By Beatrice M. Laforga, Reporter

THE BUREAU of Internal Revenue (BIR) is looking to reinstate the value-added tax (VAT) zero-rating on local purchases of raw materials by exporters, following an appeal from the pandemic-hit industry.

The BIR has drafted a revenue regulation (RR), which would exempt raw materials sold by local manufacturers to eligible export companies from the 12% VAT.

Once signed, this will finally resolve the conflict between the controversial RR 9-2021 that was issued in June, and the implementing rules of the Corporate Recovery and Tax Incentives for Enterprise (CREATE) Act, said George T. Barcelon, chairman of the Philippine Exporters Confederation, Inc. (Philexport).

Under the draft regulation, goods eligible for VAT zero-rating are raw materials, inventories, supplies, equipment and goods sold to export enterprises and will be used “directly and exclusively” in registered projects and activities.

The draft also stated that exporters have to be registered with the investment promotion agency to avail of the incentive, as cited in the implementing rules of CREATE.

Aside from goods, the sale of services to the eligible export company that will be used for a registered project would also qualify for the VAT zero-rating.

To recall, the BIR on July 28 suspended the implementation of the RR 9-2021 that had imposed the 12% VAT on previously exempt materials sold by local manufacturers to exporters, after objections were raised by the industry.

The BIR had defended the issuance of RR 9-2021 in June, saying it was complying with the conditions set by the Tax Reform for Acceleration and Inclusion (TRAIN) Law on its refund system.

Mr. Barcelon said the imposition of 12% VAT in June hurt the industry, as exporters dealt with additional taxes alongside higher shipping costs and the impact of the pandemic.

“We hope there will be a finality on this issue especially now that exporters are facing challenging times. We have this issue on freight costs for exporters both in and out, it’s been going up drastically and this issue [on VAT zero-rating] also hampered the sector. Exports have been picking up but we are held up by the hard lockdown,” he said over a phone call.

During the online public consultation on the draft regulation on Wednesday, BIR officials said another Revenue Memorandum Circular will be issued to clarify other issues raised by stakeholders, such as the refund of VAT paid to vendors when RR 9-2021 was in effect and if domestic market enterprises are qualified to avail of the VAT zero-rating.

Many items in the draft regulation were still unclear even after the public consultation, according to Maria Lourdes P. Lim, the tax managing partner of Isla Lipana & Co., PwC Philippines.

“For one, it limits the VAT zero-rating on local purchases and VAT exemption on importation to export enterprises which is not in accordance with the law as CREATE did not make a distinction… [It also] seems to limit the coverage of ‘direct and exclusive use’ to ‘direct costs’ to qualify for VAT zero-rating which is not expressly provided in CREATE unlike in the case of duty-free importation,” Ms. Lim said in a mobile phone message.

Instead, Ms. Lim said the “reasonable interpretation” is for the purchase to be zero-rated if the company’s business is solely for the registered activity, while those purchases that cannot be separated from the unregistered activity should subject to the 12% tax rate.

Once the new regulation takes effect, she said the BIR should clarify what will happen if the supplier passed on the VAT to the exporting company and those that did not do so even if the sale is subjected to VAT.

“In the interest of fair play, perhaps BIR should apply prospectively and provide first clarity before strictly implementing,” she added.

Aside from goods and services from local manufacturers, the BIR also laid out other transactions that are VAT-exempted in the draft regulation including the sale and actual shipment of goods from the country to another country; the goods, supplies, equipment, and fuel sold to be used in international shipping or air transport operations coming from Philippines’ ports; and the sales to entities whose exemption from direct and indirect taxes where granted via special laws or international agreements, among other things.