BIR answers questions on VAT zero-rate transactions and VAT Zero-rate incentives

20 October 2023

The Bureau of Internal Revenue (BIR) clarifies issues relative to the implementation of Revenue Regulations No. 3-2023 and other related concerns on Value-Added Tax (VAT) zero-rate transactions in the Philippines on local purchases of the Registered Export Enterprises (REEs) and other entities granted with VAT zero-rate incentives under special laws and international agreements

Revenue Memorandum Circular (RMC) No. 80-2023 issued on August 9, 2023, clarifies the issues relative to the implementation of Revenue Regulations (RR) No. 3-2023 and other related concerns on VAT zero-rate transactions in the Philippines on local purchases of the Registered Export Enterprises (REs) and other entities granted with VAT zero-rate incentives under special laws and international agreements.
Pursuant to RR No. 3-2023, released last April 27, 2023, the local supplier of goods and/or services of REEs shall no longer be required to secure prior approval for VAT zero-rate with the BIR. The VAT zero-rating certificate issued by the Investment Promotion Agency (those under the Board of Investments) will suffice as proof of the transaction’s eligibility to VAT-zero rating.

To be eligible for VAT zero-rating transactions in the Philippines, the local purchase of the REE must be: (1) directly and exclusively used in the registered project or activity, and (2) not included in the negative list provided in RR No. 3-2023. The VAT zero-rating on local purchases of goods and/or services shall be availed of on the basis of the VAT Zero-Rate Certification issued by the concerned Investment Promotion Agency (IPA), without prejudice, however, to the conduct of post audit investigation/verification by the BIR that the goods and/or services are indeed directly and exclusively used by the RE in its registered project or activity.

Furthermore, Section 4(E) of RR No. 7-2022 likewise provides that local suppliers of goods, properties, and services of duly registered Renewable Energy (RE) Developer shall only require from the latter a copy of its Certificate of Registration (COR) issued by the Board of Investments (BOI) and Department of Energy (DOE) for purposes of availing the VAT zero-rate incentive.

Thus, impliedly stating that prior approval for VAT zero-rate from the appropriate BIR office shall also no longer be required.
While it is true that the VAT zero-rating on local purchases of goods and/or services shall be allowed on the basis of VAT Zero-Rate Certification issued by the concerned IPA pursuant to RR No. 3-2023, the REE-buyer still needs to provide a certified copy of the following documents to its local supplier for the latter's documentation in case of a post-audit by the BIR, namely:

  • a. VAT Zero-Rate Certification issued by the concerned IPA;
  • b. Certificate of Registration (COR) issued by the BIR having jurisdiction over the head office/branch/freeport/ ecozone location where the goods and/or services are to be delivered;
  • c. COR issued by the concerned IPA stating all registered ecozone location; and
  • d. A sworn affidavit executed by the REB-buyer, stating that the goods and/or services are directly and exclusively used for the production of goods and/or completion of services to be exported or for utilities and other similar costs, the percentage of allocation be directly and exclusively used for the production of goods and/or completion of services to be exported, following the prescribed format under Revenue Memorandum Circular (RMC) No. 84-2022.

Applications for VAT zero-rate that have been received prior to the effective date of RR No. 3-2023 and are accompanied by a VAT Zero-Rate Certificate issued by the concerned IPA, as required by RMC No. 36-2022, but had not yet been addressed by the relevant BIR concerned officer will be granted VAT zero-rating treatment as of the date of filing, the BIR will conduct a post audit to ensure that the services are in fact being used directly and exclusively by the REE in its registered project.

If the transaction was entitled for purposes of VAT zero-rating, that is, the goods and/or services sold were used directly and exclusively in the registered project or activity and the REE was duly endorsed by the relevant IPA, but the seller was unable to obtain an approved Application for VAT Zero-Rate the sale will be subject to twelve percent (12%) VAT.
When RR No. 3-2023 takes effect, an application for VAT zero-rate for a specific sale transaction that was previously rejected won't be deemed VAT zero-rate because the BIR already determined that the transaction isn't eligible for VAT zero-rate. In light of this, despite the issuing of RR No. 3-2023, the same is subject to 12% VAT.
Applications for VAT zero-rate that have been rejected by BIR because they were found to be ineligible for such purposes are subject to VAT. Given that these transactions are subject to VAT, the VAT-registered REE enjoying 5% Gross Income Tax (GIT) or Special Corporate Income Tax (SCIT) may claim the corresponding input VAT from the aforementioned purchase, which may be used as a deduction against future output VAT liability after the incentive period or may be claimed as a VAT refund under Section 112(B of the National Internal Revenue Code of 1997, as amended, in relation to Q & A No. 40 of RMC No. 24-2022.
The following elements must be considered in the evaluation of transaction subject for VAT zero-rating during audit of transactions with REE:

