1. Filing of Requests for Confirmation, Tax Treaty Relief Applications, and Tax Sparing Applications Made Easy
In 2021, the BIR issued Revenue Memorandum Order (RMO) No. 14-2021 to streamline the procedures and requirements for the availment of tax treaty benefits. A prior application with the BIR for tax treaty relief is no longer required. Instead, withholding agents or income payors may apply the applicable tax treaty rates to income payments made to non-resident payees provided that they file with the BIR after the end of their taxable year a consolidated request for confirmation (RFC) of the applicability of such treaty rates. If, on the other hand, the withholding agent applies the regular rates under the Tax Code to income payments made to a non-resident payee, the latter may file a tax treaty relief application (TTRA) to confirm the payee's entitlement to tax treaty benefits if it wants to get a refund for the excess income taxes withheld. The non-resident income payee may already file a claim for refund together with the TTRA, but the claim for refund will be processed only after non-resident income payee's entitlement to the tax treaty benefit has been confirmed.
The BIR will issue a Certificate of Entitlement to Treaty Benefit (COE) if the RFC or TTRA is approved. There are two types of COEs: (i) COEs for recurring transactions (applicable to income such as dividends, branch profit remittances, interest, royalties); and (ii) COEs for a particular transaction or for a period of engagement (applicable to business profits, capital gains, income from services).
In February 2022, the BIR issued Revenue Memorandum Circular (RMC) No. 20-2022 to clarify that taxpayers who were already issued COEs for recurring transactions no longer need to file an RFC or TTRA every time income of a similar nature is paid to the same non-resident payee. This is intended to ease the volume of applications filed with and processed by the BIR as it was observed that more than 50% of the requests filed with it are in respect of recurring transactions.
Notwithstanding this, the withholding agent or income payor must still comply with the requisites mentioned in the COE every time a payment is made to the non-resident. As an example, RMC No. 20-2022 provides that if the COE mentions tax residency as a requirement for the availment of the tax treaty benefit, the withholding agent or income payor must require the non-resident payee to submit a Tax Residency Certificate for the relevant year before making any payment to the non-resident payee. The same principle applies to the Certificate of Entitlement to the Reduced Dividend Rate issued for tax sparing applications.
If the requirements set out in the COE issued by the BIR are not present (for example, because there is a change in the tax residence), then the taxpayer must file a new RFC, TTRA, or tax sparing application. The withholding agent or income payor should keep records of the COEs and proof of satisfaction with the requisites laid down in the COEs for purposes of tax audits.
In case of non-recurring transactions, the taxpayer must follow the procedure in RMO No. 14-2021 and RMC No. 77-2021 when filing its RFC or TTRA.
For transactions involving long-term contracts (i.e., contracts effective for more than a year), which require annual updates to be submitted to the BIR until the termination of the contract, RMC No. 20-2022 specifies the relevant documents to be submitted for purposes of the annual update.
SyCipLaw TIP 1:
While, in recurring transactions, a withholding agent or income payor is no longer required to secure a COE each time it makes the same nature of payment to the same nonresident payee, the withholding agent or income payor must ensure that (i) the COE it has already obtained expressly provides that the COE applies to future payments to the same non-resident payee; (ii) the facts and circumstances under which the COE was issued are the same as those present when a payment is to be made; (iii) all the conditions and documentary requirements set out in the COE are in place when the payment is made; and (iv) all relevant documents and records are preserved and can be presented in case of a tax audit. Failure to comply with the requisites in the COE will expose the withholding agent or income payor to deficiency withholding taxes notwithstanding that it has secured a COE for the transaction.
2. RBE's VAT Zero-rating under CREATE
2a. Clarifications on Revenue Regulations No. 21-2021 on VAT zero-rated transactions under the CREATE Act
Prior to the Corporate Recovery and Tax Incentives for Enterprises ( CREATE) Act, the Philippines adhered to the cross-border doctrine where Ecozones and Freeport zones are considered as foreign territories, even if they are situated within the Philippines. In effect, the sale of goods and services by a VAT-registered seller to registered enterprises in Ecozones and Freeport zones are treated as constructive exports subject to 0% VAT. However, in RMC No. 24-2022, the BIR declared that the cross-border doctrine has been rendered ineffectual and inoperative for VAT purposes under the CREATE Act. This confirms the BIR's position on whether the cross-border doctrine will still apply notwithstanding that Economic zones and Freeport zones are recognized and managed as separate customs territories under the law creating them and such provisions were not repealed by the CREATE Act.
Based on current law and regulations, only goods and services that are directly and exclusively used in the registered project or activity of Registered Business Enterprises (RBEs) qualify for VAT zero-rating on local purchases.
Direct and exclusive use
Under Revenue Regulations (RR) No. 21-2021, "direct and exclusive use in the registered project or activity" refers to "raw materials, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out." RMC No. 24- 2022 further clarified that expenses for administrative purposes are excluded from the definition and that registered export enterprises should adopt a method for allocating local purchases between those used in the registered export enterprise's registered project or activity and for administrative purposes. If the local purchases are used in both the registered export enterprise's registered project or activity and for administrative purposes and the proper allocation cannot be made, the local purchase will be subject to the 12% VAT.
