ELSE you are not forgotten
Less than a week after the mass “transfer” of Information Technology-business process management firms from the Philippine Economic Zone Authority (PEZA) to the Board of Investments (BoI), following the expiry of the application period on Jan. 31), the BoI and the Bureau of Internal Revenue (BIR) issued circulars to clarify that Ecozone Logistics Service Enterprises (ELSEs) are to be included in the new Strategic Investment Priority Plan (SIPP) but may also be classified as Export Enterprises. This turn of events was brought about by the diligent efforts of PEZA to actively lobby for the industry’s inclusion with the BoI and Fiscal Incentives Review Board (FIRB).
WHAT DO ELSEs DO EXACTLY?
As defined under Revenue Memorandum Circular (RMC) No. 24-2023, an ELSE is a registered business enterprise supplying production-related raw materials and equipment catering exclusively to the requirements of ecozone locators. They provide critical support particularly to export manufacturing companies with their requirements for logistics to facilitate their import and export shipments, sourcing of raw materials, inventory management, just-in-time delivery, localization and process customization.
Prior to the effectivity of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, Ecozones and Freeport zones were, by legal fiction regarded as foreign territory. Thus, following the “cross-border doctrine,” the sale of goods and services by a VAT-registered seller to registered enterprises in these ecozones and freeports were treated as constructive exports subject to zero-percent VAT.
With the passage of CREATE, the VAT exemption on imports and VAT zero rating on local purchases were limited to only: (1) those goods and services directly attributable to and exclusively used in the registered activity of the enterprise; and (2) those goods and services sold to entities that are registered “export enterprises.”
As defined under the Implementing Rules and Regulations of CREATE, an export enterprise refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organized and existing under Philippine laws, and registered with an incentive promotion agency to engage in manufacturing, assembling or processing activity, and services such as information technology (IT) and business process outsourcing (BPO), and resulting in the direct export and/or sale of its manufactured, assembled or processed product or IT/BPO services to another registered export enterprise that will form part of the final export product or export service of the latter, of at least 70% of its total production or output.
From the definition, there is nothing which would indicate that ELSEs may also be classified as export enterprises. Thus, although the majority of services rendered by ELSE are provided to export enterprises, they are unable to avail of the VAT zero rating incentive on their local purchases of goods and services. This would have a big impact not only in terms of their cash flow (input VAT on purchases) but also may increase the price of their services. They may also suffer the burden of the administrative costs of filing for an eventual VAT refund with the tax authorities since services rendered by ELSEs to PEZA operators will likewise be VAT zero-rated.
BOI: ‘WE HEARD YOU!’
Given the relentless efforts of PEZA to file position papers with the BoI and the FIRB, the BoI issued Memorandum Circular No. 2023-001 to clarify that Logistics services (warehousing, inventory management and transport of goods except mere trucking and forwarding services) indeed qualify as “activities in support of exporters” under the 2022 SIPP, and thus, are entitled to the VAT zero rating incentive.
In line with the BoI Memorandum Circular, the BIR also issued RMC No. 24-2023 to provide further guidance on the eligibility of ELSEs to utilize the VAT zero rating incentive. For easy reference, I have enumerated some of the key points as follows:
1. To qualify as an export enterprise, at least 70% of the ELSE’s output/services should be provided to another registered export enterprise.
2. Qualified ELSEs should be undertaking both of the following:
a. Establishment of a warehouse storage facility; and
b. Importation or procurement from local sources and/or from other registered enterprises of goods for resale, or for packing/covering (including marking, labeling), cutting or altering to customers’ specifications, mounting and/or packaging into kits or marketable lots thereof for subsequent sale, transfer or disposition for export.
3. Same rules on documentation as enumerated under Q&A No. 32 to 37 of RMC 24-2022 shall be required to avail of the VAT zero rating incentive. Meanwhile, processing of applications for VAT zero-rating are still to be governed by Revenue Memorandum Order No. 7-2006 and any subsequent amendments.
Upon comparison with the BoI Memorandum Circular, however, one would note that the BoI did not require ELSEs to engage in both activities at the same time. The BoI anchored its definition on PEZA Board Resolution No. 97-366, which allows ELSEs to conduct either of the above activities or a combination of both. Hopefully the BIR will issue a clarification to resolve the apparent misalignment.
With the classification of ELSEs as export enterprises by virtue of carrying out “activities in support of exporters” under the 2022 SIPP, I also wonder if the same treatment can be extended to other ecozone locators in similar situations, such as ecozone developers, utilities and environmental management facilities which were still not included in the SIPP. Hopefully both the BoI and BIR would also issue a similar clarification for these entities soon since they also provide critical support to direct exporters, and their classification, similar to ELSEs, will have a significant impact on their operations.
Nevertheless, considering the various changes in tax rules/guidelines brought on by new tax laws (e.g., TRAIN, CREATE) and new initiatives (e.g., digitalization), I am ecstatic that our regulators were able to provide clarity on this issue. This development, at the very least, is proof that every industry, not only the major ones, will be heard and not merely “forgotten” until the clamor eventually dies down.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Steven Lloyd Co is a manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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