Tax Articles

Export Sales under EO 226

By: Atty. Mabel L. Buted

The recent issuances on the value-added tax (VAT) treatment of sale transactions made to enterprises enjoying tax incentives, especially those registered and located in special economic zones, are causing confusions. Even experts on the matter have varying opinions. Let me not add to that confusion, although I have my own opinion on the matter. In the meantime, I’ll limit this discussion to what is considered export sales under EO 226 as it applies to export processing zones.

Claiming that the conditions - successful implementation of an enhanced VAT refund system and the payment of all pending refund claims as of December 31, 2017 by December 31, 2019 – as provided in the TRAIN Law for the imposition of 12% on certain items (3 types of transactions for sales of goods and 2 for sales of services) of zero-rated transactions had been met, RR 09-2021 now seeks to impose 12% VAT on these five items of zero-rated sales. These sales previously treated as VAT zero-rated will now be subject to the 12% VAT. That includes the sales considered exports under EO 226.

And what are considered export sales under EO 226, which are now subject to VAT on the assumption that the enhanced VAT refund system have been satisfied? Does this include sales to entities enjoying tax incentives, such as those registered and located in economic zones?

EO 226 provides an enumeration of the transactions which are treated as exports. The VAT regulations adopted the same list, except for a few which are excluded. And these sales transactions considered as constructive exports include sales to export processing zones.

A reference to a few cases decided by the Courts affirmed the classification of sales to ecozone registered enterprises as constructive exports. In Commissioner of Internal Revenue vs. Seagate Technology (Philippines), Inc. (G.R. No. 153866, February 11, 2005), the Court declared that sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226.

The Court noted that an ecozone — indubitably a geographical territory of the Philippines — is, however, regarded in law as foreign soil. This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone. The Court also noted that the ecozone within which the taxpayer is registered is managed and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. And following the cross-border principle of the VAT system, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory to an ecozone. Thus, sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country.

It is not only the Courts that declared the sales to ecozone registered enterprises as VAT zero-rated, being constructive exports under EO 226. The BIR itself, in a number of issuances, described the sales to ecozone registered enterprises as export sales entitled to the VAT zero-rating. Specifically for PEZA registered enterprises, the BIR, in Revenue Memorandum Circular No. 74-99, clarified that the sales of goods made by a VAT registered supplier from the customs territory to a PEZA registered enterprise are indirect exports subject to zero percent (0%) VAT. In recognizing the VAT treatment as zero-rated, the BIR used the classification of export sales under EO 226 as the basis. In effect, the BIR recognized the sale of goods to PEZA registered enterprise as export under EO 226. Note that this has no counterpart provision for sale of services. But just the same, the circular treated the sales of services to PEZA registered enterprise as zero-rated, not as an export sale under EO 226 because that only pertains to goods, but under the "cross border doctrine" of the VAT System.

Thus, for a long time, sales of goods and services to PEZA registered enterprises or to ecozone registered enterprises in general had always been enjoying VAT zero-rating. And this had always been the rule until these recent issuances were made. On the assumption that the enhanced VAT refund system had in fact been successfully established, then there is no doubt that constructive exports under EO 226 may now be subject to the 12% VAT. But shouldn’t the sale of services be spared from the imposition of the 12% VAT? Services do not fall under the category of exports under EO 226. And should they not therefore remain as zero-rated under the same justification provided in RMC 74-99?