Are the transactions of registered commercial enterprises zero-rated or not?


ILast year, new Value Added Tax (VAT) rules were introduced by Republic Act (RA) No. 11534 or the CREATE Act. The CREATE Implementing Regulation (IRR) and Tax Regulation (RR) No. 21-2021 soon followed, which did not end questions surrounding the law. Of these, the least important are: What is the appropriate VAT treatment of transactions with Registered Business Enterprises (RBEs)? What type of BIR documentation is required in addition to Investment Promotion Agency (API) approval? What does API approval mean? What rules apply when using VAT incentives?

To clarify questions regarding the zero rate of VAT, the Internal Revenue Bureau (BIR) has issued Revenue Memorandum Circular (RMC) No. 24-2022.

Below are summarized some of the highlights of the RMC, in particular on the VAT treatment of transactions with RBEs within the framework of CREATE.

RMC n°24-2022 recalls that sales are to be classifiedIfas zero VAT provided that (a) the buyer is a registered export business, (b) the seller is a VAT taxable person, and (c) the goods and services purchased will be used directly and exclusively within the framework of the project or registered business activity.

The RMC ofIfan export business registered as an individual, partnership, corporation, Philippine branch, or any entity organized and existing under the laws of the Philippines and registered with an IPA to engage in the business of manufacturing, assembly or processing, and services such as information technology (IT) activities and business process outsourcing (BPO), resulting in the direct export and/or sale of its manufactured, assembled or processed products or its IT/BPO services to another registered export business that will be part of the Ifthe latter’s final export product or service, for at least 70% of its total production. However, the export business is also a commercial business registered asIfin section 4(W) of the CREATE IRR.

The RMC pointed out that only the part of the expenditure directly and exclusively used in the project or the registered activity is considered as a registered export business for the zero rate of VAT. Therefore, those used for administrative purposes do not allow this business to be zero-rated. Taxpayers are now advised to adopt an apportionment method (for example, the use of separate water and electricity meters for utilities or the use of Iffinancial ratios) to determine purchases relating to the project or registered activity and for administrative purposes. In the event that the appropriate allocation cannot be determined, the purchase is subject to 12% VAT.

The RMC explicitly states that services for administrative expenses, such as legal, accounting and other similar services, are not considered to be directly and exclusively used in the project or registered activity.

In the event that the transfer to the registered exporting company is carried out by another RBE under the 5% Gross Income Tax (IRG) or Special Corporate Tax (SCIT) regime, the transfer is exempt from VAT. The VAT passed on to the seller by his local VAT-registered suppliers forms part of his costs or expenses.

As provided by the RMC, DMEs or registered non-exporting companies are not entitled to the zero rate of VAT on local purchases. On the contrary, these are subject to 12% VAT.

Similarly, service businesses such as those engaged in customs brokerage, trucking or shipping services, janitorial services, security services, insurance, banking and other financial services, consumers, credit unions, counseling services, retail businesses, restaurants or other similar services, as determined by the Tax Incentives Review Board (FIRB), although duly accredited or licensed by one of the APIs, are subject to 12% VAT on their local purchases.

The VAT rules applicable to sales transactions by RBEs may vary depending on the tax regime of the RBE and the taxation of the acquirer.

Sales of RBEs, whether to an exporting company or a DME, under the 5% TIG are generally exempt from VAT. Meanwhile, sales from VAT-registered RBE sellers enjoying an income tax holiday (ITH) to registered exporting companies are treated as zero-rate VAT, provided that the goods and services sold are directly and exclusively used in the project or activity.

In addition, the RMC also provided clariIfcation on the sale, transfer or disposal by the RBE of imported capital goods, raw materials, spare parts or accessories previously exempt from VAT. These subsequent sales may be zero-rated if the purchaser is a registered export business and the “direct and exclusive use” rule applies.

If the subsequent sale is made through a DME, the transaction may either be VAT exempt (if the DME is less than 5% GIT) or subject to VAT. VAT will be imposed on the net book value of the good(s) sold. If the purchaser is a registered export business, zero-rating rules apply.

For registered exporting companies with multiple incentive schemes (i.e. the company has registered activities under ITH and GIT), sales under the 5% GIT scheme should be reported as VAT exempt while that sales under ITH are zero-rated.

The CREATE IRR pointed out that the zero rate of VAT on qualiIfed purchases only applies after approval of the IPA concerned, in addition to the documentary requirements of the BIR. Many taxpayers were previously confused about the meaning of “Approved Affected APIs”. As part of the RMC, APIs can now provide VAT certificatesIfcation only at qualiIfregistered export companies. The CertiIfspecific cationIfes: (a) registered export activity, (b) tax incentives and validity period, and (c) applicable goods and services, e.g., raw materials, equipment, etc.

Taxpayers should note that prior BIR approval must be obtained by local VAT-registered suppliers as per the guidelines of the Revenue Memorandum Ordinance (RMO) No. 7-2006. In this context, registered exporting companies must provide their suppliers with a photocopy of their BIR – CertiIfcate of Registration (BIR Form No. 2303), CertiFregistration certificate and VAT certificateFication issued by the API concerned, and a sworn certificateIfdavit indicating that the goods and/or services purchased are intended for direct and exclusive use in connection with the registered project.

In addition, supporting documents such as, but not limited to, purchase orders, work orders, service contracts, sales invoices and/orIffinancial receipts or other similar documents may also be attached to the request to prove the existence and legitimacy of the transactions.

Since the application may take some time, it is necessary to process it in advance as the lack of prior approval from the BIR may result in the refusal of the supplier’s zero VAT sale.

Certainly, unanswered questions often lead to confusion and disparities, especially when there are no clear rules. For businesses, a prolonged period of uncertainty can paralyze decision-making and rob them of better opportunities. Thanks to the guidance provided by RMC No. 24-2022, taxpayers are now relieved of the stress and time spent debating the rules that apply to them. Needless to say, better taxpayer compliance is now also planned.

Let’s Talk Tax is a weekly column from P&A Grant Thornton which aims to keep the public informed of various tax developments. This article is not intended to be a substitute for competent professional advice.

Iris Mae P. Uri is the Senior Head of Tax Advisory & Compliance at P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

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