Tax Articles

Updates on VAT-Zero Rating under CREATE

By: Atty. Mabel L. Buted

Mabel L. Buted Partner   +632 8403-2001 loc.160 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Last year, I wrote about some of the issues and challenges surrounding the implementation of the VAT incentives as modified by CREATE. These included the parameters and limitations introduced in the implementing rules and regulations (“IRR”) that were not included in the law. This year, in response to the cries of the affected parties, the concerned authorities introduced changes to the rules and addressed some of these concerns.

To recall, while the law did not limit the registered enterprises that are entitled to VAT zero-rating on local purchases, the IRR limited the availability of the VAT zero-rating incentive to registered export enterprises. These are the entities engaged in the manufacturing, assembling or processing and information technology and business process outsourcing activities, and whose activities will result in the direct exportation and/or sale of their products or services to another registered export enterprise that will form part of the final export product or export service of the latter, of at least 70% of the total production or output.

Domestic Market Enterprises (DMEs or those that are not Export Enterprises) and Service Enterprises are not qualified. This rule affected mostly those entities which are not entitled to other incentives other than the VAT zero-rating on purchases, like those enterprises engaged in logistics service activities in support to exporters, or the ELSE (Ecozone Logistics Service Enterprise) companies. These are the companies which provide critical support to export manufacturing companies in terms of their requirements for logistics to facilitate their import and export shipments, procurement of raw materials, inventory management, just-in time deliveries, localization, and process customization.

With the new changes, ELSEs are now considered export enterprises entitled to VAT-zero rating, if they meet the 70% threshold criteria. Their local purchases will be entitled to the VAT at 0%, but these will apply only to the goods and services that are directly and exclusively used in their registered projects. Further, to qualify for the VAT incentives, they must be engaged in both the (a) establishment of a warehouse storage facility; and (b) importation or procurement from local sources and/or from other registered enterprises of goods for resale, or for packing/covering (including marking, labelling), cutting or altering to customers’ specification, mounting and/or packaging into kits or marketable lots for subsequent sale, transfer or disposition for export.

Those engaged only in the trucking and forwarding services, including those in other service activity areas (janitorial, security, banking and financial, consultancy, marketing and promotion, other administrative functions) are still not qualified for VAT-zero rating on their purchases.

Prior application for the VAT zero-rating or the prior approval from the tax authority before the qualified business enterprises can avail of the incentives has also been removed in the rules. Similar to the procedures before, registered business enterprises can now avail of VAT-zero rating on their local purchases on the basis of the Certification of VAT-Zero Rating issued in their favor.

In addition to this requirement, they must show too to their local suppliers their Certificates of Registration with the BIR and with their Investment Promotion Agency. As their VAT-zero rating still applies only to their purchases of goods and services that are directly and exclusively used in their registered activities, they must also provide sworn affidavits, stating that the goods and services bought are directly and exclusively used in the production of goods and completion of services to be exported.

Our authorities could have saved itself of the need to make changes had it issued the implementing rules based on what our legislatures intended the laws to be. Nonetheless, this is a development that we gladly need and welcome. These changes to the previous rules under CREATE and the IRR are part of the government’s efforts in implementing reforms in the way we do business in the country. And I am still hopeful that the remaining issues would be addressed soon.

To the concerned parties (registered business enterprises and suppliers), the availment of the incentive is still subject to the post-audit investigation by the tax authority. Hence, it is very important to know these basic documents and requirements and preserved for future substantiation purposes in case the entitlement is challenged during audits and verifications.