BIR amplifies rules on 0% VAT, change in exporter tax status

Exporters and suppliers, take note that the Bureau of Internal Revenue (BIR) has released new guidelines on the Value-Added Tax (VAT) zero rating incentives, specifically on transactions that have become subject to VAT and the registration of VAT-registered exporters to non-VAT.

On December 7, 2022, BIR issued Revenue Memorandum Circular (RMC) No. 152-2022 clarifying the transitory provisions for the VAT zero rating of registered export enterprises (REEs) whose incentive period has already expired and who are already subject to 12% VAT.

“Such entities are no longer qualified for VAT zero-rating on their local purchases starting from the effectivity of RR No. 21-2021 on December 10, 2021,” the circular said, adding that this is pursuant to Revenue Regulations (RR) No. 21-2021 and Revenue Memorandum Circular (RMC) No. 24-2022.

As clarified in RMC 24-2022, REEs with expired incentive periods are already subject to 12% VAT and are no longer qualified for VAT zero-rating on their local purchases.

However, BIR also acknowledged that since RMC 24-2022 was issued after December 10, 2021—specifically March 9, 2022—the affected suppliers “are now in a quandary on whether or not they have to revert the sales from VAT zero-rated to subject to 12% VAT.”

Thus, some suppliers may have declared their sales to unqualified registered business enterprises (RBEs), including REEs with expired incentives, as subject to VAT zero rating from December 10, 2021 to March 8, 2022.

In the new RMC 152-2022, BIR clears this matter up by saying that since retroactive application of the 12% VAT may prejudice affected taxpayers, such transactions will remain at VAT 0% during this transitory period.

“(It) is clarified that the above transactions which transpired from the effectivity of RR No. 21-2021 on December 10, 2021 up to the day before the effectivity of RMC No. 24-2022 on March 8, 2022, shall remain as VAT zero-rated.”

In case the purchaser is qualified for VAT zero rating but was imposed 12% VAT by the seller during the transitory period, the buyer and seller are given options to correct the situation.

One is to retain the transaction as subject to 12% VAT. The seller shall declare the sale as subject to 12% VAT, and the purchaser, if VAT registered, can utilize the passed-on VAT as input tax and shall be deducted from output tax. If the purchaser is engaged in zero-rated activities, the VAT can be recovered through refund pursuant to Section 112(A) of the Tax Code, as amended. If the purchaser is not VAT-registered, the VAT shall be claimed as part of the cost of sales or expenses.

The other option is for the seller to revert the transaction from VAT at 12% to VAT zero-rated. Here, the seller amends the related VAT return after reimbursing or returning the VAT paid by the REE buyer. The seller shall retrieve the originally issued VAT sales invoice/official receipt for cancellation and replacement with a zero-rated SI/OR, and prepare a list of canceled and replacement SIs/ORs for validation by the BIR.

The circular states that the adjustment to sales shall only be to the extent of the reimbursed VAT to the REE. The resulting overpayment due to unutilized input tax credits, if any, may be recovered through VAT refund since the corresponding sale is reverted to VAT zero-rated.

On the part of the VAT-registered REE purchaser, the buyer shall amend the VAT return filed so as to reflect the reduced input VAT.

Meanwhile, RMC 152-2022 also sets the provisions for the change in status of exporters from VAT-registered to non-VAT-registered.

It orders REEs to change their registration to non-VAT within two months from expiration of the income tax holiday (ITH) incentive or effectivity of RMC 49-2022, whichever is applicable. Covered are REEs that have completed their ITH and are now under the 5% gross income tax/special corporate income tax regime and REEs already enjoying the 5% GIT/SCIT upon effectivity of the CREATE law but have remained VAT-registered.

The circular addresses further concerns related to this change in status. On whether percentage tax will apply to REEs that changed from VAT-registered to non-VAT, it states that this will not.

“Percentage Tax type should not be registered since these REEs are only subject to GIT/SCIT in lieu of all other internal revenue taxes,” it said.

BIR explained that the REE taxpayers are only required to file and pay the corresponding tax due in their respective annual or quarterly income tax returns. This is subject to regular validation by the Revenue District Office or Large Taxpayer Audit Division where the REE is registered in order to verify whether no project or activity other than those that are registered under the 5% GIT/SCIT is being carried out by the REE. If found to be in violation, the corresponding assessment and penalties shall be imposed accordingly, said BIR.

The agency also affirms that REEs required to register as non-VAT taxpayers are still qualified for the VAT zero-rate incentive on their local purchases of goods and services that are directly and exclusively used in their registered activity until the end of their incentive period. REEs whose incentive periods have already expired will be subject to 12% VAT on the local purchases.

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