Tax Articles

VAT on Local Sales of RBEs

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

CREATE MORE (Republic Act No. 12066) made significant clarifications on the taxation of and incentives enjoyed by registered business enterprises (RBEs) – enterprises which are registered with various Investment Promotion Agencies (IPAs). Among those clarified are the value-added tax (VAT) treatment of the local sales made by these RBEs. Specifically, as the law now stands, local sales of RBEs are clearly subject to the usual 12% VAT.

And what are these local sales? As defined by CREATE MORE, “local sales” shall cover sales of goods and services to domestic market enterprises (DMEs) or non-registered business enterprises, regardless of whether the sale occurs within the freeport or economic zones. This means that local sales made by RBEs, including those made to DMEs, are subject to the 12% VAT.

Interestingly, CREATE MORE placed in the hands of the buyers the liability for the remittance of the VAT due on local sales. Apparently, this is a deviation from the usual rule in the remittance of VAT due on sales. Ordinarily, it is the seller who is responsible in the remittance of the VAT due on VATable transactions. The buyer simply reports the purchase and input tax in its VAT returns and summary list of purchases.

Because of this deviation from the usual rules, the process for the payment of the VAT due on local sales and the reports to be made by both the RBE-seller and the buyer had become more chaotic – involves the consideration of a number of factors. In fact, I understand that the crafting of the implementing rules had been difficult.

The initial draft of the joint Implementing Rules and Regulations (IRR) of the Department of Finance and the Department of Trade and Industry included the proposed procedures for the remittance of tax on local sales – by enumerating a number of scenarios to be followed in complying with the payment obligation. However, the final version is silent – other than simply reiterating the provision of the law, that is, the liability to pay and remit the VAT rests with the buyer of goods and services.

Meanwhile, Revenue Regulations No. 09-2025 (RR 09-25) which was crafted by the DOF and BIR to implement this specific provision distinguishes the party responsible for the remittance of the VAT due on local sales. Primarily, the obligation to remit the VAT depends on whether the transaction is a (a) business-to-business (B2B) or (b) business-to-consumer (B2C) transaction. Similarly, the manner of paying and reporting the same and the forms to be used – depend on a number of scenarios.

Based on said RR 09-25, for a B2B transaction, the buyer of goods and services shall be liable to pay and remit the corresponding VAT due from the transaction. The form to be used and the regularity of reporting and payment by the buyer in turn depend on whether the transaction involves purchase of goods or purchase of services and whether the purchase is made from an economic or freeport zone locator or from a BOI-registered enterprise. On the other hand, the invoicing and other compliance obligations of the seller differ between a VAT-registered seller and non-VAT registered seller, which in turn depends on the income tax regime/incentive that the seller is enjoying.

For a B2C transaction, RR 09-25 acknowledges that imposing payment and remittance of VAT on the buyer is not administratively possible. Hence, it is still the responsibility of the RBE-seller to pay the VAT due to the government. Other compliance obligations of the seller and the buyer are also affected by a number of factors – such as: the income tax regime of the RBE-seller.

I’m not sure why the law shifted the burden of remitting the VAT to the buyer, especially that economic/freeport zones are no longer considered “foreign territory” and the purchases are no longer “deemed importations”. It actually made compliance with the VAT obligations on local sales, both on the part of the seller and the buyer, more complicated than the usual rules. This goes against the spirit of an earlier enacted law – the Ease of Paying Taxes Act. Perhaps, this is one area that needs to be considered in future amendments. And even disregarding the complications in compliance, the supposed shifting of the responsibility for the remittance of the VAT due on local sales to the buyer, as required by the law, is not even fully realizable – as in B2C transaction where the rules still require the remittance on the seller. In the end, the objective of shifting the obligation to the buyer is not met.

Aside from the complications from a compliance perspective, there are also other concerns related to the shifting of the payment to the buyer for local sales of RBEs. The law and the implementing rules simply refer to local sales of RBEs, without qualification. It appears, therefore that this includes local sales of DMEs. The circumstances, however, related to the transactions of DMEs, other than high-value DMEs (HVDMEs), need some evaluation.

DMEs, except HVDMEs, do not enjoy VAT incentives on importations and VAT zero-rating on local purchases. Hence, DMEs accumulate input taxes incurred on importations and local purchases. On the other hand, being DMEs, most, if not all, of their sales are subject to output taxes. Ordinarily, the accumulated input taxes will be applied against these output taxes. However, if sales by DMEs are included in the shifting of the VAT payment to the buyer, they will end up with no VAT liability against which their accumulated input taxes will be applied. This is true even if DMEs are required to report the output taxes as the VAT payments made by the buyer will be applied as credit. The net effect – DMEs will be accumulating input taxes with no use. This couldn’t even be refunded as they are not attributable to zero-rated sales. Such scenario would put DMEs in a disadvantaged position compared to other RBEs and even compared to other VAT taxpayers in general.

Lastly, locators in freeport and economic zones and their buyers are used to the procedures prescribed by the Bureau of Customs (BOC) for the payment of VAT due on goods taken out of the zone. While I understand that the procedures outlined in RR 09-25 should now govern the payment of the VAT, there are still some zones that implement the old rules. While this may just be a temporary concern, the same should be addressed through proper coordination between the BIR and the BOC for clarity and avoid affecting the movement of goods out of the freeport/economic zones.