The Philippines Imposes New 12% VAT Rate on Exporters

Posted by Written by Ayman Falak Medina Reading Time: 3 minutes

Editor’s Note, July 31, 2021: Due to the continuing COVID-19 pandemic and its impact on the export industry, the government has decided to defer Revenue Regulation (RR) No. 9-2021 until an amendatory revenue regulation is issued.

On June 12, 2021, the Philippines issued Revenue Regulation (RR) No. 9-2021, which introduces a 12 percent value-added tax (VAT) rate on certain sales transactions that were previously taxed at zero percent. The new regulation came into effect on June 27, 2021.

Why has the Philippines announced the new VAT charge?

Transactions covered under RR No. 9-2021 are the export sales of raw materials and packaging items to a non-resident buyer for delivery to a resident, local export-oriented enterprise. The new VAT rate will also be imposed on outsourced services, such as manufacturing, processing, or the repacking of goods to be exported.

RR No. 9-2021 was issued to implement the provisions of the Tax Reform and Acceleration and Inclusion Act (TRAIN) or Republic Act (RA) No. 10963, which was enacted in 2018 and aimed to provide a fairer and simpler tax regime in the Philippines.

Under a provision of the TRAIN Act, certain transactions that were previously taxed at zero percent are subject to the 12 percent tax rate if two conditions were met:

  • The successful establishment of an enhanced VAT system; and
  • All VAT refund claims as of December 31, 2017, were to be paid by December 31, 2019.

RR No. 9-2021 has deemed these conditions to have been fulfilled.

Exports account for some 30 percent of the GDP of the Philippines

What transactions are subject to the new 12% VAT?

The following transactions are now subject to a 12 percent VAT:

  1. The sale of raw materials or packaging materials to a non-resident buyer, for delivery to a local export-oriented enterprise, to be used in the processing, manufacturing, packaging or repackaging in the Philippines;
  2. The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 70 percent of total annual productions; and
  3. Activities considered export sales under Executive Order (EO) No. 226, or the Omnibus Investment Code of 1987, as well as other special laws.

In addition to the above transactions, the following sale of services or lease of properties are also subject to 12 percent VAT:

  • The manufacturing, processing, or repacking of goods for persons or entity that is doing business outside of the Philippines, and the said goods are subsequently exported; and
  • Services performed by contractors and/or subcontractors in the manufacturing, processing, or converting of goods for an entity whose export sales exceed 70 percent of its annual total production.

Will small businesses in special economic zones get impacted?

The 12 percent VAT rate is set to impact small businesses and in particular, businesses located in special economic zones located throughout the Philippines. Treating the passed-on VAT as part of their costs will increase the price of goods and services and could force local suppliers to source raw materials from foreign suppliers to mitigate these costs.

Exporters in economic zones used to enjoy VAT-free purchases of goods made in the Philippines. They have already been impacted by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which restructured many of the privileges afforded to economic zone locators.

The CREATE Act removed the five percent tax on gross income paid in lieu of national and local taxes for exporters. In exchange, the Act lowered the corporate income tax from 30 to 25 percent.

Other concerns for businesses are the implementation procedures to file for VAT refunds, particularly the requirement to physically file such refunds at the Bureau of Internal Revenue’s (BIR) Credit Audit Division. Many small businesses are currently short-staffed due to the quarantine and lockdown measures. This adds to their costs and causes delays to exporters and their customers.

Moreover, exporters are at a disadvantage due to the Peso’s strength over the dollar, making the Philippines’ exported goods more expensive. 

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