By Wendell Ganhinhin
PEZA-REGISTERED enterprises in the Philippines are expected to have a positive start this second half of the year, as the passage of Revenue Regulation No. 03-2023 on April 27, 2023, made it easier for them to avail of Value Added Tax (VAT) zero rating.
This new regulation removes the requirement for local suppliers of goods and services of Registered Export Enterprises (REE) from securing prior Bureau of Internal Revenue (BIR) approval for applying VAT zero rating on its local purchases. This effectively lessens the burden of the process of acquiring the grant of VAT zero-rating for registered enterprises.
Prior to the passage of the amendatory regulation, local suppliers of REEs had to secure BIR approval for VAT zero-rating in determining if it is a qualified transaction, i.e. whether the local purchase of goods/service is directly or exclusively related to its registered activity. This is notwithstanding the fact that REEs are already required to obtain VAT Zero-rating Certification from their respective Investment Promotion Agency (IPA). This meant that REEs and their local suppliers had to go through a ‘double approval’ process to secure the grant of VAT zero-rating, which included approval from the IPA and, thereafter, approval from the BIR.
However, with the effectivity of the new regulation on April 28, 2023, local suppliers of REEs will no longer need to seek approval from the BIR. After the issuance of VAT Zero-rating Certification by the IPAs, the REE can already enjoy the benefit of VAT zero-rating on their local purchases. The concerned IPA is tasked to furnish the BIR through the Assessment Service, Audit Information, Tax Exemption and Incentives Division (AITEID), a list of registered enterprises issued with VAT zero-rating certification within twenty (20) days following the end of each taxable quarter; significantly speeding up the process and easing the burden of the registered enterprises.
Then again, even if the new Revenue Regulation mandates that the BIR will not require prior approval on applications for VAT zero-rating, it does not mean that it is entirely stripped of its authority to determine whether local purchases are directly and exclusively used by the REEs in their registered project or activity. The REEs should note that BIR is still empowered to conduct post-audit investigation/verification to check if the local purchases indeed qualify for VAT zero-rating.
Having said that, since the determination of the qualifications of REEs in availing of the benefit of VAT zero-rating has been left mainly to the concerned IPAs, the Revenue Regulation reiterates that IPAs should be guided by the rule that local purchases of goods and services are directly attributable to the registered project or activity of the enterprise, i.e. those which are indispensable in the operation of the registered project or activity.
On that note, the Revenue Regulation provided an additional list of services and related purchases of goods that shall not be deemed as ‘directly and exclusively used’ for VAT zero-rating purposes. The list includes janitorial services, security services, financial services, consultancy services, marketing and promotion, and services rendered for administrative operations such as Human Resources (HR), legal, and accounting.
For purchased goods or services that are used in both the registered project or activity and administrative operations, the REE shall adopt an allocation method to best apportion the same. If a proper allocation cannot be determined, the purchase of goods and services shall be subject to twelve percent (12%) VAT. Nevertheless, REEs are not precluded to prove with supporting evidence that any of the listed services or any purchase of goods relating to the listed services are directly and exclusively used in their registered project or activity.
Despite the additional exclusions from the VAT zero-rating, the removal of the prior approval requirement from the BIR is definitely a welcome relief for registered enterprises after the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, which limited the incentives that REEs previously enjoyed by rendering the ‘cross-border doctrine’ inoperative.
Wendell Ganhinhin is Partner for the Tax Advisory and Compliance at P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines, with 24 Partners and more than 1000 staff members. We’d like to hear from you! Tweet us: @GrantThorntonPH, like us on Facebook: P&A Grant Thornton, and email your comments to firstname.lastname@example.org. For more information, visit our website: www.grantthornton.com.ph.
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