What Lies Beyond? Exploring VAT Zero-Rating and Certification under the CREATE MORE Act

“I know the path that must be chosen, but this is bigger than before.” This lyric from Moana 2’s original soundtrack ‘Beyond,’ perfectly captures Moana’s realization that her journey is more significant than she initially understood. In much the same way, the Philippine tax system stands at a transformative moment. The amendments to the VAT zero-rating and certification processes under the CREATE MORE (Corporate Recovery and Tax Incentives for Enterprises Maximize Opportunities for Reinvigorating the Economy) Act represent a bold step forward to an opportunity for our economy to evolve and reach new heights, just as Moana ventured beyond to discover her true potential.

VAT ZERO-RATING FOR EXPORT-ORIENTED ENTERPRISES

One of the key features under the CREATE MORE Act is the revised criteria for VAT zero-rating for export-oriented enterprises. Under the previous CREATE Act, VAT zero-rating is applicable only to goods and services “directly and exclusively used” in registered projects or activities. For instance, PEZA (Philippine Economic Zone Authority) registered entities that used the purchased goods or services for both registered projects or activities and administration operations were needed to adopt a method to best allocate these expenses. 

If not properly allocated, the entire purchase price would be subjected to 12% VAT. Under the new CREATE MORE Act, VAT zero-rating will be applied to goods and services that are “directly attributable” to registered activities. The term “directly attributable" shall refer to goods and services that are incidental to and reasonably necessary for the export activity of the export-oriented enterprise. As a result, even operating expenses, which are not classified as cost sales or cost service but still are connected to the export activities, may now qualify for VAT zero-rating if they are deemed incidental to such activities. Further, the following services are now qualified for VAT zero-rating if used directly in registered projects or activities:

1. janitorial services;
2. security services;
3. financial services;
4. consultancy services;
5. marketing and promotion; and 
6. services rendered for administrative operations such as human resources, legal, and accounting.

Previously, these services were generally not considered directly or exclusively used in their registered project or activity unless the registered export enterprise (REE) could provide supporting evidence to the concerned Investment Promotion Agency (IPA) that any of the local purchases of goods relating to the above-listed services were indeed directly and exclusively used in their registered project or activity.

CONDITIONS FOR AVAILING VAT ZERO-RATING 

To avail of VAT zero-rating on local purchases, export-oriented enterprises must meet the following conditions:

1. Export sales subject to zero-rating include sales of goods and services to export-oriented enterprises whose export sales constitute at least 70% of total annual production in the preceding taxable year. Such goods must be directly attributable to export activity, as determined by the Export Marketing Bureau of the Department of Trade and Industry.
2. Enterprises failing to meet the threshold shall be disqualified from availing themselves of VAT zero-rating on local purchases  immediately in the succeeding year, provided that input tax otherwise due on VAT zero-rated local purchases attributable to VAT-exempt sales shall be paid and deducted from the gross income of the taxpayer.
3. VAT zero-rating applies only to goods and services directly attributable to registered projects or activities, subject to the following:

• • Sale of goods or services by a VAT-registered seller to a registered export enterprise, regardless of location, shall be subject to zero percent (0%) VAT.
  • Sale, transfer, or disposal of previously VAT-exempt imported capital equipment, raw materials, spare parts, or accessories shall be subject to the following rules:
    I. Zero-rated if sold to a registered export enterprise, regardless of location.
    II. Subject to 12% VAT (based on net book value) if sold to a registered domestic market enterprise.

Local sales made by Registered Business Enterprises (RBEs) to domestic market enterprises or non-RBEs are generally subject to 12% VAT, for which the liability to pay and remit the VAT to the government rests with the buyer of the said goods or services.

Failure to meet the 70% threshold or investment requirements disqualifies enterprises from duty exemptions on imports and VAT zero-rating for the following year. Sales receipts and other income derived from non-registered projects or activities shall be subject to appropriate taxes.

PROCESS FOR APPLYING FOR A VAT ZERO-RATING CERTIFICATE

Based on the CREATE MORE Act’s draft implementing rules and regulations, the process for applying for a VAT zero-rating certificate involves several steps as follows:

• All RBEs shall annually apply for a VAT zero-rating certificate with their concerned IPA.
• Applications shall be filed on a per-project basis and made upon the prescribed forms that shall be prescribed by the Fiscal Incentives Review Board (FIRB). 
• Prior to the purchase, the RBE shall apply for a VAT zero-rating certificate, which shall be filed electronically, together with the documentary requirements, through the Fiscal Incentives Registration and Monitoring System (FIRMS) or through the system of the IPA: provided, that the IPA system is interoperable with and can be linked to the FIRB system: provided, further, that in the event that the FIRMS or the IPA system is unavailable, such application may be filed manually. The applicable fees shall be determined by the concerned IPA.

Upon verification of the compliance with the condition for the issuance of the VAT zero-rating certificate, the concerned IPA shall issue the VAT zero-rating certificate. The VAT zero-rating certificate shall state, among others:

a. Name and business address of the RBE; 

b. Taxpayer identification number of the RBE;

c. Unique control number; 

d. Registered project or activity; Implementing Rules and Regulations of RA No. 12066;

e. Name of IPA having jurisdiction over the registered enterprise; and 

f. Covered taxable year.

VALIDITY OF VAT ZERO-RATING CERTIFICATE 

Based on the CREATE MORE Act’s draft implementing rules and regulations. The VAT zero-rating certificate shall be valid for one calendar/fiscal year. Applications for the period must be filed beginning the fourth quarter of the current taxable period until the first quarter of the next taxable period to the concerned IPA. Upon determination of the REE compliance, the IPA may issue the corresponding VAT zero-rating certificate, which will cover the immediately succeeding taxable period of the qualified RBE. The compliance of the requirements shall be based on the performance of the RBE either:

• If during the current taxable period, the determination will be during the 4th quarter of the current taxable year; and
• If during the previous taxable period, the determination will be during the 1st quarter of the succeeding year.

Failure to meet the 70% export sales threshold or investment requirements disqualifies enterprises from duty exemptions and VAT zero-rating in the following year. Non-compliance will result in IPA notification to the BIR for VAT zero-rating certification cancellation, without affecting prior-year non-income tax incentives.

ADDITIONAL REQUIREMENTS AND COMPLIANCE MEASURES 

Based on the CREATE MORE Act’s draft implementing rules and regulations. The VAT zero-rating certificate must be presented to suppliers for VAT-free purchases. Refunds or credits for passed-on VAT are not allowed. RBEs must resolve such issues with suppliers and replace or cancel any VAT-imposed invoices. 

IPAs must submit a quarterly list of RBEs issued VAT zero-rating certificates to the BIR's AITEID within 20 days after the quarter ends. 

TAKEAWAY

With these changes and beyond, the government reaffirms its commitment to fostering a more business-friendly environment. With the VAT amendments under the CREATE MORE Act, it reflects the encouragement for foreign investment and the bolstering of the export industry. Furthermore, the government’s commitment to improving business ease and lowering compliance burdens is reflected in the streamlined process for applying for VAT zero-rating certificates. These reforms would likely open the door for long-term prosperity, job creation, and sustainable economic growth in the Philippines. Adapting to these, businesses may need tax compliance services for proper guidance to ensure they can comply and fully benefit from the CREATE More Act reforms.

As published in BusinessWorld, dated 24 December 2024