IT-BPM welcomes clarification on VAT zero-rating

MANILA, Philippines — The recent clarification issued by the Bureau of Internal Revenue (BIR) on the value-added tax (VAT) zero-rating is a welcome development for the information technology-business process management (IT-BPM) sector.

In a statement, Information and Business Process Association of the Philippines (IBPAP) president and CEO Jack Madrid welcomed the release of Revenue Regulations (RR) 3-2023 by the BIR, which clarifies the local purchases of registered business enterprises subject to the 12 percent VAT.

“After months of uncertainty on the VAT zero-rating of goods and services, IT-BPM registered export enterprises (REEs) and their local suppliers finally have much-needed clarity on this important matter,” Madrid said.

Madrid said the RR articulates that health maintenance organization (HMO) premiums are appropriately VAT zero-rated and investment promotion agencies (IPAs) are confirmed to have jurisdiction over any and all issues relating to VAT zero-rated purchases of their respective REEs.

“We are grateful that we now have this RR as basis in handling the issues that we have been grappling with for some time and we look forward to the further streamlining of the regulation to the effect that those exporting within the minimum threshold of 70 percent be allowed full VAT exemption or zero-rating on their purchases given their compliance to the export condition of their registration,” Madrid said.

IBPAP and its members expressed appreciation for the efforts of the Department of Trade and Industry (DTI), the Board of Investments (BOI), the Fiscal Incentives Review Board (FIRB), and the Philippine Economic Zone Authority (PEZA) – “for listening to the concerns of the IT-BPM industry and for working with us to address them.”

“We are hopeful that no obstacles will be encountered, henceforth, given the new direction to allow IPAs to exercise full supervision and monitoring on this matter,” Madrid said.

In March, IBPAP along with Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI), and the Confederation Wearables Exporters of the Philippines (CONWEP) urged the government for a resolution regarding the VAT zero-rating.

As exporters, the groups claimed that a VAT zero-rating on their purchases is consistent with existing local regulations and globally accepted principles allowing for the sectors to remain competitive.

“The understanding of the sectors is that most of the government agencies involved in resolving the issue believe that there is clear basis for all purchases of exporters to be without the 12 percent VAT, given that this is not only allowed by the rules, but is more importantly critical in ensuring that the prices at which the services and goods offered are able to remain competitive in the international market,” the groups said in March.

The same issue has also given rise to confusion on the part of the various industries engaged as suppliers of goods and services to the export sectors, such as the providers of healthcare, power, raw materials, and other integral services.

They emphasized that failure to address the VAT issue may have a crippling consequence on the parts localization initiatives of exporters and particularly affect their local suppliers who will be more at risk should they lose their market.

PEZA director-general Tereso Panga said earlier that the revised BIR guidelines are seen to encourage PEZA-registered business enterprises (RBEs) to source more of their service requirements locally.

“With the revised guidelines, this will encourage the locators to localize their outsourcing of goods and services. This will increase value adding in the country and facilitate the integration of local suppliers of goods and services into the ecozone value chain,” he said.

He explained that before the revised guidelines, RBEs were exposed to VAT payments because the existing revenue memorandum circulars (RMCs) limited the goods and services to be covered by the zero-VAT rating incentive.

As a consequence, Panga said this increased the cost of doing business for locators, prompting some of them to outsource their service requirements abroad to avoid exposure to VAT.

“Some locators have resorted to importing their materials as it is easier to avail of tax and duty free incentive than sourcing them from the local market given the grey area in BIR’s definition for direct and exclusive use in a registered activity,” Panga said.

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

The recently issued BIR RR states that local purchases relating to janitorial services, security services, financial services, consultancy services, as well as marketing and promotion, are not covered by the VAT zero-rating.