The need to review the rules on VAT zero rating
By Euney Marie Mata-Perez on August 24, 2023
THE amendments to the National Internal Revenue Code of 1997 (Tax Code), introduced by Republic Act (RA) 11534 (Create) and by RA 10963, or the “Tax Reform for Acceleration and Inclusion” (Train), particularly on the imposition of value-added tax (VAT) on indirect exports and limiting the transactions subject to zero-rated VAT, have caused an uproar and much confusion in the business world.
The Tax Code, particularly Sections 294(E) and 295(D), as amended by Create, now provides that VAT zero rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of a registered business enterprise. Applying such provision, the Bureau of Internal Revenue (BIR) clarified in Revenue Memorandum Circular (RMC) 24-2022 that the VAT zero rating of enterprises located in economic or freeport zones, pursuant to the “cross-border doctrine” no longer applies.
Under the “cross-border” doctrine, economic or freeport zone territories are, by legal fiction, considered “foreign territories.” Thus, sales of goods and services to enterprises operating in such zones are deemed export sales, and thus subject to a zero rate on VAT.
THE amendments to the National Internal Revenue Code of 1997 (Tax Code), introduced by Republic Act (RA) 11534 (Create) and by RA 10963, or the “Tax Reform for Acceleration and Inclusion” (Train), particularly on the imposition of value-added tax (VAT) on indirect exports and limiting the transactions subject to zero-rated VAT, have caused an uproar and much confusion in the business world.
The Tax Code, particularly Sections 294(E) and 295(D), as amended by Create, now provides that VAT zero rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of a registered business enterprise. Applying such provision, the Bureau of Internal Revenue (BIR) clarified in Revenue Memorandum Circular (RMC) 24-2022 that the VAT zero rating of enterprises located in economic or freeport zones, pursuant to the “cross-border doctrine” no longer applies.
Under the “cross-border” doctrine, economic or freeport zone territories are, by legal fiction, considered “foreign territories.” Thus, sales of goods and services to enterprises operating in such zones are deemed export sales, and thus subject to a zero rate on VAT.
As discussed in my article entitled “Revisiting the Imposition of VAT on Indirect Exports,” which was published in The Manila Times on July 22, 2021, Train also changed the rules, and by subjecting indirect exports to VAT, 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 BIR. This change has also caused inconvenience to exporters who now have to seek refund on input VAT passed on by their suppliers, instead of the zero rating they enjoyed prior to the Train amendments.
In an expression of solidarity, we learned that the Clark Investors and Locators Association and Subic Bay Freeport Chamber of Commerce are now joined by the American Chamber of Commerce, Metro Clark Chamber of Commerce and Industry, Tarlac Chamber of Commerce and Industry, Metro Clark ICT Council, and IT and Business Process Association, which passed a joint resolution that calls for the immediate suspension of RR 21-2021 and RMC 24-2022 issued by the BIR.
The business groups also urge the government to conduct a review of the Implementing Rules and Regulations of Create, and to suspend RR 21-2021 and RMC 24-2022 “in order to preserve the original intent of the Create Act.”
Indeed, it is high time that the BIR reviews its issuances to implement Create, as well as Train, to determine whether or not the real intention of the said laws are being carried out. Also, the BIR should consider other factors like the ease of doing business, and the bigger policy consideration of making investments in the Philippines attractive by not issuing regulations that are anti-business.
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Euney Marie J. Mata-Perez is a CPA-Lawyer and the managing pPartner 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 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.