Vvalue added tax (VAT) is only imposed if the goods or services are “intended” for local consumption. There is no VAT when they are intended for consumption abroad. The Philippine system follows the so-called destination principle, preventing exporters and export-oriented businesses from paying VAT on their local purchases.
Before the adoption of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), case law applied the so-called cross-border doctrine. This rule benefits companies located in special economic zones or free zones. CREATE now limits the application of this rule. While these areas retain the legal fiction of being foreign territory for tax purposes, locators will now bear VAT on their purchases.
The export sales treatment of their local purchases now extends only 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 that they can claim as a deduction for the calculation of their income, subject to a special tax. Local suppliers can now pass VAT on to their commercial and administrative costs.
The changes in the VAT system are essentially revenue neutral. The law seeks to plug loopholes in the system and prevent avenues of tax evasion. It should be remembered that the Tax Reform for Acceleration and Inclusion (TRAIN) has gradually abolished the effective zero rate system, where a supplier cannot normally pass VAT on to exporters.
The effective zero-rating posed problems. Many suppliers had reported that their sales were zero-rated, even when they were subject to VAT. To avoid this, the TRAIN shifted the burden of claiming reimbursement from suppliers to exporters. A VAT on the supply of goods and services can be passed on to exporters, who can claim a refund to the extent that they have not been used.
As a prerequisite for the system change, the Bureau of Internal Revenue (BIR) must adopt and implement an improved VAT refund regime. The reimbursement process needs to be redesigned, given the unsatisfactory experience of claimants in the previous system. Essentially, the law changed from a âdeemed refusedâ plan to an amended âdeemed approvedâ plan.
The improved reimbursement system
The envisaged refund system aimed to put in place several mechanisms to assure exporters that VAT on their purchases would be immediately refunded. Concretely, the BIR decision deadline on the reimbursement request has been shortened from 120 days to 90 days. Its calculation date has been changed “from the date of filing complete documents in support of the claim” to “filing the claim for VAT refund”, while there should be “presentation of official receipts or invoices and application. âIndeed, the applicant must present all the supporting documents when filing the application.
A dedicated VAT refund center within the BIR and the Customs Office (BOC), with adequate staff able to focus and act on the request, should speed up the refund process. Staff who willfully fail to act on the complaint within the 90-day period may be held criminally responsible. To ensure that a dedicated fund is available within the National Treasury to process processed requests, the TRAIN automatically appropriates 5% of the total VAT collected the previous year. It will be placed in a special account or treated as fiduciary receipts for the purpose of financing VAT refund claims.
To facilitate Congress oversight, the BIR and BOC are mandated to submit to Congress a quarterly report of all pending reimbursement requests and any unused funds.
The shortened processing of refund requests will only materialize through the issuance of electronic receipts or invoices and the correct implementation of the electronic sales declaration system. It requires an efficient system that requires cash spending on the part of the government. This system is expected to be in place by the end of 2022.
Until the system is in place, exporters and export-oriented businesses may be faced with the traditional way of claiming reimbursement of the VAT passed on on their local purchases. The BIR, as part of its services, will hopefully speed up the processing of these reimbursement requests in order to avoid companies incurring additional tax costs and to ensure that our country remains competitive in attracting foreign investors.
Eric Recalde is partner and head of the tax department of ACCRALAW
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