BIR Ruling No. 437-2022

REPUBLIC OF THE PHILIPPINES

BUREAU OF INTERNALREVENUE DEPARTMENT OF FINANCE National Office Building Quezon City

Section 31 the Tax Rule 18 of IRR of VAJ-4|37-2022 RA No. Code; Section 5, 1/1534 Person to Contact: Chief, Law & Legislative Division Tel. Nos. 926-55-36/927-09-63

Date: DEC 0 1 2022

PHILIPPINE ECONOMIC ZONE AUTHORITY 10th Floor, Double Dragon Center Macapagal Avenue Pasay City,1302 West Building, DD Meridian Park

Attention: BGen CHARITO B.PLAZA MNSA,PhD

Director General

Gentlemen:

incentives granted to RBEs under the sunset provisions of the Corporate Recovery and Tax Incentives for Enterprises (CREATE") Act. RevenueBIR whether health maintenance organizationHMO) related expenses Authority PEZA are subject to zero-rated Value Added Tax VAT,as one of the incurredby business enterprises (RBEs) registered with the Philippine Economic Zone This refers to your request for a clear determination from the Bureau of Internal

Background:

1 PEZA has various registered IT-BPM (Business Process Management) Enterprises

(the "IT-BPM Enterprises") within its ecozone.

2 Prior to the effectivity of the CREATE Law, these IT-BPM Enterprises were granted

the Cross-Border Doctrine as provided in Republic Act No.79162PEZA Law and jurisprudence, including its HMO expenses for its employees. incentives, among others, VAT zero rating on their local purchases in accordance with

Zone Authority (PEZA), and for Other Purposes, February 21, 1955. Code of 1997, as Amended, and Creating Therein New Title XIII, and for Other Purposes, March 26, 2021. 2 An Act Providing for the Legal Framework and Mechanisms for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for This Purpose, the Philippine Economic Republi Act No. 11534, An Act Reforming the Corporate Income Tax and Incentives System, Amending for the Purpose Sections 20, 22, 25, 27, 28, 29, 34, 40, 57, 109, 116, 204 and 290 of the National Internal Revenue

VAT-437 -2022 DEC 0 1 2022

3. In support of the request, it was claimed that pursuant to Section 5, Rule 18 of the amended ("Tax Code"). Implementing Rules and Regulations (IRR) of the CREATE Law,3 all RBEs may continue to avail of their respective existing tax incentives until the expiration of the transitory period under Section 311 of the National Internal Revenue Code of 1997, as

states: In reply, please be informed that Rule 18 of the amended IRR of CREATE Law4

"RULE 18. Investments prior to the effectivity of the Act

business enterprises whose projects or activities were granted only an ITH prior thereof for the remaining period of the ITH as specified in the terms and conditions of their registration: Provided, That for those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of this Act, SECTION 1. Projects or Activities Granted Only an ITH. - Registered to the effectivity of this Act shall be allowed to continue with the availment they may use the ITH for the period specified in the terms and conditions of their registration.

incentive after the ITH be allowed to use the ITH for the period specified in the incentives under this Act. SECTION 2. Projects or Activities Granted an ITH and are Entitled to the Five whose projects or activities were granted an ITH prior to the effectivity of this Act and that are entitled to the five percent (5%) tax on gross income earned terms and conditions of their registration and thereafter, avail of the five percent ($%) tax on gross income earned incentive, subject to the 10-year limit for both Percent (5%) Tax on Gross Income Earned. - Registered business enterprises

tax incentive at the rate of five percent (5%) for ten (10) years. ptior to the effectivity of this Act shall be allowed to continue availing the said SECTION 3. Registered Business Enterprises Currently Availing of the Five Percent (5%) Tax on Gross Income Earned. Registered business enterprises currently availing of the five percent (5%) tax on gross income earned granted

Iaws shall be observed and shall not result in the diminution of their respective SECTION 4.Allocation of Gross Income Earned. allocation of shares for LGUs and IPAs as specified in the latter's governing shares - If applicable, the

incentives subject to sections 1, 2 and 3 of this Rule, may continue to enjoy the purchases as provided in their respective IPA registrations; provided, that the SECTION 5. Non-income related tax incentives. - All registered export and duty exemption, VAT exemption on importation, and VAT zero-rating on local dbmestic market enterprises that will continue to avail of their existing tax

No. 11543[(CREATE Act), Revenue Memorandum Circular No. 120-2021, December 13, 2021. 3 Revenue[Memorandum Circular No. 83-2021, Circularizing the Implementing Rules and Regulations of Title XIII of Republic Act No.8424 Otherwise Known as the National Internal Revenue Code of 1997As Amendedby Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises CREATEAct,July 12.2021 Circulariing Amendments to the IRR of Title XIII of R.A.No. 8424 NIRC of 1997), as Amended by R.A.

