Clarifications on the VAT rules for Registered Business Enterprises (RBEs) under the CREATE Law

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Clarifications on the VAT rules for Registered Business Enterprises (RBEs) under the CREATE Law

(Revenue Memorandum Circular No. 24-2022, March 9, 2022)

This Tax Alert is issued to inform all concerned on the clarifications on the VAT rules applicable to Registered Business Enterprises (RBEs) pursuant to Revenue Regulations No. 21-2021, implementing Sections 106 and 108 of the Tax Code, in relation to Sections 294(E) and 295(D), Title XIII of the Tax Code as introduced by Republic Act No. 11534, also known as the CREATE Act and its Implementing Rules and Regulations.

I. Applicable Rules

  • RBEs duly registered with the concerned Investment Promotion Agencies (IPAs) under the CREATE Act shall now be governed by the CREATE provisions with respect to their availment of tax incentives, including VAT exemption of RBEs enjoying the 5% special corporate income tax (SCIT), VAT exemption on importation and VAT zero-rating on local purchases of goods and services.
  • The “cross border doctrine”, as applied to Ecozones or Freeport Zones, has been rendered ineffectual and inoperative for VAT purposes upon the effectivity of CREATE Act.
  • After the effectivity of CREATE Act, RBEs cannot invoke Sections 106(A)(2)(b) and 108(B)(3) of the Tax Code, which provides for VAT zero-rating under special laws and international agreements.
  • Prior approval for VAT zero-rating must be secured from the BIR by local suppliers of goods/services of export RBEs in order for the sales to be accorded VAT zero-rating.

II. Effectivity and Transitory Provisions

  • RR No. 21-2021 took effect on December 10, 2021 but covers transactions entered into during third quarter of taxable year 2021 and onwards.
  • The following should be the treatment for sale to RBEs during the period of effectivity of RR No. 09-2021 until its deferral on July 28, 2021, and until effectivity of RR No. 21-2021.

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III. VAT Treatment of Sales to RBEs upon effectivity of CREATE Act

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Direct and Exclusive Use

  • Direct and exclusive use in the registered project or activity refers to raw materials, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures without which the registered project or activity cannot be carried out. Other expenditures include (1) insurance costs required to be paid before the facility can start operations, (2) freight costs for bringing-in raw materials and equipment, and (3) telecommunication expenses of IT/BPO export enterprises.
  • This excludes those used for administrative purposes.
  • The registered export enterprise concerned should adopt a method to best allocate goods or services purchased. If the goods or services are used in both the registered project or activity and administration purposes and the proper allocation could not be determined, the purchase of such goods and services shall be subject to 12% VAT.
  • Services for administrative purposes like legal, accounting, and such other similar services, are not considered expenses directly attributable to and exclusively used in the registered project or activity and shall not qualify for VAT zero-rating on local purchases.
  • Any costs incurred prior to registration of a project or activity with the IPA shall not be allowed VAT zero-rating.

IV. VAT treatment of sales made by RBEs

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  • For imported capital equipment, raw materials, spare parts, or accessories use in non-registered project or activity, corresponding VAT shall be paid accordingly. For partial utilization in a non-registered project or activity, the amount corresponding to the VAT on a specific capital equipment, raw materials, spare parts, or accessories shall be paid in proportion to its utilization for the non-registered project or activity.
  • Sale to enterprises covered by special laws such as renewable energy developers under RA No. 9513, IRRI, ADB, etc. remains to be subject to 0% VAT.

V. Taxability of Existing Export Enterprise Registered Prior to CREATE Act

VI. Application for VAT zero-rating

  • Prior approval from the BIR is needed to be secured by the local suppliers of goods/services of registered export enterprises in order for their sales to be accorded VAT zero-rating. Absence of prior approval from the BIR may result in the disallowance of the VAT zero-rated sale of the supplier.
  • The concerned Investment Promotion Agencies (IPA) shall issue annually a VAT zero-percent (0%) certification only to registered export enterprises. Such certification shall indicate the registered export enterprise:
    1. registered export activity i.e., manufacturing, IT BPO;
    2. tax incentives entitlement under agreed terms and conditions with the validity period; and
    3. 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.
  • All IPAs are required to submit to BIR the list of RBEs which are categorized as export enterprise, for purposes of VAT zero-rating.
  • Applications for VAT zero-rating shall include the following attachments:
    1. Certificate of Registration and VAT Certification issued by concerned IPA as submitted to them by their registered export enterprise buyers;
    2. A sworn affidavit executed by the buyer RBE, stating that the goods and/or services bought are directly and exclusively used in the registered project.
    3. Other documents to corroborate entitlement to VAT zero-rating such as but not limited to duly certified copies of purchase order, job order or service agreement. sales invoices and/or official receipts, delivery receipts, or similar documents to prove existence and legitimacy of the transaction.
  • In order to avail of the VAT zero-rating incentive, the registered export enterprise buyers, prior to the transaction, shall provide their suppliers with a photocopy of the BIR Certificate of Registration (BIR Form No. 2303), Certificate of Registration and VAT certification issued by the concerned IPA. In addition, the RBE shall provide their suppliers a sworn declaration stating that the goods and/or services being purchased shall be used directly and exclusively in the registered project.

VII. Refund by Local Suppliers and Recovery of Input VAT Passed on to Registered Export Enterprises

  • The approved application for VAT zero-rating shall be submitted by the supplier-applicant of the buyer RBE upon filing of VAT credit or refund.
  • If the local supplier inadvertently passed on VAT to the RBE on its purchases of goods and services directly and exclusively used in the registered project or activity, the RBE may contest the same and/or resolve with the local supplier the reimbursement of VAT paid, if any. The previously issued SI/OR to the registered export enterprise having VAT imposed must be surrendered/returned to the local supplier for cancellation and replacement.
  • VAT paid or incurred for purchases not directly and exclusively used in the registered project or activity of the registered export enterprise are not allowed for VAT refund. However, the following options may be availed of:
    1. If VAT registered and enjoying ITH, claim the passed-on VAT is input tax credit and apply against future output VAT liabilities; or
    2. Should there be no sales subject to VAT, accumulate the input tax credits and claim as VAT refund upon expiration of VAT registration (i.e. end of ITH period and 5% SCIT incentive commences); or
    3. If non-VAT registered- charge to cost or expense account.
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