VAT rules: Make it make sense

A look at the various issuances released by the Bureau of Internal Revenue to address taxpayer questions about VAT rules arising from the CREATE Act

14 August 2023

By Felimyn Norren Torres

IT has been more than two years since the promulgation of Republic Act 11534, or the "Create Act," but taxpayers are still trying to make sense of the value-added tax (VAT) rules introduced by the said law, particularly those affecting enterprises registered with investment promotion agencies (IPAs). The Bureau of Internal Revenue (BIR) has issued regulations implementing the VAT provisions of the Create Act and a number of circulars to address unclear matters.

Prior to the approval of the law, the VAT system adhered to the "cross-border doctrine," wherein no VAT shall form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. As such, purchases of goods and services by ecozone and freeport enterprises were treated as constructive exports subject to zero percent VAT.

The Create Act rendered this doctrine ineffectual and inoperative for VAT purposes. Upon effectivity of the law, the VAT zero-rating incentive was limited to purchases of goods and services "directly and exclusively used" in the registered projects of registered export enterprises (REEs). As clarified under Revenue Memorandum Circular (RMC) 24-2022, purchases of goods and services of REEs not "directly and exclusively used" in their registered activities and all local purchases of domestic market and service enterprises are subject to 12 percent VAT.

For an REE to be able to avail of the zero percent VAT on its purchases of goods and services, the incentive should be endorsed by the concerned IPA, as evidenced by an IPA-issued VAT zero-rating certificate. In addition, as clarified under RMCs 24-2022, 49-2022, and 152-2022, approval should be obtained from the BIR attesting that the purchased goods and/or services were "directly and exclusively used" in the registered project.

This required REEs to submit documentary requirements to local suppliers, including a sworn declaration that the purchases were "directly and exclusively used" in the registered activity. Suppliers were also required to submit an application for VAT zero-rating to the BIR. All approved applications took effect on the date the application was received, were only valid until December 31 of the year of application, and were renewable every year thereafter. Approvals did not have a retroactive effect.

On April 28, 2023, the BIR issued Revenue Regulations (RR) 03-2023, which provided that securing BIR approval was no longer required beginning April 28, 2023, and that local purchases of goods and services can be subject to zero percent VAT on the basis of the VAT zero-rating certificate issued by the concerned IPA but subject to BIR post-audit investigation. For applications received but not yet acted upon by the BIR, these would be treated as VAT zero-rating from the date of filing of the application subject to BIR post-audit verification.

Continuing with tradition, as the provisions of RR 03-2023 left much room for individual interpretation, the BIR issued RMC 80-2023 on Aug. 9, 2023, supplying further clarifications.

Aside from being used directly and exclusively in the registered project, the local purchase should not be included in the "negative list" under RR 03-2023 to qualify for VAT zero-rating. In case the purchase falls within the "negative list," the REE can still prove to the concerned IPA that the goods and/or services are indeed directly and exclusively used in its registered project by submitting relevant supporting documents.

The RMC also clarified that while the VAT zero-rating on local purchases of goods and services can be availed of on the basis of the IPA VAT zero-rating certificate, this may be subject to post-audit by the BIR, and, as such, the REE should still provide local suppliers with certified true copies of its IPA-issued VAT zero-rating certificate, IPA-issued certificate of registration (COR), BIR-issued COR, and a sworn declaration that purchases are "directly and exclusively used" in the registered activity with the percentage of allocation. There was also the issue of whether the provisions of RR 03-2023 had retroactive effect, which the RMC clarified that any local purchase prior to April 28, 2023 without BIR approval was subject to 12 percent VAT.

In the span of two years, the BIR has had to release several clarificatory circulars due to the ambiguity of the provisions of earlier regulations. It has been a common theme for taxpayers to be left reading between the lines of answers provided by the BIR that do not entirely apply to them. Further, the clarifications from the BIR do not come in a timely manner, leaving taxpayers with no choice but to figure out the most prudent approach to their transactions. Perhaps it is high time the BIR issued a circular that would finally address all issues faced by taxpayers due to the new tax rules of the Create Act.

As published in The Manila Times on 14 August 2023. Flyn Torres is a Manager with the Tax & Corporate Services group of Deloitte Philippines.

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