BIR Issues Clarifications on VAT Zero-Rated Transactions in Revenue Regulations No. 21-2021

April 22, 2022

Introduction

Prior to the implementation of the Corporate Recovery and Tax Incentives for Enterprises Act (the CREATE Act), the Philippines adhered to the "cross-border doctrine", under which ecozones and freeport zones were considered foreign territories, even if they were 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 was treated as a constructive export subject to a VAT zero rating. According to the Philippine Bureau of Internal Revenue (BIR) in its recent Revised Memorandum Circular (RMC) No. 24-2022, the cross-border doctrine was rendered ineffectual and inoperative for VAT purposes under the CREATE Act. This appears to confirm the BIR's position that the cross-border doctrine will no longer apply, despite the fact that ecozones and freeport zones are recognised and managed as separate customs territories under the law creating them, and even though such provisions were not repealed by the CREATE Act.

Based on current law and regulations, only goods and services directly and exclusively used in the registered project or activity of a registered business enterprise (RBE) qualify for a VAT zero rating.

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