Zero-Rating VAT Incentive to PEZA-Registered Companies Not Affected by TRAIN Law
President Rodrigo Duterte vetoed five provisions from the Tax Reform for Acceleration and Inclusion (TRAIN) Act before he signed it into law as Republic Act No. 10963 in December 2017. Among the provisions he vetoed is the zero-rating on the sales of goods and services to separate customs territories and tourism enterprise zones – which created uncertainties on the fate of the 0% value-added tax (VAT) incentive currently being enjoyed by companies registered under the separate customs territories of the Philippine Economic Zone Authority (PEZA).
A lack of consistent stand from the government on how the President’s veto should be interpreted has prompted conflicting interpretations from various government agencies. Some government officials claim that the veto mandated local suppliers to impose VAT when selling goods and services to PEZA-registered companies.
PEZA officials, however, maintain that the veto could not remove the tax incentive because economic zones are treated as foreign soil and purchases made with them by local suppliers should be considered cross-border transactions that are outside the territorial boundary of the taxing authority in the Philippines.
To settle the issue, PEZA officials sought for clarification from the Department of Finance (DOF) as to whether the veto applies to PEZA-registered companies. DOF officials informed PEZA through a letter reply addressed to PEZA Director General Charito Plaza that TRAIN law does not affect the current zero-rating for sales of goods and services pursuant to Section 8 of Republic Act No. 7916, otherwise known as the “Special Economic Zone Act of 1995”.
Section 8 of RA No. 7916 provides that PEZA ecozones should be operated and managed as separate customs territories – which allows them exemption from national and local taxes, import duties, and other trade restrictions for sales of goods and services within the Philippines. Additionally, PEZA ecozones have trade laws and business regulations that are different from the rest of the country and thus cannot be affected by new laws and revenue regulations until RA No. 7916 or some of its provisions are repealed and deemed ineffective.
Following the confirmation from DOF on the status quo of the 0% VAT incentive to PEZA-registered companies, PEZA issued Memorandum Circular No. 2018-003 on March 12, 2018 to advise ecozone administrators and PEZA-registered companies to inform their local suppliers not to impose VAT on their sales transactions.