VAT Zero-Rating for Export Enterprises in the Philippines: Rules and Requirements

Export enterprises in the Philippines enjoy VAT zero-rating on certain local purchases and importations, but only if they meet specific thresholds under the National Internal Revenue Code (NIRC), as amended by Republic Act No. 12066 (the CREATE MORE Act). The key requirement: an export-oriented enterprise must have export sales of at least seventy percent (70%) of its total annual production in the preceding taxable year. The Export Marketing Bureau of the Department of Trade and Industry (DTI) determines compliance with this threshold. Enterprises that fail to meet it are disqualified from VAT zero-rating on local purchases in the immediately succeeding year.

What is VAT zero-rating?

Zero-rating is not the same as exemption. A zero-rated sale is a taxable transaction where the VAT rate is 0%. This means the seller charges no output VAT but can still claim a refund or tax credit for input VAT paid on purchases attributable to that sale.

In contrast, a VAT-exempt transaction carries no output VAT, but input VAT generally cannot be credited or refunded.

For export enterprises, zero-rating preserves the principle that exports should not carry domestic indirect taxes.

Which sales are subject to zero percent VAT?

Under Section 106 of the NIRC, as amended, the following sales by VAT-registered persons are subject to zero percent (0%) VAT:

• Export sales, which include the sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise, paid for in acceptable foreign currency and accounted for under Bangko Sentral ng Pilipinas (BSP) rules.
• Sale of goods to an export-oriented enterprise whose export sales are at least 70% of total annual production in the preceding taxable year, as determined by the DTI Export Marketing Bureau.
• Sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or international air transport operations, provided these are used for such operations.
• Sales to bonded manufacturing warehouses of export-oriented enterprises.

Under Section 108 of the NIRC, as amended, services performed for an export-oriented enterprise are also zero-rated if the enterprise meets the 70% export sales threshold and the services are directly attributable to the export activity.

What does "directly attributable" mean?

Section 106 of the NIRC, as amended, defines "directly attributable" as goods and services that are incidental to and reasonably necessary for the export activity of the export-oriented enterprise.

This includes:

• Janitorial and security services
• Financial, consultancy, marketing, and promotion services
• Services for administrative operations such as human resources, legal, and accounting

Section 108 provides that "directly attributable" follows the same definition under Section 106.

Importation exemptions for export enterprises

Under Section 109 of the NIRC, as amended, the importation of goods by an export-oriented enterprise whose export sales are at least 70% of total annual production in the preceding taxable year is exempt from VAT, provided the goods are directly attributable to the export activity.

The DTI Export Marketing Bureau determines compliance with the threshold.

How VAT refunds work

Section 112 of the NIRC, as amended, governs refunds or tax credits of input VAT. The Commissioner of Internal Revenue must grant a refund for creditable input taxes within ninety (90) days from the date of submission of certified true copies of invoices and other required documents.

VAT refund claims are classified into low-, medium-, and high-risk categories based on factors such as the amount of the claim, tax compliance history, and frequency of filing. Medium- and high-risk claims are subject to audit or verification.

If the Commissioner denies the refund, the taxpayer must be informed in writing of the legal and factual basis within the 90-day period. The taxpayer has fifteen (15) days from receipt of the denial to file a request for reconsideration. The Commissioner must decide within fifteen (15) days from receipt.

If the request is denied or the Commissioner fails to act within the prescribed periods, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days.

Electronic invoicing requirements

Under Section 237 of the NIRC, as amended, taxpayers engaged in the export of goods and services are required to issue electronic invoices once the Bureau of Internal Revenue establishes a system capable of storing and processing the required data. Section 237-A similarly requires electronic sales reporting for these taxpayers.

Frequently asked questions

What is the 70% export sales threshold for VAT zero-rating? An export-oriented enterprise must have export sales of at least 70% of its total annual production in the preceding taxable year. The DTI Export Marketing Bureau determines compliance. Failure to meet the threshold disqualifies the enterprise from VAT zero-rating on local purchases in the immediately succeeding year.

Can an export enterprise claim a refund of input VAT? Yes. Under Section 112 of the NIRC, as amended, the Commissioner must grant a refund for creditable input taxes within 90 days from submission of the required documents, subject to risk-based classification and audit for medium- and high-risk claims.

What happens if the export enterprise fails the 70% threshold? It is disqualified from availing VAT zero-rating on local purchases in the immediately succeeding year. Input tax otherwise due on VAT-exempt sales must be paid and may be deductible from gross income.

Practical takeaways

• Confirm that export sales meet the 70% threshold of total annual production; the DTI Export Marketing Bureau makes this determination.
• Ensure that local purchases and services for which zero-rating is claimed are directly attributable to the export activity.
• Maintain certified true copies of invoices and supporting documents for any VAT refund claim.
• Be aware of the 90-day processing period, the 15-day reconsideration window, and the 30-day appeal period to the Court of Tax Appeals.
• Prepare for mandatory electronic invoicing and sales reporting if engaged in export of goods or services.

Primary sources

The rules discussed above are drawn from the following primary sources. Where the firm's library holds the document as a PDF it is embedded here in full; the rest are cited by title.

RR No. 18-2024 — Implementing Section 32(B)(5) of the National Internal Revenue Code of 1997, as amended by Republic Act 12066, or the CREATE MORE Act (Date posted: December 17, 2024) Digest | Full Text | Annex AOpen in Law LibraryDownload PDF

• REPUBLIC ACT NO. 12066 - AN ACT AMENDING SECTIONS 27, 28, 32, 34, 57, 106, 108, 109, 112, 135, 237-A, 269, 292, 293, 294, 295, 296, 297, 300, 301, 308, 309, 310, AND 311, AND ADDING NEW SECTIONS 135-A, 295-A, 296-A, AND 297-A OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

• REPUBLIC ACT NO. 9238 - AN ACT AMENDING CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, BY EXCLUDING SEVERAL SERVICES FROM THE COVERAGE OF THE VALUE-ADDED TAX AND RE-IMPOSING THE GROSS RECEIPTS TAX ON BANKS AND NON-BANK FINANCIAL INTERMEDIARIES PERFORMING QUASI-BANKING FUNCTIONS AND OTHER NON-BANK FINANCIAL INTERMEDIARIES BEGINNING JANUARY 1, 2004

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.