Tax Articles

Beyond Liberalizing Tax Incentives Under Bayanihan 2

By: Atty. Lino Ernie M. Guevara

The government’s invigorated legislative response against COVID-19, Republic Act (RA) No. 11494 or more popularly known as “Bayanihan to Recover as One Act” (Bayanihan 2), echoed one of the more important provisions of its precursor, Bayanihan 1 (RA 11469). Section 4(cc) of RA 11494 liberalizes once again the grant of duty and tax incentives to manufacturers and importers alike dealing with essential goods or critical equipment needed to contain the cataclysmic effects of this pandemic.

Bayanihan 2 took effect immediately upon its publication on September 15, 2020. But the law also specifically provided that its Section 4(cc) “shall be deemed to be in effect since Republic Act No. 11469 expired”, that is, on June 25, 2020. RA 11469’s effectivity is until the next adjournment of the Eighteenth Congress or on December 19, 2020, the same being expressly provided by law.

So, what goods are covered by and could benefit from these incentives?

The list is a bit long. First, the covered COVID-19 goods refer to those essential goods related to the containment or mitigation of the pandemic. These goods include personal protective equipment (PPE) such as gloves, gowns, masks, goggles, and face shields; surgical equipment and supplies; laboratory equipment and its reagents; medical equipment and devices; support and maintenance for laboratory and medical equipment; surgical equipment and supplies; medical supplies, tools, and consumables such as alcohol, sanitizers, tissue, thermometers, hand soap, detergent, sodium hypochlorite, cleaning materials, povidone iodine, common medicines (e.g., paracetamol tablet and suspension, mefenamic acid, vitamins tablet and suspension, hyoscine tablet and suspension, oral rehydration solution, and cetirizine tablet and suspension); testing kits, and such other supplies or equipment as may be determined by the Department of Health (DOH) and the Department of Trade and Industry (DTI).

Secondly, the incentives shall likewise be granted to equipment for waste management, including, but not limited to, waste segregation, storage, collection, sorting, treatment and disposal services. Note that the said equipment and technologies and services should be approved by the Department of Environment and Natural Resources (DENR), DOH or other concerned regulatory agencies.

Lastly, goods covered also include inputs, raw materials and equipment necessary for the manufacture or production of those essential goods referred to above related to the containment or mitigation of COVID-l9. Understandably, these goods are vital components in order to undertake the production of those goods previously enumerated.

Since these involve incentives, the law specifically provides that the exemption from such duties and taxes for the manufacture or importation of critical equipment or essential goods shall be determined by the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR). The BOC issued a Customs Administrative Order for these importations under Section 4 (cc) of RA 11494. For its part, the BIR issued Revenue Regulations (RR) No. 28-2020 dated October 15, 2020 to implement said tax provisions of RA 11494, the salient points of which are outlined below.

In general, the covered period for the importation would be from June 25, 2020 (i.e., upon the lapse of Bayanihan 1’s effectivity) up to December 19, 2020 (i.e., end of Bayanihan 2). The importation of those sets of goods enumerated above shall be exempt from Value-Added Tax (VAT), excise tax and other fees, subject to certain conditions (i.e., approval and certification by the concerned government agencies such as DOH, DTI and DENR). It is critical to take note of the effectivity or the specific period covered when such exemption applies. In the event that VAT has been paid on qualified shipments/importations within the period of June 25,2020 up to September 14,2020, the same shall be refunded pursuant to Section 204(C) of the Tax Code (i.e., refund of taxes erroneously received). However, the input tax on the imported items should not have been reported and claimed as input tax credit in the monthly and/or quarterly VAT returns. The same shall not be allowed as input tax credit pursuant to Section 110 of the Tax Code for purposes of computing the taxpayer’s VAT payable for the said period.

Remember that in order to qualify for exemption from import duties, taxes and other fees and ensuring the PPE supply at competitive prices, the taxpayer availing of the exemption must present a certification from DTI that the equipment and supplies being imported are not locally available or of insufficient quality and preference.

Unlike in other importations, the importations herein shall not be subject to the issuance of Authority to Release Imported Goods (ATRIG) under Revenue Memorandum Order No. 35- 2002, as amended. It may be released by the Bureau of Customs without need of such ATRIG. The BIR may, however, conduct post investigation/audit on these importations released by the BOC without ATRIG under this regulation.

As mentioned, inputs, raw materials and equipment necessary for the manufacture of essential goods of medical grade related to the containment and mitigation of COVID-l9 enumerated above, as determined by the Food and Drug Administration - Department of Health (FDA-DOH), whether locally sourced or imported by the registered manufacturer, shall also be exempt from VAT. To avail the exemption, the supplier of inputs, raw materials and equipment should submit the certified true copy of the "License to Operate" as issued to the manufacturer-buyer by the FDA-DOH, authorizing the manufacture of such essential goods of medical grade. Also required would be a Sworn Declaration from the manufacturer-buyer that the items shall be used for the manufacture of essential goods of medical grade related to the mitigation of COVID-l9.

Lastly, donations of these imported articles to or for the use of the National Government or any entity created by any of its agencies not conducted for profit, or to any political subdivision of the Government are likewise exempt from donor's tax and subject to the ordinary rules of deductibility under existing rules and issuances.

What happens then when sales of those covered goods occur?

The sale of finished goods or products categorized above as essential, whether locally manufactured or imported, is subject to value-added tax. On the other hand, the sale of inputs, raw materials and equipment to a non-holder of "License to Operate" issued by the FDA-DOH is likewise subject to VAT.

Reiterating said tax incentive provision under Bayanihan 2 continues to give a welcome respite to businesses that are striving to stay afloat amidst the devastation of this pandemic. Incentivizing the manufacturing sector which has consistently been fueling the country’s economic growth could help boost their chances of continuing their operations while at the same time aiding the government to ensure the critical supply of these essential COVID-19 goods. But given the continuing economic uncertainty, the government should look beyond short-term fix or stop-gap measures mainly being offered now. A more comprehensive and sustainable solution should be formulated and already implemented not only to assist business to recover but one that gets us back on track to regain the lost momentum in our country’s economic growth.