VAT incentives under CITIRA, a taxing battle and a rational decision
VAT incentives under CITIRA, a taxing battle and a rati
By: Jani R. Camena
The second package of the tax reform program or the Corporate Income Tax and Incentives Rationalization Act (CITIRA), which is still subject of deliberations in the Senate Committee on Ways and Means, aims to rationalize the incentives system, with the hope that foreign investments will match or even surpass the incentives given, allowing net positive benefits to our country. As a result, additional requirements are proposed before a registered entity can avail certain tax incentives, such as the VAT incentives on importation and domestic purchases.
The CITIRA proposes to grant VAT exemption on importation and VAT zero-rating on domestic purchases of capital equipment and raw materials used in the manufacturing and processing of products and importation of source documents of registered enterprises whose export sales meet the 90% threshold and are located within the ecozone, freeport, or utilizing customs bonded manufacturing warehouse.
If a registered enterprise’s export sales are below the 90% threshold but is located within an ecozone, freeport, or is utilizing customs bonded manufacturing warehouse, the CITIRA likewise grants VAT exemption on importation and VAT zero-rating on domestic purchases of capital equipment and raw materials used in the manufacturing and processing of products and importation of source documents, subject to the condition that it shall comply with the requirement under Sections 237 and 237-A of the Tax Code, as amended, to issue and transmit electronic receipts or sales or commercial invoices through designated electronic channels with a public certification system accredited by the BIR.
However, if a registered enterprise’s export sales are below the 90% threshold or it is located outside an ecozone or freeport, regardless of the amount of its export sales, it shall be subject to 12% VAT on importation of capital equipment and raw materials and source documents, and 0% VAT on domestic purchases of capital equipment and raw materials until an enhanced VAT refund system is established and all pending VAT refund claims as of 31 December 2017 are refunded by the end of this year, in which case the 12% VAT shall apply.
Under existing laws, PEZA-registered enterprises operating within the ecozones are exempt from the payment of VAT on importation of machineries, equipment and spare parts which are directly and reasonably needed and will be generally used exclusively in and as part of the direct cost of the registered activity. In addition, domestic purchases of PEZA-registered enterprises are subject to VAT zero-rating under the principle that the ecozones are separate customs territory; hence, considered foreign territory.
Considering the changes proposed by the CITIRA, existing PEZA-registered enterprises may opt to register under the CITIRA to enjoy the VAT exemption on importation and VAT zero-rating on domestic purchases of capital equipment and raw materials used in the manufacturing and processing of products and importation of source documents by complying with the additional requirement of e-invoicing. The additional requirement of 90% export sales threshold would be irrelevant to them under the assumption that they will be operating within an ecozone.
However, registered enterprises who operate outside the ecozone or freeport, such as Board of Investment (BOI)-registered entities, regardless of the amount of export sales, shall be subject to 12% VAT on importation of capital equipment and raw materials and source documents, and 0% VAT on domestic purchases of capital equipment and raw materials until an enhanced VAT refund system is established and all pending VAT refund claims as of 31 December 2017 are refunded by the end of this year.
For e-invoicing requirements, the currently effective Tax Reform for Acceleration and Inclusion (TRAIN) Law mandates taxpayers engaged in export operations to adhere to this requirement within five (5) years from its effectivity in January 2018 and upon establishment of a system capable of storing and processing the required data. In addition, the CITIRA bill effectively requires registered enterprises to likewise adhere to the e-invoicing requirement to avail of the VAT incentives. PEZA-registered enterprises may consider the benefits of leveraging on the use of e-invoicing, allowing a more efficient and effective record keeping of invoice/receipt documents of the company. In addition, other benefits should also be considered such as the tax credit of 0.1% of the purchase value, net of VAT, for every electronic receipt or invoice subject to certain conditions and allowable deductible expense of up to 10% of the electronically traceable payments, as provided under Section 237-A of the Tax Code, as amended.
Aside from the availment of VAT incentives, PEZA-registered enterprises may take into consideration the VAT treatment for domestic purchases of services once the CITIRA is enacted into law.
CITIRA does not expressly state any amendments as to the VAT treatment on domestic purchases of services by an entity exempt under special law. Hence, there may be basis to say that, insofar as PEZA-registered enterprises are concerned, VAT zero-rating for services rendered in the Philippines by a VAT registered person to an entity exempt under special laws still applies. In addition, the recent amendments to Section 108 of the Tax Code under the TRAIN Law pertaining to the potential change from VAT zero-rating to 12% VAT upon fulfillment of the relevant conditions may not adversely affect them. Further, the BIR issued Revenue Regulations No. 13-2018 providing guidelines that the services performed in the Philippines by a VAT-registered person to entities exempt under special laws are subject to 0% VAT.
However, since the VAT incentives provided under CITIRA do not include those relating to domestic purchases of services, the application of VAT zero-rating on these transactions of PEZA-registered enterprises remain in question. If zero-rating shall no longer be applicable, this would have significant implications on the cash flow management of PEZA-registered enterprises since they will have to shell out more cash to pay the input VAT from these purchases. While they can hold such input VAT as a prepaid tax asset that can be utilized as credits against output VAT, if any, any excess and unutilized input VAT has no other use unless refunded by the taxing authority. The time value of money will play a significant role in an enterprise’s operations since the initial cash outflow paid for input VAT could have been used in an investment opportunity that will earn additional income or for financing current operations.
Overall, considering the different set of tax incentives that can be enjoyed under the CITIRA, existing PEZA-registered enterprises may consider conducting a tax cost and benefit analysis of operating as a registered enterprise under CITIRA vis-à-vis operating as a regular corporation, taking into consideration the complete set of incentives for registered enterprises and revised corporate income tax rate for regular corporation.
Jani R. Camena is an Associate from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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