Major Philippine export sectors prod leaders on VAT exemption

Major Philippine export sectors prod leaders on VAT exemption
Photo by Scott Graham on Unsplash
  • Philippine chips and electronics, IT and business process management, and garments and wearables sectors are pressing the government to issue a resolution exempting them from the 12% value-added tax on local purchases by March 31
  • The leading export industries in a petition said government failure to issue urgently a resolution on their VAT exemption would hurt their competitiveness and growth potential
  • The dispute arose from confusing Bureau of Internal Revenue circulars on the interpretation of the VAT exemption for exporters before the TRAIN Law was implemented in January 2018

Three major export industries of the Philippines are urging the government to issue a resolution exempting their local purchases from 12% value-added tax by March 31 as promised them, so that they could offer competitive prices in the international market.

The petition was issued on March 21 by the semiconductors and electronics, information technology and business process management (ITBPM), and garments and wearables industries and appears targeted at the Department of Finance, whose Fiscal Incentives Review Board still has to finalize the resolution.

The IT and Business Process Association of the Philippines (IBPAP), Semiconductor & Electronics Industries in the Philippines Foundation Inc. (SEIPI), and the Confederation of  Wearables Exporters of the Philippines (Conwep), said the document needs to be issued before March 31.

“A solution has been promised by the end of the month, which coincides with the end of the first taxable quarter. As exporters, these three industries have claimed VAT zero-rating on their purchases consistent with existing local regulations and globally accepted principles allowing for the sectors to remain competitive,” the industry groups said.

IBPAP, SEIPI and Conwep said their industries’ combined contribution to the country’s exports of goods and services in 2022 reached US$89 billion, or 69% of the country’s total export revenues last year, accounting for 20% of GDP in 2022.

They said the semiconductors and electronics, ITBPM, and garments and wearables sectors are also directly employing 2.5 million Filipinos and created 6.75 million indirect jobs.

Confusion over VAT exemption for the country’s export industries began with the passage of Republic Act No. 10963, or the Tax Reform and Acceleration and Inclusion (TRAIN) Act on November 28, 2017 by both houses of Congress after then President Rodrigo Duterte certified the bill as “urgent.” Duterte signed the legislation on December 19, 2017, and the new law took effect on January 1, 2018.

Before the passage f the TRAIN Law, sales to PEZA-registered entities were zero-rated as clarified under Bureau of Revenue Memorandum Circular No. 74-99.

This memorandum circular states that all sales of goods, properties, and services made by a VAT-registered supplier from the customs territory to any registered enterprise operating in the ecozone are subject to 0% VAT, regardless of the latter’s type or class of PEZA registration.

The BIR issued Revenue Regulations No. 9-2021 on June 9, 2021 stating that certain sales previously considered VAT-exempt are already subject to 12% VAT as provided by relevant sections of the TRAIN Law. But RR 9-2021 was superseded by RR 15-2021 issued on July 21, 2021, which deferred RR No.16-2005 implementing the 0% VAT rating due to the pandemic and pending a review of the regulation.

On December 3, 2021, BIR issued RR 21-2021, which provides VAT exemption for goods and properties bought by registered export enterprises on condition that the purchases will be used exclusively and directly for business activities.

But on March 9, 2022, BIR issued MC No. 24-2022 stating that registered export enterprises whose incentives have already expired are no longer qualified for 0% VAT on local purchases, except during the December 10, 2021 to March 8, 2022 transitory period.

The petitioners said they had been promised a final decision on the tax before March 31. In their petition, IBPAP, SEIPI and Conwep said failure of the government to resolve the 0% VAT issue by end of this month “will have detrimental effects (on) these three sectors, particularly in sustaining their growth potential”.

“The understanding of the sectors is that most of the government agencies involved in resolving the issue believe that there is clear basis for all purchases of exporters to be without the 12% VAT, given that this is not only allowed by the rules but is more importantly critical in ensuring that the prices at which the services and goods offered are able to remain competitive in the international market,” they added.

IBPAP, SEIPI and Conwep also underscored the need to address the confusion on the VAT issue for indirect exporters, such as healthcare, power, raw materials and other integral goods and services being provided to exporters.

“It is believed that the failure to address the VAT issue may have crippling consequences on the parts localization initiatives of exporters and particularly affect their local suppliers who will be more at risk should they lose their market,” the groups said.

It added that investment promotion agencies such as the Philippine Economic Zone Authority, Board of Investments, Clark Development Corporation, Authority of the Freeport Area of Bataan, among others, are in the best position to endorse the list of goods and services eligible for 0% VAT purchased by exporters from Philippine-based suppliers.

RELATED READ: BIR clarifies ecozone logistics service enterprises entitled to zero VAT