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To VAT or not to VAT: Incentive regulations of IPA registrants

Over the years, the incentives availed of by enterprises registered with investment promotions agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), have been closely scrutinized and challenged by the tax authorities. For example, policy changes in the past limited the direct cost deductions of these registered enterprises; more recently, a sunset period was imposed for some incentives by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. Even so, new rules further regulating tax incentives have come as a complete surprise to taxpayers.

I am referring to the recently issued Revenue Regulations (RR) No. 9-2021, amending some provisions of the value-added tax (VAT) regulations. Under the RR, some transactions that were previously considered VAT zero-rated are now being taxed at 12%. Consequently, a tax advisory was issued, declaring that the certificates for VAT zero-rating of certain transactions of registered business enterprises are no longer effective starting June 28.

The provisions implemented by the RR are actually from the first package of the government’s comprehensive tax reform program, Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on Jan. 1, 2018. Under the RR, the following transactions are now subject to 12% VAT:

For sale of goods: (1) sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise, or directly to an export-oriented enterprise whose export sales exceed 70% of total annual production; and (2) those considered export sales under Executive Order (EO) No. 226 and other special laws.

For sale of services: (1) services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of total annual production; and (2) processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas (BSP).

This specific provision in the TRAIN Law was proposed by the Department of Finance and legislated by Congress to control the leakages in the VAT system by limiting VAT zero-rating to direct exporters only, and at the same time, by setting up a proper cash refund system so as not to burden the exporters. In support of this policy objective, the following conditions must first be satisfied before the 12% VAT rate could be imposed: (1) the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within 90 days from the filing of the VAT refund application with the BIR; and (2) the payment in cash of all pending VAT refund claims as of Dec. 31, 2017.

With the issuance of the RR, the BIR effectively pronounced that the above two conditions were satisfied even though no supporting statistics or information had been presented for the taxpayers to validate. The RR having been circulated, taxpayers can only assume that the requisite conditions are in place for the efficient observance of the policy.

Contrary to what the TRAIN Law wants to achieve — a simple, fairer, and more efficient tax system — these amendments seemed to cause more confusion and anxiety, especially among entities registered with the IPAs. This is because of their understanding that their local purchases shall now be subject to 12% VAT. Even during the TRAIN Law deliberations, the representatives of certain IPAs put forth their concerns on this change in the VAT treatment. According to them, this would lead to, among others, decreased competitiveness in the international market, increased imports instead of purchasing from local suppliers, and in the worst-case scenario, closure of registered businesses, thus fueling unemployment.

I think the notion that local purchases of IPA-registered firms are no longer entitled to VAT zero-rating also stems from the President’s veto of zero-rating provisions that the legislators added specifically granting VAT zero-rating to such transactions. From a personal perspective, however, I believe that there is sound legal basis to continue to subject the local purchases of registered entities under special laws (such as Republic Act No. 7916 or the PEZA Law, except those whose incentives are granted under EO No. 226 or those registered with the Board of Investments) to a 0% VAT rate. While the TRAIN Law and RR No. 9-2021 only removed the VAT zero-rating on certain indirect exports and those falling under “other special laws,” it did not entirely remove all sale of goods or services to persons or entities with exemptions provided under special laws which still appears in the other sections of the law and the VAT regulations.

This can be confirmed from the paragraph after the discussion on “export sales” [Section 4.106-5(b) of RR No. 9-2021] and the second enumeration on services [Section 4.108-5(b)(2) of RR No. 9-2021], which are both still subject to 0% VAT. These follow the same provisions on 0% VAT rate which likewise remain in the amended Sections 106(A)(2)(b) and 108(B)(3) of the Tax Code. Since some local suppliers are now insisting on passing on VAT to these registered entities because of confusion, or perhaps, for prudence’s sake, affected registered enterprises may try appealing to the BIR to clarify the matter (although I understand that PEZA already submitted an appeal to the Department of Finance) or explore other legal remedies.

With the CREATE Act codifying the incentives law in the Tax Code, incentives granted by IPAs after the sunset period will now fall under the Tax Code and not under special laws. The question will then be — will IPA registrants continue to enjoy incentives beyond the sunset period?

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Samantha Joy H. Oreta is a senior manager with the Tax Services group of Isla Lipana & Co., the Philippine member firm of the PwC global network.

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