The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) No. 9-2021 which imposed 12% Value-Added Tax (VAT) on certain transactions that were previously taxed at 0%. The RR took effect on June 27, 2021, 15 days from its publication.

RR No. 9-2021 was issued to implement the provisions of Republic Act (RA) No. 10963 or the Tax Reform and Acceleration and Inclusion Act (TRAIN) which provide that certain transactions previously considered zero-rated shall be subject to 12% VAT upon satisfaction of two conditions: (1) the successful establishment and implementation of an enhanced VAT refund system, and that (2) all pending VAT refund claims as of Dec. 31, 2017 shall be fully paid in cash by Dec. 31, 2019. RR 9-2021 declared that the conditions set forth by the TRAIN Law have been fully satisfied. As such, the following sales of goods or properties are now subject to 12% VAT:

1. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a local export-oriented enterprise;

2. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production; and

3. Those considered export sales under Executive Order (EO) No. 226, or the Omnibus Investment Code of 1987, and other special laws (Section 106 (A) (2) (a) (5) of the Tax Code, as amended).

From the foregoing, the sale of goods or properties by local suppliers to exporters IS now subject to 12% VAT.

A big concern, however, has been raised by taxpayers whose exemptions emanate from special laws, such as those with exemptions granted by the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI), Subic Bay Metropolitan Authority (SBMA), and the Clark Development Authority (CDA), among others, on the VAT treatment of their local purchases of goods or properties.

RR 9-2021 provides that those considered export sales under EO 226 and other special laws are now subject to 12% VAT. Section 3 of the same RR, on the other hand, also provides the VAT zero rating of sales to persons or entities whose exemption under special laws or international agreements, to which the Philippines is a signatory, effectively subject such sales to a zero rate. This is also found in Section 106 (A) (2) (b) of the Tax Code, as amended. Thus, there is confusion on whether RR 9-2021 removed the zero rating of goods sold to entities exempt under special laws such as PEZA registered entities.

In the 2004 case of Contex Corporation vs. Commissioner of Internal Revenue, the Supreme Court (SC) considered that sales transactions with SMBA, CDA, and PEZA entities, being governed by special laws, are effectively subject to zero rate. In another case (CIR vs. Seagate, 2005), the SC held that sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country. The SC anchored its ruling on the fiction that an ecozone is a foreign territory. The SC considered that sales to ecozones are export sales and thus, subject to a zero-rate pursuant to Section 106 (A)(2)(a)(5) of the Tax Code.

The Philippine VAT system adheres to the Cross-Border Doctrine which provides that no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines are subject to 12% VAT.

In RR No. 4-07, it was clarified that the sale of goods to special economic zones and freeport zones is considered export sales under Section 106 (A)(2)(a)(5) the Tax Code.

Thus, prior to the passage of TRAIN, these transactions were subject to zero VAT. With the enactment of the TRAIN Law and the fulfillment of conditions outlined under this law, these transactions are now subject to 12% VAT.

It is worthy to note that the President vetoed the provision under the TRAIN Law which treats the sale of goods to registered enterprises within a separate custom territory as provided under special laws and those registered enterprises within tourism economic zones as export sales subject to the zero rate. With this veto, we see the clear intent of the Executive to remove the zero-rating on the local purchases of goods of PEZA-registered entities and those entities enjoying similar incentives.

In view of the above discussions, it can be gleaned that local purchases of goods or properties of PEZA-registered entities and those entities having similar exemptions under special laws are now subject to 12% VAT.

However, there is an issue on the retention of VAT zero-rating in relation to the recently passed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law. Section 5 of Rule 18 of the recently-signed Implementing Rules and Regulations (IRR) for fiscal incentives under the CREATE Law provides that VAT zero-rating on local purchases of registered business enterprises (RBEs) may still apply provided such locally-purchased goods and services are directly and exclusively used in the registered project or activity of the RBE during the period of registration of the registered project/activity of the enterprise.

The direct and exclusive use in the registered project or activity refers to raw materials, inventory, 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.

Considering that the TRAIN Law, through RR 9-2021, effectively removed the zero-rating of goods sold to PEZA-registered entities, and that the IRR of the CREATE Law provides that the VAT zero-rating may still apply, it is now deemed necessary for the BIR to issue clarifications or guidelines on the proper VAT treatment of the transactions mentioned. A clarification that will harmonize the provisions on VAT zero-rating under the TRAIN Law and CREATE Law will be much appreciated by taxpayers.

After all, the Philippines adheres to the principles of sound taxation, particularly in terms of administrative feasibility, which means that tax laws and regulations must be capable of being effectively enforced with the least inconvenience to the taxpayer.

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.


Neptali G. Maroto is an associate of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.


As published in BusinessWorld, dated 29 June 2021