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Heraclitus was quoted saying that the only constant in life is change. Many of us fear change as it causes worries and uncertainties in all aspects of life, whether it be big or small, happy or sad, life-changing or mundane, welcome or unwelcome. The worries brought about by change is apparent when you go to your favorite restaurant and your usual order is unavailable, when you go to the barbershop/salon and your barber/hairdresser did not report for work, when you graduate from college and get exposed to the “real world,” or when you decide to move back to the province after living in Metro Manila for more than half a decade. Basically, change is ever-present.

In a Philippine tax setting, change came via the tax reform packages (i.e., the TRAIN Law and the CREATE Act). Prior to the TRAIN Law (Republic Act No. 10963), companies registered with the Philippine Economic Zone Authority (PEZA) enjoyed tax incentives provided under Republic Act No. 7916 such as tax and duty-free importation of capital equipment, Income Tax Holidays (ITH), and a preferential tax rate of 5% on gross income in lieu of all national and local taxes. In addition, PEZA-registered entities were also entitled to VAT zero-rating on any goods, properties, and services they received from local VAT-registered suppliers.

Upon enactment of the TRAIN Law, major concerns were raised by PEZA-registered entities, export-oriented entities, and other stakeholders due to a potential change of the applicable VAT rate imposed (from 0% to 12%) on the sale of goods and services to such entities. This change, however, was subject to the fulfillment of the following conditions: (1) successful establishment of an Enhanced VAT System – a system which grants full refund 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 applications and claims before 31 December 2017, must be fully paid in cash on or before 31 December 2019.

On 11 June 2021, the BIR issued Revenue Regulations (RR) No. 9-2021 confirming that the above conditions have already been satisfied and, thus, already imposing 12% VAT on the following previously zero-rated sales of goods and services:

  1. Sale of raw materials or packaging materials to a non-resident 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 BSP [Sec. 106(A)(2)(a)(3) of the Tax Code];
  2. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production [Sec. 106(A)(2)(a)(4) of the Tax Code];
  3. Those considered export sales under E.O. No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws [Sec. 106(A)(2)(a)(5) of the Tax Code];
  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 BSP [Sec. 108(B)(l) of the Tax Code]; 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 the total annual production [Sec. 108(8)(5) of the Tax Code].


Note that the foregoing is also mentioned in Rule 5, Section 4 of the Implementing Rules and Regulations of the new Title XIII of the Tax Code, as amended by the CREATE Act (Republic Act No. 11534).

The transition from VAT zero-rating to 12% will definitely cause unfavorable reaction from PEZA-registered and export-oriented entities as this can be seen as an additional burden to them. This may potentially force these entities to avoid local suppliers and engaged more into importation in order to reduce the impact of tax costs. Investors of export-oriented entities might also modify their business plans in the country now that one of their major incentives has been taken away.

Local entities, who mainly supply exporters, will also face a major shift in their game. The implementation of RR No. 9-2021 opens these enterprises into a larger market and competition.

With a 12% increase in total costs, local companies will now need to focus more on quality products and services rather than focusing on cost leadership. Investors engaged with affected enterprises might struggle to keep up with the market and might eventually shift into different industries like Business Process Outsourcing (BPOs) and logistics.

But the affected entities are not left without any recourse as they are given the option to file a VAT refund application under the Enhanced VAT Refund System. It is important to note, however, that this may only be applicable to entities which are registered for VAT as the input taxes must be attributable to VAT zero-rated sales.

In a litany of cases decided by the Supreme Court, it is fundamental that rules on tax refunds are strictly construed against the taxpayers and liberally in favor of the State. Thus, while affected entities may file a claim for refund with the BIR, the process will not be a walk in the park.

For purposes of filing a claim for VAT refund, the supporting documents must be complete and compliant. Otherwise, the claim will be denied. Claimants must also take into consideration the documents required to be secured and the timeline in securing the same from other government agencies/offices such as the Securities and Exchange Commission (SEC), DOF, BOC, the BIR Regional Office, and/or the Accounts Receivable Monitoring Division (ARMD) at the BIR National Office. Further, taxpayers will also have to determine whether the actual and time costs spent in preparing the documentary requirements and the risks of being subjected to a tax audit far outweigh the amount to be claimed.

As most companies are still recovering from massive losses caused by the pandemic, the affected entities might find the enforcement of RR No. 9-2021 unfair and burdensome. But taxes are inevitable. It is the lifeblood of the government and our country relies on it now more than ever due to COVID-19. Hopefully, the BIR would further streamline the procedures and lessen the documentary requirements for claiming VAT refunds to appease the taxpayers affected by RR No. 9-2021.

While the tax reforms of the government are slowly achieving its end goal of having a more equitable tax system, it appears that the government is already looking to shift to consumption taxes to cover the reduction of personal and corporate income tax collections. We can only be hopeful that these changes in our tax rules will improve the capacity of the government in providing better opportunities for all.


Alvin G. Jacobo 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.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.