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8 October 2021
 

The issuance of Revenue Regulations (RR) No. 9-2021 on June 11, 2021 was reported in the news to have generated a lot of confusion among the export enterprises located in economic zones and freeport zones due to the imposition of the 12% VAT on the sale of goods and services to export enterprises pursuant to the provisions of Republic Act (RA) No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The imposition of the 12% VAT on the sale of goods or services to export enterprises was further confirmed when the implementing rules and regulations of RA No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act IRR) were issued on June 23, 2021. The CREATE Act IRR provided that the VAT zero-rating on local purchases apply to goods or services that are directly or exclusively used in the registered projects or activities of export enterprises, except that the transactions falling under Section 106(A)(2)(a)(3), (4) and (5) and Section 108(B)(1) and (5) of the National Internal Revenue Code, as amended (Tax Code) (which includes the sale of goods and services to export enterprises) will be subject to the 12% VAT pursuant to RR 9-2021. In response to the concerns raised by various stakeholders on the effect of RR No. 9-2021, the Department of Finance (DOF) deferred the implementation of RR No. 9-2021 on July 27, 2021, until an amended RR is issued.
 

Based on the draft RR amending the VAT regulations and the CREATE Act IRR, the sale of raw materials, inventories, supplies, equipment, goods or services, “to registered export enterprises, to be used directly and exclusively in their registered project or activity,” shall be subject to 0% VAT. This is in line with Section 294(e) and Section 295(d) of the Tax Code (as amended by the CREATE Act) in relation to the VAT incentives that may be availed by registered business enterprises. The provision imposing the twelve percent (12%) VAT on transactions falling under Section 106(A) (2)(a)(3), (4) and (5) and Section 108(B)(1) and (5) of the Tax Code, as amended, is no longer found in the draft amendatory RR.
 
The CREATE Act IRR already defined the phrase “direct and exclusive use in the registered project or activity” as “raw materials, inventories, supplies, equipment, goods, services and other expenditures necessary for the registered project or activity without which the registered project or activity cannot be carried out.” The draft amendatory RR, on the other hand, further provided that the term “registered export enterprise” refers to those export enterprises defined under Section 4(M), Rule 1 of the CREATE Act IRR and that they must be also a registered business enterprise as defined under Section 4(W) of the CREATE Act IRR. The draft amendatory RR likewise provides that the sale to registered export enterprises covered by Section 5, Rule 18 of the CREATE Act IRR (i.e., those registered with investment promotion agencies prior to the effectivity of the CREATE Act) of goods or services used directly and exclusively in their registered project or activity is qualified for VAT zero-rating. The draft amendatory RR has not yet been issued.
 
SyCipLaw TIP: The sale to registered export enterprises of goods and services is subject to 0% VAT provided that such goods or services are directly and exclusively used in their registered projects or activities. Given the requirement and considering that any deficiency VAT assessment will be imposed on the suppliers, suppliers will be seeking assurance from registered export enterprises that the goods or services being sold to the registered export enterprise will be directly and exclusively used in the latter’s registered project or activity. Registered export enterprises will thus have to work with their suppliers to ensure that there is sufficient proof available to establish that the transaction between the supplier and the registered export enterprise is subject to 0% VAT in case of a deficiency VAT assessment from the BIR. 
 

For further information, please contact:

Carina C. Laforteza, Tax Department Head,
SyCip Salazar Hernandez & Gatmaitan

cclaforteza@syciplaw.com 

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