Zero-Rated Transactions | Value-Added Tax (VAT) | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

Zero-Rated Transactions Under the National Internal Revenue Code of 1997 (NIRC), as Amended by the TRAIN Law and Further Amended by the Ease of Paying Taxes Act

Under the Philippines’ National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 10963 (TRAIN Law) and further amended by Republic Act No. 11976 (Ease of Paying Taxes Act), value-added tax (VAT) applies generally to the sale, barter, exchange, or lease of goods, properties, and services within the Philippines, as well as the importation of goods into the Philippines. The standard VAT rate in the Philippines is 12%. However, certain transactions are classified as zero-rated transactions, meaning they are subject to VAT at a rate of 0%.

Zero-rating of VAT means that the taxpayer (supplier or seller) does not pass on VAT to the buyer, and the seller’s output VAT rate is effectively zero. This feature allows suppliers to claim input VAT credits or refunds for the VAT they incur on purchases used in these transactions, supporting industries engaged in export and other similar undertakings.

Key Components of Zero-Rated Transactions Under the NIRC

1. Definition of Zero-Rated Transactions:

   • Zero-rated VAT transactions are sales of goods, properties, or services that are still VAT-taxable but are taxed at 0%, enabling the seller to claim input VAT credits on these transactions.
   • Zero-rated transactions do not include exempt transactions, which are not subject to VAT at all and therefore do not allow input VAT credit or refunds.

2. Purpose of Zero-Rated VAT:

   • The main purpose of zero-rating is to promote export-oriented industries by relieving them of the VAT burden, making their products competitive in the international market.

3. Applicable Legal Provisions:

   • Sections 106 and 108 of the NIRC cover the VAT on sale of goods and services, respectively.
   • Section 109 enumerates exempt transactions, distinguishing them from zero-rated transactions.
   • Revenue Regulations issued by the Bureau of Internal Revenue (BIR) provide further guidelines on zero-rating.

Types of Zero-Rated Transactions

Under Section 106(A)(2)(a) of the NIRC and the amendments from the TRAIN Law and the Ease of Paying Taxes Act, the following transactions qualify for zero-rating:

1. Export Sales:

   • Direct Exports of Goods – Sale and actual shipment of goods from the Philippines to a foreign country. This applies to manufacturers, producers, or traders whose products are shipped out of the country.
   • Sales to Export-Oriented Enterprises – Sales of goods or services to enterprises registered with agencies like the Philippine Economic Zone Authority (PEZA), Freeport Zones, or other export zones, provided these goods or services are directly and exclusively used in the registered activities of the enterprise.

2. Foreign Currency-Denominated Sales:

   • Sales of goods in foreign currency paid for in acceptable foreign exchange and accounted for in accordance with the Bangko Sentral ng Pilipinas (BSP) rules.

3. Sales to Government Entities or Agencies:

   • Services rendered to persons or entities with contracts or agreements with foreign governments or funded by official development assistance (ODA) as defined by law, as long as they comply with specific requirements set by the government.

4. Other Services Rendered to Foreign Clients:

   • Services rendered to persons engaged in business conducted outside the Philippines, or services rendered to foreign corporations, provided these services are paid for in acceptable foreign currency in accordance with BSP regulations and the service is substantially performed outside the Philippines.

5. Sale of Goods, Properties, and Services to Certain Industries and Entities:

   • Sales to ecozones or special economic zones, such as PEZA-registered enterprises, and Freeport entities within Subic, Clark, and other special zones.
   • Sales to industries with approved tax exemption under international agreements or treaties to which the Philippines is a signatory.

Requirements and Documentation for Zero-Rating

The Bureau of Internal Revenue (BIR) has set specific requirements to avail of zero-rated status, ensuring that only qualified entities can benefit from the VAT zero-rating:

1. Certification and Accreditation:

   • Sellers to zero-rated entities (e.g., PEZA-registered entities or Freeport enterprises) are required to obtain accreditation or certification from the relevant governing bodies, such as PEZA or the BIR, verifying the buyer’s eligibility for zero-rating.

2. Proof of Export or Foreign Transaction:

   • Sellers must provide documents such as shipping and customs documents to prove that goods were actually exported.
   • For services, proof of payment in foreign currency and compliance with BSP rules is required to support the zero-rated status.

3. BIR Ruling and Valid Documentation:

   • Sellers need to secure a BIR ruling or VAT Zero-Rating Certificate when necessary, depending on the nature of the transaction.
   • Valid invoices and official receipts must indicate “VAT Zero-Rated Sale” as required by BIR rules to qualify for the zero-rating benefits.

Input VAT and Refund Claims for Zero-Rated Transactions

Sellers engaged in zero-rated transactions are entitled to a VAT refund or credit on input VAT incurred from purchases directly attributable to zero-rated sales. Key points to consider:

1. Documentation Requirements:

   • Adequate records of input VAT from local purchases must be maintained, and these claims must be substantiated with BIR-approved receipts and invoices.
   • Only input VAT incurred in relation to zero-rated transactions may be claimed for refund or tax credit.

2. Filing Period for VAT Refund:

   • A refund claim must be filed within two years from the close of the taxable quarter in which the sale was made. The two-year period is strictly enforced to avoid forfeiture of refund rights.
   • Failure to meet this deadline results in the inability to claim a refund, though the taxpayer may still carry forward the input VAT as part of its available credit against future output VAT.

3. Approval Process and Remedies:

   • The BIR has a 90-day period from the submission of complete documents to either grant or deny the refund claim.
   • In cases of denial, taxpayers may appeal the decision to the Court of Tax Appeals (CTA) within 30 days from the receipt of the denial.

Amendments from the TRAIN Law and Ease of Paying Taxes Act

1. TRAIN Law (R.A. No. 10963):

   • Expanded the scope of zero-rated transactions, specifically targeting export-oriented industries and BPO (business process outsourcing) companies, to increase competitiveness in the global market.
   • Simplified requirements to improve the refund system by mandating the BIR to streamline and expedite refund claims, particularly for exporters.

2. Ease of Paying Taxes Act (R.A. No. 11976):

   • Enhanced processes to make VAT zero-rating more accessible by reducing the administrative burden and expediting the processing of refund claims.
   • Reduced documentation requirements and clarified procedural guidelines for zero-rating claims, thereby addressing taxpayer compliance and easing bureaucratic hurdles.

Practical Considerations and Compliance

1. Classification Accuracy:

   • Businesses must carefully assess if their sales qualify as zero-rated transactions to avoid misclassification, as incorrect application may result in penalties, disallowance of input VAT credits, or denial of refunds.

2. Invoice and Receipt Compliance:

   • Taxpayers should ensure their sales invoices and receipts clearly state “VAT Zero-Rated Sale” for eligible transactions. Non-compliance with invoicing rules may lead to the denial of zero-rated status.

3. Annual Audit and Record-Keeping:

   • It is essential for businesses engaged in zero-rated transactions to maintain comprehensive records for potential audit purposes, as the BIR may require detailed documentation to verify the eligibility of zero-rated transactions.

In summary, the zero-rating provisions under the NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act, are designed to bolster the competitive position of Philippine exporters and certain service providers in the global market by relieving them of the VAT burden. However, to avail of the benefits under these provisions, taxpayers must rigorously comply with the BIR’s documentary requirements and filing procedures, ensuring a solid understanding of zero-rating requirements to successfully claim VAT refunds or credits.