TThe imposition of a 12% value added tax (VAT) on local purchases by PEZA registered businesses continues to generate debate and concern. The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 9-2021 stating that certain sales that were previously considered zero-rated for VAT are now subject to 12% VAT. This RR implements the provisions of the Law of the Republic (RA) No. 10963 or the Law on Tax Reform and Acceleration and Inclusion (TRAIN).
In accordance with the RR, the Philippine Economic Zone Authority (PEZA) recently issued a memorandum ordering the imposition of 12% VAT on its transactions with registered business enterprises (RBE).
Before the adoption of the TRAIN law, sales to entities registered by PEZA were zero-rated, as specified in fiscal circular (RMC) n ° 74-99. Under RMC No. 74-99, all sales of goods, properties and services made by a supplier subject to VAT from the customs territory to any registered business operating in the ecozone are subject to 0% VAT, which regardless of the type or class of record PEZA (for example, ITH or 5% GIT).
However, with the enactment of the TRAIN law and the supposed fulfillment of the conditions set out in that law, the sale of goods to certain exporters is now subject to 12% VAT. This is explicitly provided for in RR 9-2021 which indicates that those considered as export sales under EO 226 and other special laws are no longer subject to 0% VAT but to VAT at 12%.
On the other hand, sales of services carried out by providers subject to VAT, from the customs territory to PEZA-RBE continue to benefit from the zero rate of VAT since article 108 (B) (3) of the General Tax Code, such as modified, has not been deleted under the TRAIN Act. The article provides that services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to the rate of 0%. Thus, sales of services to PEZA-RBE are still zero-rated for VAT, even under the TRAIN law and RR 9-2021. This was confirmed by the Supreme Court in the case Commissioner of Taxes against Toshiba Information Equipment (Phils.) Inc., (GR n ° 150154) where it was found that all sales of services to PEZA registered companies made by VAT registered suppliers of the customs territory are effectively subject to 0% VAT, in accordance with Article 108 (B) (3), with regard to the provision of RA No. 7916 and the cross-border doctrine of the VAT system. Thus, the sale of service to PEZA-RBE is still zero-rated for VAT, even under the TRAIN law and RR 9-2021.
However, with the introduction of the Business Recovery and Tax Incentives for Businesses Act (CREATE), the zero rate of VAT on sales to RBEs, in general, is now subject to conditions. Under the CREATE law, the zero rate of VAT on local purchases by EBRs has been limited to apply only to goods and services directly and exclusively used in the registered project or activity. The Implementing Rules and Regulations (IRR) define “direct and exclusive use” as raw materials, inventories, supplies, equipment, goods, services and other expenses necessary for the project or registered activity, without which the registered project or activity cannot be carried out outside. Therefore, if the sale of services by the supplier subject to VAT to the RBE is not directly and exclusively used in its project or registered activity, the local supplier can pass on the 12% VAT to the RBE.
The question now is whether the condition of “direct and exclusive use” will also apply to PEZA-RBE. Is it possible that the condition only applies to RBAs that are not located in an ecozone? The rule change introduced by CREATE creates confusion among locators and their suppliers. If the condition applies without distinction to all RBEs including PEZA RBEs, it will appear that the concept of “separate customs territory” from the PEZA economic zone has been abandoned or ignored.
In the case of 2016 Coral Bay Nickel Corporation v Internal Revenue Commissioner, (GR n ° 190506), the Supreme Court (SC) ruled that the companies registered by PEZA are entities exempt from VAT, and not because of article 24 of the law of the Republic n ° 7916, as amended , which imposes the preferential tax rate of 5% on the gross income of PEZA registered businesses, instead of all taxes, but rather, due to section 8 of the same law which establishes that ecozones are a territory foreign.
Article 8 of Republic Law No. 7916 states that PEZA shall manage and operate the ecozone as a separate customs territory. The provision thus establishes that an ecozone is a foreign territory separate and distinct from the customs territory. Thus, sales made by suppliers in a customs territory to a buyer located in an ecozone will be considered as exports and therefore exempt from VAT.
The Philippine VAT system is based on the cross-border doctrine and the principle of destination. Thus, RMC 74-99 recalled that “no VAT will be imposed to form part of the cost of goods intended for consumption outside the territorial border of the tax authority”. Therefore, imports are subject to VAT and exports are exempt from VAT. If the service provider is subject to VAT, the sale of services to a PEZA registered company is subject to 0% VAT.
It is interesting to note that Article 8 of RA 7916 which provides that ecozones are to be operated and managed as a separate customs territory has not been repealed. In fact, the CREATE law defined special economic zones or ecozones as areas selected, operated and managed as separate customs territories.
Also, assuming that the local supplier can now pass VAT on to a PEZA-RBE, how will the PEZA-RBE recover the VAT imposed by a local supplier? Article 112 of the Tax Code, as amended, provides that only deductible VAT attributable to zero-rated or effectively zero-rated sales transactions may be refunded.
If the PEZA-RBE is currently subject to an Income Tax Exemption (ITH) scheme, the remedy is to request a VAT refund as the actual export sales are considered zero-rated. However, if the PEZA registered entity is no longer under the ITH regime but benefits from the 5% tax instead of all taxes, its export sales are exempt from VAT since the RBE is no longer VAT registered.
In article 9.236-2 (6) of RR 16-05, as modified by RR 04-2007, PEZA and other companies registered in the ecozone benefiting from the preferential tax rate of 5% instead of all taxes are required to register as non-VAT. people. In the VAT decree n ° 003-10, it was judged that a PEZA entity being subject to the special 5% tax regime, its gross receipts are not entitled to 0% VAT. Thus, PEZA-RBEs with less than 5% TGI might no longer be able to reimburse unused input VAT passed on by their local suppliers. Input VAT will now be part of the cost of goods and services of PEZA-RBE. This will certainly affect the pricing of manufactured goods and services of PEZA-RBE, which will ultimately impact its competitiveness in the global market. In addition, to address cost inequality, PEZA-RBEs may be forced to seek out suppliers overseas instead of sourcing from local suppliers due to the VAT differential, thus creating a domino effect on value chain and having an impact on a multitude of stakeholders.
Therefore, the proper determination of what qualifies as locally purchased goods and services that are directly and exclusively used in the project or registered activity of the RBE becomes very crucial. The question is whether this limitation applies to all local suppliers regardless of the location of the RBE. If so, does this mean that we are abandoning the concept of separate customs territory for ecozones?
While the TRI of the CREATE Act gives this definition of “direct and exclusive use”, taxpayers are still waiting for clearer and more detailed guidelines that will help them implement the new VAT rules.
It is hoped that subsequent BIR enactments will finally resolve all issues and concerns surrounding the move from 0% to 12% VAT and bring the clear intent and purpose of the law to life. After all, the goal of VAT reforms is to make the VAT system fairer and more efficient to encourage investment, job creation and poverty reduction.
Let’s Talk Tax is a weekly column by P&A Grant Thornton that aims to keep the public informed about various tax developments. This article is not intended to be a substitute for competent professional advice.
Paraluman Andres-Neagoe is Director of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.