When Revenue Regulations (RR) No. 9-2021 was issued, the enterprises registered with the Philippine Economic Zone Authority (PEZA) became concerned as their once value-added tax (VAT) zero-rated local purchases would be subject to 12% VAT starting on June 27, 2021.
Due to this, PEZA sought a clarification from the Department of Finance (DoF) and asked for the deferment of RR No. 9-2021 while the conflict between RR No. 9-2021 and the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) remains unresolved.
Prior to the amendments introduced to the Tax Code by the Tax Reform for Acceleration and Inclusion Law (TRAIN Law) in 2018 and the CREATE this year, the sale of raw materials, packaging materials, and services to export-oriented enterprises and those considered as export sales under the Omnibus Investments Code and other special laws were subject to 0% VAT.
Under the TRAIN Law, these transactions, including the domestic sale to PEZA-registered entities, previously subject to 0% VAT will now be subject to the 12% VAT upon satisfaction of certain conditions: 1.) the establishment and implementation of an enhanced VAT refund system, and, 2.) that all pending VAT refund claims as of Dec. 31, 2017, shall be fully paid in cash by Dec. 31, 2019.
This year, CREATE was passed into law. Under CREATE, Section 294(E) of the Tax Code provides that registered projects or activities are entitled to zero-rated VAT local purchases. Further, Section 295(D) of the Tax Code, as amended by CREATE, states that the VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of a registered business enterprise (RBE).
Despite the amendments introduced in Sections 294(E) and 295(D) of the Tax Code, the Bureau of Internal Revenue (BIR) still issued RR No. 9-2021 to establish that the conditions set forth under the TRAIN Law have already been satisfied; hence, 12% VAT shall already be imposed on local purchases of RBEs even if these purchases are directly related to their registered activities which, under CREATE, should still be subject to 0% VAT. Naturally, this caused outright confusion and negative reactions especially from export enterprises. Further, the implementing rules and regulations (IRR) on Title XIII — Tax Incentives of CREATE adopted Section 295(D) that the local purchases of goods and services which are directly and exclusively used in the registered project of activity of export enterprises shall be subject to 0% VAT but qualified that the transactions covered under RR No. 9-2021 shall be subject to 12% VAT. The said IRR clarified that direct and exclusive use in the registered project or activity 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.
In its Letter to the DoF, the PEZA pointed out that RR No. 9-2021 is contrary to the CREATE; it utterly disregards the separate customs territory principle under Section 8 of the PEZA Law; and violates the cross-border doctrine as recognized and established by jurisprudence. Considering, however, that there is still no resolution yet from the DoF and the BIR, the PEZA was forced to direct the imposition of the 12% VAT on the local purchases of PEZA RBEs.
PEZA, together with various export enterprises, reached out to the DoF and the BIR to have a dialogue on this matter. And on July 21 this year, the DoF and the BIR issued RR No. 15-2021 to defer the implementation of RR No. 9-2021 until the issuance of amendatory regulations. This means that the imposition of 12% VAT on the covered transactions under the TRAIN Law, which is dependent on the satisfaction of certain conditions, is suspended. Hence, until there are clear regulations on such, the covered transactions should still be subject to 0% VAT, including the local purchases of PEZA RBEs, which are directly used and related to their registered activities.
In implementing the TRAIN Law and the CREATE, regulators must keep in mind that the purpose of these laws is not only to generate much needed revenues for the government, but also to boost the economy by supporting local businesses with a more responsive and globally competitive incentives regime. It must be noted that these export enterprises may opt to purchase cheaper raw materials through importation rather than from local producers if VAT will be imposed. Hence, instead of boosting the economy and, in effect, generating more revenues for the government, the improper implementation of tax laws could lead to long-term adverse consequences. As of date, amendatory regulations are yet to be issued to clarify RR No. 9-2021.
The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.
Fatima Faye E. Cordova is a Senior Associate at the Tax Department of the Angara Abello Concepcion Regala & Cruz Law Offices.