RMC No. 24-2022 also defined the term "other expenditures" as costs that are indispensable to the project or activity which include expenses that are necessary or required to be incurred depending on the nature of the registered project or activity of the export enterprise. The RMC expressly mentions that services for administrative expenses such as legal, accounting, and other related services are not considered expenses directly attributable to and exclusively used in the registered project or activity.
We note that, similar to the definition of "direct and exclusive use" in the amendment to the implementing rules of the CREATE Act, RMC No. 24-2022 also uses the term "directly attributable" to describe what is meant by other expenditures that are "directly and exclusively used" in a registered export enterprise's registered project or activity. The use of the term "directly attributable to and exclusively used" appears to be less restrictive than the term "direct and exclusive use" and could cover a broader range of expenditures. However, we note that the term "attributable" is not found in the CREATE Act. Thus, it is still not clear how the BIR will view the VAT treatment of local purchases during audit if a registered export enterprise claims that a local purchase of goods or services is VAT zero-rated since it is directly attributable to its registered project or activity.
Prior to the transaction, a registered export enterprise must provide its suppliers with a photocopy of its (i) BIR Certificate of Registration (BIR Form No. 2303); (ii) Certificate of Registration and VAT certification issued by the concerned Investment Promotion Agency (IPA); and (iii) a sworn declaration stating that the goods and/or services being purchased shall be used directly and exclusively in the registered export enterprise's registered project. The suppliers must also secure prior approval from the BIR in order that their sales to the registered export enterprises will be accorded the VAT zero-rating. Without the prior approval of the BIR, the suppliers run the risk that their VAT zero-rated sales will be disallowed. The suppliers will also be required to submit the approved application for VAT zerorating if they file a claim for refund of input VAT under Section 112(A) of the Tax Code.
Input VAT recovery
In cases where VAT is erroneously passed on by a local supplier to a registered export enterprise, the latter can seek reimbursement from the former and the previously issued invoice or receipt to the registered export enterprise must be returned to the local supplier for cancellation and replacement.
If VAT is paid or incurred for purchases not directly and exclusively used in the registered project or activity of the registered export enterprise, the registered export enterprise may (i) claim the VAT as an input VAT credit under Section 110 if it is also enjoying the income tax holiday incentive; (ii) file a claim for VAT refund upon expiration of its VAT registration if the registered export enterprise has no sales subject to VAT; or (iii) charge the VAT to cost or expense account if it is non-VAT registered.
If the RBE is categorized as a Domestic Market Enterprise (DME), the DME is not entitled to VAT zero-rating on its local purchases. Sales of goods or services to a registered DME are subject to 12% VAT. The registered DME may recover the input VAT by (i) deducting the input VAT against its output VAT, if VAT-registered; (ii) filing a claim for refund if it has zero-rated sales; or (iii) charge the VAT to cost or expense account if it is non-VAT-registered.
VAT treatment on the sale of goods and services during the effectivity of RR No. 9-2021.
RMC No. 24-2022 also seeks to clarify the VAT treatment for the sale of goods and services during the effectivity of RR No. 9-2021 (i.e., from June 27, 2021 to June 30, 2021) and sales during the effectivity of RR No. 9-2021 but covered by the retroactive application of RR No. 21-2021 (i.e., from July 1, 2021 to July 27, 2021). RR No. 9-2021 implemented the TRAIN Law provision subjecting to 12% VAT certain transactions that were previously subject to 0% VAT. For sales of goods and services that transpired from June 27, 2021 to June 30, 2021, such sales should be subject to l2% VAT. If the sales transpired from July 1, 2021 to July 27, 2021, the seller and the purchaser have the option to treat the transaction as either subject to 12% VAT or revert the transaction from being subjected to 12% VAT to 0% VAT.
SyCipLaw TIP 2a:
Registered export enterprises and their suppliers may still have concerns regarding the implementation of the changes to the VAT incentives brought about by the TRAIN Law and the CREATE Act with the issuance of RMC No. 24-2022. Registered export enterprises would likely wish to be able to avail themselves of the VAT incentive and may be more inclined to argue that an expenditure qualifies for VAT zero-rating, while suppliers may be more inclined to adopt a cautious approach since the wrong VAT treatment can result in deficiency VAT assessments against the suppliers. The RMC also does not provide much by way of guidance where a service incurred is arguably related or is attributable to a registered activity. For example, legal advice sought in connection with a lease contract of a registered export enterprise located in an ecozone or research and development costs incurred for the enhancement of a registered project or activity would appear to be directly used in the registered business or activity of the enterprise. In the meantime, affected taxpayers will have to be guided by the rules and procedures set out in RMC No. 24-2022 to minimize non-compliance issues.
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