Many in the local export sector might be considering how the recent issuance of Rules and Regulations (RR) 9-2021 from the Bureau of Internal Revenue (BIR) can be rather ill-timed or otherwise, unfair.  

Considering that Companies are just on the brink of rebounding from a global economic quagmire brought about by COVID-19 pandemic, and in consideration of how the export industry contributes to 30% of the country’s gross domestic product (GDP), doing away with zero percent-VAT incentives seems like the most unlikely route to take right now. 

With the new RR having taken effect this June, export leaders voiced out their concerns on how the issuance could be detrimental to small players of the export industry and other indirect manufacturers as it could force companies to directly source their raw material requirements from international companies instead and at higher rates aside from other fiscal inconveniences.  

This longstanding pursuit for tax incentives that extend to MSMEs registered under investment promotions agencies (IPAs) including the Philippine Economic Zone Authority (PEZA) is at its tipping point with certain loopholes finally coming from beneath the surface.  

As the national government continues to seek a sound tax refund system that will be in accordance with the Tax Reform for Acceleration and Inclusion (TRAIN) Law, certain aspects on the exemption of taxpaying individuals or entities covered by economic zones that are under special laws and international agreements are quite unclear at the moment, leading to louder calls for the suspension of the new RRs among export groups. 

Then there’s also the issue of the new RR’s conflict with provisions under the Corporate Recovery and Tax incentives for Enterprises (CREATE) Law that aims to help micro, small, and medium enterprises (MSMEs) recover from financial stress by reducing the corporate income tax from 30% to 20%. Unless the BIR and other concerned government agencies address this, RR 9-2021 might be viewed as another straw that could break every MSME’s back. 

Confusing provisions

RR 9-2021 stipulates that from June 28 onwards, the indirect export sale of raw or packaging materials will be subjected to a 12% VAT, applicable to the following: 

• Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency [Sec. 106(A)(2)(a)(3) of NIRC, as amended];
• Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production [Sec. 106(A)(2)(a)(4) of NIRC, as amended];
• Those considered export sales under Executive Order (EO) No. 226, otherwise known as the “Omnibus Investment Code of 1987”, and other special laws [Sec. 106(A)(2)(a)(5) of NIRC, as amended;
• Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency [Sec. 108(B)(1) of NIRC, as amended]; and
• Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production [Sec. 108(B)(5) of NIRC, as amended].

The new rule applies to the Department of Trade and Industry’s (DTI) Board of Investments (BOI)-registered enterprises; individuals and entities engaged in out-of-the-country business, and any sale of services through contractors and subcontractors to export-oriented companies. 

Aside from the rules on export sale, RR 9-2021 also covers the sale of services and use of lease properties under subparagraphs (1) and (5) of Section 108 (B) of the Tax Code of 1987, as amended.

While many would think that this should still leave individuals or entities that are previously exempted under the special laws or international agreements to a zero percent VAT rate under Section 3 of RR 9-2021 and Section 106 (A)(2)(a)(5) of the Tax Code, it is yet to be clear if the new issuance supersedes RR 4-2007 which stipulates that sales within ecozones should enjoy zero tax rates, not to mention the government’s adherence to the Destination Principle and Cross-Border Doctrine.    

Along with the new issuance is RR 10-2021 issued on June 17, which imposes an excise tax payment for sweetened beverages for export upon their exit from production plants. Further, RR 10-2021 only gives export companies with the necessary documents that can prove that their products have been exported some room for flexibility through applications for tax credit, exemption, or avail of the product replenishment scheme. 

With these developments, exporters and taxpayers covered under the ‘special laws’ section of the Tax Code and those with exemptions granted by the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI), Subic Bay Metropolitan Authority (SBMA), and the Clark Development Authority (CDA) are seeking clarifications from government agencies that would reconcile provisions of the new RRs and those under Sections 294 (E) and 295 (D) of the CREATE Law which tackles the incentive in question. 

