This or that, VAT or not

A look at the evolving rules regarding the payment of, and incentives concerning, value-added tax following the implementation of the CREATE Act

By: Kenneth Manalo

THE drafting of implementing rules and regulations (IRR) becomes imperative after a law is enacted. The IRR's purpose is to establish guidelines that will facilitate compliance with the law and the realization of its objectives. A recurring challenge, however, is the presence of IRR provisions that may conflict with the underlying law or, in some cases, the absence of necessary regulations. This raises concerns and questions among interested parties regarding which set of guidelines should take precedence.

The IRR for the Corporate Recovery and Tax Incentives for Enterprises Act, also known as the Create Act (Republic Act 11534), was signed on June 21, 2021, roughly three months after the law took effect on April 11, 2021. Subsequently, amendments to the IRR have been introduced to address issues, including clarifications pertaining to policies governing the grant and administration of incentives for eligible enterprises.

The most recent update involves the amendment of Rule 18, Section 5, promulgated by the Secretary of Finance and the Secretary of Trade and Industry, specifically addressing concerns related to value-added tax (VAT). The amended rule stipulates that all registered business enterprises (RBEs) choosing to retain existing income tax incentives under Sections 1, 2, and 3 are eligible to maintain the following incentives outlined in their registrations with investment promotion agencies (IPAs): duty exemption, VAT exemption on importation, and VAT zero-rating on local purchases.

A registered export enterprise (REE) whose income tax-based incentives have expired may continue to enjoy VAT zero-rating on local purchases until the Bureau of Internal Revenue's (BIR) electronic sales reporting system under Section 237-A of the Create Act is fully operational or until the expiration of the transitory provision under Section 311 (C), whichever comes earlier. Note that under Section 311, RBEs enjoying a 5 percent tax on gross income earned, granted prior to the Create Act's effectivity, are allowed to continue availing of the tax incentive at the rate of 5 percent for 10 years.

A domestic market enterprise (DME) located inside the economic or freeport zone during the transitory period, meanwhile, will be allowed to register as a VAT taxpayer.

Those who do so, however, will not be allowed to claim VAT refunds for transactions prior to the amendment's effectivity.

Prior to the IRR amendment, the law was silent on any applicable period for VAT incentives. Under the Create Act, Sections 296 and 311 exclusively outlined the duration for availing of income tax incentives and the transitory period for incentives granted prior to the law's effectivity. Essentially, only the periods for income tax holidays and special corporate income tax or enhanced deduction eligibility were explicitly defined while non-income tax incentives were presumed to be available throughout the duration of the RBE's registration.

On November 15, 2023, following the amendment of Rule 18 Section 5, the BIR issued Revenue Regulations (RR) 13-2023, prescribing the policies and guidelines for the voluntary VAT registration of DMEs. This registration allows VAT-registered DMEs covered by the transitory provision of the Create Act to either impose output VAT on domestic customers or seek a refund from the BIR for the input VAT directly attributable to their zero-rated sales.

To be eligible, a DME must obtain from the IPA concerned a certification explicitly excluding VAT from the 5 percent gross income earned tax in lieu of all tax incentives granted to it. The certification must expressly mention "in lieu of all taxes except VAT." For this purpose, the DME is required to submit the following to the IPA: a request letter stating its intention to avail of the option to register as a VAT taxpayer to Rule 18 Section 5 of the amended IRR; a notarized "Deed of Waiver of Right to Avail of the VAT Exemption Incentive"; and other documents that may be prescribed by the IPA concerned.

The regulations further specify that once the taxpayer waives its rights to avail of the VAT exemption incentive, the decision is irrevocable and stays in effect throughout the remaining transitory period. DMEs that have secured the certification are required to update their registration from non-VAT to VAT. Subsequently, they will be subject to the same VAT imposition and compliance standards as regular corporations.

To monitor the implementation of the optional registration, the IPAs must provide the BIR with a list of RBEs with certifications. This list should be submitted to the Audit Information, Tax Exemption, and Incentives Division of the Assessment Service office within 20 days after the close of each taxable quarter.

As the government continues to implement the Create Act, taxpayers should anticipate further amendments or issuances from the Department of Finance, Department of Trade and Industry, and the BIR as these agencies work to improve and clarify rules and policies and resolve issues affecting the investment climate. Ideally, there should be harmonious collaboration between the legislative and executive branches when executing the rules and regulations of the law. After all, our collective aim is to adhere to established guidelines.

As published in The Manila Times on 20 November 2023. The author is an Assistant Manager with the Tax & Corporate Services group of Deloitte Philippines.

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