The CREATE Act has radically changed the Value-Added Tax (VAT) landscape for Registered Export Enterprises (“REEs”) when the phrase “Directly and Exclusively Used” was first introduced. It has effectively repealed the Cross-Border Principle where the Philippine VAT System is anchored. Under this long-standing principle, no VAT shall be imposed to form part of the cost of goods and services destined for consumption and performance outside the territorial border of a taxing authority. Consequently, no VAT may be passed on to REEs on goods and services delivered to them as Economic Zones are treated as a separate customs territory by legal fiction.

However, this is not the case in the current VAT setup for REEs. Under the CREATE Act, only goods and services that are directly and exclusively used in the REEs’ registered activities and projects have been qualified for VAT zero-rating treatment.

In pursuit of effectively implementing this change in the VAT rules, the BIR has issued several issuances. To provide a brief background, the BIR has issued, among others, the Revenue Memorandum Circulars (“RMC”) 24-2022 and 49-2022 to inform taxpayers that to avail the 0% VAT, a prior approval must be secured by the local suppliers of goods and services of REEs starting March 9, 2022.  However, with the numerous applications piling up, the BIR has deemed it necessary to simplify the process and remove the requirement of a prior approval through the issuance of Revenue Regulations (“RR”) No. 3-2023.

Under RR No. 3-2023, local supplier of goods and/or services of RRE shall no longer be required to secure prior approval for VAT zero-rate with the BIR starting April 28, 2029.

The removal of the required prior approval of VAT zero-rating for REE by the BIR gave relief to taxpayers as the prior application requirement has hindered or delayed REEs from enjoying the VAT Zero-rated entitlement granted to them under the law. With the new and efficient rules, local suppliers will only need to secure certain documents from the REEs and ensure that the transactions are covered under the VAT-Zero Rate Certificate provided by the latter so that in case of a post-audit, the vat 0% treatment can be justified. It also relieves REEs from the rigorous process of applying for a VAT refund for purchases that are really qualified for 0% VAT.

However, RMC No. 80-2023 clarified that the retroactive effect of RR No. 3-2023 shall only apply to sales of goods and services to REEs with prior applications accompanied by a VAT-Zero Rate Certificate issued by the concerned Investment Promotion Agency (“IPA”) which have not been acted by the concerned office of the BIR. Consequently, if no application was made by the local supplier, sales to REE prior to the effectivity (i.e., 28 April 2023) of RR No. 3-2023 shall be subject to 12% VAT.

In relation to the foregoing, what if a service was performed and the billing invoice was issued, on or after March 9, 2022, without the required prior application? Would there still be an exposure if local service providers applied for the zero-rating before collection and issuance of official receipts?  Can the taxpayer argue that prior application was filed on time since for VAT purposes, sale of services is reported upon collection?

Additionally, for long-term contracts, if the taxpayer failed to file an application for those contracts entered and commenced on or after March 9, 2022, but before the effectivity of RR No. 3-2023, does it mean that the taxpayer is no longer entitled to 0% VAT until the completion of the said long- term contract? Or can the taxpayer consider that the services billed and performed, pursuant to the said long-term contract, on and after the effectivity of RR No. 3-2023 can already be entitled to 0% VAT even without prior application?

In this regard, it may be necessary for the tax authorities to release clarificatory issuances to address these noted concerns, among others.

On another note, even though taxpayers are relieved of filing a prior application, it is important to emphasize that they still bear responsibilities under the rules. Q5 and A5 of RMC No. 80-2023 provides that local suppliers should secure from the REEs the following documents prior to the transactions to be entitled to 0% VAT and must be presented to the BIR, in case of a post audit:

  1. VAT Zero-Rate Certification issued by the concerned IPA;
  2. COR issued by the BIR having jurisdiction over the head office/branch/freeport/ecozone location where the goods and/or services are to be delivered;
  3. COR issued by the concerned IPA stating all registered ecozone location; and
  4. A sworn affidavit executed by the REE-Buyer, stating that the goods and/or services are directly and exclusively used for the production of goods and/or completion of services to be exported or for utilities and other similar costs, the percentage of allocation be directly and exclusively used for the production of goods and/or completion of services to be exported following the format under RMC No. 84-2022.

These documents, in addition to the existing substantiation requirements, will prove that the transactions that they have been entered into were indeed entitled to 0% VAT. These are very crucial in the case of a tax audit as even if only one of the above is missing, the authorities may assess deficiency in VAT. Thus, local suppliers and REEs should work together to fully substantiate the 0% VAT nature of the transactions.

Now that the new rules on 0% VAT to REEs are restricted to goods and services “Directly and Exclusively Used”, the BIR has recognized the need for more streamlined and simplified government procedures, and in response, has issued RR No. 3-2023 and RMC No. 80-2023. These efforts underscore the Bureau's commitment to aligning with the government's goals, particularly in accordance with the Ease of Doing Business Act.

The removal of prior approval has made it easy for REE to enjoy VAT-zero rating as both processing and filing of applications can be burdensome to both the taxing authorities and the taxpayers. By continuously improving their services, the BIR can enhance the taxpayers’ overall experience and facilitate a more efficient and business-friendly environment.

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 03 October 2023