THE House Committee on Ways and Means is now working on a proposal that will address challenges as well as “enhance” the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
While CREATE has achieved “notable successes,” Albay Rep. Joey Sarte Salceda admitted that challenges and opportunities for improvement have emerged during the implementation of the law, which aimed to tackle tax uncertainty, provide relief to businesses adversely affected by the Covid-19 pandemic, and streamline the country’s complex tax incentives system.
Members of the Ways and Means Committee are set to meet on November 7 to discuss Salceda’s House Bill (HB) 8968, which seeks to establish a simplified VAT refund system for registered business enterprises, providing them with a more predictable and efficient process for claiming refunds.
“With the passage of the law, despite headwinds and the then-ongoing global health emergency, the country recorded its highest ever foreign direct investment (FDI) performance of $10.5 billion. However, because of adverse global economic conditions and a steep interest rate hike regime by the US Federal Reserve, the Philippines’s FDI [foreign direct investment] performance shrank to $9.2 billion, a 23 percent year-on-year decline,” Salceda said.
“While unfavorable global conditions were the key factor in declining FDI, uncertainty over the implementation of VAT and tax administration provisions of the CREATE Act has dampened investor sentiment and made doing business more difficult,” he added.
Additionally, Salceda said the failure to carry out the heart of the reform, the “mix-and-match” provision of CREATE, which allows the President to customize the tax incentive regime, meant that the most potent instrument of investment promotion in the law was not utilized.
One of the key challenges associated with the CREATE Act has been the implementation of VAT and tax administration provisions, he said.
Salceda said his proposal also institutionalizes risk-based audits conducted by the Commission on Audit (COA) for tax refunds, enhancing transparency and fairness in the system.
The latest draft of the substitute bill for House Bill 8968, obtained by BusinessMirror, provides various conditions regarding VAT for the sale of goods and services, depending on the nature of the transaction.
Here are the conditions outlined under the latest draft of the proposal:
- The sale of goods and/or services by unregistered and registered domestic market enterprises to another unregistered and registered domestic market enterprise shall be subject to 12 percent VAT.
- The sale of goods and/or services to a non-registered export enterprise shall be subject to 12 percent VAT.
- The sale of goods and/or services by a VAT-registered seller to registered export enterprises, regardless of location, shall be subject to zero percent VAT.
- The sale of goods and/or services by a registered export enterprise to another export enterprise shall be subject to specific rules:
- If the seller is VAT-registered and enjoying an income tax holiday, the sale of goods and/or services to another export enterprise shall be subject to zero percent VAT.
- If the seller is enjoying the 5-percent special corporate income tax incentive, the sale of goods and/or services shall be VAT-exempt.
The proposal also provides clear guidelines for the sale, transfer, or disposal of previously VAT-exempt imported capital equipment, raw materials, spare parts, and accessories:
- If the purchaser is a registered export enterprise, regardless of location, the transaction shall be subject to zero percent VAT.
- If the seller is a registered domestic market enterprise, regardless of location, the transaction shall be subject to 12 percent VAT based on the net book value of the capital equipment, raw materials, spare parts, or accessories, unless the purchaser is a registered export enterprise. In such cases, the transaction shall be subject to zero percent VAT.
The proposal also provides special consideration for large domestic market enterprises.
Under the bill, domestic market enterprises with an investment capital of at least $500,000,000 or its equivalent in Philippine pesos, which are import-substituting or cater to non-residents, may avail of zero percent VAT on local purchases and VAT exemption on importation of capital equipment, raw materials, spare parts, or accessories. However, this must be approved by the Fiscal Incentives Review Board during the availment period.
Also, during the period of availment of the income tax holiday and the enhanced deduction regime, the registered business enterprise local tax will be imposed. The tax will be collected for the local government either by the concerned investment promotion agency or by the Bureau of Internal Revenue, as assigned by the investment promotion agency.
In cases where two or more local government units cover the same enterprise, the sharing of the tax revenue shall follow the formula prescribed under Section 285 of the Local Government Code of 1991, as amended.
Additionally, local government units have the discretion to reduce or waive the rate of tax, or their share thereof, when multiple local government units cover the same enterprise.
To ensure efficient and simplified compliance with tax rules and regulations, a separate service or unit within the Bureau of Internal Revenue has been created for registered business enterprises.
The Commissioner will prescribe the manner and place of filing returns and payments of taxes by registered business enterprises through this specialized service or unit.
This latest draft of the substitute bill for HB 8968 is still open to potential amendments by the committee members.