Atty. Irwin C. Nidea discusses the conflicting revenue circulars and court rulings on whether purchases by a PEZA registered entity is subject to VAT.
PEZA and VAT
By Atty. Irwin C. Nidea Jr.
"This is good news to all Peza enterprises. All their purchases are now exempt from VAT regardless where they are consumed or rendered. It has effectively overturned Revenue Memorandum Circular (RMC) 74-99 and RMC 50-2007, which both state that purchases destined for consumption outside the ecozone are subject to 12 percent VAT. These RMCs made it clear that purchases must be consumed within the ecozone to be entitled to VAT zero-rating. Thus, when the purchases are consumed outside the ecozone, VAT zero-rating does not apply. Instead, the regular VAT rate of 12 percent must govern."
Until now, there is still confusion on how VAT is applied to transactions involving entities located in the Philippine Economic Zone Authority (Peza). One school of thought is that all purchases of a Peza entity, regardless where they are consumed, must only be imposed VAT at zero-percent rate. The second school of thought, on the other hand, advocates that only purchases of goods or services that are consumed inside the ecozone are entitled to VAT at zero-percent rate. If the goods or services are purchased and consumed outside the ecozone, then the same is subject to VAT. Thus, a grey area that confounds business remains.
Suppliers of goods or services to Peza entities demand that they be allowed to impose VAT on these purchases. The BIR might issue tax assessments for their failure to do so. Peza entities, on the other hand, have no choice but to blindly accept the VAT, which they cannot use to offset against any output VAT. They usually have no output VAT to begin with since they are all engaged in export, which is considered a zero-rated transaction. This grey area is fueled by conflicting BIR rulings and court decisions.
The BIR has issued many rulings stating that sales of goods and/or services by VAT-registered suppliers, to their various Peza-registered customers, are subject to VAT at zero percent rate. But sale of goods and services outside the ecozone is not qualified for VAT zero-rating. Thus, if employees of a Peza entity book a hotel that is located outside the ecozone, the food and accommodation services rendered by the hotel to these employees are subject to 12-percent VAT.
The courts have issued conflicting rulings on this matter. In many cases, it was ruled that only purchases that are consumed inside the ecozone can enjoy VAT at zero percent rate. But in a recent Decision (CTA EB 1909 and 1910), citing the Toshiba Case (GR 150154), the court has ruled that the sale of services made by a VAT-registered enterprise outside the ecozone to a Peza-registered enterprise operating within the ecozone is subject to VAT at zero percent rate. The CTA has implicitly ruled that there is no distinction as to purchases of goods and services which are rendered and consumed within the ecozone and those rendered and consumed outside the ecozone.
This is good news to all Peza enterprises. All their purchases are now exempt from VAT regardless where they are consumed or rendered. It has effectively overturned Revenue Memorandum Circular (RMC) 74-99 and RMC 50-2007, which both state that purchases destined for consumption outside the ecozone are subject to 12 percent VAT. These RMCs made it clear that purchases must be consumed within the ecozone to be entitled to VAT zero-rating. Thus, when the purchases are consumed outside the ecozone, VAT zero-rating does not apply. Instead, the regular VAT rate of 12 percent must govern.
With this new ruling of the court, suppliers must not impose VAT on purchases made by Peza enterprises. BIR must also refrain from issuing tax assessments against these suppliers for failing to impose VAT.
Unfortunately, this good news is short lived. In a more recent decision (CTA Case 9128), the court has returned to the old rule. A distinction should be made between purchases of a Peza-registered entity, which are rendered and consumed within the ecozone and those purchases that are rendered and consumed outside the ecozone. This decision has implicitly ruled that VAT must be imposed on purchases that are consumed outside the Peza Zone.
This means that we are back to square one. A big question mark remains on what rule should suppliers of goods and services to Peza registered enterprises follow? Is it correct for the BIR to assess the failure of the suppliers to impose VAT on purchases by Peza registered entities?
Uncertainty is not good for business. VAT of 12 percent can make or break the financial health of a company. There must be clarity on this issue. If it cannot be done by the courts, hopefully, a clear rule can be cast in stone, by law.
The author is a senior partner of Du-Baladad and Associates Law Offices, a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 local 330.