The Bureau of Internal Revenue (BIR) has issued new guidance that identifies which local purchases of goods relating to certain services are not deemed as “directly and exclusively used” in the registered project or activity of a registered export enterprise (REE), and therefore such purchases are not covered by the value-added tax (VAT) zero-rating.
Revenue Regulations (RR) No. 3-2023 issued on April 26, 2023 amends certain provisions of RR 16-2005, as amended by RR 21-2021. The latest amendments are meant to implement Sections 294 (E) and 295 (D), Title Xlll of the National Internal Revenue Code of 1997, as amended by Republic Act (RA) No. 11534 (Corporate Recovery and Tax Incentives for Enterprise Act or CREATE Act), and Section 5, Rule 2 and Section 5, Rule 18 of the CREATE Act Implementing Rules and Regulations, as amended.
Under CREATE, VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of registered export enterprises, to the exclusion of domestic enterprises.
A registered export enterprise or REE refers to any Philippine entity registered with an investment promotion agency (IPA) to engage in manufacturing, assembling or processing activity, and services such as information technology (IT) activities and business process outsourcing (BPO) that result in direct exportation, or the sale of the product or IT/BPO services to another REE.
RR 3-2023 states that local purchases of the following services shall not be considered as “directly and exclusively used” in an REE’s registered project or activity:
• Janitorial services
• Security services
• Financial services
• Consultancy services
• Marketing and promotion
• Services rendered for administrative operations such as Human Resources (HR), legal, and accounting
But also according to the same RR, if the purchased goods are used in both the registered project or activity and administrative operations, the REE shall adopt a method to best allocate the purchase. If a proper allocation could not be determined, the purchase of such goods shall be subject to 12% VAT.
The guideline further says the VAT zero-rating on local purchases of goods shall be availed of based on the VAT zero-rating certification issued by the concerned IPA.
This means that local suppliers of services of REEs shall no longer be required to apply for approval of VAT zero-rating with the BIR.
However, the BIR may conduct post-audit investigation/verification to make sure that the goods were indeed directly and exclusively used by the REE in its registered project or activity, says RR 3-2023.
It explains: “All applications with accompanying VAT zero-rating certification issued by the concerned IPA which have been received but have not yet acted upon by the concerned office of the BIR upon the effectivity of these Regulations shall be accorded VAT zero-rating treatment from the date of filing of such application subject to the conduct of post audit by the BIR that the goods are indeed directly and exclusively used by the registered export enterprise in its registered project or activity.”
For its part, the concerned IPA shall furnish the BIR within 20 days following the close of each taxable quarter a list of REEs issued with VAT zero-rating certification.
The new policy notes that the REE may also set out to prove, with supporting evidence, to the concerned IPA that any of the above-listed local purchases of services are indeed directly and exclusively used in its registered project or activity.
“In all instances, in issuing the VAT zero-rating certification, the concerned IPA shall be guided by the rule that such local purchases of services are directly attributable to the registered project or activity without which such registered project or activity cannot be carried out. These are costs that are indispensable to the project or activity, i.e., without which the project or activity cannot proceed, and these include expenses that are necessary or required depending on the nature of the registered project or activity of the export enterprise.”
Finally, RR 3-2023 adds that health maintenance organization (HMO) plans acquired by an REE for its employees who are directly and exclusively involved in the operations of its registered projects or activities and forming part of its compensation package shall be considered as “directly and exclusively used” in the REE’s registered project or activity.