Confusion over Duterte veto on zero rating of goods, services

Confusion has arisen over President Duterte’s veto of the provision providing zerorating on the sales of goods and services of separate customs territories and tourism enterprise zones, with officials from the Philippine Economic Zone Authority (PEZA) and the Department of Trade and Industry (DTI) having opposing views on the matter.

Following the signing of the first package of the tax reform law, Duterte has vetoed the zero-rating of goods and services to separate customs territory and tourism enterprise zones, saying such provisions goes against the principle of limiting the value-added tax (VAT) zero rating to direct exporters.

The President’s veto has resulted to varying interpreta- tions, with PEZA claiming that their tax rates are not affected and are on status quo.

“For us it is status quo because there is a provision in the PEZA law which states that PEZA economic zones are to be operated and managed as a separate customs territory and there’s already a Supreme Court decision that says that separate customs territory is in effect foreign soil. So PEZA ecozones are foreign soil by legal fiction,” PEZA deputy director general Harriet Abordo said.

A 2010 SC decision of a case involving the Bureau of Internal Revenue and Toshiba Information Equipment Inc. noted the economic zones constitute a separate customs territory and thus, creating the fiction that the economic zone is a foreign territory.

“So since VAT follows the principle of cross border doctrine, so in effect, any sale from a local supplier to a PEZA economic zone, which is a foreign soil, is considered cross border and is, therefore, VAT zero-rated. So the tax reform TRAIN 1 did not repeal Section 8 of the PEZA law so we are status quo for VAT-zero rates,” Abordo argued.

The DTI, however, has a different interpretation on the provision.

“The decision of the Supreme Court was based on the old law. This (the zero-rated status) is already superseded,” Trade Secretary Ramon Lopez said.

PEZA, however, said the agency would stand by its own interpretation.

“The interpretation by some is that, in effect, when the efficient VAT system is already in place because of that, then export sales by local sellers to PEZA enterprises will already be subject to VAT. But that is not the provision alone in which our VAT zero rating is based. We have Section 8 of the PEZA law,” Abordo said.

PEZA along with local business groups and the Joint Foreign Chambers in the Philippines earlier called for the retention of the zero VAT provisions for PEZA locators.

PEZA director general Charito Plaza had warned of as much as P250 billion worth of annual losses to local suppliers of export-oriented firms should the zero VAT exemption be removed, saying its removal would likely push its locator industries to just import everything because importation is cheaper, instead of buying from local suppliers.