Registered export enterprises (REEs) that have transitioned from the Income Tax Holiday (ITH) regime to the 5% Gross Income Tax (GIT) regime are generally required to change their registration status from value-added tax (VAT) to non-VAT. This is because the 5% special tax rate is in lieu of all other taxes, including VAT.
Of course, only those REEs that have no other activities subject to 0% or 12% VAT are required to change their registrations to non-VAT. Such a change may come with consequences that would cause the REE’s management to decide to maintain the status quo. On the other hand, this change may actually provide some relief to qualified REEs.
In today’s article, I would like to share some tax and regulatory considerations when shifting an REE’s registration to non-VAT after they fall under the 5% GIT regime.
First, the REE’s VAT registration will be canceled. As such, the REE will no longer be required to comply with the requirements associated with being a VAT-registered taxpayer such as the submission of quarterly VAT returns and the corresponding summary list of sales, purchases, and imports.
Also, the cancellation of the VAT registration triggers the cancellation and replacement of the VAT invoices or official receipts with a new set of non-VAT invoices or official receipts. In case the REE is using a Computerized Accounting System (CAS), the REE must update its CAS (as well as the system’s BIR registration) so that its computer-generated books of account, invoices and receipts will be compliant with the reports, invoices or receipts suitable for non-VAT taxpayers.
Second, as clarified in Revenue Memorandum Circular (RMC) No. 152-2022, shifting to non-VAT will not subject the REE to Percentage Tax since REEs are only required to file and pay the corresponding tax due in their respective Annual or Quarterly Income Tax Returns (BIR Form No. 1702/1702Q).
However, REEs should note that there might be a need to revert to being VAT-registered or to apply for VAT as an additional tax type for potential transactions that they may enter into in the future, like the sale or disposal of used equipment or assets.
Based on RMC 24-2022, the sale, transfer or disposal of previously VAT-exempt imported capital equipment, raw materials, spare parts, and accessories, by a non-VAT- registered export enterprise observing a 5% GIT regime is VAT-exempt.
Further, according to PEZA Memorandum Circular No. 2005-032, the sale of production rejects and seconds, recovered waste and scrap materials and supplies that have undergone processing or have been used in production or processing activity, are covered by the applicable income tax incentive (i.e., 5% GIT in lieu of national and local taxes).
So, this would mean that the non-VAT-registered REE need not revert to being VAT-registered in order to accommodate the above-mentioned transactions.
Nonetheless, I hope that the authorities also provide additional rules or clarifications as to the treatment of other transactions incidental to an REE’s registered activities (e.g., REE’s sale or disposal of damaged or obsolete assets which were previously acquired locally at 0% VAT) and provide alternative means of payment of applicable taxes (if not covered by 1702/1702Q), without the need to revert to being a VAT-registered taxpayer.
Third, shifting registration to non-VAT will not affect the REE’s entitlement to VAT zero-rate incentives on local purchases. Non-VAT REEs can enjoy VAT Zero Rating on local purchases until the end of their incentive period. This is subject to the requirement of securing an annual VAT Zero Rating Certificate from the Investment Promotion Agency (IPA) administering the REE’s incentives.
Fourth, the VAT passed on by VAT-registered suppliers on purchases which are not directly and exclusively related to the Non-VAT REE’s registered activity can be charged to cost or expense. In this case, the VAT attributable to expenses which are not considered indispensable to the registered activity but nonetheless considered direct costs, can be claimed as a deduction from revenue to arrive at Gross Income.
Would this be the same if the qualified REE opted to remain VAT-registered even if no sales subject to 12% VAT are forthcoming?
To me, there’s an advantage in shifting to non-VAT in this case. A VAT-registered REE cannot claim as a deduction the input VAT mentioned in the above scenario because the VAT-registered REE’s export sales are classified as a VAT Zero-rated sales transaction. If the sales are subject to VAT (0% or 12%), the related VAT on purchases cannot be treated as expenses.
Moreover, since the purchases are not directly and exclusively related to the REE’s sales activity, and the REE is under 5% GIT, the related input VAT will not be recoverable through a claim for refund under the existing VAT rules.
In comparison, a non-VAT REE’s export sales are classified as a VAT-exempt transactions under Section 109 1(O) of the Tax Code. As such, the VAT passed on to the non-VAT REE can be claimed as costs or expenses.
Given that the input VAT cannot be claimed as deduction or refund, it makes sense to change the registration of the REE to non-VAT.
Last, upon the expiration of the REE’s incentives, it is expected to deregister from its IPA and change its registration to a VAT-registered taxpayer.
Deregistration is a tedious process, and may even require the non-VAT taxpayer to pay VAT for any assets disposed of. Thus, I hope the authorities provide simplified rules, policies and guidelines so that, when that time comes, the eventual reversion to VAT would be easier.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Delila Dayag is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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delila.l.dayag@pwc.com