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Business groups call for 12% VAT ruling repeal

  • More business groups are calling for immediate repeal of a new regulation imposing a 12% VAT on indirect exports, saying it will jack up costs and is harmful to businesses
  • Bureau of Internal Revenue Revenue Regulations 9-2021 implements the 12% VAT on export transactions and sale of services previously taxed 0% VAT, particularly those considered as export sales
  • For the electronics industry alone, the new policy will cost the economy up to P28 billion in revenues and job losses of up to 50,000, according to the Philippine Economic Zone Authority

More business groups are calling for immediate repeal of Bureau of Internal Revenue (BIR) Revenue Regulations 9-2021, which imposes a 12% value-added tax on indirect exports, saying the policy will add to costs and turn off investors.

Information Technology and Business Process Association of the Philippines president Rey Untal, in a virtual press briefing on July 13, said RR 9-2021 is “hurtful and harmful to businesses” since the additional tax will be passed on to export-oriented firms.

RR 9-2021, which took effect last June 27, implements the 12% VAT on export transactions and sale of services previously taxed 0% VAT, particularly those considered as export sales under Executive Order No. 226 or the Omnibus Investments Code of 1987 and other special laws.

The imposition of 12% VAT is contained in Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Semiconductor and Electronics Industries in the Philippines Foundation, Inc. president Dan Lachica said they have written Trade Secretary Ramon Lopez asking for help in addressing their concern with RR 9-2021.

Lachica said RR 9-2021 will discourage foreign investors engaging in export activities to invest in the Philippines as it would be much cheaper to source raw materials and packaging supplies from foreign sources than from domestic suppliers.

For the electronics industry alone, Lachica said the new policy will cost the economy up to P28 billion in revenues and job loss for about 10,000 to 50,000 employees.

Confederation of Wearable Exporters of the Philippines executive director Maritess Jocson-Agoncillo said the new policy “directly cuts the profit center” of the wearable exports sector. Agoncillo said this will drive exporters to import materials and this “can marginalize the existence of the local support sectors such as the suppliers of the manufacturers of thread, button, zippers, and cartons.”

The Pilipino Banana Growers and Exporters Association also pointed out there is conflict between Corporate Recovery and Tax Incentives for Enterprises Act or CREATE Law and RR 9-2021.

PEZA memo

Earlier, the Philippine Economic Zone Authority (PEZA) directed its registered business enterprises (RBEs) to comply with the VAT ruling.

In a memo dated July 6, PEZA said the VAT should be imposed on, among others, lease rentals, utilities, and all fees prescribed under PEZA Memorandum Circular (MC) 2000-01, which provides rates of administrative fees and charges.

PEZA said that while it believes registered enterprises should be exempt from the imposition of 12% VAT on indirect exports, it has no option but to implement the regulation absent any injunction form the courts or a deferment of the regulation.

PEZA said it has already asked the Department of Finance and BIR to defer the policy’s implementation.

READ: PEZA seeks deferment of 12% VAT on locators’ local purchases

PEZA director general Charito Plaza in a letter to Finance Secretary Carlos Dominguez III requested a deferment of the ruling or, to in effect, maintain the status quo on 0% VAT, to give PEZA’s export enterprises time to study the regulation before enforcement.

Plaza expressed concern that implementing RR 9-2021 would add to the burden of registered enterprises and affect their competitiveness in the world market.

“The additional VAT is an unnecessary expense that will make the Philippines unattractive to foreign investors,” she noted.

Plaza also sought clarification on RR 9-2021 in relation to the expressed provision of the recently passed CREATE Law.

“We would like to seek confirmation that local purchases of PEZA export enterprises, whether from an export-oriented or domestic enterprise, shall be taxed at 0% VAT subject to the condition required under the provisions of Section 295 of RA 11534 and Section 5 of its IRR,” Plaza said.

She noted, “The inclusion of the RR in the final draft of CREATE’s implementing rules and regulations and the amendment of the definition of ‘export sales’ in the law has created the impression and interpretation that sale to PEZA RBEs shall be automatically subject to 12% VAT.”

Legal contradiction

In the PEZA memo, the agency said its official position is that RR 9-2021 contradicts provisions of the CREATE Law, which specifically provides for VAT exemption of registered enterprises under Section 294.

Moreover, PEZA said RR 9-2021 rejects the separate customs territory principle provided under RA 7196 or the PEZA Law, and the cross-border doctrine fully recognized and established by the Supreme Court in the cases of Commissioner of Internal Revenue (CRI) vs Seagate Technology (Philippines), and CIR vs Toshiba Information Equipment (Phils.), Inc.

“It is by virtue of this legal fiction that a proclaimed economic zone is a separate customs territory, thus, the cross-border principle should still be applied in all transactions of registered enterprises as long as the VAT exemption applies only to goods and services directly and exclusively used in the registered activity of the enterprise,” PEZA noted.

Transactions under the National Internal Revenue Code (Tax Code) of 1997 previously taxed at 0% VAT but now subject to 12% VAT and no longer considered as export sales are the following:

  • Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)
  • 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 No. 226

Also covered by the 12% VAT is the sale of services and use or lease of properties under subparagraphs (1) and (5) of Section 108(B) of the Tax Code:

  • Processing, manufacturing or repacking goods for other persons doing business outside the Philippines whose goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of BSP
  • Services performed by subcontractors and or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production – Roumina Pablo

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