The entitlement to value-added tax zero-rating on local purchases of registered business enterprises (RBE) remains to be a challenge even as the Bureau of Internal Revenue (BIR) has already issued several administrative issuances implementing and clarifying the VAT zero-rating provisions of the Tax Code, as amended by the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE).
Section 294(E) of the Tax Code provides for the VAT zero-rating on local purchases of RBEs, and under Section 295(D), conditions for its availment are clearly provided there. It says that VAT zero-rating on local purchases shall only apply to goods and services that are directly and exclusively used in the registered project or activity by a registered business enterprise. Under Section 293(M) of the Tax Code, RBE has been defined as any individual, partnership, corporation, or other entity organized and existing under Philippine laws and registered with an Investment Promotion Agency (IPA), excluding only certain service enterprises enumerated there and other service entities as may be determined by the Fiscal Incentives Review Board.
Following the above conditions, an enterprise duly registered with the IPA whose local purchases are directly and exclusively used in its registered project or activity shall qualify for VAT zero-rating on such purchases.
However, under the Implementing Rules and Regulations of the CREATE, specifically in Section 5, Rule 2 of the IRR, it says that the VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of export enterprises, to the exclusion of domestic enterprises. This was echoed in Revenue Regulations (RR) 21-2021 as well as in Revenue Memorandum Circular (RMC) 24-2022.
According to Section 293(E) of the Tax Code, an export enterprise refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organized and existing under Philippine laws and registered with an IPA to engage in manufacturing, assembling or processing activity, and services such as information technology activities and business process outsourcing (BPO), and resulting in the direct exportation, and/or sale of its manufactured, 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 70 percent of its total production or output.
Thus, following the IRR of the CREATE and the relevant revenue issuances, VAT zero-rating on local purchases of RBEs shall only apply if the RBE is an export enterprise as defined under Section 293(E). Ergo, the VAT zero-rating does not apply to purchases made by an RBE that is not considered as export enterprise.
Apparently, the IRR of the CREATE and the revenue issuances implementing the VAT zero-rating provisions of the CREATE are not consistent with the provisions of the law sought to be implemented. Can the IRR and the revenue issuances limit the application of the VAT zero-rating provisions of the Tax Code to export enterprises, to the exclusion of domestic enterprises?
The provision of Section 295(D) of the Tax Code, as amended by CREATE is very clear to the effect that VAT zero-rating on local purchases shall apply to goods and services directly and exclusively used in the registered project or activity by RBE. The law does not make any distinction whether the RBE is engaged in export or not.
Well-settled is the rule that rules and regulations implementing the law should conform to the law, otherwise, the rules and regulations are null and void. Administrative agencies cannot, in the exercise of such power, issue administrative rulings or circulars inconsistent with the law sought to be applied. Administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Administrative issuances, which are inconsistent with the clear mandate of the law, cannot prevail over the law being implemented.
Be that as it may, the administrative issuances, despite apparent inconsistency with the provisions of the law being implemented, are presumed to be valid and binding, until otherwise declared invalid by a competent authority.
The author is a partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at firstname.lastname@example.org or call 8403-2001 local 140.