Tax Articles

VAT Zero-Rating under CREATE MORE

By: Atty. Mabel L. Buted

Mabel L. Buted Partner   +632 8403-2001 loc.160 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Registered business enterprises (“RBEs”), especially those registered and operating within freeport and economic zones, have always been enjoying VAT zero-rating on their local purchases. This means that their purchases of goods and services from local suppliers have been subjected to 0% VAT. But the qualifications and the rules on entitlement to the VAT incentive have evolved throughout the years.

Before the enactment of the CREATE Act (Corporate Recovery and Tax Incentives for Enterprises) in 2021, the cross-border doctrine was in place. Based on this doctrine, sales to RBEs registered with and located in economic and freeport zones were treated as export sales. Hence, these were subjected to 0% VAT. In other words, all RBEs located inside the zones were entitled to VAT zero-rating on their local purchases as long as the entities remain registered. No prior application for effective VAT zero-rating was required. The VAT incentive could be availed of on the basis of the Certification of VAT zero-rating issued by the Investment Promotion Agency to the RBE.

Then, after the CREATE Act was passed, the application of the VAT zero-rating incentive became limited. The incentive covered only purchases that were directly and exclusively used in the registered project or activity of the enterprise. The “direct and exclusive use” in the registered project or activity would refer to the raw materials, inventories, supplies, equipment, goods, services, and other expenditures necessary for the registered project or activity, without which the registered project or activity cannot be carried out. Based on the law, local purchases qualified for VAT zero-rating were restrictive. This effectively removed the coverage, support, and administrative expenses like janitorial, security, banking and financial, consultancy, marketing and promotion, and other administrative expenses.

The implementing revenue regulations (“IRR”) of the CREATE Act further restricted the application of the VAT incentive. While the law did not limit the RBEs that are entitled to VAT zero-rating on their local purchases, its IRR limited the entitlement of the incentive only to those considered as export enterprises (Registered Export Enterprises or the REEs). In effect, the domestic market enterprises or the DMEs were stripped off the incentive. Further, during the initial implementation of the CREATE Act, prior approval from the tax authority before the RBEs can avail of the VAT zero-rating was required. However, this requirement was later removed.

In response to the concerns raised by various groups on the changes introduced by the CREATE Act and its implementation, the CREATE MORE Act (Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy) was subsequently passed. The Act later became effective in November 2024.

The requirement of “direct and exclusive use” in the RBE’s registered project or activity before the purchases may be subjected to 0% VAT was relaxed in the CREATE MORE Act. Under the new law, the local purchases need only to be “directly attributable,” and not anymore “directly and exclusively used,” to the registered project or activity. “Directly attributable” expenses would include expenses incidental to and reasonably necessary for the registered project or activity. These now cover the administrative expenses previously excluded under the CREATE Act (janitorial, security, financial, consultancy, marketing, legal, human resources, and accounting). Under the CREATE MORE Act, registered export enterprises are still entitled to VAT zero-rating without further qualification. However, with respect to domestic market enterprises, only those considered as high-value DMEs can enjoy the VAT incentive. To qualify as a high-value DME, the enterprise must meet either of the following requirements: (a) investment capital exceeding P15 billion and it must be engaged in sectors considered as import-substituting; or (b) with export sales in the immediately preceding year amounting to at least USD100 million. No prior application or prior approval from the tax authority is required before entitlement to VAT zero-rating.

Our tax laws are indeed significantly evolving. We are yet to see the impact of the changes under the CREATE MORE Act. But whatever it is, I hope that our government will continue the tax reforms, as there are still rules that need to be fixed and to conform with the requirements of our current situation.