Special InTAX: May 2023 Issue 1 | Volume 2

Department of Finance

The Department of Finance (DOF) issued Revenue Regulations (RR) No. 3-2023, 20 April 2023, to amend Sections 4.106-5 and 4.108-5 of RR No. 16-2005, as amended by RR No. 21-2021 pursuant to Sections 294 (E) and 295 (D) of the National Internal Revenue Code of 1997, as amended* (Tax Code). 

The salient points of the RR are as follows: 

• Transactions qualified for VAT zero-rating include the following sales to a registered export enterprise** used directly and exclusively in its registered project or activity pursuant to Sections 294 (E) and 295 (D) of the Tax Code, for a maximum of 17 years from the date of registration, unless otherwise extended under the Strategic Investment Priority Plan:

1. Sale of raw materials, inventories, supplies, equipment, packaging materials, and goods [Section 4.106-5 of RR No. 16-2005, as amended]

2. Sale of services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment [Section 4.108-5 of RR No. 16-2005, as amended]

The above-described sales to existing registered export enterprises located inside ecozones and freeport zones shall also qualify for VAT zero-rating until the expiration of the transitory period.

• Health maintenance organization (HMO) plans acquired by registered export enterprise for its employees who are directly and exclusively involved in the operations of their registered projects or activities and forming part of their compensation package shall be considered as “directly and exclusively used” in the registered project or activity of a registered export enterprise.
• The local purchase of the following services and goods related thereto shall not be considered “directly and exclusively used” in the registered project or activity of a registered export enterprise, unless the registered export enterprise can prove to the concerned Investment Promotion Agency (IPA) that any of the listed services or any goods related to these services are indeed directly and exclusively used in its registered project or activity:

1. janitorial services;

2. security services;

3. financial services;

4. consultancy services;

5. marketing and promotion; and

6. services rendered for administrative operations such as Human Resources (HR), legal and accounting.

• In issuing the VAT zero-rating certification, the concerned IPA shall be guided by the rule that local purchase of goods and services are directly attributable to the registered project or activity without which such registered project or activity cannot be carried out (i.e., costs that are indispensable to the project or activity).
• If the purchased goods and services are used in both the registered project or activity and administrative operations, the registered export enterprise shall adopt a method to best allocate the same. If a proper allocation could not be determined, the purchase of such goods and services shall be subject to 12% VAT.
• The VAT zero-rating on local purchase of goods and services shall be availed on the basis of the VAT zero-rating certification issued by the concerned IPA, subject to the conduct of post-audit investigation/verification by the Bureau of Internal Revenue (BIR) that the goods and services are indeed directly and exclusively used by the registered export enterprise in its registered project or activity.
• Upon effectivity of RR No. 3-2023, the local suppliers of goods and services of a registered export enterprise shall no longer be required to apply for approval of VAT zero-rating with the BIR. All applications with accompanying VAT zero-rating certification issued by the concerned IPA which have been received but not yet acted upon by the BIR shall be accorded VAT zero-rating treatment from the date of filing of such application.

The RR shall take effect immediately after its publication in Manila Times on 28 April 2023.

Please click on the link for the full text of the issuance: RR No. 3-2023

* Amendment introduced by Republic Act No. 11534 (CREATE Law), in relation to Section 5, Rules 2 and 18 of the CREATE Implementing Rules and Regulations (IRR)

** “Registered export enterprise” refers to an export enterprise as defined under Section 4(M), Rule 1 of the CREATE IRR that is also a registered business enterprise as defined in Section 4(W) of the same IRR.