The need for clearer VAT exemption rules under Create

Clarity of tax rules and regulations is the key to an effective tax system. One of the areas that tax authorities need to clarify is the zero-rating of sales to businesses operating in and registered in existing economic zones.

The Law on Business Recovery and Tax Incentives for Businesses (Establishment) (Republic Law 11534) amended Article 294 (D) of the National Tax Code (Tax Code) to provide that registered business enterprises (RBE) are entitled to value added tax (VAT) import exemption and VAT exemption on local purchases. Article 295 (E) of the Tax Code provides that this VAT exemption and zero rate only apply to goods and services “used directly and exclusively in the registered project or activity” by an RBE.

The Bureau of Internal Revenue (BIR) has posted on its website a Draft Implementing Regulation (IRR) for the above proposed changes to Articles 294 (D) and 295 (E) of the Tax Code. (See

In a September 17, 2021 letter to the Secretary of Finance, the Tax Management Association of the Philippines (TMAP) sent its comments and position on the IRT project. Mainly, the TMAP has called for the establishment of clear and detailed guidelines similar to those set out in Tax Regulation 74-99 (RR 74-99). These guidelines should apply to transactions between RBAs located in special economic zones (ecozones) and between RBAs and local suppliers of goods and services in the customs territory.

Prior to the adoption of the Creation Law, RR 74-99 served as a “benchmark” for sales of goods and services to economic zones. RR 74-99 adheres to the so-called “cross-border doctrine” that 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 goods intended for consumption outside the territorial border of the tax authority. Accordingly, under RR 74-99, any sale of goods, goods or services made by a VAT registered supplier from the customs territory to any registered business operating in the ecozone – regardless of class or Philippine Economic Zone Authority registration type – is subject to zero percent VAT.

It should be noted that the Creation Act neither abandoned nor repealed the “principle of cross-border doctrine”. In addition, it was agreed that export processing zones or ecozones should be managed as a separate customs territory from the rest of the Philippines and, therefore, for tax purposes, are effectively considered foreign territory. For this reason, sales from persons in the 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) (GR Nos. 141104 & 148763, June 8, 2007).

With the aforementioned changes and due to the principle of the cross-border doctrine still in force, taxpayers need advice on the following points:

* How the proposed TRI will be interpreted in relation to the provisions of RR 74-99 and vice versa.

* Which will be subject to the IRR project requirements.

* How the expression “used directly and exclusively in the project or recorded activity” by an RBE will be interpreted.

* How the general repeal clause of the draft RIP is to be interpreted in light of the existing provisions of RR 74-99.

The position of the TMAP is that the requirement or qualification of “direct and exclusive” use only applies to new RBEs since these will be those that will be subject to the provisions of Article 294 (Incentives) and the article 295 (Conditions of availability) of the Tax Code as amended. by the law on creation. It should not apply to other ecozone businesses or existing RBAs.

It is also necessary to clarify what falls under the scope of inputs that are “directly and exclusively used” in the recorded activities of RBAs and who makes this decision. Without clear rules or guidelines, RBAs and their suppliers can take conflicting positions. Most likely, and out of prudence, suppliers will pass VAT on to RBE. Once the VAT is passed on in error, the RBE will no longer be able to claim from the BIR the reimbursement of the input VAT paid in error. This was stated in Coral Bay Nickel Corporation v. CIR (GR No. 190506, June 13, 2016) where the Supreme Court ruled that the ecozone company’s recourse is to seek reimbursements from suppliers, not from BIR.

The following are therefore offered:

* There should be “clear documentation” to confirm entitlement to the zero rate of VAT to guide EBRs and their suppliers.

* What qualifies as “direct and exclusive use” should not be limited to direct costs and should cover other costs necessary or incurred in carrying out the registered activity.

* If the RBE does not have an “unregistered activity”, zero-rated VAT should cover all of its purchases as these could be considered “attributable” to zero-rated sales, which are refundable under section 112 (C) of the General Tax Code.

The TRI project should prescribe the billing requirements if the EBR has both registered and unregistered activities.

For efficiency, it is essential that the tax authorities clarify the rules and establish detailed guidelines on the zero-rating or exemption of sales to businesses operating in and registered in existing economic zones and RBEs, in accordance with the changes introduced by the law on creation. We hope that the BIR will soon come up with clearer guidelines or regulations.

Euney Marie J. Mata-Perez is a CPA lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a lawyer in corporate law, mergers and acquisitions and tax. She has also served as President of the Philippine Tax Management Association and was ranked among the Top 100 Lawyers in the Philippines by the Asia Business Law Journal. This article is for general information only and does not replace professional advice when the facts and circumstances warrant. If you have any questions or comments, you can email the author at [email protected] or visit the MTF website at

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