REVENUE MEMORANDUM CIRCULAR NO. 24-2022 issued on March 9, 2022 clarifies the issues relative to Revenue Regulations (RR) No. 21-2021 implementing the amendments to the Value-Added Tax (VAT) zero rating provisions under Sections 106 and 108 of the National Internal Revenue Code of 1997 (Tax Code), in relation to Sections 294(E) and 295(D), Title XIII of the Tax Code, introduced by Republic Act (RA) No. 11534 (CREATE Act), and Section 5, Rule 2 and Section 5, Rule 18 of the CREATE Act Implementing Rules and Regulations (IRR).

       Before the CREATE Act, Ecozones and Freeportzones were, by legal fiction, regarded as foreign territories under Revenue Memorandum Circular (RMC) No. 74-99 and RMC No. 7-2007. Thus, following the “cross border doctrine”, the sale of goods and services by a VATregistered seller to registered enterprises in these economic and freeport zones were treated as constructive export subject to zero-percent (0%) VAT.

        The “cross border doctrine” as applied to Ecozones or Freeport zones has been rendered ineffectual and inoperative for VAT purposes with the passage of CREATE Act because of the following:

a. Passage of RA No. 11534, or the CREATE Act, expressly providing that only those goods and services that are directly and exclusively used in the registered project or activity of Registered Business Enterprises (RBEs) qualify as VAT 0% local purchases;

b. Sections 294(E) and 295(D), Title Xlll of the Tax Code, as amended by the CREATE Act, and as implemented under Rule 2, Section 5, and Rule 18, Section 5, respectively, of the CREATE IRR, stating certain parameters for the availment of VAT zero-rating on local purchases of registered export enterprises, regardless of location; and

c. Issuance of RR No. 21-2021, amending Sections 4.106-5(b) and of RR No. 162005, as amended, to harmonize the VAT zero-rate provisions of the Tax Code, as amended by TRAIN and CREATE Laws, which now provide that the effectively zero-rated sales shall only apply to sales of goods and services rendered to persons or entities who have direct and indirect tax-exemption granted pursuant to special laws or international agreements to which the Philippines is a signatory.

      Business enterprises 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% Gross Income Earned (GIE) or Special Corporate Income Tax (SCIT), VAT exemption on importation and VAT zero-rating on local purchases of goods and services by registered export enterprises.

       In addition, enterprises registered prior to the effectivity of the CREATE Act shall continue to enjoy the foregoing VAT exemptions and VAT zero-rating on local purchases of goods and services subject to the rules as provided in Rule 18, Section 5 of the CREATE IRR, that is: “VAT-exemption on importation, and VAT zero-rating on local purchases shall only apply to goods and services directly attributable to and exclusively used in the registered project or activity of the export enterprises during the period of registration of the said registered project or activity of the export enterprises” until the expiration of the transitory period under Section 311 of the Code.

     With the CREATE Act already in place, business enterprises duly registered with the concerned IPA pursuant to the CREATE Act shall only be accorded VAT zero-rating on their local purchases of goods and/or services that are directly and exclusively used in the registered project or activity of the registered export enterprises.

         RR No. 21-2021 took effect immediately following its publication on December 10, 2021 in a leading newspaper of general circulation, and shall cover transactions entered into the third quarter of taxable year (TY) 2021 and onwards. Considering that the taxpayers affected will be able to reclassify their sales from VATable to zero-rated by virtue of the retroactive application of RR No. 21-2021, the retroactive application is justified as it will be beneficial to the taxpayers affected.

        For sale of goods and services that transpired during the effectivity of RR No. 9-2021 or from June 27, 2021 to June 30, 2021, the seller should declare the same as subject to 12% VAT. Consequently, the purchaser, if VAT-registered, can utilize the passed on VAT as Input Tax and shall be deducted from the Output Tax, if any, or should the purchaser be engaged in zero-rated activities, the same can be recovered through VAT refund pursuant to Section 112(A) of the Tax Code, as amended. If the purchaser is not a VAT-registered taxpayer, the VAT paid may be claimed as part of the cost of sales or expenses.

