Seeking VAT zero-rating certainty after CREATE MORE

Have you ever heard of a rule so often in school that it simply stayed with you? During my college days, one phrase came up repeatedly in accounting classes: “Do not assume, unless otherwise stated.” It was a foundational principle our professors emphasized from day one, frequently resurfacing during problem-solving discussions. Outside the classroom, the same phrase even became a running joke shared among friends facing love-life dilemmas. Regardless of context, the message was clear: conclusions must be anchored on facts, not assumptions.

Years later, as a tax professional, this principle remains highly relevant. When tax provisions are ambiguous or inconsistently applied, businesses are left to fill the gaps with assumptions — often resulting in errors, disputes, and costs that could have been avoided. This is particularly true for VAT zero-rating rules, which have undergone significant changes under the CREATE Act and CREATE MORE Act.

Prior to the CREATE Act, the cross-border doctrine effectively treated sales to ecozones and freeport zones as constructive exports subject to 0% VAT, reflecting the long-standing view that such zones functioned like foreign territories for VAT purposes.

With the signing of the CREATE Act in 2021 and the issuance of Revenue Memorandum Circular (RMC) No. 24-2022 by the Bureau of Internal Revenue (BIR), the cross-border doctrine essentially became inoperative. Instead, the VAT zero-rating incentive became limited to purchases of goods and services that are “directly and exclusively used” in a registered activity of registered business enterprises (RBEs).

“Directly and exclusively used” refers to raw materials, supplies, equipment, goods, packaging materials, services, utilities, and maintenance, repairs, and other expenditures directly attributable to the registered activity without which the registered activity cannot be carried out. The BIR expressly excluded expenses used for administrative purposes such as utilities allocated to administrative operations, legal, accounting, janitorial, and other similar services.

The BIR further narrowed the incentive by limiting VAT zero-rating only to registered export enterprises (REEs), effectively denying the same to domestic market enterprises (DMEs). In 2025, however, the Supreme Court ruled that DMEs are likewise entitled to VAT zero-rating under the CREATE Act, declaring BIR issuances that limited the incentive to REEs unconstitutional.

On Nov. 28, 2024, the CREATE MORE Act became effective, and the stringent “directly and exclusively used” requirement was replaced by “directly attributable” for the VAT-zero rating incentive. Under the law, “directly attributable” refers to the purchase of goods and services that are incidental to and reasonably necessary for the registered project or activity of the RBE. This expanded coverage now includes janitorial, security, financial, consultancy, marketing and promotion services, and services rendered for administrative operations such as human resources, legal, and accounting, which were previously specifically disallowed. The CREATE MORE Act retains the limitation of VAT zero-rating incentives to REEs, but specifically now includes high-value DMEs (HVDMEs).

To avail of VAT-zero rating incentives under CREATE MORE, the BIR clarified that the incentive shall be availed of solely based on the VAT zero-rating certification issued by the Investment Promotion Agency (IPA) concerned. This change means RBEs no longer have to give their suppliers a sworn affidavit, as previously required under Revenue Regulations (RR) No. 3‑2023. The issuance of a sworn affidavit replaced the old process under RMC No. 24‑2022, where suppliers needed to get BIR approval before they could treat their sales to RBEs as zero‑rated.

Now, in determining whether the purchases are “directly attributable,” CREATE MORE provides that it be made by the IPA overseeing the RBE. In this regard, to provide clarity on which expenses qualify as “directly attributable,” the Philippine Economic Zone Authority (PEZA), one of the IPAs, released Memorandum Circular (MC) 2025-052, which provides a list of goods and services considered “directly attributable” for the registered activity therefore eligible for VAT zero-rating.

The list contains three categories of purchases. First are the purchases that are “Directly and exclusively used for the registered activity,” similar to the definition under the CREATE Act. Second is the “Positive List under RA 12066” or CREATE MORE, which lists down items such as janitorial, security, consultancy, marketing, etc.  The last is “Others,” which are incidental to and reasonably necessary for the registered activity such as delivery trucks and logistics and other essential items for the production of a registered project or activity. The “Others” category also includes brokerage and forwarding services, telephone and internet connectivity, office supplies, and occupational safety and health supplies and equipment.

PEZA clarified that the list isn’t meant to be exclusive — which is a good thing, because it helps avoid confusion and keeps suppliers from thinking that only items on the list can qualify. Where an RBE determines that a particular purchase, though not listed, is directly attributable to or reasonably necessary for its registered activity, the RBE may seek confirmation from PEZA. This requires a written request on the company’s official letterhead signed by the highest responsible official, explaining how the purchase is directly attributable, together with relevant supporting documentation, if any. A notarized sworn affidavit attesting to the same is likewise required.

Nonetheless, even with PEZA’s circular and confirmation, RBEs and suppliers must remain cautious. VAT zero-rating remains subject to post-audit verification by the BIR. Suppliers therefore must keep the VAT zero-rating certificate along with sufficient documentation — such as contracts, invoices, and allocation methods used for purchases used across both registered and unregistered activities.

On the RBE side, the key risk lies in input VAT. Under RR 10‑2025, if a supplier erroneously charges VAT, the RBE is not allowed to claim or refund that input VAT. This can create unnecessary friction with suppliers and may even result in additional cost to the RBE if it ends up absorbing the erroneously charged VAT. To avoid these issues, both sides should ensure accuracy from the outset — aligning early, validating the correct VAT treatment before invoicing, and maintaining clear documentation. Preventing an erroneous charge is far easier than trying to correct or reverse it later, especially once VAT has already been declared or reported.

Moreover, even though RBEs are generally entitled to VAT zero-rating, local suppliers cannot be faulted if they pass on VAT due to the RBE’s delay or non-submission of the required Certificate of VAT zero-rating to the local seller. This is because the local seller is the one statutorily liable for VAT and, in the event of a tax audit, must be able to prove that its sales legitimately qualify for VAT zero-rating.

While PEZA has taken a positive step toward clarifying how VAT zero-rating applies under the CREATE MORE Act, other IPAs, such as Board of Investments (BoI), and Subic Bay Metropolitan Authority (SBMA) have yet to issue similar guidance. Having parallel circulars, especially those that outline clearly the process for confirming whether purchases are directly attributable to registered activities, would go a long way in promoting consistency and reducing uncertainty. This would be particularly helpful for taxpayers operating across multiple IPAs, as well as for suppliers whose goods or services are not included in the positive list.

As the rules on VAT zero-rating continue to evolve, clarity in the implementation becomes just as important as the law itself. When uncertainties arise, taxpayers must avoid assumptions and instead seek formal confirmation with the relevant IPA. After all, one of the first lessons in accounting is that assumptions have no place where accuracy is required. In today’s tax environment, certainty comes not in what is presumed, but in what is clearly stated, properly confirmed, and carefully documented.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Marielle C. Baldemor is a manager from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.