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: Tax and Accounting Center Philippines

Under Philippine Economic Zone Authority (PEZA) rules, a Tourism Economic Zone Locator Enterprise is an establishment and operation within PEZA Tourism Special Economic Zone of sports and recreation centers, accommodation, convention, and cultural facilities and their special interest attraction activities / establishments, with foreign tourists as primary clientele. Tax Incentives of Tourism Economic Zone Locator Enterprise in the Philippines based on qualifications and registration are as follows:

• Income tax holiday where no income taxes shall be imposed on such number of years for pioneer or non-pioneer enterprise,
• 5% Gross Income Tax, in lieu of all national internal revenue and local taxes,
• Tax and duty-free importation, and
• Zero-VAT rating on local purchases of capital equipment.

Philippine Economic Zone Authority (PEZA) Board issued Board Resolution No. 12-610 dated November 13, 2012 (PEZA Board Reso. No. 2012-610) on the tax incentives of Tourism Economic Zones developers and locators in the Philippines. This was circularized by the Bureau of Internal Revenue (BIR) under Revenue Memorandum Circular No. 23-2013 dated February 22, 2013 (RMC 23-2013).

Under PEZA Board Reso 2012-610, tourism economic zones developers and locators in the Philippines shall have the following tax incentives:

• No more 5% Gross Income Tax (5% GIT) incentives to developers of Tourism Economic Zones (TEZs) in the following areas:

1. Metro Manila,
2. Cebu City,
3. Mactan Island, and
4. Boracay Island.

• No more income tax holiday (ITH) and 5% GIT incentives to locator enterprises of TEZs in the aforesaid 4 areas, except for tax and duty free importation and zero VAT rating on local purchases of capital equipment.
• No more TEZs to be established in – Metro Manila, Cebu City, Mactan Island, and Boracay Island

Prospective effect of PEZA Board Reso No. 2012-610

The new policy under PEZA Board Reso No. 2012-610 shall apply prospectively and not retroactively. TEZ developer/operators and locator enterprises in the above four areas that have not signed their Registration Agreement with PEZA shall be covered by this new policy.

Summary

Based on PEZA Board Reso. No. 2012-610, no more tax incentives are applicable to tourism ecozones in the four (4) areas – Metro Manila, Cebu City, Mactan Island, and Boracay Island. This in effect encourages development of tourism ecozones in other tourist destinations in the Philippines such as Bohol Philippines, Palawan Island Philippines, Davao Philippines, and other parts of the country for tourism industry.

Disclaimer: This article is for general conceptual guidance only 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.