       For sale of goods and services where the VAT has already been billed and/or collected during the effectivity of RR No. 9-2021 from July 1, 2021 to July 27, 2021, the seller and the buyer have the following options:

a. Retain the transaction as subject to VAT. The seller can opt to still declare the sales as subject to 12% VAT. Consequently, the purchaser, if VAT-registered, can utilize the passed on VAT as Input Tax and shall be credited against the Output Tax, if any, or should the purchaser be engaged in zero-rated activities, the same can be recovered through VAT refund pursuant to Section 112(A) of the Tax Code, as amended. If the purchaser is not a VAT-registered taxpayer, the VAT paid shall be claimed as part of the cost of sales or expenses.

b. Revert the transaction from VATable to zero-rated. Where the transactions have already been declared in the VAT return/s, the seller may amend the VAT return filed after reimbursing/returning the VAT paid by the buyer that is a registered export enterprise subject to the rule that no Letter of Authority (LOA) has been issued yet. The adjustment to sales shall only be to the extent of the reimbursed VAT to the registered export enterprise. The resulting overpayment due to unutilized input tax credits, if any, may be recovered through VAT refund pursuant to Section 112(A) of the Tax Code, as amended, inasmuch as the corresponding sale is reverted to VAT zero-rated.

        Should the seller revert the transactions from VATable to zero-rated, the seller shall retrieve the VAT sales invoice/official receipt (SI/OR) originally issued to the registered export enterprise buyer for cancellation and replacement with a zero-rated SI/OR. The seller shall prepare a list of VAT SI/OR cancelled, together with the corresponding zero-rated SI/OR replacement subject to validation of the BIR.

        Transactions that have been considered by the seller as VAT zero-rated shall still remain as VAT zero-rated for the period July 1, 2021 to December 9, 2021. However, for those taxpayers that declared their transactions to qualified registered export enterprises and domestic market enterprises (DMEs) within the Ecozones and Freeport zones as subject to VAT, the options laid down in Q&A No. 7 and 8 of the Circular may be followed.

        Sale of VAT-registered suppliers to registered export enterprises enjoying fiscal incentives under the CREATE Act shall be treated as VAT zero-rated. However, it shall only apply to goods and/or services directly and exclusively used in the registered project or activity of said registered export enterprise, for a maximum period of seventeen (17) years from the date of registration, unless otherwise extended under the Strategic Investment Priority Plan (SIPP). The enjoyment of VAT and duty incentives is reckoned from the registered export enterprise’s date of registration and throughout the period as indicated in its Certificate of Registration.

       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 directly attributable to the registered project or activity without which the registered project or activity cannot be carried out.

      Only the portion of the expense directly and exclusively used by a registered export enterprise for its registered project or activity shall qualify for VAT zero-rating on local purchases, excluding those used for administrative purposes. The registered export enterprise concerned should adopt a method to best allocate goods or services purchased, e.g. for utilities, use of separate water and power meters for its registered project or activity or any method that may determine the allocation, such as area usage or ratio of utility expenses between cost of sales and administrative expenses as reflected in the prior year Audited Financial Statements. 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. For this purpose, services for administrative purposes, such as legal, accounting, and such other similar services, are not considered expenses directly attributable to and exclusively used in the registered project or activity.

         Cost items that fall under the “other expenditures” are costs that are indispensable to the project or activity, i.e., without which, the project or activity cannot proceed, and 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. Any costs incurred prior to the registration of a project or activity with the IPA shall not be allowed for this purpose.

      Only the purchases of goods and services that are directly and exclusively used in the registered project or activity of the registered export enterprise shall be allowed for VAT zerorating. Hence, not all goods coming into, or services rendered within the Ecozones or Freeport shall be accorded VAT zero-rating.

        RBEs which are categorized as Domestic Market Enterprises (DMEs) are not entitled to VAT zero-rating on local purchases. Sale of goods or services to a registered DME shall be subject to VAT at 12%. In addition, the following service enterprises, though duly accredited or licensed by any of the IPAs, are not entitled to VAT zero-rating on their local purchases of goods and/or services:

• • • Customs brokerage;
    • Trucking services;
    • Forwarding services;
    • Janitorial services;
    • Security services;
    • Insurance;
    • Banking and other financial services;
    • Consumers’ cooperatives;
    • Credit unions;
    • Consultancy services;
    • Retail enterprises;
    • Restaurants; and
    • Such other similar services as may be determined by the Fiscal Incentives Review
      Board (FIRB).

     The DME under the 5% Gross Income Tax (GIT) or Special Corporate Income Tax (SCIT) regime, registered as a VAT exempt entity, shall treat its revenues as VAT exempt. The VAT passed on to it by its VAT-registered local suppliers shall form part of its cost or expenses.

