VAT CHRONICLES: ZERO-RATING ON SALES TO PEZA REGISTERED ENTITIES PHILIPPINES

With the enactment of the Republic Act. No. 10963, otherwise known as Tax Reform and Inclusion Law (TRAIN), and Republic Act No. 11534 otherwise known as Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) amending Republic Act No. 8424, otherwise known as the National Internal Revenue Code of 1997 (Tax Code), particularly on the imposition and treatment of Value-Added Tax on local purchase of Registered Business Enterprise (RBE) such as those with Philippine Economic Zone (PEZA), VAT zero-rating on sales to PEZA registered entities in the Philippines have drawn so much attention and debates, if not confusion.

Let’s take a quick walkthrough of the significant events relative to the VAT Zero-rating of a PEZA Registered Business Enterprise to better appreciate these rules.

1. 0% VAT INCENTIVE ON EXPORT ENTERPRISES

Prior to CREATE, VAT zero-rating incentive in the Philippines for purchases from local suppliers was applicable to PEZA-registered entities without much emphasis on export volume. Under CREATE, registered business enterprises (RBEs) such as PEZA registered entities classified as export enterprises (EE) or one who exports at least 70% of its output, or a domestic market enterprise (DME), VAT zero-rating incentive in the Philippines is made applicable only to export enterprises.

2. INCLUSION OF ECOZONE LOGISTICS ENTERPRISE (ELSE) AS EXPORT ENTERPRISE

Under Revenue Memorandum Circular No. 15-2023 which published the full text of BOI Memorandum Circular No. 2023-001 and as further clarified by Revenue Memorandum Circular No. 24-2023, ELSEs that render at least 70% of their output/services to another registered export enterprise are covered by the definition of “export enterprise” under Section 293(E) of the Tax Code, as amended.

3. DIRECTLY AND EXCLUSIVELY USED IN THE REGISTERED PROJECT OR ACTIVITY

Prior to the enactment of TRAIN and CREATE, sale from customs territory to PEZA Registered Entity within the ecozone is classified as constructive export, thus, subject to Effectively Zero-Rated Sales on the premise of Cross Border Doctrine that treats the ecozone as foreign customs territory by operation of law.

With the passage of CREATE Act, the cross-border doctrine is rendered ineffectual and VAT Zero-Rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity with the concerned IPA and is defined under Section 5, Rule 2 of its Implementing Rules and Regulation as circularized by Revenue Memorandum Circular No. 83-2021 as follows:

“The direct and exclusive use in the registered project or activity refers to raw materials, inventories, supplies, equipment, goods, services and other expenditures necessary for the registered project or activity without which the registered project or activity cannot be carried out”

Recently, Revenue Regulation No. 3-2023 was issued to further amend RR 21-2021 with notable amendments such as providing a list of local purchases of goods relating to services or local purchase of services shall not be considered as “directly and exclusively used” in the registered project or activity of a registered project or activity of a registered export enterprise (REE) as follows:

4. PROPER DOCUMENTATION ON VAT 0% IN THE PHILIPPINES

PEZA then issues Memorandum Circular (MC) 2022-11 on clarification that the VAT Zero-Rating Certificate it issued annually to qualified and compliant enterprises should be sufficient basis for the enjoyment of the incentives and RBE should ensure and justify whether a specific transaction which involves goods and services are directly and exclusively used in the registered activity or project.

RMC 84-2022 prescribes the template for a sworn declaration to be executed by RBE on goods and/or services directly and exclusively used in registered activity and/or projects.

RR 3-2023 amended RR 21-2021 which provides that the VAT zero-rating on local purchase of goods or services shall be availed on the basis of the VAT zero-rating certification issued by the concerned IPA, without prejudice to the conduct of post-audit investigation/verification by the BIR

5. IS PRIOR BIR APPROVAL ON VAT ZERO-RATING ALLOWED?

RR 3-2023 provides that local suppliers of goods or services of REE shall no longer be required to apply for approval of VAT zero-rating with the BIR which repeals RMC 24-2022 and RMC 49-2022 that requires prior approval to avail VAT Zero-rating.

6. 90-DAY REFUND OF EXCESS INPUT VAT FROM VAT ZERO-RATING PHILIPPINES

Under Section 112 (A) of the Tax Code, as amended, any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. Consequently, Section 112(C) as consolidated by Revenue Memorandum Order No. 47-2020, provides that the time frame to grant claims for VAT refund is ninety (90) days from the actual filing of the application with complete documents duly received by the processing office..

