This Circular is issued to provide clarification on the provisions of RR No. 3-2023 and certain issues and concerns pertaining to transactions with other entities granted VAT zero-rate incentives on local purchases under special laws and international agreements.
RR No. 3-2023 was published in a newspaper of general circulation on April 28, 2023, thus, it took effect on the said date. Upon the effectivity of RR No. 3-2023, the local supplier of goods and/or services of REEs shall no longer be required to secure prior approval for VAT zero-rate with the BIR.
To qualify for VAT zero-rating, the local purchase of the REE must be directly and exclusively used in the registered project or activity, and not included in the negative list provided in RR No. 3-2023. Should the goods and/or services fall within the negative list, the REE is not precluded from further proving, with supporting evidence, to the concerned Investment Promotion Agency (IPA) that such goods and/or services are indeed directly and exclusively used in the registered project or activity of the REE, a VAT Zero-Rate Certificate shall be issued by concerned IPAs. This is without prejudice to the BIR’s power to conduct post-audit.
While it is true that the VAT zero-rating on local purchases of goods and/or services shall be availed of on the basis of VAT Zero-Rate Certification issued by the concerned IPA pursuant to RR No. 3-2023, the REE-buyer must still provide a certified true copy of the following documents to its local supplier for the latter’s documentation in case of post-audit by the BIR, to wit:
- VAT Zero-Rate Certification issued by the concerned IPA;
- Certificate of Registration (COR) issued by the BIR having jurisdiction over the head office/branch/freeport/ecozone location where the goods and/or services are to be delivered;
- COR issued by the concerned IPA stating all registered ecozone locations; and
- A sworn affidavit executed by the REE-buyer, stating that the goods and/or services are directly and exclusively used for the production of goods and/or completion of services to be exported, following the prescribed format under Revenue Memorandum Circular (RMC) No. 84-2022.
Applications for VAT zero-rate accompanied by VAT Zero-Rate Certificate issued by the concerned IPA, as prescribed in RMC No. 36-2022, which have been received prior to the effectivity of RR No. 3-2023 but not yet been acted upon by the concerned office of the BIR shall, be accorded VAT zero-rating treatment from the date of filing of such application subject to the conduct if post-audit by the BIR that the services are indeed directly and exclusively used by the REE in its registered project or activity.
If the transaction was entitled for purposes of VAT zero-rating, ie., the goods and/or services sold were directly and exclusively used in the registered project or activity, and the REE is duly endorsed by the concerned IPA, but the seller failed to secure an approved Application for VAT Zero-Rate, such sale shall be subject to twelve percent (12%) VAT.
Application for VAT zero-rate for a particular sale transaction that was previously disapproved will not be considered VAT zero-rate upon the effectivity of RR No. 3-2023 since there was already a prior determination by the BIR that the transaction is not qualified for VAT zero-rate. Accordingly, the same is subject to twelve percent (12%) VAT notwithstanding the issuance of RR NO. 3-2023.
BIR – disapproved applications for VAT zero-rate determined to be not qualified for VAT zero-rating purposes are subject to VAT. Inasmuch as these transactions are subject to VAT, the VAT-registered REE enjoying 5% Gross Income Tax (GIT) or Special Corporate to Income Tax (SCIT) may claim the corresponding input VAT from the said purchase, which can be utilized as a deduction against future output VAT liability after the incentive period or may be claimed as VAT refund under Section 112(B) of the National Internal Revenue Code of 1997, as amended in relation to Q & A No. 40 of RMC No. 24-2022.
The following elements must be considered in the evaluation of transaction subject to VAT zero-rating during an audit of transactions with REE:
- The REE’s place of business where the registered project or activity is being processed/rendered must be duly registered with the appropriate BIR office;
- The REE must be duly registered with the IPA administering tax incentives;
- A VAT Zero-Rate Certificate has been issued by the IPA to the REE;
- The transaction occurred within the period the REE is entitled to VAT zero-rate incentives and is corroborated with valid documentation, such as but not limited to duly certified copies of the purchase order, job order or service agreement, sales invoice, and/or official receipt, delivery receipt, or similar documents to prove existence and legitimacy of the transaction;
- The purchased goods and/or services must be delivered within the REE’s registered head office/branch/freeport/ecozone/location granted with VAT zero-rate incentives; and
- The transaction is indeed qualified for VAT zero-rating in accordance with the provisions of the Tax Code, and its implementing rules and regulations, revenue issuances.
