FIRB moves to resolve VAT issue

Luisa Maria Jacinta C. Jocson, Reporter

THE FISCAL Incentives Review Board (FIRB) said it is fast-tracking the resolution of the issue on value-added tax (VAT) zero-rating for local purchases made by exporters.

This as exporters warned the failure to resolve the VAT zero-rating issue may force them to consider imports instead of local purchases, and even move their operations overseas.

In a statement sent to BusinessWorld, the FIRB said it formed a technical working group (TWG) on VAT “to evaluate the VAT zero-rating issues from an operational and legal standpoint.”

The TWG is composed of representatives from the departments of Finance and Trade, and the Bureau of Internal Revenue (BIR).

“The FIRB-TWG is working on its recommendation to resolve the issue, subject to the consideration or approval of the Secretary of Finance. The export industry groups can rest assured that the TWG is fast-tracking its recommended action points to resolve their concerns relevant to VAT zero-rating,” it said.

Last week, the IT and Business Process Association of the Philippines, Inc. (IBPAP), Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI), and Confederation of Wearables Exporters of the Philippines (CONWEP) urged the government to address the conflicting provisions of the VAT zero-rating guidelines.

“The inability to address this serious and pressing matter by the end of March will have detrimental effects to these three sectors particularly in sustaining their growth potential,” they said in a statement.

The issue stemmed from the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which took effect on April 11, 2021.

Under the CREATE Act, the VAT zero-rating on local purchases applies only to “goods and services directly and exclusively used in the registered projects or activity by a registered business enterprise.” This covered “raw materials, inventories, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment.”

The law required registered business enterprises to prove local purchases of goods and services directly and exclusively used in their registered activities before it can get a VAT zero-rating. Otherwise, the purchase of such goods would be subject to 12% VAT.

Before CREATE, local purchases by enterprises registered with and located in economic and freeport zones were entitled to VAT zero-rating.

CONWEP Executive Director Maritess J. Agoncillo said the VAT zero-rating rules under CREATE do not properly take into account the export manufacturing and service sectors.

“Our competitor countries are applying the VAT zero-rating, wherever you go in Southeast Asia. The exporters in other countries are zero-rated and the cross-border doctrine is applied. It’s globally practiced. We are disadvantaged by the CREATE law because it failed to recognize that. Our global competitors are not subjected to this kind of taxation,” she told BusinessWorld in a phone interview.

To address the confusion, the government has amended CREATE’s implementing rules and regulations (IRR), while the BIR has issued several regulations and circulars.

Another change brought about by the passage of the CREATE Act was rendering the cross-border doctrine “ineffectual and inoperative,” according to BIR Revenue Memorandum Circular No. 24-2022.

The cross-border doctrine mandates that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. This means that the actual export of goods and services from the Philippines to a foreign country must be free of VAT.

“The current law does not recognize the cross-border doctrine under the destination principle. The doctrine mandates that no VAT shall be imposed on the formed part of the cost of goods destined for outside the country. VAT is a consumption tax. Our goods are not consumed in the country so why are we being taxed?” Ms. Agoncillo said.

Meanwhile, the failure to address the VAT zero-rating issue may prompt business enterprises to resort to just import materials and services, instead of locally purchasing these.

“Otherwise, those companies enjoying these privileges will just import. If they import, these local supplies are wasted,” Philippine Chamber of Commerce and Industry (PCCI) George T. Barcelon said in a phone call.

Ms. Agoncillo said the garments exporters may have to start importing additional components that they usually source locally.

“These imports are not taxed because we are in the ecozone and we are (Board of Investments)-registered. The mess came about when we source the local components and local services we need and require (are imposed with VAT),” Ms. Agoncillo added.

Under the CREATE Act, registered export and domestic market enterprises are exempted from customs duties on their importation of capital equipment, raw materials, spare parts and accessories for their registered project or activity.

Ms. Agoncillo said there is even a possibility of exporters relocating their businesses elsewhere if the VAT zero-rating is not resolved.

“There will be movement of operations abroad if it’s not settled,” she said, adding that some factories had already closed during the pandemic.

Micro, small and medium enterprises will also likely be affected if exporters decide against making local purchases, and opt to import additional components and materials, Ms. Agoncillo said.

Ms. Agoncillo said the investment promotion agencies like the Philippine Economic Zone Authority (PEZA) and Board of Investments should define what constitutes as “directly and exclusively used goods and services.” She also called for the return of the cross-border doctrine and destination principle.

“Our recommendation is to apply the destination principle for all manufacturing and service sectors, based on the principle that our goods and services are not consumed in the country. Segregate the rules for export manufacturing,” Ms. Agoncillo said.

Mr. Barcelon said that the BIR and PEZA can consider issuing a joint memorandum on the VAT exemption of export products.

“I’d like to think it doesn’t have to go to the legislature, but from the BIR and PEZA, that they can have a memorandum of understanding,” he said.

John Paolo R. Rivera, an economist at the Asian Institute of Management, said in a Viber message that clarifying tax provisions is necessary to ensure compliance.

“If this is not resolved there will be issues again on efficient collections once fully implemented. This might be another tax policy with loopholes if provisions are not concretized,” he added.