treats system loss as a measurable and regulated feature of distribution utility operations. Under ERC Resolution No. 10, Series of 2018, recoverable distribution system loss is subject to caps and formulas, including actual sub-transmission and substation losses, and the lower of actual non-technical loss plus feeder technical loss or the applicable distribution feeder loss cap. The same Resolution establishes a Performance Incentive Scheme for Distribution Efficiency, recognizing that system loss may be monitored and reduced through improved utility performance.

The policy issue is one of tax base design and cost allocation. Residential consumers do not determine network design, feeder conditions, or utility-side operational efficiency. Under the current framework, they may be required to pay VAT on a charge that does not represent electricity actually delivered for their use. The VAT base should therefore not include system losses charged to households for electricity they did not consume. This bill exempts the system loss component charged to residential household consumers from VAT. It also directs the ERC to ensure that the resulting reduction is not recovered from consumers through distribution wheeling charges or other pass- through components. The measure reduces the VAT burden on households, consistent with the principle that consumers should not be taxed on system losses they neither consume, cause, nor control. In view of the foregoing, the immediate passage of this bill is earnestly sought. FRANCIS N. PANGILINAN Senator

Senate Office of the sectretary TWENTIETH CONGRESS OF THE ) REPUBLIC OF THE PHILIPPINES First Regular Session 26 MAY -7 P3:34 SENATE RECEIVED BY S. No. 2124 Introduced by Senator FRANCIS N. PANGILINAN AN ACT EXCLUDING SYSTEM LOSSES FROM VALUE-ADDED TAXES (VAT) IN THE SALE OF ELECTRICITY TO RESIDENTIAL HOUSEHOLD CONSUMERS Be it enacted by the Senate and the House of Representatives of the Philippines in Congress assembled:

Section 1. Short Title. - "VAT Exemption on System Loss Act for Residential

Household Consumers"

Section 2. Section 109 of the National Internal Revenue Code of 1997, as

amended, is hereby further amended to insert an additional subsection that shall read: "SEC. 109. Exempt Transactions. - (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax: XXX (EE) SYSTEM LOSS COMPONENT IN THE SALE OF ELECTRICITY BY DISTRIBUTION COMPANIES AND ELECTRIC COOPERATIVES TO RESIDENTIAL HOUSEHOLD CONSUMERS. THE ENERGY REGULATORY COMMISSION (ERC) SHALL ENSURE THAT THE REDUCTION ARISING OUT OF THIS EXEMPTION SHALL NOT BE PASSED ON TO THE RESIDENTIAL HOUSEHOLD CONSUMERS THROUGH DISTRIBUTION WHEELING CHARGES OR OTHER PASS-THROUGH COMPONENTS. FOR THE PURPOSES OF THIS PROVISION, SYSTEM LOSSES SHALL REFER TO THE DIFFERENCE BETWEEN THE ELECTRIC ENERGY DELIVERED TO THE DISTRIBUTION SYSTEM (ENERGY INPUT) AND THE ENERGY DELIVERED TO THE RESIDENTIAL HOUSEHOLD CONSUMERS (ENERGY OUTPUT);

XXX

Section 4. Implementing Rules and Regulations. - Within ninety (90) calendar

days from the effectivity of this Act, the Secretary of Finance shall, after due consultation with the relevant agencies, promulgate the necessary rules and regulations to faithfully implement the intent and provisions of this Act.

Section 5. Separability Clause. - If any provision of this Act is declared

unconstitutional, the remaining parts or provisions not affected thereby shall remain in full force and effect.

Section 6. Repealing Clause. - All laws, decrees, executive orders, implementing

rules and regulations, issuances, or any part thereof inconsistent with the provisions of this Act are deemed repealed, amended, or modified accordingly.

Section 7. Effectivity. - This Act shall take effect after fifteen (15) days following

its publication in the Official Gazette or in a national newspaper of general circulation. Approved,