Registered business enterprises (RBEs) continue to face challenges in their entitlement to the VAT zero rating on local purchases despite administrative issuances by the Bureau of Internal Revenue (BIR) implementing and clarifying the VAT zero-rating provisions of the Tax Code, as amended by the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), according to a tax expert.

Du-Baladad and Associates Law partner Atty. Rodel Unciano in a recent newspaper column points to what appears to be limitations to applying the VAT zero rating on the local purchases of RBEs under the existing implementing rules of CREATE. Such limitations, however, are not provided under the Tax Code.

Unciano, in his opinion column published this month in the Business Mirror, said that under the Tax Code, specifically Section 295(D), an enterprise duly registered with an investment promotion agency (IPA) and whose local purchases are directly and exclusively used in its registered project or activity shall qualify for VAT zero rating on these purchases.

The Code defines a registered business enterprise or RBE as any individual, partnership, corporation, or other entity organized and existing under Philippine laws and registered with an IPA, excluding only certain service enterprises and entities.

Under these conditions, an enterprise duly registered with the IPA whose local purchases are directly and exclusively used in its registered project or activity shall qualify for VAT zero rating on such purchases, Unciano said.

However, he noted that the Implementing Rules and Regulations (IRR) of CREATE states that the VAT zero rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of export enterprises, to the exclusion of domestic enterprises.

This is echoed in Revenue Regulations (RR) 21-2021, issued on December 7, 2021, and Revenue Memorandum Circular (RMC) 24-2022, issued on March 9 this year.

In the Tax Code, an export enterprise refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organized and existing under Philippine laws and registered with an IPA to engage in manufacturing, assembling or processing activity, and services such as information technology (lT) activities and business process outsourcing (BPO), and resulting in the direct exportation, and/or sale of its manufactured, assembled or processed product or IT/BPO services to another registered export enterprise that will form part of the final export product or export service of the latter.

“Thus, following the IRR of the CREATE and the relevant revenue issuances, VAT zero-rating on local purchases of RBEs shall only apply if the RBE is an export enterprise as defined under Section 293(E). Ergo, the VAT zero-rating does not apply to purchases made by RBE which is not considered as export enterprise,” said Unciano.

This clearly shows that the IRR of the CREATE and the BIR’s revenue issuances implementing the VAT zero-rating provisions of the CREATE “are not consistent with the provisions of the law sought to be implemented,” he added.

He questioned why the IRR and the revenue issuances are limiting the application of the VAT zero-rating provisions to just export enterprises, to the exclusion of domestic enterprises, when the law itself does not place such limitations.

“The provision of Section 295(D) of the Tax Code, as amended by CREATE is very clear to the effect that VAT zero-rating on local purchases shall apply to goods and services directly and exclusively used in the registered project or activity by RBE. The law does not make any distinction whether the RBE is engaged in export or not,” Unciano pointed out.

Rules and regulations implementing the law should conform to the law, or they are deemed null and void, he stressed. “Administrative agencies cannot, in the exercise of such power, issue administrative rulings or circulars inconsistent with the law sought to be applied.”

Nonetheless, until a competent authority declares them invalid, the administrative issuances, despite being inconsistent with the provisions of the law being implemented, are presumed to be valid and binding, Unciano said.

The Philippine Exporters Confederation, Inc. (PHILEXPORT) has been critical of the amendments in the Tax Code pertaining to the VAT zero rating, and has called for a reversion to the previous system of availment which it said was easier for enterprises to comply with.

The trade group also opposes the mandatory registration of suppliers, a requirement to be qualified for tax incentives, seeing it as another barrier to ease of doing business, especially for micro, small and medium enterprises. It argued that CREATE and its IRR favor the importation of raw materials to the detriment of the local manufacturing industry.