Tax Articles

VAT Bubble Pierced

By Atty. Irwin C. Nidea Jr.

The invincibility of the cross-border doctrine has been pierced by the TRAIN Law. Export processing zones and other export-oriented enterprises are now subject to VAT on their purchases from the customs territory (outside export processing zone). The BIR recently issued Revenue Regulations 9-2021, which signals the end of an era of confusion.

The two-prong conditions of the TRAIN Law have been met: a) improvement of the VAT refund system and compliance with the 90-day period in granting or denying claims; b) payment of all pending VAT refund claims as of the end of 2017 and setting up a refund center that will handle the claim. Thus, transactions which are considered as export sale would now have to pay 12 percent VAT. This include sales of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing, or repacking in the Philippines; sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70 percent of the total annual production; also, those considered export sales under Executive Order (EO) 226, otherwise known as the Omnibus Investments Code of 1987. Export sales under EO 226 includes sales to export processing zones.

Prior to RR 9-2021, sale to export processing zones is zero-rated. It means that the supplier which is based outside the export processing zone must charge zero VAT on its sale. It may only recover the input VAT it has incurred from the items it has sold, by filing a claim for refund. Suppliers of export processing zone entities are left with the burden of going through the tedious process of proving and processing refund claims.

There were also questions on the VAT treatment of an entity registered with an export processing zone (the “Zone”) when it consumes its purchases outside the Zone. Should a hotel or a car rental company that are located outside the Zone impose VAT on a booking made by an export processing entity? What if purchases for the construction of housing for its employees are made by an export processing entity but these purchases are consumed outside the Zone, should VAT be imposed? There are also instances when the BIR denies a claim for refund by a supplier of an export processing zone entity because the latter, according to the BIR, did not comply with its registration requirement which mandates at least a 70% export sale. How can a supplier know the operations of the export processing entity when it simply relies on the certificate of zero-rating executed by the administration of the Zone? In other words, there may be instances when certificate of zero-rating is executed by the administration of an export processing zone affirming the incentive given to a company, but the BIR in its tax investigation may find it wanting. The supplier is now left with an empty bag.

With the advent of this new scheme, the rule is clear. Sale to export processing zones is VATable. The burden of claiming a VAT refund is now shifted to entities registered under these export processing zones. Since VAT has been shifted to them, they must make sure that documentation of their transactions is correct and complete. Export documents like invoice and bill of lading must be under the name of the company that will eventually file a claim for refund. They must also make sure that they have the proper documentation to prove that what they purchased are “directly and exclusively” used for their registered activity. This is a new requirement under the CREATE law. Purchases made by export-oriented enterprises to be refundable must be “directly and exclusively” used for their registered activity. It is not enough that the purchases may only be attributable to the registered activity.

The bubble of export processing zones has been pierced. There will be new dynamics at play starting July when RR 9-2021 takes effect. It is good news for the suppliers of export processing zone entities but bad news for the latter. Export processing zone entities will now experience the burden of claiming a VAT refund and test whether the promise of a 90-day period to process a claim is not an empty rhetoric.