The value-added tax (VAT) is only imposed if the goods or services are “destined” for local consumption. There is no VAT when they are meant for consumption abroad. Our system follows the so-called destination principle insulating exporters and export-oriented enterprises from paying VAT on their local purchases.
Prior to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, case law applied the so-called cross-border doctrine. This rule benefits enterprises located in special economic or freeport zones. CREATE now limits the application of this rule. While these zones retain the legal fiction of being a foreign territory for taxation purposes, the locators will now shoulder VAT on their purchases. The export sale treatment of their local purchases now only extends to goods or services “directly and exclusively used in the registered project or activity.” In other words, only the local components of their direct costs. Incidentally, these are also the costs which they may claim as a deduction to compute their income subject to special tax. The local suppliers may now pass on VAT for their selling and administrative expenses.
Changes in the VAT system are essentially revenue neutral. The law seeks to plug loopholes in the system and prevent avenues for tax evasion. It should be recalled the Tax Reform for Acceleration and Inclusion (TRAIN) law phased out the system of effective-zero rating, where a supplier may not ordinarily pass on VAT to exporters. Effective zero-rating posed problems. Numerous suppliers had claimed their sales to be zero-rated even when the same were subject to VAT. To avoid this, the TRAIN shifted the burden of claiming a refund from the suppliers to the exporters. A VAT on the supply of goods and services may be passed on to exporters, which may claim the same for refund up to the extent unutilized.
As a pre-condition for the change in the system, the Bureau of Internal Revenue (BIR) must adopt and implement an enhanced VAT refund scheme. The refund process has to be overhauled given the claimants’ unsatisfactory experience with the previous system. In essence, the law shifted from a “deemed denied” to a modified “deemed approved” scheme.
The enhanced VAT refund system, its features?
The envisioned refund system was meant to set in place several mechanisms to assure exporters that the VAT on their purchases would be immediately refunded.
Specifically, the period for the BIR to decide on the refund application was shortened from 120 days to 90 days. Its reckoning date has been changed “from the date of submission of complete documents in support of the application” to “the filing of the VAT refund application” when there will be “submission of the official receipts or invoices and other documents in support of the application.” In effect, the claimant must submit all supporting documents at the time of filing of the application.
A dedicated VAT refund center within the BIR and Bureau of Customs (BoC) — with adequate staff who can focus and act on the claim — is expected to expedite the refund process. Personnel who deliberately fail to act on the claim within the 90-day period can be held criminally liable.
To assure that a dedicated fund is available in the National Treasury to service the processed claims, the TRAIN automatically appropriates 5% of the total VAT collection from the immediately preceding year. It will be placed in a special account or treated as “trust receipts for the purpose of funding claims for VAT refund.”
To facilitate Congressional monitoring, the BIR and BOC are mandated to submit to Congress a quarterly report of all pending claims for refund and any unused funds.
What is now the status of the enhanced VAT refund scheme?
The shortened processing of refund applications will only materialize through the allowance of electronic receipts or invoices, and the proper implementation of the electronic sales reporting system. This requires an effective system that requires cash outlay from the government. This system should be in place by the end of 2022. Until such a system is put in place, exporters and export-oriented enterprises may have to contend with the traditional way of claiming refunds on the passed on VAT on their local purchases. The BIR, as part of its service, hopefully will expedite the processing of such refund applications to insulate enterprises from the burden of shouldering extra tax costs and ensuring that our country remains competitive to attract foreign investors.
The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.
Eric R. Recalde is the Head of the Tax Department and a Partner in the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) located at Bonifacio Global City, Taguig City, Metro Manila, Philippines.