RMC No. 24-2022: Clarifies issues relative to 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 RA No. 11534 (CREATE Act), and Section 5, Rule 2 and Section 5, Rule 18 of the CREATE Act Implementing Rules and Regulations

Key points

1. End of the cross border doctrine. Before the CREATE Act, sales to enterprises in Ecozones and Freeport zones were treated as constructive exports at zero percent (0%) VAT. The doctrine is now ineffectual for VAT, and only goods and services directly and exclusively used in the registered project or activity of Registered Business Enterprises qualify for VAT 0% on local purchases.
2. Coverage and transition rules. RR No. 21-2021 took effect after publication on December 10, 2021 and covers transactions from the third quarter of TY 2021 onwards. Sales from June 27, 2021 to June 30, 2021 are declared as 12% VAT. For VAT billed or collected from July 1, 2021 to July 27, 2021, the parties may keep the sale as VATable or revert it to zero-rated, which involves amending the return after reimbursing the VAT (if no Letter of Authority has been issued) and replacing the invoices or receipts.
3. What qualifies for zero-rating. Sales of VAT-registered suppliers to registered export enterprises are zero-rated only for goods and services directly and exclusively used in the registered project, for a maximum of seventeen (17) years from registration unless extended under the SIPP. Administrative expenses and costs incurred before registration are excluded, and if allocation between registered and administrative use cannot be determined, the purchase is subject to 12% VAT.
4. Who does not qualify. Domestic Market Enterprises are not entitled to zero-rating on local purchases, and sales to them are subject to 12% VAT. Listed service enterprises are also not entitled, including customs brokerage, trucking, forwarding, janitorial, security, insurance, banking, consultancy, retail enterprises and restaurants.
5. Approval and documents. Local suppliers need prior BIR approval for zero-rating, and its absence may lead to disallowance. The Investment Promotion Agency issues an annual VAT 0% certification to registered export enterprises, and the buyer gives the supplier a copy of BIR Form No. 2303, the certificates and a sworn declaration. Applications are processed under RMO No. 7-2006 with a sworn affidavit and supporting transaction documents.
6. Refunds and registration status. VAT on purchases not directly and exclusively used in the registered project cannot be refunded under Section 112(A). Options are an input tax credit under Section 110, accumulating credits for refund upon expiration of VAT registration under Section 112(B), or charging to cost or expense if non-VAT registered. Export enterprises that moved to the 5% GIT or SCIT regime change to Non-VAT registration within two (2) months of the expiration of the ITH.

Who is affected

• VAT-registered suppliers of registered export enterprises
• Registered export enterprises and Domestic Market Enterprises in Ecozones and Freeport zones
• Investment Promotion Agencies

Deadlines and effectivity

• RR No. 21-2021 covers transactions from the third quarter of TY 2021 onwards
• RR No. 21-2021 published December 10, 2021
• Maximum of seventeen (17) years from date of registration
• Change to Non-VAT status within two (2) months from expiration of ITH