Clamor surrounding RR 9-21

MORE than a month has passed since the

Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 9-21 — a three-page document that implements a 12-percent value-added tax (VAT) on exporters’ domestic purchases and indirect exports. The regulation caused confusion among registered business enterprises within separate custom territories and although questions have been piling up since then, the BIR remains silent. Businesses continue to wait, knowing they are at the mercy of the bureau’s interpretation and clarification.

Choosing to err on the conservative side, most suppliers of registered enterprises have started imposing 12 percent VAT to be compliant with said regulation. Even the Philippine Economic Zone Authority (PEZA) itself, in an advisory, instructed zone administrators to impose 12 percent VAT on lease rentals and utilities that may be directly and exclusively used in registered activities of PEZA enterprises pending any BIR clarifications.

On the premise that imposition of 12 percent VAT is valid, registered enterprises may recover the passed-on VAT either as a deductible expense for input VAT attributable to VAT exempt sales or VAT refund for unutilized input VAT on VAT zero-rated sales. To determine the appropriate recourse, one will need to know the right treatment of sales made by a registered enterprise. Are they VAT-exempt sales or VAT zero-rated sales?

The Supreme Court, on several occasions, adhered to the fiction that an ecozone is foreign territory. This is based on Section 8 of the original PEZA law, as amended, which mandates that the PEZA manage and operate the ecozone as a separate customs territory. Consequently, the said provision establishes the fiction that an ecozone is foreign territory separate and distinct from Philippine customs territory.

In addition, the Philippine VAT system observes the Cross Border Doctrine and Destination Principle wherein no VAT will be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Moreover, Revenue Memorandum

Circular 74-99 clarifies that the sale and purchase of goods and services with respect to registered activities between two ecozone enterprises is exempt from VAT. It follows that sales made by ecozone enterprises to foreign companies are exempt from VAT, being two separate custom territories.

Following this argument, the 12-percent VAT passed on to the registered enterprises constitutes unplanned costs with no or minimal tax recoveries. The remedy is limited to 5 percent tax savings as deductible expense to the extent that the related expense is considered direct costs for enterprise subject to 5 percent gross income tax. Registered enterprises are now at risk of not being able to recover passed-on VAT in full through BIR refunds.

Due to added costs, this will affect pricing and make exporters less competitive in the international market. Local purchases will also become more costly for registered enterprises, which may lead them to consider purchasing from foreign suppliers. As this would greatly affect the business operations of a registered enterprise, will the BIR allow the refund of passedon VAT? Since this involves several companies, will the BIR implement a more efficient VAT refund mechanism?

Another uncertainty puzzling registered enterprises and their suppliers is what purchases are subject to 12-percent VAT and which purchases still qualify for

VAT zero rating.

The recently issued Implementing Rules and Regulations (IRR) for fiscal incentives under the Corporate Recovery and Tax Incentives for Enterprises (Create) law provides that VAT zero-rating on local purchases may still apply on condition that the purchased goods or services are directly and exclusively used in the registered project or activity of the registered enterprise during the period of registration. Direct and exclusive use was defined as raw materials, inventory, supplies, equipment, goods, services, and other expenditures necessary for the registered project or activity, without which it cannot be carried out.

The said provision is subject to interpretation on how to determine if the expenditure is direct or exclusive use. In the absence of clear guidelines, suppliers will be at risk of applying the incorrect VAT treatment.

Also, how will the registered enterprises prove that the expenditure is for direct and exclusive use? What documents do they need to submit to suppliers for them to qualify for VAT zero rating on purchases? The Create IRR provides a list of direct costs for purposes of computing gross income subject to 5 percent special corporate income tax. Will the BIR adopt the same list of expenditures in defining direct and exclusive use for VAT purposes?

Given the ongoing pandemic and our sluggish economy, is now the opportune time to implement tax amendments that will not only deter the entrance of new investors in the Philippines but also trigger the exit of current ones? As mentioned by the PEZA, registered enterprises buttressed the Philippine economy at the height of the Covid-19 pandemic last year. A clarification from the BIR is urgently needed to at least lessen the burden on these enterprises, which are now operating under a cloud of uncertainty and unable to make critical decisions. We hope the BIR will reconsider the concerns of these affected businesses and implement rules with the least burden on taxpayers.

The author is a manager with the Tax and Corporate Services division of Navarro Amper & Co., a member of the Deloitte Asia Pacific Network. For comments or questions, email jmaniago@deloitte.com. Deloitte Asia Pacific Ltd. is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Ltd. Members of Deloitte Asia Pacific Ltd. and their related entities, each of which are separate and independent legal entities, provide services from more than 10 0 c i t i e s a c r o s s t h e r e g i o n , including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.