A promising 2018 with VAT TRAIN

New Year, perhaps, is the most celebrated occasion around the globe. People stay awake to greet midnight, most often, with fireworks and loud noises at the stroke of 12. For Filipinos, families gather to celebrate a midnight meal known as Media Noche. It is also a popular practice to open all the doors and windows to let in good luck, make noise to drive away evil spirits, put 12 round fruits on the table and wear clothes with polka dots that symbolize money.

Save perhaps for birthdays and Christmas, no other occasion in the year gets as much attention as New Year. It is the time for people to reflect, look back and assess how their lives have gone and resolve to improve. New Year, therefore, symbolizes new beginnings… new hopes.

In 2018, as Republic Act (RA) 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN), comes to life, Filipinos are hopeful and optimistic that the year will bring more food to the table and bountiful and prosperous lives to many. While TRAIN was received by our kababayans with much optimism and enthusiasm, there are also many who expressed anxiety that it will bring more hardship because of the higher prices of commodities and fuel resulting from increases in excise taxes.

Tax reform will always have trade-offs. An interesting one is the removal of VAT zero-rating on the sale of goods to PEZA-registered companies upon implementation of the Enhanced VAT Refund System.

In a veto message, the President stated that VAT zero-rating should only be limited to direct exporters. Thus, the new provision of zero-rating of sales of goods and services to registered enterprises within separate custom territories and tourism enterprise zones was vetoed by the President.

The issue, however, is whether the vetoed provision immediately removed the existing VAT zero-rating enjoyed by PEZA-registered enterprises in their purchase of goods and services. We note that even without the vetoed provisions such entitlement for zero-rated purchases has been interpreted as included in the PEZA law and consistent with the Cross-Border Doctrine of taxation. In Revenue Regulations 4-2007, the BIR clarified that the term “effectively zero-rated sales” of goods and services refers to the local sale of goods and services by a VAT-registered person to a person or entity who was granted an indirect tax exemption under special laws or international agreement. This provision of the regulations has been the basis for the zero-rating of purchases by PEZA-registered enterprises.

Assuming that the zero-rating of purchases by PEZA registered enterprises is retained based on the above provisions of the law, the VAT treatment of said transactions will still face changes under the amendments introduced by the TRAIN. The amendments state that upon the successful establishment and implementation of the Enhanced VAT Refund System, those considered export sales of goods under other special laws will no longer be considered export sales subject to zero percent. In this case, the sale of goods to PEZA–registered enterprises will necessarily be subject to 12% VAT.

We note that the provision covering zero-rated sales of services to persons exempted under special laws was not included in the list of zero-rated services which will eventually be subject to 12% VAT upon the implementation of the Enhanced VAT Refund System.

This particular change in the VAT rules has raised many concerns among PEZA-registered enterprises. The biggest apprehension of PEZA locators is the undesirable impact it will create in the global competitiveness of PEZA-registered enterprises once the VAT zero-rating is removed. PEZA-registered enterprises enjoying a 5% preferential income tax rate, in lieu of all national and local taxes, will now be constrained to treat the passed-on 12% VAT as part of their costs. This will certainly affect the prices of the manufactured goods and services of PEZA entities. Thus, the alternative option to mitigate the impact of this new law is for PEZA- registered enterprises to import goods (e.g raw materials) which are duty-free and tax-exempt. This, however, will slow down the businesses of local suppliers of goods to PEZA entities.

Some PEZA-registered entities are not expecting to really benefit from the Enhanced VAT Refund System introduced by the TRAIN. After the ITH period and during the 5% preferential tax regime, the sale of goods and services by PEZA-registered enterprises is considered VAT-exempt. Since VAT refunds are allowed only if the passed-on 12% VAT arose from zero-rated or effectively zero-rated sales, PEZA-registered entities can no longer claim a refund of the passed-on 12% VAT. Thus, a spike in the pricing of goods and services by PEZA-registered entities is expected.

While the Enhanced VAT Refund System is a commendable effort of the legislators, effective implementation of the law is necessary to make it a success. For years, taxpayers have been frustrated in the VAT refund process which takes several years to be resolved. When the Enhanced VAT Refund System is in force, refunds of creditable input tax shall now be granted within 90 days from the filing of the VAT refund application with the Bureau of Internal Revenue (BIR).

Under this enhanced system, all application filed from Jan. 1 shall be processed and must be decided within 90 days from the filing of the VAT refund application. Also, all pending VAT refund claims as of Dec. 31, 2017 shall be fully paid in cash by Dec. 31, 2019. This provision in the TRAIN is a welcome relief for taxpayers who have lost confidence in the VAT refund process.

Another welcome amendment under the Enhanced VAT Refund System is the automatic annual appropriation. Under the enhanced system, 5% of the total VAT collection of the BIR from the immediately preceding year shall be treated as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refunds. With this automatic appropriation, it is hoped that taxpayers need not wait for years to receive the cash refunds they are entitled to. Also, the BIR is required to submit to the Congressional Oversight Committee on the Comprehensive Tax Reform Program, a quarterly report of all pending claims for refund and unused funds. This action point will inevitably remind the BIR of its mandate to decide on the claim for refund within the 90-day period.

While there are some trade-offs in the TRAIN, people should be reminded that this much-celebrated tax reform was geared to uplift the lives of Filipino people, particularly the poor. Now that the TRAIN is in full gear, implementing agencies such as BIR are surely busy drafting implementing rules and regulations to guide taxpayers and regulators. As the real impact of the TRAIN is yet to be felt, the Filipino people can only wait and hope that 2018 will fulfill TRAIN’s promise.

Farrah Andres-Neagoe is a manager of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.

As published in BusinessWorld, dated 09 January 2018