Clarifications on the entitlement of economic zone developers and operators to the VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 53-2023 on May 11, 2023, to clarify the entitlement of economic zone developers and operators to the value-added tax (VAT) zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity. The development and operation of economic zones, as well as industrial parks and buildings for exporters, were included as “Activities in Support of Exporters” in the Board of Investments (BOI) Memorandum Circular (MC) 2022-003, which amended the Specific Guidelines of Activities in Support of Exporters under the 2020 Investment Priorities Plan (IPP), also known as the transitional Strategic Investment Priority Plan.

This covers the development and operation of economic zones, and industrial parks within export or freeport zones with integrated facilities for export-oriented enterprises.

Economic zones and industrial parks shall have infrastructure such as paved roads, pollution control systems, power system, water supply, drainage system, sewerage treatment facilities, communication facilities, and other infrastructure/facilities needed for the operation of exporters located therein.

This also covers the development and management of new buildings located outside the National Capital Region, declared as ecozones or within export or freeport zones, with a minimum contiguous land area of 10,000 square meters with the following features:

High-speed fiber-optic telecommunication backbone and highspeed international gateway facility or wide-area network; or any highspeed data telecommunication system that may become available in the future.

Clean and uninterruptible power supply.

Computer security and building monitoring and maintenance systems (e.g., computer firewalls, encryption technology, fluctuation controls, etc.); and

Any other requirements as may be determined by the Board of the concerned Investment Promotion Agencies (IPAs).

The said RMC states that at least 70 percent of the leasable/saleable areas shall be dedicated to exporters. In addition, revenues arising from clients/tenants engaged in activities that are not allowed pursuant to the definition of a registered business enterprise under Section 293(m) of the Create Act will not be entitled to the income tax holiday incentive. Phased development of an economic zone or industrial park, on the other hand, may be allowed, provided the whole project is completed within five years unless otherwise approved by the Board of the concerned IPA.

The following amendments shall apply to all projects qualified under the Create Act.

Clean power supply is electrical power that is free from voltage spikes and drops. It is electricity using alternating current that oscillates at a perfect 60 hertz with no noise or distortion in the line showing the current’s frequency (a perfect sine wave). Voltage ripple or power supply noise that is outside of the ideal sinusoidal waveform is, in turn, called dirty power supply or polluted power.

For IPA-registered business enterprises this means exporting at least 70 percent of its total production/service as defined under Section 293(e) of the Create Act. For non-IPA registered enterprises this means exporting at least 60 percent of their output as defined under Section 3(e) of the Foreign Investments Act, as amended.

Based on the foregoing, if the ecozone developer and operator achieves the following criteria above, it will be classified as an export firm and will be eligible for VAT incentives under the Create Act.

On the other hand, in case an enterprise is not qualified based on the amended guidelines, the ecozone developer or operator will be classified as a domestic market enterprise under Item D(I)(8)(j) of the General Policies and Specific Guidelines to Implement the 2020 IPP which covers the development of domestic industrial zones, as circularized by the BOI through Memorandum Circular 2021-001. Consequently, it shall not be entitled to the VAT incentives under the Create Act.