Tax Articles

CREATE MORE VAT CONFUSION

By Atty. Irwin C. Nidea Jr.

The quest for a definite answer to the question - what is the proper VAT treatment of a sale to a registered business enterprise (RBE) inside the ecozone? - is a continuing saga. The first chapter started when Revenue Regulation (RR) 9-2021 was released.

RR 9-2021 was issued to implement the imposition of 12% VAT on certain transactions previously taxed at zero rate under the Tax Code. After a few days, the Implementing Rules and Regulations (IRR) of CREATE Law was issued. I flagged in my previous article, that the IRR of CREATE added a provision acknowledging RR 9-2021 and the VAT burden it carries. These additional provisions in the implementing rules of CREATE is considered as unauthorized administrative legislation for they cannot be found in the law. It altered the application of VAT zero-rating, and it added restrictions to the incentives, that are not contemplated by the legislature. CREATE’s only condition is that sale to an ecozone entity must be directly and exclusively used for its registered activities to be considered VAT zero-rated. It does not contemplate the scenario laid down in RR 9-2021, where VAT will be passed on to RBEs.

This regulation was passionately opposed by ecozone locators. You cannot blame them because if RR 9-2021 is carried, VAT will be passed on to RBEs and the cross-border doctrine will be compromised. Thus, the government was forced to issue a circular deferring the implementation of RR 9-2021. Please note that it was not cancelled nor repealed by a subsequent issuance. It was just deferred.

In the meantime, RBEs and their suppliers are in suspended animation since the deferral of RR 9-2021. These businesses are going concerns. After the deferral of RR 9-2021, they are now in an unenviable position where they have to choose between two opposing schools of thought. The first school of thought asserts that the deferral of RR 9-2021 means that the status quo stands. All purchases of an RBE are considered zero-rated and the principle of cross-border doctrine remains untainted. The second school of thought on the other hand, warns that the CREATE law is already in effect and is now part of our Tax Code. It categorically states that only sale to ecozone entities that are directly and exclusively used for its registered activities are considered VAT zero-rated. It has somewhat tweaked and limited the cross-border doctrine.

Both positions carry with them compliance risks. If you follow the first school of thought and the BIR examiner does not agree, an RBE will be assessed with deficiency VAT. The BIR will argue that you should prove that your purchases are directly and exclusively used for your registered activities before you can avail of VAT zero-rating. If you follow the second school of thought on the other hand, the BIR examiner might ask suppliers of ecozone entities why are they not treating all purchases as zero-rated? RBEs might file a claim for refund against their suppliers for imposing VAT.

This is a continuing saga and we are now opening the next chapter. An amendment to the IRR of CREATE was recently issued. The new IRR now reads that all registered EXPORT AND DOMESTIC MARKET ENTERPRISES may continue to enjoy the duty exemption, VAT EXEMPTION ON IMPORTATION, AND VAT ZERO-RATING ON LOCAL PURCHASES provided the DUTY EXEMPTION, VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly ATTRIBUTABLE TO and exclusively used in the registered project or activity of SAID REGISTERED export enterprises LOCATED INSIDE THE ECOZONES AND FREEPORTS UNTIL THE EXPIRATION OF THE TRANSITORY PERIOD.

This is now the prevailing rule. To be considered VAT zero-rated, purchases by an ecozone entity must be directly attributable to and exclusively used in its registered project or activity. Suppliers and buyers must determine if what is being bought or sold will be directly attributable to and exclusively used for the registered activity of the ecozone entity.

There is a glaring attempt to abandon the phrase “directly and exclusively used” as worded in CREATE and in the old IRR. Why did they insert the term “attributable” in this new IRR?

As I discussed in my previous article, the Tax Code speaks of attribution. The Court of Tax Appeals (CTA) in the case of Toledo states that "directly" and "entirely" as stated in Section 112 of the Tax Code does not mean that only those purchases of goods that form part of the finished product of the taxpayer can be subject of an input VAT refund.

According to the CTA, it is significant to note that (in claims for refund) the Tax Code did not limit input taxes to those purchases that only form part of the finished product of the taxpayer. To the extent possible, words must be given their ordinary meaning. The word "attribute", the adjective form of which is "attributable", is defined in the dictionary as "to explain as to cause or origin". In other words, "creditable input tax due or paid attributable to such sales" simply means that the input tax is connected with the zero rated or effectively zero-rated sales.

By inserting the word “attributable”, sale to RBEs that may qualify for VAT zero-rating significantly widens. Unlike the phrase “directly and exclusively used” which is limiting, the phrase “directly attributable to and exclusively used” is much more encompassing.

I have three concerns with this new IRR though.

First, what is the status of RR 9-2021? Will it not be categorically repealed? Will it stay in limbo forever?

Second, the question of whether the cross-border doctrine has been abandoned is still up in the air. CREATE nor this new IRR did not repeal the PEZA Law.

My other concern is that the word “attributable” cannot be found in CREATE.

Is this another attempt of administrative legislation with the hope of undermining the restrictive wordings used in the law? CREATE is categorical that to be considered VAT zero-rated, sale to an ecozone enterprise must be “directly and exclusively” used for its registered activity. It does not say that to be considered VAT zero-rated, it is enough that a sale to an ecozone enterprise is “directly attributable to and exclusively used” for its registered activity.

Loosening the restrictions for VAT zero-rating may be good for the economy, in general. But is it worth it if it means undermining the wordings of the law? Only time will tell. This may not be the end of this saga after all.