DOF's implementing rules
Amendments to CREATE Act IRR
One of the amendments to the National Internal Revenue Code, as amended (the Tax Code), which was introduced by Republic Act (RA) No. 10963 (the Tax Reform for Acceleration and Inclusion (TRAIN) Law) and took effect on 1 January 2018, was the increase of value-added tax (VAT) from 0% to 12% on the sale of goods and services to export enterprises upon satisfaction of certain conditions under the TRAIN Law. On 11 April 2021, RA No. 11534 (the Corporate Recovery and Tax Incentives for Enterprises Act (the CREATE Act)), took effect. The CREATE Act rationalised the fiscal incentives that were granted by various investment promotion agencies to registered export enterprises and domestic market enterprises. In particular, the CREATE Act confined the VAT zero-rating on local purchases of goods or services by registered business enterprises only to goods and services that are directly and exclusively used in the registered project or activity of such registered business enterprise.
On 11 June 2021, the Department of Finance (DOF) issued Revenue Regulations (RR) No. 9-2021, which implemented the imposition of the 12% VAT on the sale of goods and services to export enterprises as a result of the satisfaction of the conditions under the TRAIN Law. The imposition of the 12% VAT on the sale of goods or services to export enterprises was further confirmed under the implementing rules and regulations (IRR) of the CREATE Act issued on 23 June 2021, which provided that the VAT zero-rating on local purchases applies to goods or services that are directly or exclusively used in the registered projects or activities of export enterprises. The CREATE Act IRR also provided that the transactions falling under the following sections of the Tax Code are subject to the 12% VAT pursuant to RR 9-2021:
- 108(B)(1); and
- 108(B)(5) (which includes the sale of goods and services to export enterprises).
The issuance of RR 9-2021 generated confusion among the registered export enterprises in economic zones and freeport zones. In response to the concerns raised by various stakeholders on the effect of RR No. 9-2021, the DOF deferred the implementation of RR No. 9-2021 on 27 July 2021, until the issuance of an amended RR.
In November 2021, the rules amending the CREATE Act IRR were issued. The amended CREATE Act IRR revised the phrase "direct and exclusive use in the registered project or activity" to refer to:
raw materials, inventories, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out; provided that the VAT zero-rating on local purchases shall be granted upon the endorsement of the concerned Investment Promotion Agency, in addition to the documentary requirements of the BIR. (Amendments in bold, emphasis added.)
However, it is not clear which documents under the amended CREATE Act IRR may be required by the Bureau of Internal Revenue (BIR) for the VAT zero-rating on local purchases.
The amended CREATE Act IRR expressly provides that the VAT zero-rating and exemption of registered export enterprises shall apply for a maximum period of 17 years from the date of registration, unless otherwise extended under the strategic investment priority plan. For enterprises that were registered with investment promotion agencies prior to the CREATE Act taking effect, the VAT zero-rating on local purchases will only apply to goods and services that are directly attributable to and exclusively used in the registered project or activity of the registered enterprise that is located inside the ecozones and freeports until the expiration of the 10-year transitory period.
On 3 December 2021, the DOF issued RR No. 21-2021, which implemented section 294(E) and 294(D) of the CREATE Act on duty and VAT exemptions, and VAT zero-rating on local purchases. The RR reiterated the definition of "direct and exclusive use for the registered project or activity" under the amended CREATE Act IRR, as well as the availment period of the VAT zero-rating on local purchases of registered export enterprises for a maximum of 17 years and until the expiration of the transitory period for existing registered export enterprises located inside economic zones and freeport zones.
The provision that imposes the 12% VAT on transactions falling under the above-mentioned sections 106 and 108 of the Tax Code (ie, on the sale to export enterprises) does not appear in RR 21-2021. Therefore, the prevailing rule as regards the sale of goods or services to registered export enterprises located inside economic zones and freeport zones is that the sale will be subject to 0% VAT, provided that the goods or services sold are directly and exclusively used in the registered project or activity of such registered export enterprises; otherwise, the transaction will be subject to the 12% VAT.
The CREATE Act IRR and its amendment provide examples of what goods and services may be considered directly and exclusively used in the registered project or activity of a registered export enterprise. The availment of the VAT zero-rating incentive on local purchases is further conditioned upon the endorsement of the relevant investment promotion agency and documents that may be required by the BIR. Given the requirements and considering that a VAT deficiency assessment will be imposed on the supplier for lack of compliance, it is expected that suppliers will be seeking assurance from registered export enterprises that the goods or services being sold to them will be directly and exclusively used in their registered project or activity. Therefore, registered export enterprises will have to work with their suppliers to ensure that there is sufficient proof available to establish that the transaction between the supplier and the registered export enterprise is subject to 0% VAT in case of a deficiency VAT assessment from the BIR; otherwise, suppliers may be constrained to subject their transactions with registered export enterprises to the 12% VAT in order to avoid deficiency assessments from the BIR.
For further information on this topic please contact Benedicto P Panigbatan or Joanna Marie O Joson at SyCip Salazar Hernandez & Gatmaitan (SyCipLaw) by telephone (+632 8982 3500, +632 8982 3600, +632 8982 3700) or email ([email protected] or [email protected]). The SyCipLaw website can be accessed at www.syciplaw.com.
Carina C Laforteza, partner and head of the tax department, assisted in the preparation of this article.