      The following rules shall apply on the sale made by registered export enterprise/DME to another registered export enterprise:

a. If the seller is VAT-registered while enjoying Income Tax Holiday (ITH), the sale of goods and services to another registered export enterprise is subject to VAT at zero-rate, provided, the goods and services are directly and exclusively used in the latter’s registered project or activity.

b. If the seller is enjoying the 5% GIE incentive, the sale of goods and services, such as manufactured, assembled or processed product or IT/BPO services to another registered export enterprise that will form part of the final export product or export service of the latter, of at least seventy (70%) of its total production or output, shall be VAT-exempt.

        Incentives of non-RBE exporters shall be limited only to VAT at zero rate on its direct export sale of goods or services pursuant to Sections 106(A)(2)(a)(1) and 108(B)(2) of the Tax Code, as amended. However, if the non-RBE exporter is VAT-registered and sells goods and services to a registered export enterprise, the rule under the Q&A No. 18(a) of the Circular shall apply.

        The VAT treatments on the sale, transfer, or disposition of the imported capital equipment, raw materials, spare parts, or accessories are as follows:

a. If the purchaser is a registered export enterprise, regardless of location, the transaction is subject to VAT at zero-rate; provided that the same shall be directly and exclusively used in the registered project or activity of the registered export enterprise.

b. If seller is non-registered export enterprise or a domestic market enterprise, regardless of location and is under the following regimes:

• • • • Under Special Corporate Income Tax (5% GIT), transaction is VAT- exempt.
      • Not under the 5% SCIT, transaction is generally subject to VAT at 12% based on the net book value of the capital equipment, raw materials, spare parts, or accessories, unless purchaser is a registered export enterprise, in which case, the rule above shall apply.

       In case the imported capital equipment, raw materials, spare parts, and accessories will be used for a non-registered project or activity of the RBE, the corresponding VAT on importation should 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.

      Sales to enterprises covered by special laws, such as renewable energy developers under RA No. 9513 (Renewable Energy Act of 2008, International Rice Research Institute (IRRI), Asian Development Bank (ADB), etc., are still subject to VAT at zero percent rate (0%) pursuant to Sec. 4.106-5(b) for goods and Sec. 4.108-5(b)(2) for services, of RR No. 16-2005, as amended by RR No. 21-2021.

       Sales to existing registered export enterprises located inside Ecozones or Freeport zones shall also be qualified for VAT zero-rating under Sec. 4.106-5(c) and Sec. 4.108-5(b)(3) of RR No. 16-2005, as amended by RR No. 21-2021 until the expiration of the transitory period or the remaining period of their incentives as specified in Rule 18 of the CREATE IRR. However, it shall only apply to goods and/or services directly and exclusively used in the registered project or activity of a registered export enterprise.

       Sale of goods or services to existing registered non-export enterprises located inside the Ecozones or Freeport Zones shall be subject to VAT at 12%. On the other hand, the sale of goods or services by existing registered non-export enterprises located in Ecozones and Freeport Zones shall be subject to the rules under Q&A No. 17 of the Circular.

    Sales by VAT-registered sellers to export enterprises registered with the Board of Investments (BOI) and IPAs other than Philippine Economic Zone Authority (PEZA) or Freeports are also subject to VAT at zero-rate but shall only apply to goods and/or services directly and exclusively used in the registered project or activity of the registered export enterprise until the expiration of the transitory period or the remaining period of their incentives as specified in Rule 18 of the CREATE IRR.

         A VAT-registered RBE whose registration with an IPA has already expired, shall be subject to VAT in accordance with Sections 106, 107, and 108 of the Tax Code, as amended.

       The sale of goods or services to non-resident foreign buyers by non-RBEs, not enjoying incentives, but were delivered or rendered to export-oriented companies in the Philippines, shall not be considered zero-rated under Sections 106(A)(2)(a)(3) and 108(B)(1) of the Tax Code, as amended, since said transactions have already been considered subject to VAT in compliance with the provisions of the TRAIN Law.

        The sale of processing, manufacturing or repacking services by PEZA RBEs entitled to 5% GIT or SCIT to persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), shall be exempt from VAT. In this case, the service fee shall be indicated in the Official Receipt and VAT returns as a VAT exempt sale.

        The sale of raw materials or packaging materials by a PEZA RBE to a non-resident buyer for delivery to a resident local export-oriented enterprise, to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, shall be exempt from VAT if the sale is made by a PEZA RBE entitled to 5% GIT or SCIT.

