Tax Articles

PEZA CITIRA VAT

By Atty. Irwin C. Nidea Jr.

The Senate has just recently filed SB 1357 as its version of the much awaited CITIRA. There is anticipation that this will not only rationalize incentives but also paint all grey areas of the current Tax Code with black and white answers.

One grey area that I am interested to be resolved is the question of “attribution” vis a vis the VAT incentives given to PEZA registered entities. There is an emerging doctrine that for a taxpayer to be entitled to claim for refund, he must prove that the input VAT is “directly attributable” to zero-rated sales. But “directly attributable” means purchases that are considered direct cost. I am hoping to find clarity in this bill.

This confusion is not apparent when a taxpayer has mixed transactions, i.e., he has vatable, exempt and zero-rated sales. The taxpayer just needs to compute the proportion of a particular sale in relation to all input VAT that was incurred. But when a taxpayer is only engaged in zero-rated sales, it is logical that there must be no question that the input VAT that is incurred in buying a pen, for example, is attributable to the said zero-rated sale since the PEZA entity has no other sale to speak of.

In other words, the input VAT incurred by a taxpayer whose sales is purely zero-rated sales is attributable to such sale. If not, to what type of sale should its input VAT be attributable to? The taxpayer’s input VAT cannot be attributable to vatable or exempt sale simply because it has no such sale.

Unfortunately, there are some CTA decisions that do not agree to this. In these decisions, the Court said that the input VAT must be directly related to zero-rated sales for a taxpayer to be entitled to refund. By “directly related”, the court means “direct cost”. When a taxpayer who has purely zero-rated sales, incurs input VAT, it is not guaranteed that said input VAT is considered directly related to its zero-rated sales. Taxpayer must prove that the purchase is used as direct cost. A pen for example cannot be considered a direct cost in creating renewable energy.

Has this grey area been resolved by the Senate Bill?

The bill maintains the VAT exemption on importation and vat zero-rating on local purchases of PEZA entities. But there are some conditions. It states that VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity by registered business enterprise located inside an ecozone or freeport. Sales receipts and other income derived from non-registered project or activity shall be subject to appropriate taxes. You will notice that instead of “directly attributable”, the bill uses the phrase “directly and exclusively used in the registered project...” It is also clear that non-registered activities will not be able to enjoy VAT incentives.

This has significant implications. Current jurisprudence (Toshiba case) states that all purchases of a PEZA entity regardless how they are consumed, must only be imposed VAT at zero percent rate subject to certain conditions. The Senate Bill on the other hand, advocates that only purchases of goods or services that are directly related to registered activities are entitled to VAT at zero percent rate. If the goods or services are not related to registered activities, then the same is subject to VAT. Thus, at the outset, suppliers must determine whether to impose VAT on a purchase by a PEZA entity.

How can a supplier know that VAT must be imposed? This can only be inferred from one of the provisions of the bill on duty tax exemption. In defining one of the conditions of duty tax exemption, the bill states that the capital equipment, among others, must be directly and reasonably needed and will be used exclusively in and as part of the direct cost of the registered project or activity. The bill used the term direct cost. If applied in VAT, it appears that for a purchase to be considered as directly related to registered activities it must be used as a direct cost.

If this bill is carried, a supplier must impose VAT on a pen that is purchased by a PEZA entity. This is also true to the housing facilities and safety gears that are given to workers. Only purchases that are considered as direct cost, like boring equipment of a mining company or wind turbines of a renewable energy company may be VAT exempt.

This bill answers some of the lingering questions on VAT exemption of PEZA entities. But it also exposes some new fears. Not all purchases of a purely zero-rated PEZA entity will be VAT exempt.