DOF moves to review VAT on local inputs of exporters

Published July 21, 2021, 5:21 PM

by Chino S. Leyco

The Department of Finance (DOF) is reviewing the Bureau of Internal Revenue’s (BIR) regulation, technically deferring the imposition of the value-added tax (VAT) on exporters’ purchases from local suppliers and indirect/constructive export transactions.

Finance Secretary Carlos G. Dominguez III said Wednesday, July 21, that Revenue Regulation (RR) 9-2021 is under review following calls by business groups to repeal the imposition of 12 percent VAT on local inputs.

Finance Secretary Carlos G. Dominguez III

“Yes, we will review it,” Dominguez said at a virtual forum hosted by the Financial Executives Institute of the Philippines when asked about the controversial BIR regulation. “Review will be accomplished shortly [within the month].”

Export-oriented companies earlier decried the issuance of RR 9-2021 that imposed VAT on certain transactions previously taxed at zero percent. The BIR regulation took effect last June 27, or 15 days after its issuance on June 12.

Under RR 9-2021, raw materials, packaging supplies and services rendered or sold to export companies engaged in manufacturing, processing, packing or repacking are subject to VAT. Sale of services and lease of properties to exporters are also covered.

According to exporters, the imposition of VAT on their local inputs could “cripple industry.”

However, Dominguez admitted that there are conflicting provisions regarding VAT on exports under the tax reform and acceleration and inclusion act (TRAIN) and the newly-enacted corporate recovery and tax incentives for enterprises (CREATE) law.

TRAIN law has mandated the removal of VAT zero-rating of goods sold to exporters, while CREATE law provided that the VAT zero-rating may still apply.

“We will implement it accordingly to the law,” Dominguez said. “Now the law unfortunately is not very fair. There is one law in TRAIN and there is another provision in CREATE. We will implement it strictly as we are sworn to do.”

The finance chief also said the imposition of VAT on exporters’ local inputs is “technically deferred.”

“Registrations were issued end of June. VAT returns are quarterly. So if we start implementing CREATE this quarter July, it’s technically deferred to this quarter and returns are due 25th day after the end of the third quarter,” Dominguez explained.

The Philippine Economic Zone Authority, which administers the tax and fiscal incentives to the ecozone locators, exporters and buyers expressed their gratitude to the House Ways and Means Committed chaired by Congressman Joey Salceda for support their appeal.

PEZA Director General Charito B. Plaza said the VAT RR is very “very untimely as we’re still struggling to survive in this pandemic.”

PEZA Director General Charito B. Plaza

She said that if the VAT on local purchases and indirect/constructive exporters of PEZA-registered enterprises are implemented it will affect ecozone investors, which are directly employing 1.6 million workers as investors relocate or shift production to other countries.

“It’s our ecozone and export locators as domestic suppliers who keep our economy afloat while majority of the domestic enterprises were locked down. PEZA’s balancing acts and incentives kept the trust and confidence of our investors where 98 percent are operational and our economic zones COVID-Free,” said Plaza.

In the first quarter alone of 2021, Plaza cited its 54 percent increase in investments compared to the whole year of 2020. PEZA likewise increased its employment by 3-5 percent from its 1.6 million direct jobs and 20 percent increase in export.

From the Foreign Buyers Association of the Philippines (FOBAP), the group said that the deferment is good for exporters and their SME local suppliers.

FOBAP President Robert Young said that the deferment of the controversial RR means that “Our factories/suppliers of soft and hard goods can continue with the expansion plans, because if not, the12 percent Vat was really a losing proposition, reason bring that profit margin is only 5 percent to 8 percent on export garments.”

Young added that these factories that were already contemplating on closing business will now be relieved.

Case in point is Wacoal undergarments, which Young said was planning for additional factories with 2,000 laborers. “Now they will proceed because of the deferment and hopefully we can have the RR abolished.”

In a statement, Salceda thanked the DOF for deferring RR 9-2021, allowing CREATE rule to prevail. The BIR, DOF will withdraw the regulation imposing 12 percent VAT on certain exporter inputs.

RR No. 9-2021 was issued pursuant to the provisions of Republic Act (RA) No. 10963 or the Tax Reform and Acceleration and Inclusion Act (TRAIN) (Sections 106(A)(2)(a) and 108(B) of the Tax Code of 1997, as amended) which provide that certain transactions previously considered zero-rated shall be subject to 12% VAT upon satisfaction of two conditions: (1) The successful establishment and implementation of an enhanced VAT refund system, and that (2) All pending VAT refund claims as of Dec. 31, 2017 shall be fully paid in cash by Dec. 31, 2019.

With the decision to suspend, the transactions will revert to their zero-rated status. These include sale of raw materials or packaging materials to a non-resident buyer for delivery to a local export-oriented enterprise; sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production; those considered export sales under Executive Order (EO) No. 226, or the Omnibus Investment Code of 1987, and other special laws (Section 106 (A) (2) (a) (5) of the Tax Code, as amended); processing, manufacturing, or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70 percent of total annual production.