More than a month has passed since the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 9-21 – a three-page document that applies a value-added tax (VAT) of 12 per cent on national purchases of exporters and indirect purchases of exports. The regulation has caused confusion among business enterprises registered in separate customs territories and although questions have accumulated since then, the BIR has remained silent. Businesses continue to wait, knowing they are at the mercy of the office’s interpretation and clarification.
Choosing to err on the side of caution, most suppliers of registered businesses have started to impose a 12% VAT to comply with said regulations. Even the Philippine Economic Zone Authority (PEZA) itself, in an opinion, asked administrators in the zone to impose a 12% VAT on rents and utilities that can be directly and exclusively used. in the registered activities of PEZA companies pending clarifications from the BIR.
Assuming that the 12% VAT charge is valid, registered businesses can recover passed on VAT either as a deductible expense for input VAT attributable to VAT-exempt sales or as a VAT refund for VAT upstream not used on zero interest sales. Determining the appropriate remedy will require knowing the proper treatment of sales made by a registered business. Are these sales exempt from VAT or sales at zero rate?
The Supreme Court has repeatedly endorsed the fiction that an ecozone is foreign territory. This is based on Article 8 of the original PEZA Act, as amended, which requires PEZA to manage and operate the ecozone as a separate customs territory. Therefore, this provision establishes the fiction that an ecozone is a foreign territory separate and distinct from the Philippine customs territory.
In addition, the Philippine VAT system respects the cross-border doctrine and the destination principle that no VAT will be imposed to form part of the cost of goods for consumption outside the territorial border of the tax authority. In addition, tax circular 74-99 specifies that the sale and purchase of goods and services relating to activities registered between two companies in the ecozone are exempt from VAT. It follows that sales made by ecozone companies to foreign companies are exempt from VAT, being two separate customs territories.
According to this argument, the 12 percent VAT passed on to registered companies constitutes unforeseen costs with no or minimal tax recoveries. The recourse is limited to a 5% tax saving as a deductible expense insofar as the corresponding expense is considered a direct cost for the company subject to a gross tax of 5%. Registered businesses are now at risk of not being able to recover all of the VAT passed on through BIR refunds.
Due to the additional costs, it will affect the prices and make the exporters less competitive in the international market. Local purchases will also become more expensive for registered businesses, which may cause them to consider purchasing from overseas suppliers. As this would greatly affect the business operations of a registered business, will the BIR allow the refund of passed on VAT? In the case of several companies, will the BIR put in place a more efficient VAT refund mechanism?
Another uncertainty that puzzles registered businesses and their suppliers is which purchases are subject to 12 percent VAT and which purchases are still eligible for zero VAT.
The recently published Implementing Rules and Regulations (IRR) for Tax Incentives under the Business Recovery Act and Tax Incentives for Businesses (Create) provide that the zero rate of VAT on local purchases can still be applied. ” apply on condition that the goods or services purchased are directly and exclusively used in the registered project or activity of the registered business during the registration period. Direct and exclusive use has been defined as raw materials, inventories, supplies, equipment, goods, services and other expenses necessary for the registered project or activity, without which it cannot be carried out. .
This provision is subject to interpretation on how to determine whether the expenditure is for direct or exclusive use. Without clear guidelines, suppliers risk applying incorrect VAT treatment.
Also, how will registered businesses prove that the expenses are for direct and exclusive use? What documents must they submit to suppliers in order for them to benefit from the zero rate of VAT on purchases? The Create IRR provides a list of direct costs for the purpose of calculating gross income subject to a special 5 percent corporate income tax. Will the BIR adopt the same list of expenses to define direct and exclusive use for VAT?
Given the ongoing pandemic and our sluggish economy, is the time right to implement tax changes that will not only deter new investors from entering the Philippines, but will also trigger the exit of current investors? As mentioned by PEZA, registered companies have supported the Philippine economy during the height of the Covid-19 pandemic last year. Clarification from the BIR is urgently needed to at least ease the burden on those businesses, which now operate in a cloud of uncertainty and unable to make critical decisions. We hope that the BIR will reconsider the concerns of these affected businesses and implement rules with the least possible burden on taxpayers.
The author is director of the Tax and Corporate Services division of Navarro Amper & Co., member of the Deloitte Asia Pacific Network. For comments or questions, send an email [email protected] Deloitte Asia Pacific Ltd. is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Ltd. Members of Deloitte Asia Pacific Ltd. and their related entities, each separate and independent legal entities, provide services in over 100 cities across the region including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.