Tax Articles

What is Happening to CREATE MORE?

By: Atty. Irwin C. Nidea, Jr.

Irwin C. Nidea Jr. Senior Partner   +632 8403-2001 loc.330 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

The CREATE MORE versions of the House of Representatives (the “House”) and the Senate have major conflicting provisions in terms of policy direction. One of the major differences of the two is that the House version wants to resurrect the Cross-Border principle, while the Senate version wants it to remain dead.

The tax treatment of export sales is based on the Cross Border Doctrine and Destination Principle of the Philippine VAT system. Under the Destination Principle, goods and services are taxed only in the country where these are consumed. In this regard, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while those destined for use or consumption within the Philippines shall be imposed with VAT (GR 236235).

The House version of CREATE MORE defines “freeport zone” as isolated and policed areas adjacent to a port of entry, which shall be operated and managed as a separate customs territory for value-added tax and customs duty purposes. The Senate version on the other hand has stricken off the phrase “separate customs territory”. Does this show that the Senators are not keen in bringing back the cross-border doctrine?

The Senate version of CREATE MORE has expanded goods and services that are considered zero-rated when sold to a registered business enterprise (RBE) that is located in the freeport zone. Goods and services that are sold to RBEs must only be directly attributable to its registered activity for it to be considered zero-rated. In CREATE, which is still the prevailing rule now, the goods or services that are sold to an RBE must be directly and exclusively used in its registered activity. It means that goods to be considered zero-rated must be converted into or intended to form part of a finished product for sale. or to be used in the chain of production.

Both Houses of Congress want to abandon the direct and exclusive rule. Although the Senate does not want to define freeport zones as separate customs territory, it is one with the House in saying that goods and services that are sold to RBEs are VAT zero-rated only if they are directly attributable to their zero-rated sales. By reviving the Cross-Border doctrine, the House wants to change the current rule (under CREATE) that sales between a domestic market enterprise (DME) that are in the freeport zone are subject to VAT. The House version proposes that sale and delivery of goods to registered enterprises within a separate customs territory should be subject to zero percent VAT. This proposal is not present in the Senate version.

There are peculiar provisions that the House version wants to introduce. First, it wants to consider as VAT exempt sale of goods and services to a Registered Export Enterprise (REE) whose total sales are exported. On the other hand, sale of goods or services by a VAT-registered seller to an REE will only be zero-rated if export sales are less than 100% of total annual production. In other words, if I sell to an REE that exports 100% of its total annual production, I will not be able to claim input VAT that I incurred for my production because my sales are considered exempt from VAT but if I sell to an REE that does not have 100% export sale, I will be able to claim my input VAT because my sale is considered VAT zero-rated. There appears to be a disincentive in selling to a 100% export enterprise. The Senate version, on the other hand, considers sale to an REE regardless of location as VAT zero-rated.

Another conflicting policy direction between the two versions of the CREATE MORE bills is the power of the Investment Promotion Agencies (IPA) vis a vis the Fiscal Incentives Review Board (FIRB). The House version wants to return to the IPAs, which includes PEZA, SBMA, among others, the power to approve incentives and limit the FIRB’s powers to a mere recommendatory and policy making body. The Senate version on the other hand wants the FIRB to remain in control in approving incentives and in policing RBEs.

One of the major changes being proposed in the Senate version of the bill is the transfer of the power to grant VAT refund to the Department of Finance (DOF) from the Bureau of Internal Revenue (BIR). There is also a strict timeline to be observed and a mechanism where taxpayers may request reconsideration of a denied claim. Unlike now, where a motion for reconsideration of a denied claim is not an available remedy.

There is a clamor for CREATE MORE because CREATE is found wanting. I hope that the concerns of all stakeholders are properly addressed in the final version that will be passed into law. If not, expect CREATE MOST.