         A registered export enterprise with multiple incentives regime shall remain VATregistered until the expiration of the ITH for all its registered activities and all its activities are covered by the 5% GIT or SCIT regime. The registered export enterprise shall report as VAT exempt the sales under the 5% GIT or SCIT regime as provided in Q&A No. 18(b) of the Circular, while the sales under the ITH shall be reported in the VAT return as 0% VAT.

         A registered export enterprise that has already completed its ITH and already under the 5% GIT or SCIT regime but remained as VAT-registered entity is required within two (2) months from the expiration of its ITH to change its registration status from a VAT-registered entity to Non-VAT.

        Registered export enterprises enjoying GIT or SCIT regime but are still VAT-registered at the time the CREATE Act took effect are required within two (2) months from the effectivity of the Circular to change its registration status as provided in the preceding paragraph.

         All approved applications and applications for VAT zero-rating that were suspended due to the effectivity of RR No. 9-2021 shall remain effective as if RR No. 9-2021 was not implemented should the taxpayers involved in the transaction opt to revert the same as VAT zero-rated, except for the four (4)-day period covering June 27, 2021 to June 30, 2021. Provided, however, that Title XIll of the Tax Code, as amended by the RA No. 11534 (CREATE) shall, henceforth, be strictly complied with, particularly the requisite that it shall only apply to goods and/or services directly and exclusively used in the registered project or activity of a registered export enterprise.

       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 zerorating, as provided for under the CREATE. Sections 294(E) and 295(D), Title XIII of the Tax Code, as implemented by Section 5, Rule 2 of the amended CREATE IRR emphasize that VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of a registered export enterprise upon the endorsement of the concerned IPA, in addition to the documentary requirements of the BIR. It is therefore of paramount importance to validate whether the said requisites are duly complied with before availment of the VAT zero-rate incentive by the supplier of the registered export enterprise. Absence of prior approval from the BIR may result in the disallowance of the VAT zero-rated sale of the supplier.

     The IPA concerned shall issue annually a VAT zero percent (0%) certification only to registered export enterprises. The certification shall indicate the registered export enterprise’s (i) registered export activity i.e., manufacturing, IT BPO; (ii) tax incentives entitlement under agreed terms and conditions with the validity period; and (iii) 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 the BIR the list of RBEs which are categorized as export enterprise, for purposes of VAT zero-rating. Prior to the transaction, the registered export enterprise buyers 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 containing the information or specifications required under Q&A No. 34 of the Circular. In addition, the registered export enterprises 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.

        Upon the effectivity of RR No. 15-2021, the processing of applications for VAT zerorating shall be governed by Revenue Memorandum Order (RMO) No. 7-2006. However, provisions of Sections 294(E) and 295(D), Title Xlll of the Tax code, as amended by CREATE and Section 5, Rule 2 and Section 5, Rule 18 of the CREATE IRR, as amended, shall be strictly complied with. Relative hereto, the following must be included in the attachments to the application for VAT zero-rating:

a. Certificate of Registration and VAT Certification issued by concerned IPA as submitted to them by their registered export enterprise buyers;

b. A sworn affidavit executed by the registered export enterprise-buyer, stating that the goods and/or services bought are directly and exclusively used for the production of goods and/or completion of services to be exported or for utilities and other similar costs, the percentage of allocation to directly and exclusively used for the production of goods and/or completion of services to be exported; and

c. 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 addition to the documentary requirements provided under existing revenue issuances, the supplier-applicant of the RBE-buyer shall be required to submit upon filing of the claim for VAT credit or refund the approved application for VAT zero-rating.

        No VAT shall be passed on to the registered export enterprise on its purchases of goods and services directly and exclusively used in the registered project or activity. Should the local supplier inadvertently passed on VAT to the registered export enterprise, the latter may contest the same and/or resolve with the former 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.

        Section 112(A) of the Tax Code, as amended, prescribes that “any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales.” In this regard, the CREATE Act has prescribed that the purchases, to be considered VAT zero-rated, shall only apply to goods and/or services directly and exclusively used in the registered project or activity, during the period of registration of the said registered project or activity with the concerned IPA.

        Reconciling both provisions, 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 under Section 112(A) of the Tax Code, as amended. However, the following options may be availed of:

a. If VAT registered and enjoying ITH, claim the passed on VAT as input tax credit under Section 110 of the Tax Code, as amended, and apply against future output VAT liabilities; or

b. 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 the 5% SCIT incentive commences) pursuant to Section 112(B) of the Tax Code, as amended, and implemented in Section 4.112-1 (b) of RR No. 13-2018; or

c. If non-VAT registered, charge to cost or expense account.