Almost two years into the COVID-19 pandemic, businesses worldwide are still slowly trying to recover from the effects of the economic downturn. Business establishments, both in the goods as well as the services industries, have been hit with massive losses and considerable expenses as a result of non-operation during the lockdowns.

To help corporate taxpayers deal with the losses, Congress passed Republic Act 11534 or the Corporate Recovery and Tax Incentives for Enterprise Act (CREATE). The most welcome provision of the CREATE Act is the reduction of the corporate income tax. However, the flipside of the law is the rationalization of the fiscal incentives of registered business enterprises (RBEs). One of the key incentives available to RBEs is the value-added tax (VAT) zero rating of their local purchases.

Prior to CREATE, the provisions of the TRAIN Law limited the zero-rating of local purchases of export enterprises. This portion of the TRAIN Law was implemented by Revenue Regulations No. 9-2021 issued by the Bureau of Internal Revenue (BIR) in June. However, due to various representations by exporters and their suppliers, RR 9-2021 was deferred by RR 15-2021 in July. Since then, taxpayers have been eagerly awaiting revenue regulations that harmonize the VAT zero-rating provisions of both TRAIN and CREATE.

On Dec. 7, the BIR issued Revenue Regulations 21-2021 (RR 21-2021), which provided additional guidance on the VAT zero-rating of local purchases of goods and services by RBEs enjoying incentives.

The new issuance clarified that the VAT zero-rating on local purchases is to be enjoyed by the RBEs coterminous with their income tax incentives, which can run for a maximum of 17 years from the date of registration, unless otherwise extended under the Strategic Investment Priority Plan (SIPP). Further, the zero-rating for existing registered export enterprises located inside ecozones and freeport zones are qualified for VAT zero-rating until the expiration of the transitory period. This period can run until the end of the income tax holiday (ITH) if the enterprise was granted only ITH, or 10 years from the effectivity of CREATE if the enterprise was granted both ITH and the 5% special income tax incentive.

Under CREATE, the VAT zero-rating on local purchases of goods and services by RBEs applies only to goods and services that are “directly and exclusively used for the registered project or activity” and without which the registered project or activity cannot be carried out. This requirement has been the subject of debate and discussion among tax authorities, RBEs, and their suppliers.

To this end, RR 21-2021 expanded the examples of goods and services that qualify as “directly and exclusively used.” For goods, it refers to sale of raw materials, inventory, supplies, equipment, packaging materials and goods to a registered export enterprise. For services, it refers to the sale of services, including the provision of basic infrastructure, utilities, and maintenance, repair, and overhaul of equipment. The enumeration is by way of example, which is not an exclusive listing.

Hence, the revenue regulations require that the VAT zero-rating on local purchases be granted upon the endorsement of the concerned Investment Promotions Agency or IPA, in addition to the documentary requirements of the BIR. IPAs are government agencies in charge of granting and administering tax and non-tax incentives. They include the Philippine Economic Zone Authority (PEZA), the Board of Investments (BoI), and the Subic Bay Metropolitan Authority (SBMA).

Finally, the regulations state that their provisions are immediately effective and cover transactions entered during the third quarter of taxable year 2021 and onwards.

While RR 21-2021 provided additional guidance on the new rules on zero-rating, a lot of questions posed by RBEs and their suppliers remain unanswered. For instance, what happens to a transaction which has been subjected to VAT and for which a VAT invoice or official receipt (OR) has already been issued by the supplier? Can the supplier reverse the transaction and report it as zero-rated if it qualifies under the requirements of RR 21-2021?

How about those transactions which were subjected to zero-rating? What type of BIR documentation is required in addition to the endorsement of the IPA? Will the BIR be issuing additional regulations that will enumerate such documentary requirements referred to in these latest regulations? Or were the regulations merely referring to the issuance of a zero-rated VAT invoice or official receipt? What type of endorsement will be issued by the IPA, and should such endorsement be furnished to the supplier before the transaction? If so, what happens to transactions made in the third quarter of 2021 which have already been completed but without such endorsement by the IPA?

There are definitely a lot of compliance issues that the change in rules has spawned. In addition, there are also some principle-based issues that taxpayers are now confused about. Did the change in the VAT zero-rating remove the legal fiction that ecozones and freeport zones are non-customs territories? Have we abandoned the cross-border doctrine that the tax authorities and the Courts used to apply when deciding VAT questions involving ecozones and freeport zones?

Questions abound as we enter new VAT regimes under CREATE. Such an adjustment period is expected every time we adopt new rules and regulations. Hopefully, the taxpayers will be better guided by the regulations issued by the BIR. Taxpayers really have no choice but to adapt to the changes in rules and regulations. Otherwise, they will be facing deficiency taxes and penalties for noncompliance.

As we draw nearer to the close of this year, we look forward to a new year filled with optimism and expectation that the issues surrounding the VAT zero-rating on local purchases of RBEs will be fully resolved. More importantly, we look forward to a new year with the fervent hope that this pandemic will soon be a poignant and distant memory.

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 14 December 2021