THE NEED FOR CLEARER VAT-ZERO RATING RULES UNDER CREATE
By Euney Marie Mata-Perez on September 23, 2021
Clarity of tax rules and regulations is key to an efficient tax system. One of the areas that tax authorities have to clarify is the zero-rating of sales to enterprises operating in and registered under existing economic zones.
The Corporate Recovery and Tax Incentives for Enterprises (Create) Act (Republic Act 11534) amended Section 294(D) of the National Internal Revenue Code (Tax Code) to provide that registered business enterprises (RBEs) are entitled to value-added tax (VAT) exemption on importation and VAT zero-rating on local purchases. Section 295(E) of the Tax Code provides that such VAT exemption and zero-rating only applies to goods and services “directly and exclusively used in the registered project or activity” by an RBE.
The Bureau of Internal Revenue (BIR) has posted on its website draft implementing rules regulations (IRR) for the foregoing proposed amendments to Section 294(D) and 295(E) of the Tax Code. (See https://www.bir.gov.ph/images/bir_files/internal_communications_1/Proposed%20RR/CREATE%20RR%20as%20of%20Aug%2024%202021%20-%20Copy.pdf)
In a September 17, 2021 letter addressed to the Finance secretary, the Tax Management Association of the Philippines (TMAP) sent its comments and position on the draft IRR. Principally, the TMAP requested that clear and detailed guidelines similar to what was laid down in Revenue Regulations 74-99 (RR 74-99) be put in place. Such guidelines should apply to transactions between RBEs located within special economic zones (ecozones) and between RBEs and local suppliers of goods and services from the customs territory.
Prior to the passage of the Create Act, RR 74-99 served as the “guidepost” for sales of goods and services to economic zones. RR 74-99 adheres to the so-called “Cross Border Doctrine Principle” where goods and services are taxed only in the country where the goods are consumed. Thus, no VAT will be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Accordingly, under RR 74-99, any sale of goods, property, or services made by a VAT-registered supplier from the customs territory to any registered enterprise operating in the ecozone – regardless of the class or type of Philippine Economic Zone Authority registration – is subject to the zero-percent VAT.
Clamor surrounding RR 9-21
It should be noted that the Create Act did not abandon or repeal the “Cross Border Doctrine Principle.” Also, it has been settled that export processing zones or ecozones are to be managed as a separate customs territory from the rest of the Philippines and thus, for tax purposes, are effectively considered foreign territory. For this reason, sales by persons from Philippine customs territory to those inside export processing zones are already taxed as exports. This was confirmed by the Supreme Court in Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue (CIR) (G.R. Nos. 141104 & 148763, June 8, 2007).
With the above-mentioned amendments, and because of the still prevailing Cross Border Doctrine Principle, taxpayers need guidance on the following:
* How the draft IRR will be interpreed in relation to provisions of RR 74-99 and vice-versa.
* Who shall be subject to requirements under the draft IRR.
Revisiting the imposition of VAT on indirect exports
* How the phrase “directly and exclusively used in the registered project or activity” by an RBE will be interpreted.
* How the general repealing clause in the Draft IRR should be read in light of the existing provisions of RR 74-99.
It is the TMAP’s position that the “direct and exclusive” use requirement or qualification applies only to new RBEs since these will be the ones subject to provisions under Section 294 (Incentives) and Section 295 (Conditions for Availment) of the Tax Code as amended by the Create Act. It should not apply to other ecozone enterprises or existing RBEs.
There is also a need to clarify what falls within the scope of inputs that are “directly and exclusively used” in the registered activities of RBEs and who makes such a determination. Without clear rules or guidelines, RBEs and their suppliers can take conflicting positions. Most likely and for conservatism, suppliers will pass on VAT to the RBEs. Once VAT is erroneously passed on, RBEs will not be able to claim refunds from the BIR for erroneously paid input VAT. This was enunciated in the case of Coral Bay Nickel Corporation vs. CIR (G.R. No. 190506, June 13, 2016) where the Supreme Court held that the recourse of the ecozone enterprise is to seek refunds from suppliers, not from the BIR.
The following are thus being suggested:
* There should be “clear documentation” to confirm entitlement to VAT zero-rating to guide RBEs and their suppliers.
* What qualifies as “direct and exclusive use” should not be limited to direct costs and should cover other costs needed or incurred in the performance of the registered activity.
* If the RBE has no “unregistered activity”, the VAT zero-rating should cover all its purchases as these could be considered “attributable” to zero-rated sales, which are refundable under Section 112(C) of the Tax Code.
The draft IRR should prescribe the invoicing requirements if the RBE is engaged in both registered and unregistered activities.
For efficiency, it is paramount that tax authorities clarify the rules and set detailed guidelines on the zero-rating or exemption of sales to enterprises operating in and registered under existing economic zones and RBEs, pursuant to the amendments introduced by the Create Act. We hope that the BIR comes up with clearer guidelines or regulations soon.
#CREATELaw #ZeroRatedVAT #RA11534 #CREATEIRR #CREATEZeroRatedVAT
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. She is also a past president of the Tax Management Association of the Philippines and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal. 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, you may email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.