CONCLUSION: Let’s hope that the relevant issuances will harmonize and bring light to the cloudy minds of our dear Registered Business Enterprises regarding this provision of law to help them pay the correct taxes for the welfare of the nation. After all, our Tax Laws adhere to one of the attributes of a sound taxation system which is Administrative Feasibility, in which tax laws must be capable of effective and efficient enforcement.

By: Garry Pagaspas, CPA

As we are all aware, Republic Act No. 11534 (RA 11534) or Corporate Recovery and Tax Incentives for Enterprises (CREATE) in Philippines has been signed into law last March 26, 2021 with Vetoed Provisions and became effective last April 11, 2021.

One notable aspect of RA 11534 CREATE Philippines is the rationalization of incentives thereby harmonizing the available tax incentives that Investment Promotion Agencies could grant (e.g. income tax holiday (ITH), enhanced deductions (ED), and 5% special corporate income tax (SCIT) among others), creating a new set of standards for those who can avail in certain locations throughout the Philippines. Under this, the question is how would RA 11534 CREATE Philippines affect the tax incentives of existing registered business enterprises (RBE) with the fourteen (14) Investment Promotion Agencies (IPA) such as Philippine Economic Zones Authority (PEZA) and Board of Investments (BOI)?

To address the above question, RA 11534 provides in Sections 311 and Section 296 some transition rules for existing registered business enterprises with PEZA (those in economic zones/ IT parks/ IT buildings, etc.), with BOI, and other IPAs. Below is the summary of tax incentives of existing PEZA, BOI, etc. existing entities under RA 11534 CREATE Philippines:

Impact on those under ITH and 5% GIT;

As provided under RA 11534 CREATE Philippines, existing registered business enterprises with PEZA, BOI, and other IPAs will continue as follows:

• If granted ITH only, then continue ITH until expiration;
• If granted ITH but have not availed, use ITH for the period as indicated in the terms and conditions of its registration;
• If granter ITH and 5% gross income tax, avail of 5% gross income taxation for 10 years from effectivity of RA 11534 CREATE or until April 10, 2031;
• If granter 5% gross income tax only, avail of 5% gross income taxation for 10 years from effectivity of RA 11534 CREATE or until April 10, 2031;

On comment, the transition provisions under Section 311 of the RA 11534 CREATE Philippines is a bit silent about the impact on other incentives (e.g. such as VAT exemptions on importation, machineries, etc.) as provided in the respective charters of the IPAs. The author could just speculate that with the tenor of the law on extending the existing incentives, it could follow that the rest of the incentives would still continue to be enjoyed, unless otherwise, expressly provided. Hope this area would be clarified soon.

Eligibility for new incentives under RA 11534 CREATE Philippines

RA 11534 CREATE Philippines provides as well that existing registered business enterprises with PEZA, BOI, and other IPAs could be eligible for new incentives under RA 11534 CREATE, subject to the conditions and qualifications under Strategic Investments Priorities Plan (SIPP). The original text (enrolled bill forwarded to President for approval) actually provides for an extension of up to 10 years but was Vetoed by the President justifying among others that only new export enterprises should be allowed new incentives. As such, we will have to wait and see how the Strategic Investments Priorities Plan would deal with this.

Export enterprises’ option to apply for new incentives under RA 11534 CREATE Philippines

RA 11534 CREATE Philippines likewise provides that existing registered business enterprises with PEZA, BOI, and other IPAs may have the option to apply for new incentives under RA 11534 CREATE. This is something they would have to carefully evaluate as it seems they can still continue their existing incentives until expiration of the ITH granted to them and up to 10 years of 5% gross income taxation or until April 10, 2031.

Relocation to avail of ITH extension for 3 years under RA 11534 CREATE Philippines

Under RA 11534 CREATE Philippines, existing registered business enterprises with PEZA, BOI, and other IPAs may as well consider relocating their business from National Capital Region (NCR) to metropolitan areas or areas adjacent to NCR or to other areas within the Philippines to avail of an ITH extension for 3 years from completion of relocation. Notably, the rationalization of tax incentives under RA 11534 CREATE has put much consideration to developing other areas outside NCR so that relocating an existing registered enterprise with IPAs could be an option for avail of the new tax incentives based on qualification.

