BACK in December 2021, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 21-2021 to amend certain provisions of RR 9-2021 to implement Sections 294 (E) and 295 (D) of Title XIII of the Tax Code, as amended by Republic Act (RA) 11534 or the “Corporate Recovery and Tax Incentives for Enterprise Act.”

Recently, the BIR issued another regulation, RR 3-2023. The said regulations remove the need to apply for value-added tax (VAT) zerorating approval, identify certain purchases that are not qualified for zero-rating, and the treatment of the health maintenance organization (HMO) plans of the registered export enterprise.

Application with the BIR

RR 3-2023 removes the requirement for local suppliers of goods and services of registered export enterprises to apply for approval of VAT zero-rating with the BIR. Upon implementation of RR 21-2021, as you may recall, there was the requirement that prior to the transaction, registered export enterprise buyers should provide their suppliers with a photocopy of the BIR certificate of registration (BIR Form 2303), certificate of registration and VAT certification issued by the concerned investment promotion agency (IPA), and a sworn declaration that the goods and/or services being purchased will be used directly and exclu

sively in the registered project. The supplier will then seek approval from the BIR before it can apply the VAT zero-rating. Absence of the requisites may result in disallowance of the VAT zero-rated sale.

Now that this requirement is no longer necessary, the VAT zerorating on local purchases of goods can be availed of based on the certification issued by the concerned IPA without prejudice, however, to the conduct of post audit investigation/verification by the BIR that the goods or services are indeed directly and exclusively used by the registered export enterprise in its registered project or activity. For applications pending with the concerned BIR office upon effectivity of the regulations, these will be accorded VAT zero-rating treatment from the date of filing of the application, subject to the conduct of a post audit.

Purchases not qualified

Back in 2022, the BIR issued Revenue Memorandum Circular (RMC) 24-2022 to clarify the meaning of “direct and exclusive use” as those 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. Hence, only those direct costs will qualify for VAT zero-rating while those used for administrative purposes will not. The circular also listed 13 services not entitled to VAT zero-rating though duly accredited or licensed by any of the IPAs.

For this year, RR 3-2023 clearly identified the following as local services and supplies of goods relating to the said services that are not entitled to VAT zero-rating incentive of a registered export enterprise: janitorial services, security services, financial services, consultancy services, marketing and promotion, and services rendered for administrative operations such as human resources (HR), legal, and accounting.

The new negative list retains only four out of 13 services identified in RMC 24-2022 following a clamor from registered export enterprises that most of those purchases are clearly attributable to their registered activities. Marketing

and promotion, as well as services rendered for administrative operations like HR, legal, and accounting services are recent additions.

The registered export enterprise, however, is not precluded from submitting supporting evidence to prove to the concerned IPA that any of the above local purchases of services or purchase of goods relating to the above services are indeed directly and exclusively used in its registered project or activity.

In all instances, when it comes to issuing the VAT zero-rating certification, the concerned IPA will be guided by the rule that such local purchases of goods and services are directly attributable to the registered project or activity without which such registered project or activity cannot be carried out. These 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 depending on the nature of the registered project or activity of the export enterprise.

If the purchased goods or services are used in both the registered project or activity and administrative operations, the registered export enterprise should adopt a method to best allocate the same. If a proper allocation cannot be determined, the said purchases will be subject to 12 percent VAT.

Treatment of HMO plans

Lastly, HMO plans acquired by the registered export enterprise for its employees who are directly and exclusively involved in the operations of the registered projects or activities and forming part of their compensation package will be considered directly and exclusively used in the registered project or activity of a registered export enterprise subject to the conditions provided under the existing laws, rules and regulations regarding the availment thereof.

The author is a director with the Tax and Corporate Services group of Deloitte Philippines (Landicho Abela & Co.), a member of the Deloitte Asia Pacific Network. For comments or questions, email dcnavarro@deloitte.com. Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Limited.