The economic zones’ status as separate customs territory must continue to go hand in hand with the value added tax (VAT) zero rating incentive to enable them to keep attracting more investments, according to a Philippine Economic Zone Authority (PEZA) official.
PEZA Deputy Director General (DDG) for Policy and Planning Tereso O. Panga in a recent Facebook post said the separate customs territory status of ecozones in the Philippines means they are treated like “foreign territories,” with all goods destined for these places enjoying tax and duty-free incentives.
“This long-standing tax doctrine is being practiced across all freeports and ecozones worldwide where normal tax and customs rules do not apply in these designated areas as a special kind of port,” said Panga.
Together with this separate customs territory incentive is the VAT zero rating on local purchases by ecozone locators of goods and services that are directly and exclusively used in their export-oriented activity or project in the ecozones.
“The resulting business ecosystem has been a huge selling point for PEZA with its investment promotions for the past 26 years making the agency and the ecozone program a success story,” Panga stressed.
PEZA executives and locators and other affected stakeholders have strongly pushed to retain the VAT zero rating or exemption following the issuance and effectivity of the Bureau of Internal Revenue’s (BIR) Revenue Regulations (RR) No. 9-2021.
RR 9-2021 implements the imposition of 12% VAT on transactions covered under Section 106 (A)(2)(a) subparagraphs 3 to 5 and Section 108(B) subparagraphs 1 and 5 of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
These transactions cover in particular indirect exports and sale of services previously taxed 0% VAT.
Panga said the RR has “negated the separate customs territory status vested in the ecozones,” noting that PEZA locators “are bearing the brunt of the sudden and huge increase in their cost of goods and services with the implementation of the VAT and VAT refund system.”
He said the Semiconductor and Electronics Industries in the Philippines Foundation, Inc. or SEIPI has relayed to PEZA its dismay over the 12% VAT now being imposed on previously VAT zero-rated transactions of exporters.
SEIPI, the PEZA’s biggest ecozone sector, said the VAT “will be passed on to the export-oriented manufacturing industries and should this be even refundable, the process takes years to consummate,” adding that this runs counter to the Ease of Doing Business Law.
SEIPI added: “In light of this, we hope that the BIR will reconsider reviewing the implementation of this policy, which will undoubtedly decrease the Philippines’ overall competitiveness as an investment destination.”
Panga in his post urged the Department of Finance (DOF) to defer the implementation of the BIR RR to alleviate its severe impact on ecozone investors’ operations in the country, especially amidst the pandemic and recession.
He further expressed apprehensions that the additional cost of VAT and the strain on their working capital will constrain locators, which are predominantly export-oriented, to outsource some of their processes/activities outside the country.
“In the end, this will be counter-productive as this will lead to more job losses, reduced exports, displacement of ecozone service providers, weakening of the local supply chain, and lower revenues for host LGUs,” he said. “On the other hand, maintaining the status quo on VAT and the separate customs territory of the ecozones could be our best bet in attracting more investments into the ecozones under the CREATE regime.”
Earlier this month, the Philippine Exporters Confederation, Inc. (PHILEXPORT), the country’s umbrella organization of exporters, also appealed to the DOF to immediately suspend the VAT policy on export inputs/local purchases, saying the measure is already significantly hurting the export industry, largely composed of micro, small and medium enterprises fighting to stay alive amid the pandemic.
The suspension is being called for pending the full compliance of the BIR with the three conditions sets in the TRAIN Law prior to the removal of the VAT zero rating and the streamlining of the documents and processes involved in the VAT refund.