Summary

In summary, existing registered business enterprises under IPAs (e.g. PEZA BOI) would seem unaffected in short to mid-term as they could continue their ITH until expiration of the granted term and continue further their 5% gross income tax for 10 years from effectivity of RA 11534 CREATE Philippines on April 11, 2021 or until April 10, 2031.

Existing registered business enterprises under IPAs (e.g. PEZA BOI) could qualify for the incentives under RA 11534 CREATE subject to the conditions and qualifications under the Strategic Investments Priorities Plan (SIPP) that is yet to be promulgated and issued. For those export enterprises, they could have the option to apply for the new incentives under RA 11534 CREATE Philippines based on the SIPP guidelines. Finally, they may also consider relocating their business outside NCR should they wish to avail of the new incentives under RA 11534 CREATE.

The above rules are premised on Section 296 and 311 of RA 11534 CREATE Philippines supplemented by personal views of the author. These are further subject to guidelines under the SIPP that will hopefully be issued soon. Will make necessary updates as soon as SIPP becomes available.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for almost two (2) decades now helping further taxpayers on securing BIR Rulings, appeal of BIR Ruling denials, company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has likewise been helping out local and foreign investors/clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services such as securing Ph Visa, payroll, and business consultancy. He was formerly with the academe and is presently a frequent speaker of Tax and Accounting Center, Inc. and other seminar entities.

Disclaimer: This is for purposes of academic discussions only as personally summarized by the author, not of Tax and Accounting Center, Inc. and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. 

Title XIII – Tax Incentives

Chapter I – General Provisions on tax Incentives

Sec. 291. Scope and Coverage. – This Title shall cover all existing Investment Promotion Agencies as defined in this Code or related law unless otherwise specifically exempted from the coverage of this Code.

The Investment Promotion Agencies shall maintain their functions and powers as provided under the special laws governing them except to the extend modified by the provisions of this Code: Notwithstanding the provision of this Section, the Department of Finance, the Bureau of Internal Revenue, and the Bureau of Customs shall retain their respective mandates, powers and functions as provided for under this Act and related laws.

Sec. 292. Extent of Authority to Grant Tax Incentives. – The Fiscal Incentives Review Board, or the Investment Promotion Agencies, under a delegated authority from the Fiscal Incentives Review Board, shall grant the appropriate tax incentives provided in this Title to be granted to registered business enterprises only to the extent of their approved registered project or activity under the Strategic Investment Priority Plan.

Sec. 293. Definitions. –  Where used in this title:

(A) Capital equipment refers to machinery, equipment, major components thereof, tools, devices, applications or apparatus, which are directly or reasonably needed in the registered project or activity of the registered enterprise;

(B) Direct local employment refers to the full and decent employment of Filipinos by registered business enterprises under an employer-employee relationship to perform functions that are directly related to the production of goods or performance of services under the registered project or activity

(C) Domestic input refers to purchases of locally produced raw materials or domestically outsourced services knows as services embedded in manufacturing that are uses directly in the production of goods under the registered project or activity. in the case of locally manufactured goods, fifty percent (50%) of the value-added of the said good should likewise be locally produced or manufactured;

(D) Domestic market enterprise refers to any enterprise registered with the Investment Promotion Agency other than export enterprise;

(E) Export enterprise refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organized and existing under Philippine laws and registered with the investment promotion agency to engage in manufacturing, assembling or processing activity, and services such as information technology (IT) activities and business process outsourcing (BPO), and resulting in the direct exportation, and/or sale of its manufactured, assembled or processed product or IT/BPO services to another registered export enterprise that will form part of the final export product or export service of the latter, of at least seventy percent (70%) of its total production or output;

(F) Freeport zones refer to an isolated and policed area adjacent to a port of entry, which shall be operated and managed as a separate customs territory to ensure free flow or movement of goods, except those expressly prohibited by law, within, into, and exported out of the freeport zone where imported goods may be unloaded for immediate transshipment or stored, repacked, sorted, mixed, or otherwise manipulated without being subject to import duties. However, movement of these imported goods from the free-trade area to a non-free trade area in the country shall be subject to all applicable internal revenue taxes and duties: Provided, That for the freeport to qualify as a separate customs territory, a freeport shall have a permanent customs control or customs office at its perimeter;

(G) Investment capital refers to the value of investment indicated in Philippine currency, excluding the value of land and working capital, that shall be used to carry out a registered project or activity, except that land shall be included as investment capital for registered real estate development. Investment capital may include the cost of land improvements, buildings, leasehold improvements, machinery and equipment, and other noncurrent tangible assets; (Vetoed by the President)

