Current rules on VAT zero-rating of registered business enterprises
RR 20-2021 provides that existing registered export enterprises inside ecozones and freeport zones shall also be qualified for VAT zero-rating until the expiration of the transitory period-sunset provisions as provided in the CREATE Act
Published in Daily Tribune on December 23, 2021
by: Vanessa Arrha A De Leon
Registered business entities currently enjoying fiscal incentives are at attention these days due to the recent issuances by the Bureau of Internal Revenue (BIR), providing among others for the rules on value-added tax (VAT) zero-rating on local purchases of registered business enterprises.
On 7 December 2021, the BIR issued Revenue Regulations (RR) 21-2021 to implement the provisions of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on VAT exemption and zero-rating. Meanwhile on 13 December 2021, the BIR also issued Revenue Memorandum Circular (RMC) 120-2021 apprising stakeholders of the amendments made by the Secretary of Finance and Secretary of Trade and Industry on the VAT exemption and zero-rating provisions of the Implementing Rules and Regulations (IRR) of the CREATE Act.
To recall, under the Tax Code, as amended by CREATE, one of the incentives enjoyed by a business enterprise registered with an Investment Promotion Agencies (IPA) is VAT zero-rating on its local purchases, provided that the goods or service so purchased is directly and exclusively used for its registered project or activity.
This rule on the VAT incentive, as well as the condition for its availability, was reiterated in the CREATE Act’s IRR prior to its amendment, together with additional provisions on: (1) period of availability of the incentive (the zero-rating shall apply during the period of registration of the registered project or activity with the concerned IPA); (2) an enumeration and definition of what kind of local purchase is considered as direct and exclusive use (that referring to purchases of raw materials, inventories, supplies, equipment, goods, services, and other expenditures necessary for the enterprise’s registered project or activity without which the registered project or activity cannot be carried out).
With the amendment of the IRR by the Secretary of Finance and the Secretary of Trade and Industry as incorporated in RMC 120-2021, several key points were added to the original provision under the Tax Code. First, under the amended IRR, the availing enterprise must be a registered export enterprise. Second, the period for the enjoyment of the VAT zero-rating is stated as 17 years from the date of the registration of such enterprise, unless otherwise extended under the Strategic Investment Priority Plan (SIPP). Third, the following items were included as falling under what is considered as a local purchase: Packaging materials and services which includes the provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment. Fourth, a condition to the catch-all provision of “other expenditures” was added such that the purchase must not only be necessary (as in the prior IRR) but must be directly attributable to the registered project or activity without which such project or activity cannot be carried out. And finally, the addition of a suspensive condition that the VAT zero-rating on local purchases shall be granted upon the endorsement of the concerned IPA, in addition to the documentary requirements to the BIR.
Notably, no information was provided in the amended IRR as to how to secure the endorsement of the IPA to avail of the incentive or what particular documentary requirements need to be submitted to the BIR.
With the issuance of RR 21-2021, the amendments made in the CREATE Act’s IRR were duly confirmed such that: (1) the incentive of VAT zero-rating must be availed of by an enterprise that meets the definition of both a registered business enterprise and export enterprise under the IRR; and (2) the maximum period of enjoyment of said incentive is 17 years unless extended by the SIPP. Note that with the “double definition” of what an export enterprise is, the question arises whether the enjoyment of the VAT zero-rating incentive is actually being expanded or being limited.
In addition, however, to the provisions of the IRR, RR 20-2021 provides that existing registered export enterprises inside ecozones and freeport zones shall also be qualified for VAT zero-rating until the expiration of the transitory period-sunset provisions as provided in the CREATE Act.