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dity exemption, VAT-exemption on importation, and VAT zero-rating on local exclusively used in the registered project or activity of said registered export transitory period; provided, further, that importation of capital equipment, spare enterprises registered with the BOI prior to the effectivity of the act shall continue to be subject to duty exemption for a period of five (5) years from date ofregistration. "(Underscoring supplied) purchases shall only apply to goods and services directly attributable to and enterprises located inside the ecozones and freeports until the expiration of the parts, and accessories by existing export enterprises and domestic market

follows: As mentioned in the foregoing provision, Section 311 of the Tax Codes reads as

shall be subject to the following rules: business enterprises with incentives granted prior to the effectivity of this Act SEC.311.Investments Prior to the Effectivity of This Act. -- Registered

A Registered business enterprises whose projects or activities were ghanted only an income tax holiday prior to the effectivity of this Act shall be remaining period of the income tax holiday as specified in the terms and of this Act, they may use the income tax holiday for the period specified in the terms and conditions of their registration. allowed to continue with the availment of the income tax holiday for the conditions of their registration: Provided, That for those that have granted the income tax holiday but have not yet availed of the incentive upon the effectivity

B Registered business enterprises, whose projects or activities were

.income tax holiday, shall be allowed to avail of the five percent (5%) tax on entitled to the five percent (5%) tax on gross income earned incentive after the gfanted an income tax holiday prior to the effectivity of this Act and that are gioss income earned incentive based on Subsection (C): and

( Registered business enterprises currently availing of the five percent

for ten (10) years. " (Underscoring supplied) be allowed to continue availing the said incentive at the rate of five percent (5%) (5%) tax on gross income earned granted prior to the effectivity of this Act shall

avail of the income tax incentives granted to them before the effectivity of the CREATE Law (i.e., income tax holiday (ITH, five percent (5%) tax on gross income earned incentive after the [TH). However, these incentives: Pfescinding from the above-cited provisions, it is clear that RBEs may continue to

of the CREATE Law or until April 11, 20317); and period of the ITH as specified in the terms and conditions of their registration; For 5% gross income tax, for ten (10) years from the effectivity may only be availed within the transitory period (For ITH, the remaining

The termActrefers to the CREATE Law. 5 As amendled by Section 16 of CREATE Law. April 11, 2021; Revenue Memorandum Circular No. 38-2022, April 6, 2022. 7 The CREATE was signed into law on March 26, 2021. It was published on March 27, 2021 and took effect on

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2 excludes the VAT zero-rating incentive on local purchases of non-export

enterprises.8

local purchases incentive shall only apply to goods and services directly attributable to and exclusively used in the registered project or activity of the export enterprises until the services directly attributable to and exclusively used in the registered project or activity of said export enterprises. Rule 18 of the amended IRR of CREATE Law expressly states that the VAT zero-rating on expiration of the transitory period. Hence, while it is true that a registered export enterprise REEmay still avail of the VAT zero rating, the same is limited only to goods and When it comes to the VAT zero-rating incentive, it bears stressing that Section 5,

exclusivelly used in its registered project or activity," to wit: Section 5, Rule 2 of the amended IRR provides what constitutes directly and

Tax and Duty Incentives "Rule 2

SHCTION 5. Value-Added Tax (VAT) Zero-Rating and Exemption. -xxx

the BIR. " (Underscoring supplied) materials, inventories, supplies, equipment, goods, packaging materials, services. oyerhaul of equipment, and other expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out; provided, that the VAT zero-rating on local purchases shall be granted upon the endorsement of the concerned IPA, in addition to the documentary requirements of The direct and exclusive use for the registered project or activity refers to raw including provision of basic infrastructure, utilities, and maintenance, repair and

RMC No. 24-2022 the Bureau clarified that the phrase direct and exclusive use referred to as: For this purpose, under Questions No. 13 and 14 of Revenue Memorandum Circular

Q13: What is meant by direct and exclusive use in the registered project or activity?

adtivity without which the registered project or activity cannot be carried out. materials, supplies, equipment, goods, packaging materials, services, including prjovision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or A3: Direct and exclusive use in the registered project or activity refers to raw

