Becoming an investment hotspot has been the goal of the Philippines for some time. Challenging the dominance of well-known investment destinations and providing an attractive investment climate required tweaks and changes to our tax and incentive laws, among others. One of the early attempts to improve the investment stature of the Philippines was the enactment of the ‘Corporate Recovery and Tax Incentives for Enterprises’ or more popularly known as the CREATE Act.
However, while CREATE aspired to propel the Philippines forward, to say that it has been mired in hampering issues is a bit of an understatement. CREATE’s lofty goals have been weakened by questionable execution of some of its provisions – the text of the law versus the promulgated rules and regulations; the legislative intent versus the administrative implementation.
Such incongruity has once again been highlighted in a recent decision of the Supreme Court involving the question of validity of certain provisions of CREATE’s implementing rules and regulations (IRR) as well as its related revenue regulations (RR).
Under CREATE, registered business entities (RBE) are entitled to VAT zero-rating on their local purchases of goods and services directly and exclusively used in the registered project or activity. However, the subsequently issued IRR and RRs changed the VAT zero-rating eligibility and made it applicable only to registered export enterprises (REE). It effectively deprived Domestic Market Enterprises (DME) of the same tax incentive despite them being RBEs.
Consequently, local suppliers charged VAT on the purchases of goods and services by DMEs. In turn, the DMEs under the 5 percent Special Corporate Income Tax will recognize the passed-on VAT as part of their costs or expenses.
The petitioner-DMEs in the case believed that the IRR and RRs unduly limited the application of the VAT zero-rating for local purchases since the law made no distinction between REEs and DMEs. In other words, they assert that all RBEs should enjoy the VAT zero-rating for local purchases.
After much deliberation, the Supreme Court held that the IRR and RRs are unconstitutional. Essentially, the IRR and RRs unlawfully altered the provisions of CREATE by carving-out DMEs from those entitled to the VAT zero-rating incentive. Considering that the grant and withdrawal of tax exemption is exclusive within the domain of legislation, the VAT zero-rating incentive cannot be removed or withheld from DMEs by an administrative issuance (such as an IRR or RR).
The case is a resounding acknowledgment of the implementation issues under CREATE that are experienced by taxpayers. However, while the Supreme Court sided with the taxpayer, what can the latter actually do with it? Is the decision anything more than a paper win?
Now that the Supreme Court upheld the entitlement of the VAT zero-rating incentive of DMEs under CREATE, can the latter file a claim for refund with the BIR on the VAT passed on by their local suppliers? Unfortunately, there are significant hurdles that DMEs must overcome:
Although any possible refund involves input VAT, it does not automatically mean that the claim for refund would be based on unutilized creditable input VAT under Section 112 of the Tax Code. Since the sales of DMEs are generally not zero-rated nor effectively zero-rated, it cannot claim refund under Section 112 of the Tax Code. As such, any refund would be based on Section 229 of the Tax Code which would require proof that the passed-on VAT on the local purchases is erroneous or illegally collected.
Even if the DME was able to prove that the passed-on VAT was erroneously or illegally collected, the administrative claim for refund must be filed within the 2-year prescriptive period regardless of the existence of any supervening cause after payment. Since CREATE took effect in April 2021, some claims may already be time-barred.
Further, it should be noted that CREATE has been amended by CREATE MORE. Among the CREATE MORE amendments is the express removal of the VAT zero-rating incentive on local purchases for DMEs. In effect, the doctrine laid down by the Supreme Court would not apply for local purchases by DMEs covered by CREATE MORE.
While the Supreme Court validated the position of DMEs, its redeeming effect is limited by practical circumstances and the effect of the improper implementation is not wholly recoverable. As between proper implementation and court vindication, laws would have a better chance of achieving its goal if we strive to effect the former rather than the latter.
The author is a partner of Du-Baladad and Associates Law Offices (BDB Law) (www.bdblaw.com.ph).
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal, or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at jomel.manaig@bdblaw.com.ph or call 8403-2001 local 140.