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The Death of the ‘Cross Border Doctrine’ For Sales to Registered Export Enterprises

By Euney Marie Mata-Perez on March 17, 2022

The Bureau of Internal Revenue (BIR) just released Revenue Memorandum Circular (RMC) 24-2022 (RMC 24-2022), which expressly confirmed that the cross-border doctrine, as applied to economic zones (ecozones) or freeport zones has been rendered ineffectual and inoperative for value-added tax (VAT) purposes.

VAT is a transaction tax. It applies to sales of goods or services in the ordinary course of trade or business in the Philippines. The VAT system in general adheres to the “cross border doctrine,” which means that no VAT shall form part of the cost component of products that are destined for consumption outside the territorial borders of the Philippines. Thus, export of products from the Philippines to foreign countries are subject to zero-percent VAT.

Before the passage of the Corporate Recovery and Tax Incentives for Enterprises (Create) Act (Republic Act (RA) 11534), ecozones and freeport zones were, by legal fiction, regarded as foreign territories. Thus, following the cross border doctrine, the sale of goods and services by a VAT-registered seller to registered enterprises in these economic and freeport zones, regardless of their type or class of registration, were treated as constructive exports subject to zero-percent VAT. This treatment was categorically declared under RMC 74-99. The basis for treating ecozones as separate customs territories is Section 8 of RA 7916 (the Special Economic Zone Act of 1995), which mandates the Philippine Economic Zone Authority (PEZA) to treat ecozones as separate customs territories.

However, with the passage of the Create Act, Section 295 (D) of the National Internal Revenue Code (‘Tax Code’) reads as follows: “The VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity by a registered business enterprise.”

This provision is now read to mean that ecozones cease to be considered foreign territory; thus, the registered business enterprises (RBEs) operating within ecozones can no longer avail of VAT zero-rating, unless the VAT pertains to goods and services “directly and exclusively used” in the registered project or activity of such RBEs. Furthermore, for the RBE to qualify for VAT zero-rating, it should be registered as an export enterprise (i.e. enterprises which export at least 70 percent of its output or production).

Accordingly, provided the conditions mandated under the Create are met, the VAT-zero rating still applies to registered export enterprises, including those operating outside ecozones. This rule applies to such enterprises registered with the various investment promotion agencies, such as the Board of Investments, PEZA, the Subic Bay Metropolitan Authority and the Clark Development Authority. In other words, the territorial test based on “foreign territory fiction” is no longer the basis for the VAT zero-rating on sales to enterprises operating within the ecozones or freeport zones.

RMC 24-2022 defines what is meant by expenses deemed to be in “direct and exclusive use” in the registered project or activity. In essence, these refer to raw materials, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out. These exclude expenses for administrative purposes, such as legal, accounting and other similar services. Thus, RBEs are required to adopt a method to best allocate goods or services purchases. If no proper allocation or determination can be made, the purchase of goods or services shall be subject to VAT.

RMC 24-2022 also provides the following, among others:

(a)Prior approval from the BIR needs to be secured by local suppliers of goods and services to registered export enterprises in order that their sales shall be accorded VAT zero-rating.

(b)In the event that VAT is erroneously passed on by a local supplier to a registered export enterprise, the latter can seek reimbursement from the former. (Such erroneously passed on VAT cannot be refunded from the BIR)

In addition to the foregoing, RMC 24-2022 reconciles Sections 295(D) and 112(A) of the Tax Code. Section 112(A) states that input VAT attributable to zero-rated sales may be refunded and/or issued tax credit.

RMC 24-2022 provides that VAT paid or incurred for purchases not directly and exclusively used in the registered project or activity of registered export enterprises are not allowed for VAT refund under Section 112(A) of the Tax Code. Such input VAT can be used to offset any output VAT of the registered export enterprise. Should such enterprises have no sales subject to VAT, the input VAT can be accumulated and be subject of VAT refund only upon the expiration of the VAT registration.

It should be noted that sales to enterprises covered by special laws, such as the International Rice Research Institute, Asian Development Bank and renewable energy developers under RA 9513 (“Renewable Energy Act of 2008”), are still subject to zero-percent VAT.

Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo and Francisco (MTF Counsel). She is a corporate, merger and acquisition, and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal.

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