Various changes relative to VAT have been implemented through the years. It cannot be denied that with the removal of the cross-border doctrine relative to sales to ecozones and freeport zones, VAT zero-rating has been suspended but is now fully implemented.

VAT zero-rating application has been implemented starting 2005 but it was reiterated recently due to the removal of the cross-border doctrine for local sales to registered export enterprises (REEs). The VAT zero-rating rules on export sales of REEs remained, but VAT zero-rating on their local purchases is only applicable for purchases that are directly and exclusively used in the REEs’ registered project or activity. These issues were addressed by Revenue Regulation (RR) No. 21-2021 which synchronizes our VAT zero-rating system with amendments proposed by the TRAIN and CREATE Laws.

Direct and exclusive use

What is crucial is the meaning and interpretation of the condition “directly and exclusively used” in the REE’s registered project or activity. According to the Bureau of Internal Revenue (BIR), the direct and exclusive use for the registered project or activity refers to raw materials, inventories, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out. To prove this, the REE-buyer must execute a sworn affidavit stating that the goods and/or services bought are directly and exclusively used in the registered project or activity.

However, cost incurred in relation to the REE’s administrative function such as legal, accounting, and other analogous expenses is not considered as directly and exclusively used in its registered activity. In addition, costs incurred in setting up or those incurred prior to registration with the Investment Promotion Agency (IPA) shall also be excluded in the definition of directly and exclusively used. Further, if the goods or services used in both the registered project or activity and administrative purposes and the proper allocation could not be determined, the purchase of such goods and services shall be subject to 12% VAT.

The application of the above rules is not a walk-in-the-park thing because to validate whether the aforementioned conditions are duly complied with before the availment of the VAT zero-rating on local purchases of REEs, it is of paramount importance that the local suppliers must secure prior approval from the BIR. Absence of prior approval from the BIR may result in the disallowance of the VAT zero-rating.

Hence, the application for VAT zero-rating transactions for these REEs has become a requirement again.

Requirements for VAT zero-rating application

With this requirement, what do REEs and their local suppliers need to know and prepare for their VAT zero-rating application with the BIR? The following shall be prepared and submitted to the Audit Information Tax Exemption and Incentives Division – Incentives Evaluation Section (AITEID-EIS):

1. Duly filled-out application form which is available and can be requested from AITEID-EIS

2. Photocopy of the latest Certificate of Registration or BIR Form No. 2303 (for applicant and purchaser)

3. Photocopy of Certificate of Registration issued by:

a. IPA – for VAT-Registered Applicant-Supplier of Registered Export Enterprises (REEs)

b. Under RA 9513 Otherwise known as the Renewable Energy Act of 2008 – for VAT-Registered Supplier-Applicant of Accredited & Registered Renewable Energy (RE) Manufacturers, Suppliers, Fabricators and Developers.

4. Photocopy of Board of Investments (BOI) Certificate of Registration (applicable for VAT-Registered Supplier-Applicant of Accredited & RE Manufacturers, Suppliers, Fabricators and Developers)

5. Photocopy of VAT Certification with export ratio issued by IPA as per RMC No. 36-2022.

6. Certified true copy of documents to prove existence and legitimacy of the transaction:

a. For Supplier of Services – Service Agreement or Contract, etc.

b. For Supplier of Goods – Purchase Order (PO) with delivery date, etc.

7. Sworn Declaration pursuant to RMC No. 84-2022 (for VAT-Registered Applicant-Supplier of REEs)

8. Other documents as the BIR may require

Importance of prior BIR approval

Application and prior BIR approval are needed to be secured by the local supplier of goods and services in order that the sales made by the local supplier to the REE may qualify for VAT zero-rating. Otherwise, the absence of such may result in disallowance of the VAT zero-rating and the impact of such is substantial both to the REE and the local supplier. For the REE, incurring passed-on VAT would mean additional cost of the goods or services which would possibly affect their global pricing competitiveness in the market or would decrease their gross margin. Or, the REE would accumulate the passed-on VAT and later utilize it as tax credit or for a tax refund which may be a tedious and costly process. And for the local supplier, non-compliance would mean potential tax deficiency during BIR audit.

Clearly, securing BIR approval benefits both the local suppliers and the REEs.


The BIR has and always been strict in accepting and approving applications especially with VAT zero-rating. VAT zero-rating application is a measure put in place by the BIR to properly monitor and allow qualified transactions only.

Complying with BIR requirements is no easy task, especially now that deadlines for submission of year-end requirements are fast approaching. Hence, we must always remember to check on our compliance with VAT requirements.

With regard to VAT zero-rating, its application may have been suspended, but it never did and will never go out of style.

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 24 January 2023