Business Mirror

Atty. Rodel C. Unciano discusses the salient provisions in the recently released BIR Revenue Regulations 21-2021 clarifying which transactions shall be subject to zero-percent (0%) VAT.

Clarifying VAT zero-rated transactions

By Atty Rodel C. Unciano

As you may be aware, Republic Act No. 10963 or the TRAIN Law mandates that certain transactions under subsections 3,4 and 5 of Section 106(A)2(a) and Sections 108(B)1 and 108(B)5 of the Tax Code shall be removed from the coverage of Value Added Tax (VAT) zero-rating upon the satisfaction of two conditions, namely: 1) The successful implementation of an enhanced VAT refund system that grants and pays refunds of creditable input tax within 90 days from the filing of the VAT refund application with the Bureau of Internal Revenue (BIR); and 2) All pending VAT refund claims as of December 31, 2017 shall have been refunded.

As a refresher, the transactions that will no longer be accorded VAT zero-rating upon the satisfaction of the two above conditions are as follows:

1) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
2) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;
3) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws;
4) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); and
5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

According to Revenue Regulations (RR) 9-2021 which was issued in June, the two conditions have already been satisfied. Thus, following RR 9-2021, the above transactions shall already be subject to the 12% VAT. Subsequently, however, RR 15-2021 deferred the implementation of RR 9-2021. These two issuances gave confusions on the VAT treatment of the covered transactions.

a) Export sales. This includes sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or international transport operations, provided that the goods, supplies, equipment and fuel shall be used exclusively for international shipping or air transport operations;
b) Sales to persons or entities whose exemption from direct and indirect taxes under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate;
c) Sales of raw materials, inventories, supplies, equipment, packaging materials, and goods to a registered export enterprise, to be used directly and exclusively in its registered project or activity.

On the other hand, the following services performed in the Philippines by a VAT-registered person shall be subject to zero-percent (0%) VAT:

1. Services other than processing, manufacturing or repacking of goods rendered to a person engaged in business conducted outside the Philippines, or to a non-resident person not engaged in business who is outside the Philippines when the services are performed;
2. Services rendered to persons or entities whose exemption from direct and indirect taxes under special or international agreements to which the Philippines is a signatory, effectively subjects the supply of such services to zero-percent rate;
3. Sale of services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, to a registered export enterprise, to be used directly and exclusively in its registered project or activity;
4. Services rendered to persons engaged in international shipping or air transport operations, including leases of property, provided that these services shall be exclusively for international shipping or air transport operations;
5. Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country; and
6. Sale of power or fuel generated through renewable sources of energy such as, but not limited to biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels.

So, as it now stands, these are the transactions that are currently within the coverage of VAT zero-rating, subject to compliance and satisfaction of certain requirements as provided under RR 21-2021. Transactions that are not covered by any of the items enumerated above shall not be entitled to VAT zero-rating.