A basic fact of life is that “nothing lasts forever”. Things can change, whether for better or for worse. It may be said that several entities enjoying tax incentives are left wondering about the many changes and developments in Philippine tax laws. Among the questions of taxpayers is –"Can we still enjoy what we are enjoying now?”

An example of these changes can be noted in the recently issued Bureau of Internal Revenue (BIR) Revenue Memorandum Circular (RMC) No. 024-2022, particularly on the concept of Cross Border Doctrine for value-added tax (VAT) purposes.

Cross Border Doctrine

The Supreme Court has recognized that the sale and consumption of goods or services within a given freeport or ecozone shall be deemed as constructive exportation and technical importation. This is because freeports and ecozones, as provided under the law, are to be managed as separate customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as a foreign territory.

The Cross Border Doctrine is rooted in the Omnibus Investments Code of 1987. It recognizes the existence of “constructive exportation”, wherein sales to export processing zones are considered constructive importations. The Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority, which includes the constructive exportation pertaining to sales to export processing zones.

Based on RMC 024-2022

In the recently issued RMC 24-2022, it can be noted that the Cross Border Doctrine was rendered ineffectual as applied to freeports and ecozones for VAT purposes. Only those goods and services that are directly and exclusively used in the registered project or activity of Registered Business Enterprises (RBEs) qualify as VAT zero-rated on local purchases. 

Under the above-mentioned RMC, direct and exclusive use in the registered project or activity refers to those expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out. This excludes purchases used for administrative purposes. Activities for administration purposes, including legal, accounting, and other similar services, are not considered expenses directly attributable to, and exclusively used in the registered project or activity. If goods and services used in both the registered activity and for administration purposes could not be determined, then the purchase of goods and services shall be subject to 12% VAT.

An example provided under RMC 24-2022 is that telecommunication expenses of registered enterprises in IT/BPO services may be treated as expenses covered by VAT zero-rating since they are directly and exclusively incurred due to the nature of the industry. However, if the telecommunication expense is for administration purpose, it will be subject to 12% VAT. 

Since only goods and services that are directly and exclusively used in the registered project or activity shall be allowed for zero-rating, not all goods coming into, or services rendered within freeports and ecozones shall be accorded VAT zero-rating. In addition, sale of goods or services to a registered domestic market enterprise shall be subject to 12% VAT.

Mere registration to be an RBE will not automatically make its local purchases of goods and services as qualified under VAT zero-rating following the Cross Border Doctrine. Thus, ecozone entities, such as RBEs, should classify their purchases from local suppliers, or determine whether the transaction is directly and exclusively used in the registered project or activity.

What can the taxpayers do?

In the meantime, it is highly recommended that the taxpayers, especially the RBEs, read RMC 024-2022 in its entirety. By understanding the issuance, the taxpayers can anticipate how the BIR would react and proceed. More importantly, the taxpayers must take special note of the transitory provisions under the issuance.

Under the discussions of the transitory provisions, for example, RMC 024-2022 took note of the retroactivity of Revenue Regulation (RR) 21-2021. Under RR 21-2021, taxpayers will be able to reclassify their sales to registered export enterprises, from being subject to 12% VAT to being considered zero-rated by virtue of the retroactive application of the issuance. The BIR considered the retroactivity to be justified as it is beneficial to the taxpayers affected.

Another clarification discussed by RMC 024-2022 is the treatment of VAT which had already been billed and/or collected that transpired during the effectivity of RR 09-2021, which is affected by the retroactivity of RR 21-2021. RMC 024-2022 discussed that the seller can still opt to declare the sales to registered export enterprises as subject to 12% VAT. In this case, the VAT-registered buyer may utilize the passed-on VAT as input tax which shall be credited against the output tax, or if the buyer is engaged in VAT zero-rated sales, the same can be recovered through VAT refund. If the buyer is not VAT-registered, then the VAT paid shall be claimed as part of the cost of sales or expenses.

In the alternative, the seller can revert the transaction from being subject to 12% VAT to VAT zero-rated by amending the filed VAT return after reimbursing/returning the VAT paid by the registered export enterprise buyer. If there is a resulting overpayment due to unutilized input tax credits, it may be recovered through VAT refund inasmuch as the corresponding sale is reverted to VAT zero-rated.

The above are just some of the rules to be observed in the application of RMC 024-2022.

While it may be observed that time and tested rules and procedures, such as the Cross Border Doctrine, are affected by RMC 024-2022, it is but just to mention that nothing is permanent, except “death” and “change”. Given the tumultuous situation every Filipino, or everyone in the world, is facing due to the two-year pandemic woes, the increase in gas prices, or even the threat of a nuclear winter among the global superpowers, a change in tax rules and principles should always be considered a pending threat. Who knows?

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 15 March 2022