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Status quo on VAT zero-rating of sales to PEZA entities

Marc Edwin S. Baesa

The Philippine Economic Zone Authority (PEZA) director-general announced that sales of goods and services to PEZA-registered entities shall continue to be subject to 0% VAT. This was issued following a clarification by the Department of Finance (DoF) that the TRAIN law did not amend or repeal the relevant provisions of the PEZA law.

As a recap, it took several decades of struggle for the Philippines to capture and persuade foreign investors to locate substantial operations in the country. To entice foreign investors, the Philippines granted tax incentives as a tool to stimulate economic growth, driven, among others, by foreign investment. These incentives were granted through special laws such as The Special Economic Zone Act of 1995 (RA 7916), as amended.

RA 7916, otherwise known as the PEZA law, provided the legal framework and mechanism for the creation, operation, administration and coordination of special economic zones (ecozones) in the Philippines. Exemptions from both direct and indirect taxes are granted to PEZA-registered entities operating within the ecozones. This means that indirect taxes, such as VAT, cannot be shifted to PEZA-registered entities operating exclusively within the ecozones.

Under the Destination Principle to which the Philippine VAT system adheres, goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are subject to VAT. Pursuant to this principle, sales of goods and services made by local suppliers to PEZA-registered entities are treated by the Tax Code as VAT zero-rated sales because these are considered export sales and not destined for local consumption. They are treated as export sales following the ruling of the Supreme Court that, by a fiction of law, ecozones are separate customs territory and, hence, considered foreign territory.

Recent events made it a new ball game for PEZA-registered entities and their local suppliers. President Rodrigo R. Duterte vetoed certain items of the TRAIN law including a provision which expressly added the “zero-rating of sales of goods and services” to separate customs territory and tourism enterprise zones as provided under special laws.

The veto triggered uncertainty and serious concerns among PEZA-registered entities as to whether the said veto applies to PEZA locators/entities since local suppliers are already incorporating the VAT on their sales of goods and services to them.

To address the situation, PEZA, after consultation with the DoF, issued on March 12, Memorandum Circular No. 2018-003, declaring status quo on VAT zero-rating incentive on the sale of goods/services to separate customs territories.

The Memorandum Circular further states that Section 8 of the PEZA law, which provides that special economic zones are to be operated and managed as separate customs territory, was not amended or repealed by the TRAIN law. Consequently, until a law or revenue regulation is passed or issued contrary to or incompatible with the pronouncement by the DoF, the VAT zero-rating incentive being enjoyed by PEZA locators or entities shall remain in full force and effect.

In effect, suppliers of PEZA-registered entities are advised by PEZA to continue applying the 0% VAT on their qualified sales of goods and services to these entities. Taxpayers have interpreted the “status quo” advice to mean that no additional requirements shall be imposed for VAT zero-rating. Thus, PEZA-registered entities will continue to secure their VAT-zero rating certificates from PEZA and furnish a copy to their suppliers to enjoy the VAT zero-rating.

The BIR, on the other hand, has issued Revenue Regulations No. 13-2018 dated March 15, 2018, specific to the VAT provisions of the TRAIN law. The VAT regulations, likewise, did not impose additional requirements for the zero-rating of sales to PEZA-registered enterprises by VAT-registered suppliers. These issuances of the PEZA and the BIR are good news to PEZA-registered entities and their suppliers. Until a contrary regulation or circular is issued, taxpayers can follow the “status quo” advice and conduct their business as usual.


Marc Edwin S. Baesa is a tax associate 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 20 March 2018