THE TRAIN law is expected to make significant changes to the tax incentives of PEZA registered enterprises.
With the enactment of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, there has been concern on the impact of the law on new and existing Philippine Economic Zone Authority (PEZA)-registered enterprises. Stakeholders are also concerned that investors, including PEZA-registered enterprises, may be re-thinking their business plans in the country if tax incentives that are currently available will be removed.
Before the TRAIN law, PEZA-registered enterprises were granted income tax holidays (ITH) of three, four or six years, which means that for that given period, the PEZA-registered enterprise are fully exempt from income taxes levied by the national government (but not from all other national taxes). These PEZA-registered enterprises also enjoyed a 5% preferential tax rate on gross income earned in lieu of all national and local taxes (except real property taxes on land owned by developers) after the expiration of the ITH.
Likewise, prior to the TRAIN law, PEZA-registered enterprises enjoyed VAT zero-rating on local purchases of goods and services. This means that any sale of goods, property or services made by a VAT-registered supplier from the Customs Territory to any PEZA-registered enterprise is legally entitled to zero percent (0%) VAT.
However, when the TRAIN law took effect this year, the provision of zero-rating of sales of goods and services to registered enterprises within separate customs territories and tourism enterprise zones was vetoed by the President. There were questions on whether the vetoed provision immediately removed the existing VAT zero-rating enjoyed by PEZA registered enterprises on their purchase of goods and services.
It is noteworthy to mention that even prior to the TRAIN law, the zero-rating of sales of goods and services had a legal basis under the PEZA law (RA 7916). Furthermore, Revenue Memorandum Circular (RMC) No. 74-99 specifically states that all sales of goods or property to a PEZA-registered enterprise made by a VAT registered supplier from the Customs Territory is subject to 0% VAT.
Court rulings have also held that sales to PEZA-registered enterprises are zero-rated sales following the Destination principle. Under this principle — to which our Philippine VAT system adheres — goods and services are taxed only in the country where they are consumed. Thus, sales of goods and services made by local suppliers to PEZA-registered entities are treated as zero-rated sales because these are considered export sales and not destined for local consumption.
To address the issue on the VAT zero-rating of sales of goods to PEZA-registered enterprises, the PEZA issued Memorandum Circular (MC) No. 2018-003 on March 12, declaring status quo on the VAT zero-rating incentive on the sale of goods and services to separate customs territories. Notwithstanding this, taxpayers are anticipating the implementation of the Enhanced VAT Refund Mechanism, which will have a significant impact on the VAT-zero rating of goods.
With the Enhanced VAT Refund Mechanism, the sale of goods to PEZA-registered enterprises will no longer be considered export sales subject to 0% VAT. That said, both existing and new PEZA-registered enterprises will need to pay 12% VAT and thus, may be able to file for a refund for any unutilized input VAT.
The Bureau of Internal Revenue (BIR) issued RMC No. 17-2018, amending RMC No. 89-2017 and RMC No. 54-2014 pertaining to the processing of claims for issuance of tax refunds or tax credit certificates in relation to the amendments by the TRAIN law. The BIR is now given a period of 90 days from the date of submission of the official receipts or invoices to decide on any VAT refund claims filed. The TRAIN law also has a provision that the failure of any BIR official to act on the VAT refund claim within the 90-day period could result in administrative and criminal liability for the said BIR official.
With the new 90-day period to decide on a claim, taxpayers are concerned that BIR officials will just deny VAT refund claims if they are unable to meet the deadline. Prior to the TRAIN law, if the BIR deemed the VAT refund claim as proper, it could either grant a cash refund or issue a tax credit certificate. However, under the TRAIN law, the VAT refund claim will be granted only through a cash refund.
Another interesting change under the enhanced VAT refund mechanism is the automatic appropriation. This means that 5% of the total VAT collection of the BIR from the immediately preceding year shall be treated as a special account in the general fund or as trust receipts for the purpose of funding the claims for VAT refunds. With the amendments brought about by the Enhanced VAT Refund Mechanism, taxpayers may have a shorter window for cash refunds to which they may be entitled.
The possible change in the VAT zero-rating is dependent upon the fulfilment of the following conditions: (1) the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within 90 days from the filing of the VAT refund application with the BIR; and (2) all pending VAT refund claims as of Dec. 31, 2017, shall be fully paid in cash by Dec. 31, 2019.
We should note that the BIR has yet to issue clear guidelines on these matters. Until the time the BIR has clearly addressed this, taxpayers — including PEZA registered enterprises — can only hope that this enhanced VAT refund mechanism will be implemented as it should be and that their current tax incentives will continue.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Irish Rosanne M. Pullante is a Senior Associate at SGV — Financial Services Tax.