XXX XXX XX

Republic Act 9R/A.) No.11534 (CREATE Act),and Section 5,Rule 2 and Section 5,Rule 18 of the CREATE Act Implerhenting Rules and Regulations (CREATE IRR), February 23, 2022. 8 Section 5] Rule 18 of the amended CREATE IRR. 9 Clarifying Issues Relative to Revenue Regulations (RR) No. 21-2021 Implementing the Amendments to the Value-Added Tax (VAT) Zero Rating Provisions Under Sections 106 and 108 of the National Internal Revenue Code of 1997 Tax Code), in Relation to Sections 294(e) and 295(D), Title XIII of the Tax Code, Introduced by

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Qi: What cost items fall under the "other expenditures " in the preceding question?

prdject or activity of the export enterprise. " (Emphasis and underscoring supplied) which, the project or activity cannot proceed, and these include expenses that are necessary or required to be incurred depending on the nature of the registered Al: These are costs that are indispensable to the project or activity, i.e., without

cannot be carried out. project oractivity, without which the registered project or activity cannot be carried out. expenditurres that are/will be directly and exclusively used in or attributable to the registered These are expenses that are indispensable to the project or activity, without which, the same Ba$ed on the afore-quoted provisions, purchases of goods and services includes the

mandated jo submit the documentary requirements as prescribed in RMC No. 137-2022 and for qualified employees are given VAT zero rating. registered business or activity of REEs, hence, subject to zero percent (0%) VAT. It must be employees dependents, as well as HMO plans for employees NOT directly involved in the operationsof the registered projects or activities of the REEs. For this purpose, REEs are 202210 that HMO plans acquired by REEs for employees directly involved in the operations tool for building a competitive workforce but also ensures continuous and smooth operation HMO related expenses are considered expenses directly and exclusively used in the emphasized, however, that the VAT zero-rating shall not extend to HMO plans procured for other existing rules and regulations relating to this matter to ensure that only HMO expenses of their registered projects or activities and forming part of their compensation package can be considered necessary expenses since providing health benefits is not only an indispensable of the registered project or activity by having a healthy workforce. Considering the foregoing. In the case of HMO related expenses, this Office has clarified in RMC No. 137-

not repealRepublic Act No. 7916 in its entirety, but only those provisions that were PEZA zones as separate customs territory. However, it bears stressing that the concept of inconsistent with the provisions of the CREATE Law.11 As such, the Bureau still recognizes "Cross-Border Doctrine was rendered ineffectual and inoperative for VAT purposes. Philippine(IBPAP, it should be clarified that the Bureau agrees that CREATE Law did Fufther, in relation to the letter of IT and Business Process Association of the

The legal basis for saying this is that:

( availment of VAT zero-rating on local purchases of registered export First, the CREATE Law now expressly requires that only the purchase of services that are directly and exclusively used in the registered project or activity of a registered export enterprise are entitled to VAT zero-rating Second, the IRR of the CREATE Law provides for the requirements for the project or activity shall qualify for VAT zero-rating. In other words, not all Ecozones are automatically accorded VAT zero-rating. Only the goods and goods and services that are directly and exclusively used in the registered goods coming into, or services rendered within the Freeport Zones or

1 October 1 2022 11 Section 18. CREATE Law.

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enterprise are entitled to VAT zero-rating. enterprises, that is, only the goods and services that are directly and exclusively used in the registered project or activity of a registered export

registered project or activity of a registered export enterprise are entitled to VAT zero-rating. longer be made because it will now violate the conditions imposed under the CREATE and its IRR that only the goods and services that are directly and exclusively used in the Hence, the unqualified or sweeping application of the cross-border doctrine can no

it is VA-exempt. If it is enjoying the ITH, then it is subject to VAT. This distinction was services fo entities located within the Ecozones are considered constructive exports pursuant to the cfoss border doctrine and, therefore, subject to 0% VAT. However, with the recent issuance bf RMC No. 24-2022, the cross-border doctrine is now abandoned in order to align the VAT|rules with the provision of the CREATE and its IRR. depends pn the tax regime of the entity. If the entity is enjoying the 5% preferential tax, then abolished by RMC No. 74-99 which clarified, among others, that the sales of goods and explained that the cross-border doctrine was clearly established only on October 15, 1999 when the BIR issued RMC No. 74-99. Prior to the issuance of RMC No. 74-99, the rule In the case of Commissioner of Internal Revenue v. Toshiba,12 the Supreme Court

Please be guided accordingly.

Very truly yours,

Mao V GUIJR Cononissioner of Internal Revenue 000229

12 G.R. No150154, August 9. 2005.

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