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Proposed Amendments to the VAT Zero Rating Rules

By: Atty. Euney Marie Mata-Perez on October 26,2023

The amendments introduced by the Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) Act, Republic Act (RA) No. 11534 dated March 26, 2021, and RA No. 10963, the Tax Reform for Acceleration and Inclusion (“TRAIN”) Law, to our National Internal Revenue Code of 1997 as amended (Tax Code), significantly changed the value-added tax (VAT) landscape in the Philippines.

While export sales continue to be subject to 0% VAT, consistent with the destination principle, sales of goods or services to export enterprises or enterprises operating within economic zones, which previously enjoyed VAT zero-rating, became subject to VAT pursuant to the CREATE Act.  Thus, the recourse of  exporters or registered enterprises, whose sales are zero-rated, is to seek a refund of input VAT attributable to its export or zero-rated sales, pursuant to Section 112 of the Tax Code.

Imposition of VAT on Sales to Ecozones

The CREATE Act limited the VAT zero-rating on registered business enterprises (RBEs) to local purchases of goods and services “directly and exclusively used in the registered project or activity.” As a consequence, the Bureau of Internal Revenue (BIR) rendered inoperative the “cross border doctrine” as applied to ecozones or freeport zones (Revenue Memorandum Circular [RMC] No. 24-2022 dated February 23, 2022; Revenue Regulations [RR No. 21-2021).  Thus, VAT became due on the sale of goods and services by a VAT-registered seller to registered enterprises in these economic and freeport zones.  Previously, such transactions were treated as constructive exports and subject to zero-percent VAT under RMC 74-99 and as upheld by the Supreme Court in several cases.

Imposition of VAT on Indirect Exports

Also, pursuant to the TRAIN Act, as implemented by RR No. 9-2021, “indirect exports” which were previously taxed at zero percent  VAT are now subject to 12-percent VAT. “Indirect exports” generally involve sales of raw and packaging materials to export-oriented enterprises or the provision of processing and manufacturing services to them.

Draft Bill

In an attempt to improve the VAT landscape, a draft house bill, a proposed house bill, in substitution of House Bill No. 8968, (the “Draft Bill”) is being proposed to change the rule to state that VAT zero rating shall apply on local purchases of goods and services “directly attributable to the registered project or activity” of RBEs , provided the sale is made by a VAT-registered seller to registered export enterprises, regardless of location.

So, instead of the words “exclusive and directly used for the registered activity” the Draft Bill is proposing a different standard, which is “direct attribution” to the registered project or activity, for  local purchases to enjoy zero-VAT rating.

The Draft Bill also provides that the following shall be subject to the 12% VAT:

  • sale of goods and/or services by unregistered and registered domestic market enterprise to another unregistered and registered domestic market enterprise; and
  • sale of goods and/or services to a non-registered export enterprise;

Sale of goods and/or services by a registered export enterprise to another export enterprise shall be zero-rated if the seller is VAT-registered and enjoying income tax holiday.  Similar sales shall be VAT exempt if the seller is enjoying the 5% special corporate income tax incentive

The Draft Bill also seeks to amend Section 112 of the Tax Code, as follows:

  • To make clear the documents to be submitted for refund and state that the documents prescribed by the Commissioner of Internal Revenue (CIR) shall be deemed exhaustive, in support of the application filed.
  • For purposes of  VAT refund claims, taxpayers shall be classified into low, medium, and high-risk claims, with the risk classification based on the amount of VAT refund, tax compliance history, frequency of filing VAT refund claims, among others.

Lastly, the Draft Bill seeks to clarify that if the CIR fails to act on the input VAT refund application within the prescribed 90-day period under Section 112, the taxpayer affected may, after the expiration of said ninety-day period, appeal the “inaction” with the Court of Tax Appeals (CTA).  The present amended provision is not clear on this “deemed denial” or “inaction” rule, although the CTA has in recent decisions held that the taxpayer should appeal within thirty days from the lapse of the 90-day period on the basis of the provisions of the RA No. 1125, the act creating the CTA.[EMP1]  (Commissioner of Internal Revenue v. Maersk Global Services Centres (Philippines) LTD., CTA EB No. 2534, June 7,  2023 )

Undoubtedly, the Draft Bill seeks to improve the VAT zero-rating system.  However, it has still restricted the zero-rating of purchases of exporters to purchases “directly attributable” to the registered activity only.  Also, such zero-rating applies only if the buyer is a registered export enterprise.  If the buyer is an “unregistered” export enterprise, the sale is subject to 12% VAT.

In other words, unregistered export enterprises remain to be subject to the 12% VAT on their purchases.  As a result, such exporters have to seek refund under Section 112 of the Tax Code, which allows refund on input VAT attributable to zero rated sales.

These amendments still do not revert or adhere the VAT system to the pure “destination principle”, which provides  that goods and services are subject to VAT only in the country where they are consumed, thus exports (and all its components) should be VAT zero-rated because the goods are consumed abroad (Commissioner of Internal Revenue vs. American Express International Inc. (Philippine Branch) G.R. No. 152609, June 29, 2005).

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 and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the incoming Chair of the Tax Committee of the Management Association of the Philippines. 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 regarding this article, you may email the author at or visit MTF website at

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