BIR Provides Clarification for Issues Relative to Revenue Regulation No. 21-2021

On February 23, 2022, the Bureau of Internal Revenue (“BIR”) issued BIR Revenue Memorandum Circular (“RMC”) No. 24-2022 to clarify the transitory provisions under Revenue Regulations (“RR”) No. 21-2021 and certain issues pertaining to the effectivity and value-added tax (“VAT”) treatment of transactions by registered business enterprises (“RBEs”) particularly the registered export enterprises. Issued on 7 December 2021, RR No. 21-2021 amended certain provisions of RR No. 16-2005, as amended, to implement Sections 294(E) and 295(D), Title XIII of the National Internal Revenue Code (“NIRC”) of 1997, as amended by Republic Act No. 11534 or the CREATE Act (“CREATE”), and Section 5, Rule 2 and Section 5, Rule 18 of its Implementing Rules and Regulations (“IRR”). Recently, the BIR also issued RMC No. 49-2022 which contained amendments to RMC No. 24-2022. 

The following are some of the salient points of RMC 24-2022 as amended by RMC No. 49-2022:

Clarification of Applicable Rules

With the passage of CREATE, the “cross border doctrine” as applied to Ecozones or Freeport zones has been rendered ineffectual and inoperative for VAT purposes. The “cross border doctrine” provides that sales of goods and services by a VAT-registered seller to registered enterprises in these economic and freeport zones are to be treated as constructive export subject to zero-percent VAT.

Business enterprises duly registered with the concerned Investment Promotion Agencies (“IPAs”) under CREATE shall now be governed by the CREATE provisions with respect to their availment of tax incentives, including VAT exemption of RBEs enjoying the 5% gross income earned (“GIE”) or special corporate income tax (“SCIT”). They shall also enjoy VAT exemption on importation and VAT zero-rating on local purchases of goods and services by registered export enterprise. Enterprises registered prior to the effectivity of CREATE shall continue to enjoy the foregoing VAT exemptions and VAT zero-rating on local purchases of goods and services subject to the rules as provided in Rule 18, Section 5 of the CREATE IRR.

Business enterprises duly registered with the concerned IPA pursuant to CREATE shall only be accorded VAT zero-rating on their local purchases of goods and/or services that are directly and exclusively used in the registered project or activity of the registered export enterprises.

VAT Treatment of Sale to Registered Export Enterprises Upon the Effectivity of the CREATE

Sale of VAT-registered suppliers to registered export enterprises enjoying fiscal incentives under CREATE shall be treated as VAT zero-rated. However, it shall only apply to goods and/or services directly and exclusively used in the registered project or activity of said registered export enterprise, for a maximum period of seventeen (17) years from the date of registration, unless otherwise extended under the Strategic Investment Priority Plan.

RBEs which are categorized as Domestic Market Enterprises (“DME”) are not entitled to VAT zero-rating on local purchases. Sale of goods or services to a registered domestic market enterprise shall be subject to VAT at 12%. Meanwhile, the rules on the treatment of sales by registered non-export locators or DMEs located in Ecozones and Freeport zones shall depend on whether the seller is registered prior and during the effectivity of CREATE.

Sale made by registered export enterprise to another registered export enterprise shall be treated as follows:

1. If the seller is VAT-registered while enjoying Income Tax Holiday (“ITH”), the sale of goods and services to another registered export enterprise is subject to VAT at zero-rate, provided, the goods and services are directly and exclusively used in the latter’s registered project or activity.
   
   
2. If the seller is enjoying the 5% GIE incentive, the sale of goods and services, such as manufacture, assembled or processed product or IT/BPO services to another registered export enterprise that will form part of the final export product or export service of the latter, of at least seventy percent (70%) of its total production or output, shall be VAT-exempt.
   
   The same rule applies to the sale of a DME to a registered export enterprise.

Incentives of non-RBE exporters shall be limited only to VAT at zero rate on its direct export sale of goods or services pursuant to Sections 106(A)(2)(a)(1) and 108(B)(2) of the NIRC, as amended. However, if the non-RBE exporter is VAT-registered and sells goods and services to a registered export enterprise, the rule in item (a) of the previous paragraph shall apply.

Application for VAT Zero-Rating

All approved applications and applications for VAT zero-rating that were suspended due to the effectivity of RR No. 9-2021 shall remain effective as if RR No. 9-2021 was not implemented should the taxpayers involved in the transaction opt to revert the same as VAT zero-rated, except for the four (4)-day period covering 27 June 2021 to 30 June 2021. Provided, however, that the rule that it shall only apply to goods and/or services directly and exclusively used in the registered project or activity of a registered export enterprise, shall strictly be applied.

Prior approval from the BIR is needed to be secured by the local suppliers of goods/services of registered export enterprises for their sales to be accorded VAT zero-rating, as provided for under CREATE. Absence of prior approval may result in the disallowance of the VAT zero-rated sale of the supplier. However, for sales transactions that are qualified for VAT zero-rating but failed to secure an approved application for VAT zero-rating with the BIR, prior application may not be required until 9 March 2022. In relation to the this, an annual VAT zero percent certification must be issued by the IPA concerned only to registered export enterprises. Further, all IPAs are required to submit to BIR the list of RBEs which are categorized as export enterprise, for purposes of VAT zero-rating.

Processing of applications for VAT zero-rating shall be governed by Revenue Memorandum Order No. 7-2006. However, provisions of Sections 294(E) and 295(D), Title XIII of the Tax Code, as amended by CREATE and Section 5, Rule 2 and Section 5, Rule l8 of the CREATE IRR, as amended, shall be strictly complied with.The issuance also included clarifications on the following: (a) effectivity and transitory provisions of RR No. 21-2021; (b) the taxability of existing export enterprises registered prior to CREATE; and (c) refund by local suppliers and recovery of input VAT passed on to registered export enterprises. A copy of the RMC may be viewed here.