The Bureau of Internal Revenue (BIR) amends Rule 18, Section 5 of the Implementing Rules and Regulations (IRR) to address VAT-related issues and concerns of Registered Business Enterprises (RBEs) registered prior to the CREATE Act.
The BIR addressed certain issues regarding Value Added Tax (VAT), tax incentives, and even concerns of Registered Business Enterprises (RBEs) in the recent amendments to Rule 18, Section 5 of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act as circularized in the Revenue Memorandum Circular (RMC) No. 91-2023, released on September 11, 2023. These amendments are also particular to enterprises that were registered before the CREATE Act was implemented.
Changes to the Tax Incentives and Corporate Recovery
The new amendment to Rule 18, Section 5 of the CREATE IRR is as follows:
“Section 5. Non-income related tax incentives. – All registered export and domestic enterprises that will continue to avail of their existing tax incentives subject to sections 1, 2 and 3 of this Rule, may continue to enjoy the duty exemption, VAT exemption on the importation, and VAT zero-rating on local purchases as provided in their respective IPA registrations; PROVIDED, THAT REGISTERED EXPORT ENTERPRISES AS DEFINED UNDER SECTION 293 (E) OF THE ACT WHOSE INCOME TAX-BASED INCENTIVES HAVE EXPIRED, MAY CONTINUE TO ENJOY VAT ZERO-RATING ON LOCAL PURCHASES UNTIL THE ELECTRONIC SALES REPORTING SYSTEM OF THE BUREAU OF INTERNAL REVENUE UNDER SECTION 237-A OF THE ACT IS FULLY OPERATIONAL, OR UNTIL THE EXPIRATION OF THE TRANSITORY PERIOD REFERRED TO IN SECTION 311(C) OF THE ACT, WHICHEVER COMES EARLIER; PROVIDED FURTHER, THAT AN RBE CLASSIFIED AS DME WHICH IS LOCATED INSIDE THE ECONOMIC OR FREEPORT ZONE DURING THE TRANSITORY PERIOD WILL BE ALLOWED TO REGISTER AS A VAT TAXPAYER; Provided, FINALLY, that the duty exemption, VAT exemption on importation, VAT zero-rating on local purchases shall only apply to goods and services directly attributable to and exclusively used in the registered project or activity of said registered export enterprises.”
In summary, the amendments state that export and domestic enterprises that want to continue availing their tax incentives can still use duty exemption, VAT exemption on the importation, and VAT zero-rating on local purchases as provided by their Investment Promotion Agencies (IPA). However, registered export enterprises with expired tax-based incentives can only continue VAT zero-rating on their local purchases up until the Electronic Sales Reporting System of the BIR remains fully operational, or until the expiration of the transitory period of the Act, whichever comes earlier.
The amendments also state that RBEs that are classified as Domestic Market Enterprises (DMEs) inside Economic or Freeport zones during the transitory period can still register as VAT taxpayers given that the duty exemptions, VAT exemptions, and VAT zero-rating on local purchases only apply to goods and services directly attributable to and exclusively used in said registered project or activity of the RBE.
Lastly, the RMC then explains that these rules apply prospectively and DMEs inside the economic or freeport zone that choose to register as VAT taxpayers will not be allowed to claim VAT refunds for transactions before the effectivity of these rules. Furthermore, all existing rules and regulations that are inconsistent with the provisions of this Implemented Rules and Regulations (IRR) are to be amended accordingly.