Tax Articles

Export-Oriented Enterprises: VAT Zero-Rating or Exemption

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

When we talk of CREATE MORE (Republic Act No. 12066), we usually refer to the amendments made on the tax incentive rules. But aside from those changes, there are a few provisions of the National Internal Revenue Code (NIRC) that were also modified. Among these are the VAT treatment of purchases and importations made by or sales made to export-oriented enterprises.

Sales of Goods to Export-Oriented Enterprises. Sale of goods to export-oriented enterprises whose export sales is at least 70% of the total annual production of the preceding taxable year is treated as an export sale, subject to VAT at zero percent (0%). This VAT zero-rating treatment of this kind of transaction is not a new concept. However, prior to CREATE MORE, the entitlement to VAT zero-rating was limited to raw materials or packaging materials. With the new law, that limitation was removed. It should follow that all types of goods, including finished goods, sold to export-oriented enterprises should be entitled to VAT zero-rating. What is required is that the goods sold should be directly attributable to the export activity of the export-oriented enterprise/buyer.

Aside from these, there are other conditions that must be met for the VAT zero-rating to apply. Prior to CREATE MORE, the export sales should exceed 70% of the annual production. The new law uses the word “at least,” which means that zero-rating applies even if the buyer’s export sales is just 70% of annual production. The new law also made clear that the reference for the 70% export achievement shall be the transactions for the preceding taxable year. Hence, failure to achieve this percentage of export sales in a taxable year will disqualify the sales of goods to export-oriented enterprises in the following year from enjoying VAT zero-rating.

Sales of Services to Export-Oriented Enterprises. Similar to goods, sale of services to export-oriented enterprises whose export sales is at least 70% of the total annual production of the preceding taxable year is treated as VAT zero-rated. The prior rule limited this VAT zero-rating privilege to the services performed by subcontractors and/or contractors in processing, converting, or manufacturing of goods for an export-oriented enterprise. CREATE MORE expanded the transactions entitled to VAT zero-rating to all types of services, as long as the services rendered are directly attributable to the export activity of the export-oriented enterprise/buyer.

Importation of Goods by an Export-Oriented Enterprise. A new provision was introduced by CREATE MORE, exempting from VAT the importation of goods by an export-oriented enterprise whose export sales is at least 70% of the total annual production of the preceding taxable year. Similar to sale of goods and services, the imported goods should be directly attributable to the export activity of the export-oriented enterprise.

Based on my reading of these modified/new provisions of the NIRCs on VAT zero-rating of sales to export-oriented enterprises and the VAT exemption on their importations, I thought that the rule is simple. Sales of goods and services to export-oriented enterprises are VAT zero-rated, provided that all other conditions are present and the required certifications are obtained.

In the VAT-zero-rated sale of goods [under the modified Section 106(A)(2)(a)(3) of the NIRC], the term “export-oriented enterprise” and the “export activity” in which it is engaged in is not qualified. That means that the buyer/export-oriented enterprise may either be engaged in export of goods or export of services or both. Similarly, in VAT zero-rating for sale of services [under the modified Section 108(A)(B)(5) of the NIRC], the term “export-oriented enterprise” and the “export activity” in which it is engaged in is not qualified. That means that the buyer/export-oriented enterprise may be engaged in export of goods or services or both.

In essence, VAT zero-rating on sale of goods is not limited to sales made to exporters of goods. It applies, as well, on sales of goods made to exporters of services. Similarly, VAT zero-rating on sale of services is not limited to sales made to exporters of services. It applies, as well, on sales of services to exporters of goods. What is important is that the goods sold or services performed are incidental to and reasonably necessary for the export activity of the buyer.

A reference, however, to the amended provisions of the VAT Regulations (RR 16-2005) seem to limit the entitlement to the VAT zero-rating. The provision of the VAT Revenue Regulations [Section 4.106-5(a)(3), as amended by RR 10-25], which implements the VAT zero-rating of sales of goods to export-oriented enterprises, defines “export-oriented enterprises” as referring to a person, natural or juridical, engaged in the sale and actual shipment of goods from the Philippines to a foreign country or economy. Similarly, the provision of the VAT Revenue Regulations [Section 4.108-5(b)(5), as amended by RR 10-25], which implements the VAT zero-rating of sales of services to export-oriented enterprises, defines “export-oriented enterprises” as referring to a person, natural or juridical, engaged in the sale of services from the Philippines to a foreign country or economy. In other words, VAT zero-rating for sale of goods will apply only if the buyer is an exporter of goods, and VAT zero-rating on sale of services will be available only if the buyer is an export of service. Suppliers of goods for exporters of goods, suppliers of services, for exporters of services – this is the effect of these rules.

I hope that this rule should be further clarified, as this would be limiting the availment of VAT zero-rating on sales made to export-oriented enterprises. Some exporters of goods rely heavily on services for the production of goods for export. Also, some exporters of services need equipment and other tangible goods to be able to render services for exports. These transactions should not be denied the benefit of VAT zero-rating.