While the Bureau of Internal Revenue (BIR) recently ironed out some issues on the value-added tax (VAT) zero-rated goods and services made by exporters, the head of the IT and Business Process Association of the Philippines (IBPAP) sees some issues with the list of zero-rated services such as the distinction set in the health maintenance organization (HMO) plans acquired by their employees.
“In the case of direct and exclusive, the biggest component of that was HMO premium and so the list that will come out is gonna make a distinction between dependents and non-dependents because HMO premium are benefits of many IT-BPM [IT and Business Process Management]players but now there’s gonna be a distinction,” IBPAP President Jack Madrid told reporters on the sidelines of the IT-BPM Talent Summit last Wednesday in Makati City.
“Direct employees will be VAT zero-rated, that’s what I expect and then dependents are not,” the IBPAP chief explained.
HMO plans acquired by registered export enterprises for its employees who are directly and exclusively involved in the operations of their registered projects or activities and forming part of their compensation package shall be considered as “directly and exclusively used,” the BIR Revenue Regulation (RR) No. 3-2023 noted.
Meanwhile, Madrid mentioned other “gray areas” in the BIR regulation such as services rendered for Human Resources (HR) as these are not considered as “directly and exclusively used” in the registered project or activity of a registered export enterprise.
To avail of the VAT zero-rating certification, the BIR regulation noted the registered export enterprise should provide proof to the concerned investment promotion agency (IPA) that any of the listed local purchases of services are “indeed directly and exclusively used in its registered project or activity.”
“In all instances, in issuing the VAT zero-rating certification, the concerned IPA shall be guided by the rule that such local purchases of services are directly attributable to the registered project or activity without which such registered project or activity cannot be carried out,” the BIR measure which was released on Wednesday, April 26, noted.
The local services listed by the BIR that shall not be considered as “directly and exclusively used” in the registered project or activity of a registered export enterprise are: janitorial services; security services; financial services; consultancy services; marketing and promotion; and services rendered for administrative operations such as HR, legal, and accounting.
Further, the BIR regulation explained that those considered “directly and exclusively used” are “costs that are indispensable to the project or activity, i.e., without which the project or activity cannot proceed, and these include expenses that are necessary or required depending on the nature of the registered project or activity of the export enterprise.”
While the VAT zero-rating certification will be issued by the concerned IPA, the BIR will conduct post audit investigation/verification that the services are indeed directly and exclusively used by the registered export enterprise in its registered project or activity.
Madrid said to the IT-BPM industry, the HR is “direct and exclusive” because “we cannot…BPO [Business Process Outsourcing] companies cannot do what they do without HR but in the eyes of some people in the government, that’s not direct and exclusive because it’s not directly included in the service being provided but that’s a bit of a gray.”
But, the IBPAP head noted, “The good news is it will be more clear. Not everyone will be happy but it will not be perfect, it’s not gonna be what we want. Hundred percent of what we want but it’s better than the current ambiguity because investors don’t like ambiguity.”
Last March 2023, three major export sectors in the Philippines namely the IT-BPM, semiconductor/electronics, and garments/wearables industry said in a joint statement that they are urgently waiting for a resolution on the VAT issue.
The understanding of the sectors is that most of the government agencies involved in resolving the issue believe that there is “clear basis” for all purchases of exporters to be without the 12-percent VAT, given that this is not only allowed by the rules but is more importantly “critical” in ensuring that the prices at which the services and goods offered are able to remain competitive in the international market.
Meanwhile, Semiconductor and Electronics Industries in the Philippines Foundation Inc. (SEIPI) President Danilo C. Lachica told the BusinessMirror in a Viber message on Friday that the BIR regulation is a “significant” improvement to alleviate concerns of constructive exporters.
However, Lachica noted, “What could be better is to have zero VAT for companies that export at least 70 percent of their products.” He added that this was discussed with and supported by the Department of Trade and Industry.