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Revenue Memorandum Circular (RMC) 24-2022, which aims to clarify Revenue Regulations (RR) 21-2021, states that the provisions of the Corporate Recovery and Tax Incentives for Enterprise Act (CREATE) and its implementing rules, as it provides  the zero-rating on Value Added Tax (VAT) on local purchases, shall only apply to sales of goods and services directly and exclusively used in the registered project or activity of a registered export enterprise (REE). Direct and exclusive use of the registered project or activity is limited to expenses directly attributable to the registered project or activity without which the registered project or activity cannot be carried out. Such VAT zero-rating may only be granted upon endorsement of the concerned Investment Promotions Agency (IPA) in addition to the requirements of the Bureau of Internal Revenue (BIR).

The said RMC further identifies the documents required to prove the existence of local purchases of goods and services directly and exclusively used by REEs in their registered activities that shall be entitled to VAT zero-rating. Under the said issuance, prior to any transaction with any local supplier, REEs shall provide their local suppliers with the following: (1) Photocopy of BIR - Certificate of Registration (BIR form 2303); (2) IPA Certificate of Registration; (3) Sworn declaration stating that the goods and/or services being purchased shall be used directly and exclusively in the registered project; and (4) VAT zero-rate certification issued by the concerned IPA annually containing the following information:

a. The registered export activity, i.e., manufacturing, IT Business Process Outsourcing (BPO);

b. The tax incentives entitlement under agreed terms and conditions with the validity period; and

c. The applicable goods and services (or category thereof), i.e., raw materials, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or activity, without which the registered project or activity cannot be carried out.

To standardize the contents of the said certification, the BIR issued RMC 36-2022 on April 6, 2022 prescribing the format of the VAT zero-rate certification issued by IPAs to the REEs. Details such as the I) CREATE Certification number of the REE for entities registered under CREATE, II) IPA Registration Certificate number, III) a QR Code which shall reflect the VAT Certificate number, REE’s name and date issued when scanned, IV) legal basis for entitlement to VAT zero-rating, V) validity of the certification, and vi) a provision that once the registration with the concerned IPA of the REE has been cancelled, the VAT zero-rate certification is considered as automatically revoked.

Other details are included in the annex to the certification, such as the REE’s registered activities, tax incentives, and validity periods, other terms and conditions based on an undertaking to be attached by the REE. However, RMC 36-2022 does not provide the contents of the undertaking to be made by the REE.

The VAT zero-rate certification issued may be counterchecked with the master list of all REEs which have been issued with a zero-rated VAT to be provided by all IPAs to the BIR.

On the other hand, local suppliers of REEs who wish to avail themselves of the VAT zero-rating on sales to REEs are required to file an application for VAT zero-rating as governed by Revenue Memorandum Order 7-2006. This is apart from the requirement for said local suppliers to issue a VAT zero rated official receipt (OR) for sales of services or sales invoice (SI) for sales of goods to REEs which are compliant with the invoicing requirements to support the existence of zero-rated sales.

As the BIR continues to respond to the REEs’ clamor for more guidance on the new documentary requirements, the BIR and IPAs may consider clarifying further the following items while considering the abovementioned requirements.

REEs should be clarified on the impact of non-compliance with these requirements. While a transaction would, in substance, qualify as zero-rated local purchases attributable directly to the registered activity of an REE, would it be possible that, due to non-compliance with these requirements, the benefit of VAT zero-rating can no longer be enjoyed?

The frequency of the need to execute the sworn declaration, especially for recurring transactions with each concerned supplier, can be further clarified.

Lastly, it would be best to clarify if a VAT zero-rate certification is required on a per project basis since validity periods must be specified in the annex to the VAT zero-rate certification. It is possible that REEs with several registered activities may have different incentive validity periods and a separate set of attributable goods and services.

The BIR’s support for FIRB and the IPAs in implementing the amendments to the Tax Code embodied in the CREATE Act is apparent. With proper guidance, REEs can be better equipped to navigate through the new requirements and continue enjoyment of the VAT zero-rate incentive on qualified local purchases. After all, it cannot be denied that the continuous operation of these REEs in the Philippines is vital to the recovery of our economy from the adverse effects of the pandemic.

Ilssa Ma. Tara T. Mediodia is a supervisor from the tax group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax 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 KPMG International or KPMG RGM&Co.

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