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By Euney Marie Mata-Perez on July 22, 2021

There have been so many discussions on the promulgation of Revenue Regulations 9-2021 (RR 9-2021) that implemented certain amendments introduced by Republic Act (RA) 10963 or the “Tax Reform for Acceleration and Inclusion” (Train) Law to Sections 106(A)(2)(a) and 108(B) of the National Internal Revenue Code of 1997 as amended (Tax Code).

RR 9-2021 categorically states that since conditions prescribed by the Train Law have been satisfied, certain transactions previously taxed at zero percent value-added tax (VAT) are now subject to 12-percent VAT. These transactions, referred to as “indirect exports,” generally involve the sales of raw and packaging materials to export-oriented enterprises or the provision of processing and manufacturing services to them.

Destination principle

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax ( – fnt51). Goods and services are taxed only in the country where they are consumed, thus exports are zero-rated because the goods and services are obviously consumed abroad. Imports, on the other hand, are taxed (Commissioner of Internal Revenue vs. American Express International Inc. (Philippine Branch) G.R. No. 152609, June 29, 2005).

On the basis of this principle, indirect exports or sales of goods or packaging materials or the provision of certain services (processing, manufacturing or repacking) to exporters were also considered zero-rated for VAT purposes. This is because such materials form part of the exported products or the services are directly related to the production of the exported product.

This was the rule ever since the VAT system was introduced in 1988 through Executive Order 273 (EO 273). The adoption of the VAT (which replaced the sales tax) was one of the structural reforms provided in the 1986 Tax Reform Program, which was designed to simplify tax administration and make the tax system more equitable.

RA 7716, which was passed in 1994, expanded the coverage of the original VAT law and extended the zero-rating of exports sales to sales of raw materials or packaging materials as well as to services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70 percent of total annual production. The foregoing rule continued to be embodied in the Tax Code until it was modified by the Train Law.


Subjecting indirect exports to zero-rated VAT simplifies the VAT system and makes doing business easier for exporters and their suppliers. Since sales or services of exporters are zero-rated for VAT purposes, they have no output VAT against which they can offset any input VAT that suppliers will pass on to them.

 The Tax Code provides for a remedy, which is for taxpayers whose sales or services are zero-rated to be entitled to claim for a refund of input VAT attributable to such zero-rated transactions (Tax Code, Sec. 112). Under this category falls all other input VAT passed on to them, subject to the condition that these are “attributable” directly or indirectly to the taxpayers’ export sales.

By subjecting indirect exports to zero-rated VAT, exporters are spared the hassle of claiming refunds of input VAT on these purchases.

Train Law

The Train Law, however, changed the rules. It states that these so-called indirect exports are subject to VAT. This is conditioned on the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within 90 days from the filing of the VAT refund application with the Bureau of Internal Revenue (BIR).

In other words, the law requires indirect exporters to pay the VAT (thereby giving the government immediate collection) and pass this on as input VAT to exporters. Subsequently, the exporters, being zero-rated sellers or suppliers, will then be constrained to claim refund of the input VAT paid.

It is quite clear that the Train Law provision helps the government collect the VAT first and leaves the problem of claiming refunds to exporters. However, this does not contribute to the simplification of our tax system. This does not also contribute to the ease of doing business in the country. Lastly, this does not support manufacturers who export their products and bring foreign currency to the country.

RR 9-2001

RR 9-2001 was passed merely to implement the Train Law. Of course, there is an issue whether the required enhanced VAT refund system has been successfully established but that is a question of fact. The BIR, in RR 9-2001, represented that the system had been established. It was thus inevitable that the imposition of VAT on indirect exports would be implemented.

Timing wise, because of the coronavirus disease 2019 (Covid-19) pandemic, many exporters are claiming that now is not the best time to make the imposition of VAT on indirect exports effective. Thus, dialogues with the Department of Finance on this matter are ongoing. Congress is also conducting hearings on this.

In the end, it should be borne in mind that the VAT was established to simplify the indirect tax system of the country. It is just unfortunate that this overall goal could be eclipsed by the need for our government to collect revenues.

Euney Marie Mata-Perez is a CPA-lawyer and 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 the Asia Business Law Journal.

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