Tax Articles

CREATE MORE’s implementing rules and regulations have been passed. But more importantly, drafts of the Bureau of Internal Revenue’s (BIR) Revenue Regulations (RR) have been released. Some questions have been answered, but some answers have sparked more questions. I hope the BIR is keen on making sure that the RRs are airtight.

First, the draft RRs emphasized that there are two distinct categories of businesses that operate under different regulatory frameworks and tax incentives, i.e., Registered Business Enterprises (RBEs) and Export-Oriented Enterprises (EOEs). RBEs are entities that are registered with the Board of Investments (BOI) or other Investment Promotion Agencies (IPAs) and are engaged in activities that qualify for fiscal and non-fiscal incentives. RBEs can operate under various income tax regimes, such as the Gross Income Earned (GIE)/Special Corporate Income Tax (SCIT), and Enhanced Deduction Regime (EDR). On the other hand, EOEs are businesses primarily engaged in the sale and actual shipment of goods or services from the Philippines to foreign countries. To qualify as an EOE, a business must meet the export sales threshold, which is at least 70% of its total annual production or sales from the preceding taxable year. EOEs benefit from VAT zero-rating on their local purchases, provided they secure the necessary certification from the Export Marketing Bureau (EMB) of the Department of Trade and Industry (DTI).

One area of concern is the vagueness of the definition of "total annual production" in EOEs, which is crucial in determining the 70% threshold. For goods, it refers to the volume or value of production that is manufactured and sold, including mark-up, by the export-oriented enterprise during the taxable year. For services, it refers to the value of services rendered by the export-oriented enterprise during the taxable year.

The vagueness in this definition arises when the BIR in an audit asks how the goods manufactured in one year but sold in the subsequent year were treated. Is it correct to include it in computing the 70% threshold? In other words, the definition of “total annual production” is only focused on the volume or value of production that is manufactured and sold within the same taxable year. It is silent on the treatment of goods that were manufactured in a particular year but sold in another.

Second, the draft regulations specified in detail the procedure in claiming for VAT refund. The BIR is required to process and decide on the VAT refund claim within 90 days from the date of submission of the complete documents. If the BIR finds that the grant of the refund is not proper, it must state the legal and factual basis for the denial in writing. If the claim is denied, the taxpayer has 15 days from receipt of the denial to file a request for reconsideration. This request must be limited to questions of law and cannot introduce new evidence or documents that were not part of the original claim. The request for reconsideration must include specific documents, such as the authority to file the request, a copy of the original application for refund, the notice of denial, and pertinent documents relevant to the legal issues raised. The BIR must decide on the request for reconsideration within 15 days from receipt. If the BIR fails to act within this period, the taxpayer may appeal the decision to the Court of Tax Appeals within 30 days. At this point in the process, the draft RRs are consistent with the law. But the next steps seem to veer away from what the law intends.

The draft RRs state that the decision on the request for reconsideration, if granted, restarts the 90-day period for processing the refund claim. My concern is that the “restart” procedure that is being introduced by the BIR cannot be found in the law. The law also did not limit the ground for an MR to only questions of law. The law is clear that an MR must be denied or granted within 15 days. If an MR is granted but is effectively remanded to the first step, the taxpayer might find itself losing its right to appeal to the Court of Tax Appeals. It must be recalled that the CREATE MORE Act is categorical in saying that the BIR has 15 days to grant or deny an MR, which means that the BIR must release the tax refund within the 15-day period if the decision is to grant the same. The fresh 90-day period that is being floated cannot be found in the law.

There are other issues that must be addressed. Unfortunately, this space can only accommodate so many words. Again, what was released last week were just drafts of the RRs that will govern us for years. The final version may be released this week. I hope that the final version of the revenue regulations will be categorical in defining terms and careful in introducing new ones. Again, as I said before, I do not want to see the word MOST after CREATE.