A call to suspend RR 9-2021

George T. Barcelon, chairman of Philippine Exporters Confederation, Inc. (Philexport) who is currently urging the Department of Finance (DoF) for the suspension had earlier shared how the two new issuances can serve as a huge inconvenience to companies given that it would take up to 90 days processing time for refund claims. Such inconvenience could put the export sectors at a disadvantage according to Barcelon.

On the other hand, Philexport president Sergio R. Ortiz-Luis Jr. went ahead and wrote BIR Commissioner Caesar R. Dulay to air concerns regarding the physical filing for VAT refunds at the BIR’s VAT Credit Audit Division in Quezon City given current limitations on mobility due to COVID-19 Inter-Agency Task Force rules. He further stressed that these inconveniences in seeking refunds can cause negative impacts on MSME’s cash flows.

PEZA Chairperson Charito B. Plaza had earlier written a letter to DoF Secretary Carlos “Sonny” Dominguez citing the inclusion of RR 9-2021 in the final IRR draft of CREATE Law redefines ‘export sales’ as the “sale and actual shipment of goods from the Philippines to a foreign country,” making the sale of goods to PEZA registered businesses subject to a 12% VAT. 

Plaza further cited Section 5 of the final draft of the CREATE Law which states that VAT zero-rating shall be imposed on local purchases of registered business enterprises provided business transactions concerning the use of the local goods and services including raw materials, supplies, equipment, and other expenditures have been previously registered as essentials for the projects or activities of the enterprise. This means that a zero percent VAT rate must be retained as a fiscal incentive for local purchases of PEZA export enterprises regardless if they are from an export-oriented or domestic enterprise. 

Also noted in the letter is how the CREATE Law does not repeal or amend provisions under Section 8 of R.A. No. 7916 or the Special Economic Zone Act which defines ‘ecozones’ as “entities managed and operated by PEZA as a separate customs territory.” This maintains how PEZA entities should be exempted from RR 9-2021 and covered by the Destination Principle and Cross-Border Doctrine which leads to the request for the deferment of RR 9-2021’s implementation.

Untying the VAT loopholes on export 

Solutions to address conflicts between the new RRs’ objectives with that of the CREATE Law can still be reached to ease the export groups’ concerns. However, there are more things to tackle on the table. 

For one, there’s the Strategic Investments Priorities Plan’s (SIPP) connection with how incentives are implemented and how changes in leadership within priority investment sectors may affect export groups. After all, the BIR should include local export groups as permanent beneficiaries under the plan. 

Now, should a 12% VAT be imposed with the option to apply for tax refunds despite talks, online filing systems that could streamline the process would cut down both processing time and logistical inconveniences for the affected companies. Automating validation procedures would also do away with the need for additional processes and documents on the part of the taxpayers. The export community will also benefit if a provision under RR 9-2021 on full VAT cash refunds was included instead of the less preferred tax credit certificates.

With provisional conflicts still present between how the RR 9-2021 seeks to improve the government’s tax refund system, and how the CREATE Law aims to reduce the financial strain brought about by the pandemic to corporate entities, the BIR is being called out to issue the necessary guidelines on the imposition of 12% VAT to goods sold to ecozone-registered companies. Mitigation from other concerned national agencies will surely help and fast track the process and only until then can once and for all the rules on zero percent VAT rate exemptions under the TRAIN Law can be appreciated by the taxpayers for its true benefits.

DISCLAIMER: This article is not a substitute for an expert opinion and is purely a general research that may have not considered the entirety of other related topics. Any tax and/or compliance advice is not intended or written by the author to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on by the regulatory bodies, or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

The opinion or advice expressed in this advisory is based on the facts and circumstances gathered. Any inaccuracy in any of the assumptions set forth above may have the effect of changing all or part of this report, and this report may not apply. The advice is based on our interpretation of the provisions of the Code, the Revenue Regulations promulgated and issued by the tax bureau, BIR positions as set forth in published Revenue Rulings, other pronouncement, orders and circulars, and judicial decisions in effect on the date of this report, any of which could be changed at any time. Any such changes may be retroactive and could significantly modify the statements and opinions/ advice expressed herein In effect, this might render the advisory obsolete or incorrect in partial or in full. We undertake no obligation to advise you of changes that may hereafter be brought to our attention.