The Bureau of Internal Revenue (“BIR”) has issued Revenue Regulations (“RR”) No. 15-2021 deferring the implementation of RR No. 9-2021 in view of the COVID-19 pandemic and its impact on the export industry.
RR No. 9-2021 was issued to implement the imposition of 12% Value-Added Tax (“VAT”) on certain transactions previously taxed at zero rate after the satisfaction of the following conditions set forth in Republic Act No. 10963 or the “TRAIN Law”: (a) the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application; and (b) all pending VAT refund claims as of 31 December 2017 shall be fully paid in cash by 31 December 2019.
In particular, Section 2 of RR No. 9-2021 imposed 12% VAT on the following transactions:
Sale of Goods or Properties
Sale of Services
1. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (“BSP”);
2. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production; and
3. Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws.
1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; and
2. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production.
RR No. 9-2021 has brought some confusion and concerns among taxpayers whose VAT exemption emanates from special laws such as the Special Economic Zone Act and the Bases Conversion and Development Act regarding the VAT treatment of their local purchases.
On one hand, Section 2 of RR No. 9-2021 imposes 12% VAT on export sales of goods or properties under the Omnibus Investment Code and other special laws.
On the other hand, Section 3 of same RR No. 9-2021 provides that sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate shall be subject to 0% VAT. Further, the Implementing Rules and Regulations of Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act provides that VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of export enterprises, during the period of registration of the said registered project or activity with the concerned Investment Promotion Agencies. The term “direct and exclusive use” 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.
This raises questions as to whether VAT zero rating of goods and properties sold to PEZA-registered entities has been removed under RR No. 9-2021, or whether the said PEZA-registered entities continue to enjoy their zero-rating privilege provided that the goods and services are directly and exclusively used in their registered project or activity.
On 06 July 2021, the Philippine Economic Zone Authority (“PEZA”) issued a Memorandum stating that, while it fully supports the exemption of PEZA-registered enterprises from VAT, absent any injunction from the courts or directive from the Department of Finance or the BIR that RR No 9-2001 is deferred, PEZA has no option but to implement the said RR. Thus, PEZA directed the imposition of 12% VAT on the transactions of PEZA-registered enterprises including, but not limited to, lease rentals, utilities and relevant fees.
The deferment of the implementation of RR No. 9-2021 under RR No. 15-2021 has provided some form of relief to PEZA-registered enterprises. It remains to be seen, however, how the BIR will address the concerns raised when it issues the amendatory revenue regulations.
For questions, please contact:
Head, Tax Practice