Since the application for VAT zero-rate is no longer required upon effectivity of RR No. 3-2023, the supplier should identify the goods and/or services being sold that are directly and exclusively attributable to the registered project or activity of the REE enumerating them in Section III, Annex “A” of the prescribed template for VAT Zero Rate Certification per RMC No. 36-2022. The aforementioned goods and/or services must likewise be declared in the REE’s sworn undertaking.
The VAT zero-rating shall not extend to Health Maintenance Organization (HMO) plans procured for employees’ dependents, as well as HMO plans acquired for employees directly involved in the operation of REE’s registered project or activities and forming part of their compensation package shall be accorded with VAT zero-rating.
For audit investigation/verification purposes, the supplier of HMO plans must still require the REE-buyer to provide detailed information on the acquired HMO plans as prescribed in Annex “A” of RMC No. 137-2022 and maintain a database of the same, for ease of reference.
The submission of applications for VAT zero-rate of the local suppliers of other entities granted with VAT zero-rate incentives under special laws and international agreements shall not be required. Alternatively, such local suppliers of goods and/or services shall require from the aforementioned entities the documentary requirements enumerated below:
A. For the Supplier of Renewable Energy (RE) Developer
The local suppliers of goods, properties, and services shall require from the duly registered RE Developer a certified copy of the following documents:
- COR issued by the BIR which has jurisdiction over the location of the RE Project;
- COR issued by the Board of Investments (BOI); and
- COR issued by the Department of Energy (DOE).
It is emphasized that the VAT zero-rating shall apply only on the sale of goods, properties, and services, for the development, construction, and installation of the RE Developer’s power plant facilities. This includes the whole process of exploring and developing renewable energy sources up to their conversion into power, including, but not limited to, the services performed by subcontractors and/or contractors.
B. For the Supplier of Other Entities Under Special Law and International Agreements
The buyer must provide its local supplier a certified copy of the VAT Exemption Certificate/Ruling or equivalent document, issued by the appropriate office of the BIR and other documentary requirements as may be required under the special law and international agreement, including its implementing rules and regulations.
The following elements must be considered in the evaluation of transactions subject to VAT zero rate:
- The location of the registered project of the entity granted with VAT zero-rate incentives under special law must be duly registered with the appropriate BIR office;
- The entity granted VAT zero-rate incentives under special law must be duly registered with other government agency (OGA) administering tax incentives;
- The entity granted VAT zero-rate incentives under the special or international agreement must have been issued by its concerned OGA administering Tax Incentives a VAT Exemption Certificate/BIR Ruling/ equivalent certificate; and
- The transaction is indeed qualified for VAT zero-rating in accordance with the provisions of the Tax Code, and its implementing rules and regulations, revenue issuances, special laws, or international agreements; and is likewise corroborated with valid documentation, such as but not limited to duly certified copies of purchase order, job order or service agreement, sales invoice and/or official receipt, delivery receipt or similar documents to prove existence and legitimacy of the transaction;
The template for the VAT Zero–Rate Certificate to be issued by the concerned IPA to its compliant REEs is prescribed under RMC No. 36-2022 and attached as Annexes “B-1” and “B-2” of the Circular, for registered under Corporate Recovery and Tax Incentives for Enterprises (CREATE) and Pre-CREATE, respectively.
The template for VAT Zero-Rate endorsement of IPAs which contains basic information needed in the audit investigation/verification by the concerned investigating office of the BIR, is attached as Annex “C” of the Circular and shall be submitted to the BIR through the Assessment Service, Attention: Audit Information, Tax Exemption and Incentives Division (AITEID), in softcopy (excel file format), via email address: firstname.lastname@example.org, within twenty (20) days following the close of each taxable quarter.