Enterprises registered with the Philippine Economic Zone Authority (PEZA) are entitled to VAT zero-rating on local purchases on the basis of the cross-border doctrine.
Under Section 8 of the Special Economic Zone Act, or Republic Act (RA) 7916, as amended, PEZA shall manage and operate the ecozones as a separate customs territory, thus, creating the fiction that the ecozone is a foreign territory. As a result, sales made by a supplier from the customs territory to a purchaser in the ecozone shall be treated as exportation from the customs territory. Conversely, sales made by a supplier from the ecozone to a purchaser in the customs territory shall be considered an importation into the customs territory.
Under the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (GR No. 150154), the Supreme Court held that the Philippine VAT system adheres to the cross-border doctrine where no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. Since the ecozone is regarded as a foreign territory, the sales of goods and services by VAT-registered enterprises to PEZA-registered enterprises shall be subject to zero percent VAT.
Zero-rating of the local purchases of goods and services by PEZA-registered enterprises was strengthened by Revenue Memorandum Circular (RMC) 74-99 and RMC 42-03.
However, in BIR Ruling DA-202-08, involving the sale of room accommodation.
food and beverage services of a hotel located within Metro Manila to PEZA-registered enterprises, the BIR ruled that the special tax incentives only apply with respect to the registered enterprise’s operations within the ecozone. If the service is rendered within the customs territory, such sale of service by a VAT-registered person shall be subject to 12 percent VAT regardless of the status of the buyer as an ecozone-registered enterprise. The BIR has taken a smilar position in all its subsequent rulings.
In a recent Court of Tax Appeals (CTA) decision, a taxpayer requested for refund of the unutilized input VAT from purchases of goods and services, related to zero-rated sales. But the BIR held that the taxpayer was not entitled to a refund on the basis that as a PEZA-registered enterprise, it is subject to VAT at zero percent rate on its local purchases and no VAT can be passed on to it.
In response, the taxpayer alleged that domestic purchases of goods and services were consumed and rendered outside the PEZA zone and are therefore subject to the 12 percent VAT.
In order to prove the same, the taxpayer presented documentary evidences and a number of witnesses testifying that unutilized input VAT were indeed consumed in its operations outside the ecozone.
The motion for partial reconsideration of the BIR was granted in part considering that an aliquot portion of the unutilized input VAT arose from the purchase of goods and services that were consumed within the ecozone. The CTA disallowed the taxpayer’s claim for refund of unutilized input VAT on purchased goods and services consumed within the ecozone.
On the other hand, the court granted the partial refund of the unutilized input VAT pertaining to purchases of goods and services consumed outside the ecozone, on the basis of the cross-border doctrine and destination principle.
The cross-border doctrine stipulates that 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. Since the ecozone is regarded as a foreign territory, the sales of goods and services by VAT-registered enterprises to PEZA-registered enterprises shall be subject to zero percent VAT.
The destination principle provides that the onus of taxation is on the country where the goods, property, or services are destined, used, or consumed. Those destined for use or consumption within the Philippines shall be imposed with the 12 percent VAT, and those destined for use or consumption outside shall be imposed with the zero percent VAT.
In its decision, the CTA made a distinction on whether the purchased goods and services were utilized with respect to the taxpayer’s operations within the ecozone or not. Previous court decisions and the provisions of law did not make such qualifications.
Will this CTA decision now be the standing rule? Will the suppliers of goods and services pass on their VAT to PEZA-registered customers on the basis of this decision? How will suppliers know when to pass on their VAT to their customers?
With tax reform a hot topic nowadays, we hope that the concerned governing bodies will include the simplification of tax rules on VAT in its discussions, so that tax issues such as this can be avoided and PEZA’s goal of encouraging foreign investments can be further realized.
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The author is a tax manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd.—a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.