(H) Investment Promotion Agencies refer to government entities created by law, executive order, decree or other issuance, in charge of promoting investments, granting and administering tax and non-tax incentives, and overseeing the operations of the different economic zones and freeports in accordance with their respective special laws. These include the Board of Investments (BOI), Regional Board of Investments Autonomous Region in Muslim Mindanao (RBOI-ARMM), Philippine Economic Zone Authority (PEZA), Bases Conversion and Development Authority (BCDA), Subic Bay Metropolitan Authority (SBMA), Clark Development Corporation (CDC), John Hay Management Corporation (JHMC), Poro Point Management Corporation (PPMC), Cagayan Economic Zone Authority (CEZA), Zamboanga City Special Economic Zone Authority (ZCSEZA), PHIVIDEC Industrial Authority (PIA), Aurora Pacific Economic Zone and Freeport Authority (APECO), Authority of the Freeport Area of Bataan (AFAB), Tourism Infrastructure and Enterprise Zone Authority (TIEZA), and all other similar existing authorities or that may be created by law unless otherwise specifically exempted from the coverage of this code;

(I) Metropolitan areas refer to Metro Cebu and Metro Davao or those local government units which are later qualified or grouped as such by the national economic and development authority or through laws or executive issuances;

(J) Other government agencies administering tax incentives refer to government agencies other than investment promotion agencies which register or administer tax incentives of any kind to any specific entities and/or class of persons pursuant to any law;

(K) Other registered entities refer to any individual, partnership, organization, corporation, Philippine branch of a foreign corporation, or other entity incorporated and/or organized and existing under Philippine laws, and registered with other government agencies administering tax incentives;

(L) Qualified capital expenditure refers to purchases of capital goods with a useful life of more than one (1) year acquired for the entity’s production of goods and services to be directly used in the project or activity of the registered business enterprise;

(M) Registered business enterprise refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organized and existing under Philippine laws and registered with an Investment Promotion Agency excluding service enterprises such as those engaged in customs brokerage, trucking or forwarding services, janitorial services, security services, insurance, banking, and other financial services, consumers’ cooperatives,             credit unions, consultancy services, retail enterprises, restaurants, or such other similar services, as may be determined by the fiscal incentives review board, irrespective of location, whether inside or outside the zones, duly accredited or licensed by any of the investment promotion agencies and whose income delivered within the economic zones shall be subject to taxes under the National Internal Revenue Code of 1997, as amended;

(N) Research and development refers to experimental or other related projects or activities:  

(1) Whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work:

• (i) Based on principles of established science; and
• (ii) Proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions.

(2) That are conducted for the purpose of generating new knowledge, including new knowledge in the form of new or improved materials, products, devices, processes or services;

(O) Sophisticated refers to the state when a product or service requires a high level of technology, human capital, competencies or know-how, and infrastructure to be produced or offered;

(P)Sophistication refers to the level of technology, human capital, competencies or know-how, and infrastructure required for a product or service to be offered by an economy like that of the Philippines;

(Q) Source document refers to input materials and documents reasonably needed by information technology (IT) and it-enabled industries such as books, directories, magazines, newspapers, brochures, pamphlets, medical records or files, legal records or files, instruction materials, and drawings, blueprints, or outlines;

(R) Special economic zone or ecozone refers to a selected area, which shall be operated and managed as a separate customs territory that is highly developed or has the potential to be developed into an agro-industrial, industrial, information technology, or tourist/recreational area, whose metes and bounds are fixed or delimited by presidential proclamations and within a specific geographical area which includes industrial estates (IES), export processing zones (EPZs), ICT parks and centers, and free trade zones: Provided, That for the ecozone to qualify as a separate customs territory, an ecozone shall have a permanent customs control or customs office at its perimeter: Provided, however, That areas where mining extraction is undertaken shall not be declared as an ecozone: Provided, further, That vertical economic zones, such as, but not limited to, buildings, selected floors within buildings, and selected areas on a floor, need to comply with the minimum contiguous land area as determined by the fiscal incentives review board; and

(S) Training refers to courses, curricula, certifications or modules provided to Filipino employees that are directly related to the production of goods or performance of services under the registered project or activity and that are of a technical nature, which shall develop or improve the specific skills or practical knowledge of the employee especially in the mechanical, industrial art, scientific field or practical science of a particular position or job function in the registered project or activity, or in preparation for enhancing the value chain.