The CREATE Act significantly altered the VAT regulations for Registered Export Enterprises (REEs) by implementing a requirement that only goods “directly and exclusively used” for export are eligible for VAT exemption. This effectively abolished the Cross-Border Principle that has been the basis of the Philippine VAT system. This principle states that no VAT can be charged as part of the cost of goods and services that are used or consumed outside the jurisdiction of a taxing authority.
As a result, REEs are not responsible for paying VAT on goods and services they receive in Economic Zones, since these zones are considered separate customs territories by legal definition.
Unfortunately, the current VAT system for REEs does not follow this approach. According to the CREATE Act, only goods and services that are specifically and solely utilized for the registered activities and projects of REEs are eligible for zero-rating of VAT.
The BIR has issued various documents to implement the modification of VAT regulations. In particular, Revenue Memorandum Circulars (RMC) 24-2022 and 49-2022 notify taxpayers that in order to qualify for the 0% VAT, local suppliers of goods and services to REEs must obtain prior approval beginning on March 9, 2022.
Due to the increasing number of applications, the BIR has decided to streamline the process and eliminate the need for prior approval by issuing Revenue Regulations (RR) No. 3-2023.
The elimination of the need for prior approval for VAT zero-rating of REEs was a welcome change for taxpayers. The previous requirement for application had caused delays and hindered REEs from receiving the entitled VAT zero-rated benefit as stated by the law. Under the new and streamlined regulations, local suppliers only need to obtain specific documents from REEs and verify that the transactions are covered by the VAT-Zero Rate Certificate provided by the latter. This will ensure that in the event of a post-audit, the 0% VAT treatment can be justified. Additionally, it relieves REEs from the burdensome process of applying for a VAT refund for qualified purchases.
However, RMC No. 80-2023 clarified that the retroactive effect of RR No. 3-2023 only applies to sales of goods and services to REEs with prior applications accompanied by a VAT-Zero Rate Certificate issued by the concerned Investment Promotion Agency (IPA) which have not been acted by the BIR. Consequently, if no application was made by the local supplier, sales to REE prior to the effectivity (i.e., April 28, 2023) of RR No. 3-2023 are subject to 12% VAT.
If a service was performed and the billing invoice was issued on or after March 9, 2022 without the necessary prior application, would there be any risk if local service providers applied for zero-rating before collecting and issuing official receipts?
Can the taxpayer make the argument that the previous application was submitted within the designated timeframe, as the sale of services is reported when they are collected for VAT purposes?
If a taxpayer did not apply for a long-term contract entered and started on or after March 9, 2022 but before the implementation of RR No. 3-2023, does this mean they are no longer eligible for a 0% VAT until the completion of the contract? Or can they still claim 0% VAT for services provided under the contract after the implementation of RR No. 3-2023 without prior application?
Therefore, it might be essential for the tax agency to issue clarifying documents to resolve these issues.
In addition, while taxpayers are no longer required to submit an initial application, it is essential to note that they still have obligations to fulfill according to the regulations. Q5 and A5 of RMC No. 80-2023 state that local suppliers must obtain the necessary documents from the REEs before conducting transactions in order to qualify for a 0% VAT rate. These documents must also be presented to the BIR in the event of a post-audit.
1. VAT Zero-Rate Certification issued by the concerned IPA;
A COR is given by the BIR from the relevant office overseeing the main office, branch, freeport, or ecozone where the goods and/or services will be provided.
3. COR issued by the concerned IPA stating all registered ecozone location; and
4. A legally binding statement made by the REE-Buyer, confirming that the goods and/or services will be solely used for the production of goods and/or completion of services for export or for utility and other related expenses. The proportion of these goods and/or services allocated for export must follow the guidelines stated in RMC No. 84-2022.
These papers, along with the current requirements for proof, will demonstrate that the transactions were eligible for a 0% VAT rate. This is essential in the event of a tax audit, as the authorities can levy a VAT deficiency even if only one of these documents is absent. Therefore, local suppliers and REEs must collaborate to thoroughly prove the 0% VAT status of the transactions.
The Bureau of Internal Revenue (BIR) has acknowledged the importance of simplified government procedures in light of the new regulations regarding 0% VAT on REEs. To address this, the BIR has released RR No. 3-2023 and RMC No. 80-2023, reflecting their dedication to aligning with the Ease of Doing Business Act and contributing to the government’s objectives.
The elimination of previous authorization has simplified the process for REE to receive VAT exemptions, as the application and submission procedures can be cumbersome for both tax authorities and taxpayers. By consistently enhancing their services, the BIR can improve the overall experience for taxpayers and create a more streamlined and business-friendly atmosphere.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Aaron Paul A. Santos is the head of the Tax Advisory & Compliance department at P&A Grant Thornton. P&A Grant Thornton is a top firm in the Philippines, offering services in audits, tax, advisory, and outsourcing. They have 29 Partners and over 1000 employees.
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