IT has been more than three years since the enactment of Republic Act (RA) 10963, otherwise known as the “Tax Reform for Acceleration and Inclusion (Train) Act.” If you recall, under the Train Act, certain transactions previously taxed at zero rate shall be subject to 12-percent value-added tax (VAT) upon the implementation of the enhanced VAT refund system and cash refund of all pending VAT claims as of Dec. 31, 2017. This significant shift on VAT, which raised many concerns among the registered enterprises within separate custom territories back in 2018, mainly among Philippine Economic Zone Authority (PEZA)-registered entities, shall now be in full force and effect.

On June 9, 2021, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 9-2021 to announce that conditions set forth in Train have been fully satisfied. As such, sales by local suppliers to exporters, such as PEZA-registered entities, are now subject to 12-percent VAT.

These transactions include sale of raw materials or packaging materials 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.

The 12-percent VAT will also be imposed on the sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 70 percent of total annual production and those considered export sales under Executive Order 226, otherwise known as the Omnibus Investments Code, and other special laws.

Likewise, outsourced services such as processing, manufacturing, or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported and services performed by subcontractors and or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70 percent of the total annual production, shall no longer be VAT zero-rated sales.

These regulations shall take effect 15 days following their publication, or on June 27, 2021, to be exact.

So how should PEZA-locators now treat the 12-percent unutilized input VAT?

They have two possible approaches available to them: file a VAT refund or treat the VAT as part of the cost.

It should be noted that VAT refund is only allowed if the unutilized input VAT arose from zerorated sales. This means that this option only applies to PEZA-registered enterprises under the income tax holiday regime. For PEZA-registered enterprises under the 5-percent preferential tax regime, and assuming they de-registered as VAT taxpayers, there is no other option but to treat the passed-on 12-percent VAT as part of their costs.

Either of the two options will certainly not benefit PEZA-registered entities and their local suppliers.

While the enhanced VAT refund system is in force with the promise that refunds will be granted within 90 days from the date of the submission of the official receipts or invoices and other documents in support of the application, PEZA locators cannot be blamed for their skepticism towards its proper implementation.

Some may think that the BIR might not fully account for the documents and simply deny the claim just to get away with the imposition of the penalty and liability. If this happens, it would have a significant impact on the cash flow of

PEZA locators considering the cost of filing an appeal with the Court of Tax Appeals and that the input VAT remains unutilized.

There is no doubt that getting a VAT refund in the Philippines is a tedious task. Hence, PEZA locators should ensure that all supporting documents are complete and true before submitting the same; failure to do so may be grounds for the denial of the application.

On the other hand, treating the passed-on VAT as part of the costs will increase the price of the goods and services. This has raised concerns among local suppliers as some PEZA locators may instead source the raw materials from foreign suppliers to mitigate the impact of the pricing. As a consequence, the growth of local businesses may slow down at a time when the economy is already struggling due to the pandemic.

With the change introduced by RR 9-2021, we are hoping that export companies will not be discouraged but will instead continue to be key drivers of the economy amidst the ongoing health crisis. We also hope that the BIR will pay close attention to this matter, especially regarding the VAT refund claims and the proper implementation of the refund process.

The author is a manager with the Tax and Corporate Services Division of Deloitte Philippines, a member of the Deloitte Asia Pacific Network. For comments or questions, email raadelacruz@deloitte.com. Deloitte Asia Pacific Ltd. is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Ltd. Members of Deloitte Asia Pacific Ltd. and their related entities, each of which are separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.