Tax Articles

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CREATE VAT on PEZA

By Atty. Irwin C. Nidea Jr.

CREATE has rationalized tax incentives of PEZA entities. Sunset provisions have also been introduced. It has put an end to the “forever” concept of income tax holiday. There is also a subtle change in the wordings of the VAT provisions governing PEZA entities that can possibly shake the landscape of how they must do business.

Prior to CREATE, input VAT incurred by a PEZA-registered entity will only be refundable if it is proven that the same is used for an activity that is directly attributable to zero-rated sales. The key words are “directly attributable”. To be considered refundable, purchase of goods must form part of the finished product of the taxpayer, or it must be directly used in the chain of production. There must be a showing of the direct attributability of the purchases or input tax to the finished product. So, if a PEZA company is engaged in the export of computers, only input VAT on its purchases from the custom’s territory that form part of these computers (finished product), may be refunded. The pen and paper used by a PEZA entity in its office cannot be considered directly attributable to the production of computers. Thus, the taxpayer cannot file a claim for VAT refund on the same.

There are conflicting views on this issue. In some cases, the court agreed with the BIR and ruled that the meaning of attribution is “direct attribution.” VAT is only refundable on the purchase of goods that is used for conversion into or intended to form part of a finished product for sale and not supplies that will be used the course of business, e.g., pen and paper that will be used by employees in the office of a computer manufacturing company.

Another view opines that, if it is shown that the purchases are used for the operations of the business, then the input VAT charged on the said purchase is refundable and is still considered “directly attributable” to zero-rated sales. So, for example, the input VAT derived from purchase of paper and pen by a computer company which do not directly form part of the computer that is produced, is still refundable.

The third view is that when a company sells to a PEZA registered entity, no VAT should be imposed against it. Since PEZA is considered outside the Philippines for tax purposes, all sales to companies registered therein are zero-rated. So, if a PEZA entity allows itself to be charged VAT on its purchase, it cannot blame the government and claim for VAT refund. Its only recourse is against the suppliers that should not have imposed VAT on its sale in the first place.

But now, CREATE has dropped the word “attributable” as far as VAT incentive is concerned. It now 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 a registered business enterprise.

So, zero percent VAT on local purchases by a PEZA registered company is applicable only if the said purchase is directly and exclusively used in its registered activity. The law dropped the phrase “directly attributable” and used “directly and exclusively” instead. What are the implications of this?

If I sell goods to a PEZA registered entity, can I merely rely on a PEZA certificate of zero-rating when I decide not charge VAT on the said sale or should I make sure that the goods are directly and exclusively used for the registered activity? If yes, how am I going to do that? I am not involved in the operations of the PEZA entity. What if upon examination, the BIR discovers that the products that I sold to the PEZA entity was not used by it in its registered activity? Can the BIR go after me for not charging VAT on the sale?

What if the PEZA entity is engaged in purely zero-rated sales, should the input VAT it incurred be considered as directly or exclusively used for its registered activity automatically? Thus, should it be considered zero-rated in its entirety? As illustrated in the example above, a company that manufactures computers purchase paper and pen for its office. It is engaged in 100% export of computers which is considered as zero rated. Should VAT be imposed by its suppliers on its purchase of paper and pen?

With the enactment of CREATE, does it mean that attribution requirement is no longer an issue since only goods and services “directly and exclusively” used in the registered activity are considered VAT zero-rated?

There are many questions that must be resolved by the BIR. Hopefully, the implementing rules and regulations of CREATE is comprehensive enough to address all these questions.