BIR clarifies list of purchases, services subject to VAT

MANILA, Philippines — The Bureau of Internal Revenue (BIR) has issued a regulation clarifying the local purchases of registered business enterprises subject to the 12 percent value-added tax (VAT).

Under BIR Revenue Regulations 3-2023 signed by Finance Secretary Benjamin Diokno and BIR Commissioner Romeo Lumagui Jr., local purchases relating to janitorial services, security services, financial services, consultancy services as well as marketing and promotion are not covered by the zero-VAT rating.

Likewise, the issuance also clarified that services rendered for administrative operations such as human resources, legal, and accounting are not considered directly and exclusively used in the registered project or activity of a registered export enterprise are not covered by the zero-VAT rating.

“In all instances, in issuing the zero-VAT  rating certification, the concerned IPA (investment promotion agency) shall be guided by the rule that such local purchases of goods are directly attributable to the registered project or activity without which such registered project or activity cannot be carried out,” the BIR said.

The listed services are directly and exclusively used in the registered project or activity, the registered enterprise is given the chance to prove such by providing supporting evidence to the concerned IPA.

“If the purchased goods are used in both the registered project or activity and administrative operations, the registered export enterprise shall adopt a method to best allocate the same. If a proper allocation could not be determined, the purchase of such goods shall be subject to 12 percent VAT,” the BIR added.

The regulation also state that health maintenance organization plans for employees directly and exclusively involved in the operations of the registered projects or activities as part of the compensation package shall be considered as “directly and exclusively used” in the registered project or activity of a registered export enterprise subject to the conditions provided under the existing laws, rules and regulations.

Under the RR, the BIR would conduct an audit to determine if the local purchase of goods and services with zero-VAT rating certification are indeed directly and exclusively in the registered project or activity.

Industry groups such as the Information Technology and Business Process Association of the Philippines, Semiconductor and Electronics Industries in the Philippines Foundation Inc. and the Confederation Wearables of Exporters of the Philippines earlier urged the government to immediately address the zero-VAT rating issue.

The groups said a lack of resolution would have detrimental effects to sustaining the growth of the three sectors.

Prior to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, all purchases of goods and services by registered business enterprises in economic zones were entitled to zero VAT rating.

Under the law, the zero VAT rating was limited to purchases that are directly and exclusively used in the registered project or activity of the registered enterprise.