The Negative List for VAT Zero-Rating

One of the objectives of the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act is to improve the equity and efficiency of the corporate tax system by reducing tax distortions and leakages. A way by which CREATE effected this mandate is through imposing certain restrictions on tax incentives enjoyed by entities that are registered export enterprise enterprises (REEs) with Investment Promotions Agencies (IPAs) such as the Philippine Economic Zone Authority (PEZA) and the Board of Investments (BOI). The long-enjoyed incentives involving the VAT zero-rating on local purchases of REEs are now qualified under the CREATE Act to apply only to local purchases of goods and services that are directly and exclusively used in their respective registered project/s or activity/ies. Generally, local purchases that are “directly and exclusively used in the registered project or activity” include raw materials, inventories, supplies, equipment, goods, services and other expenditures necessary for the registered project or activity without which the registered project or activity cannot be carried out, as provided under the CREATE Implementing Rules and Regulations (IRR) and subsequent issuances. From this definition, the term "other expenditures" has been specified to pertain to costs that are indispensable to the registered project or activity or those without which the registered project or activity cannot proceed. These include expenses that are necessary or required to be incurred, depending on the nature of the registered project or activity of the export enterprise.

To give further clarity on the definition of local purchases that are “directly and exclusively used” in the registered project or activity, the Bureau of Internal Revenue (BIR) and the Department of Finance (DOF) issued Revenue Regulations (RR) No. 3-2023 on 20 April 2023. This issuance introduced a "Negative List" of purchases of services and related goods that generally do not qualify as local purchases directly and exclusively used for an REE’s registered activity, to wit: 

• Janitorial services;
• Security services;
• Financial services;
• Consultancy services;
• Marketing and promotion; and
• Services rendered for administrative operations such as human resources (HR), legal and accounting.

Thus, local purchases of the above-mentioned services and goods related to these services are generally subject to VAT. However, the REE is not precluded from proving with supporting evidence to the concerned IPA that any of the local purchases of such services and related goods are indeed directly and exclusively used in its registered project or activity. If the purchased goods or services are used in both the registered project or activity and administrative operations, the REE shall employ a suitable allocation method. If a proper allocation could not be determined, the related purchase shall be subjected to 12% VAT.

In addition to the negative list of purchases, RR No. 3-2023 also simplifies the process for availing the VAT zero-rating incentive for registered export enterprises. Unlike previous issuances which require securing a prior approval from the BIR that the transaction indeed qualifies as a zero-rated local purchase for REEs, the said RR provides that such VAT zero-rating benefit shall be granted on the basis of the VAT zero-rating certification issued by the concerned IPA, without prejudice to the conduct of post-audit investigation/verification by the BIR that the goods/services are indeed directly and exclusively used by the REE in its registered project or activity. As a result, it is no longer necessary to apply for approval of a VAT zero rating with the BIR, which was a requirement prior to the issuance of RR No. 3-2023.

Because of the implementation of RR No. 3-2023, which took effect on 28 April 2023, REEs now have the opportunity to avail of the VAT zero-rating incentive with some additional guidance from the BIR and the DOF. Ultimately, it is the responsibility of the taxpayers to determine whether their local purchases of goods and services qualify for a VAT zero-rating. The issuances of the BIR merely serve as guidance for effectively enforcing the provisions of the Tax Code and its amendments. Taxpayers must ensure that proper documentation is in place to support the VAT zero-rating of their local purchases as contemplated under existing rules. Having proper documentation and supporting source documents are helpful, especially during post-audit investigation or verification to be conducted by the BIR.