Since the effectivity of Republic Act 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the Bureau of Internal Revenue (BIR) has consistently released several issuances and clarifications to implement the amendments introduced therein. Last December 10, 2021, Revenue Regulation (RR) No. 21-2021 took effect, implementing the amended Value Added Tax (VAT) incentives of Registered Export Enterprises (REE) on their importations and local purchases, as provided under the Tax Code, as amended, and the Implementing Rules and Regulations of the CREATE Act.

Months after, Revenue Memorandum Circular (RMC) Nos. 24-2022 and 49-2022 were issued to provide clarifications on RR No. 21-2021. RMC No. 24-2022 clarifies that VAT-registered REEs whose registration with an IPA has already expired shall be subject to VAT, whereas RMC No. 49-2022 clarifies that REEs enjoying 5% GIT/SCIT shall register from VAT to Non-VAT taxpayers. In this regard, concerns may have surfaced from taxpayers on the proper application and consequences of the above clarifications.

To address these concerns, the BIR recently issued RMC No. 152-2022 to further clarify the transitory provisions of RR No. 21-2021 and as explained in RMC Nos. 24-2022 and 49-2022. These issuances implement and clarify the VAT zero-rate incentives under the Tax Code, as amended, and as implemented by Rule 18 of the CREATE Act Implementing Rules and Regulations.

The BIR grants relief to suppliers/sellers who might have treated and declared their sales to REEs as VAT zero-rated in their respective quarterly returns during the transitory period between the effectivity of RR No. 21-2021 on December 10, 2021, and the issuance of Q&A No. 26 of RMC NO. 24-2022 on March 9, 2022. It is to be noted that RMC No. 24-2022 clarified that an REE whose incentives have already expired are no longer qualified for VAT zero-rating on their local purchases during the transitory period. In such cases, the BIR, under RMC No. 152-2022, ruled that the above transactions which transpired during the transitory period shall remain VAT zero-rated to avoid prejudice to affected taxpayers.

On the other hand, in cases where the REE is qualified for VAT zero-rate on its purchases, but was imposed 12% VAT by the seller during the said transitory period, the buyer and the seller may either:

1. Retain the transaction as subject to 12% VAT

VAT-registered purchasers, in such case, can utilize the input VAT from their output tax or if the purchaser is engaged in zero-rated activities, the same can be recovered through the VAT refund pursuant to Section 112(A) of the Tax Code, as amended. If the purchaser is not VAT-registered, the VAT paid shall be claimed as part of the cost of sales or expenses.

2. Revert the transaction from VAT at 12% to VAT zero-rated where the seller may amend the same after reimbursing/returning the VAT paid by buyer that is an REE.

The related VAT Sales Invoices/Official Receipts (SI/OR) to such transactions shall be retrieved by the seller for cancellation and replacement with VAT SI/OR. The seller shall prepare a list of cancelled VAT SI/OR together with the replacement subject to validation of the BIR.

Consequently, the purchaser shall likewise file an amendment return to reflect the reduced input VAT it previously declared in the VAT return/s.

The BIR has yet to clarify the time and manner of submission of the required list under the 2nd option above, whether it will be submitted to the BIR or only to be presented in case of a tax audit. Nonetheless, taxpayers shall determine transactions during the transitory period and prepare the list required by the BIR to be ready once the BIR requires its submission.

RMC No. 152-2022 also discussed the mandatory registration from VAT to Non-VAT of REEs that are under the 5% Gross Income Tax (GIT)/Special Corporate Income Tax (SCIT) within two (2) months from the expiration of the ITH or the effectivity of RMC No. 49-2022, whichever is applicable, as provided under RMC No. 24-2022

It was clarified further that the mandatory shift from VAT to Non-VAT would not subject REEs’ sales to Percentage tax as they are entitled and subject only to GIT/SCIT in lieu of all other internal revenue taxes. Despite the shift from VAT to Non-VAT, the BIR clarified that REEs are still entitled to VAT zero-rate incentives on their local purchases until the expiration of the incentive period of the Company.

While this issuance is somehow a respite to some taxpayers, the question on the validity of provisions under the CREATE IRR that limit the duration of entitlement of non-income-related tax incentives remains, such as VAT zero-rate on local purchases and VAT exemption on importations. This limitation under the IRR may have unduly expanded the provisions of the CREATE Act since it seems that such duration was not provided under Section 296 and 311 of the Tax Code, as amended.

It is clear under Paragraph 3 Section 6 of the Civil Code that “[a]dministrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws or the Constitution.”. Additionally, the Supreme Court has always been consistent on the limitation of the delegated legislative powers to administrative agencies through enacted laws. Mere administrative issuances cannot modify, expand, or restrict the law delegating the power to prescribe rules to implement statute’s provisions. This is consistent with the long-standing legal principle that the spring cannot rise higher than the source.

In this case, it seems the prohibition under the CREATE Act was specifically included by the Congress to limit the duration of income-related tax incentives only. Thus, a distinction should be made, and such duration may not extend to other incentives granted under the law. This would cause undue restriction of the rights of REEs clearly granted by the CREATE Act. Accordingly, taxpayers are hoping that the limit on the period of availment of VAT zero-rating be further evaluated by our regulatory bodies. 

Nevertheless, the BIR continues to revisit and address all the relevant concerns of taxpayers to implement effectively and efficiently the CREATE Act, and frequently releases clarificatory issuances primarily aimed at helping taxpayers navigate the changes introduced to our tax system.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


As published in BusinessWorld, dated 20 December 2022