  1. The REE's place of business where the registered project or activity is being processed/rendered must be duly registered with the appropriate BIR office;
  2. The REE must be duly registered with the IPA administering tax incentives;
  3. A VAT Zero-Rate Certificate has been issued by the IPA to the REE;
  4. The transaction occurred within the period the REE is entitled to VAT zero-rate incentives and is corroborated with a valid documentation, such as but not limited to duly certified copies of purchase order, job order or service agreement, sales invoice and/or official receipt, delivery receipt, or similar documents to prove existence and legitimacy of the transaction;
  5. The purchased goods and/or services must be delivered within the REE's registered head office/branch/freeport/ecozone/location granted with VAT zero-rate incentives; and
  6. The transaction is indeed qualified for VAT zero-rating in accordance with the provisions of the Tax Code, and its implementing rules and regulations, revenue issuances.

The application for VAT zero-rate is no longer necessary after RR No. 3-2023. By listing them in Section Ill, Annex "A" of the required template for VAT Zero-Rate Certification in accordance with RMC No. 36-2022, the supplier must specify the items and/or services being sold that are solely and directly due to the registered project or activity of the REE. In the REE's sworn pledge, the aforementioned goods and/or services must also be listed.

The VAT zero-rating shall not apply to Health Maintenance Organization (HMO) plans purchased for employees' dependents or for employees who are not directly involved in the management of the projects or activities of the REEs that are registered.

On transactions with entities granted with VAT zero-rate incentives under special laws and international agreements

There is no longer a requirement for local vendors of goods and services to file an application for VAT zero-rate incentives for firms given such incentives under specific legislation and international agreements. Alternately, these local suppliers must demand the pertinent documentary standards outlined in RMC 80-2023 from the aforementioned entities.

Local suppliers of other companies that have been granted incentives for VAT zero-rate under certain legislation and international agreements are not obliged to submit applications for VAT zero-rate. Alternatively, these regional providers of goods and services shall demand from the aforementioned organizations the documentation listed below:
A. For the Supplier of Renewable Energy (RE) Developer

The local suppliers of goods, properties, and services shall require from the duly registered RE Developer a certified copy of the following documents:

  1. COR issued by the BIR which has jurisdiction over the location of the RE Project;
  2. COR issued by the Board of Investments (BOI); and
  3. COR issued by the Department of Energy (DOE).

B. For the Supplier of Other Entities Under Special Law and International Agreements

The buyer must provide its local supplier a certified copy of VAT Exemption Certificate/Ruling or equivalent document, issued by the appropriate office of the BIR and other documentary requirements as may be required under the special law and international agreement, including its implementing rules and regulations.

The following elements must be considered in the evaluation of transaction subject for VAT zero-rate:

  1. The location of the registered project of the entity granted with VAT zero-rate incentives under special law must be duly registered with the appropriate BIR office;
  2. The entity granted with VAT zero-rate incentives under special law must be duly registered with other government agency (OGA) administering tax incentives;
  3. The entity granted with VAT zero-rate incentives under special law or international agreement must have been issued by its concerned OGA administering Tax Incentives a VAT Exemption Certificate/BIR Ruling/equivalent certificate; and
  4. The transaction is indeed qualified for VAT zero-rating in accordance with the provisions of the Tax Code, and its implementing rules and regulations, revenue issuances, special laws or international agreements; and is likewise corroborated with a valid documentation, such as but not limited to duly certified copies of purchase order, job order or service agreement, sales invoice and/or official receipt, delivery receipt, or similar documents to prove existence and legitimacy of the transaction;

VAT Zero-Rate Certification/Endorsement by appropriate government agency

According to RMC No. 36-2022, the IPA must issue compliant REEs with the VAT Zero-Rate Certificate using the template that is prescribed.

A masterlist of REEs with issued VAT Zero-Rate Certificates issued by the appropriate IPA must be provided to the BIR by all involved IPAs within 20 days of the end of each taxable quarter.
For this year, we will see a clarifying issue brought by RMC No. 80-2023, relative to the implementation of RR No. 3-2023 and other related concerns on VAT zero-rate transactions in the Philippines. We must not overlook the significant changes in the tax rules, it is important for us to understand the various taxes we must pay so we can account them to avoid penalties for non-compliance.