A closer look at recent amendments to the CREATE IRR

The new year seems like a good time to leaf through recent developments in legislation, simply as a prudent exercise in picking up from where we left off due to the long holidays. Worth noting are the latest amendments to the Implementing Rules and Regulations (IRR) of RA 11534 (or CREATE Law). On Dec. 2, the Department of Finance (DoF) and Department of Trade and Industry (DTI) issued the following amendments:

Availment period — First, the IRR prescribed a maximum period for availing of non-income-related tax incentives. These incentives refer to the exemption from customs duty on importations of capital equipment, raw materials, spare parts or accessories; the VAT exemption on imports; and the VAT zero-rating on local purchases. Thus, registered export enterprises may avail of these incentives for a maximum of 17 years, while registered domestic market enterprises are eligible for customs duty exemption for a maximum of 12 years. The period is counted from the date of registration, unless otherwise extended under the Strategic Investment Priority Plan.

Sunset period — A sunset period was also imposed on the non-income-related tax incentives of existing registered business enterprises (RBEs) under their respective registrations. Export enterprises registered with ecozones and freeports are to enjoy the incentives until the sunset period ends. If the existing RBE is entitled only to an income tax holiday (ITH), then the sunset period will run until the expiration of the ITH. However, if the existing RBE was granted the 5% gross income tax rate, whether solely or after the expiration of the ITH, the sunset period is set for 10 years from the effectivity date of CREATE. On the other hand, existing RBEs registered with the Board of Investments (BoI) are eligible for duty exemption for five years from the date of registration.

Zero rating — Rule 2 Section 5 on VAT Zero-Rating and Exemption was further amended to delete the clause relating to the 12% VAT on indirect exports (i.e., transactions falling under Section 106(A)(2)(a) (3), (4), and (5), and Section 108(B) (1) and (5) of the Tax Code, as amended). The enumeration of goods and services that qualify as for the “direct and exclusive use for the registered project or activity” was expanded to include packaging materials, provision of basic infrastructure, utilities and maintenance, repair and overhaul of equipment. Finally, the grant of VAT zero-rating on local purchases requires the endorsement of the concerned Investment Promotion Agency (IPA), as well as meeting the documentary requirements of the Bureau of Internal Revenue (BIR).

ITH — The three-year income tax holiday that may be granted to qualified expansion projects or activities shall be followed by the Special Corporate Income Tax (SCIT) or enhanced deductions, as may be applicable. Non-income-related tax incentives may also be given.

Duty exemption — Existing RBEs qualify for duty exemption until the expiry of the Certificate of Authority to Import or Admission Entry for imports which were ordered, loaded, or are still in transit during the effectivity of Executive Order 85, series of 2019. Executive Order 85 provided for duty-free imports of certain capital equipment, spare parts and accessories by BoI-registered enterprises with new or expansion projects.

Offshore gaming — An additional section lays down the transitory rules for offshore gaming licensees and accredited service providers registered with IPAs before CREATE took effect. They may continue to enjoy the incentives until the expiry of the sunset period or of their license/registration, whichever comes first.

Notably, some amendments were highly anticipated by stakeholders, such as the deletion of the clause relating to 12% VAT on indirect exports, and the expansion of the list of goods and services classified as for “direct and exclusive use.” While not intended to be exclusive, the expanded list provides additional guidance on what purchases qualify for VAT zero-rating.

These periods are not found under the law. Sections 296 and 311 of CREATE, which provide the availment and sunset periods, respectively, speak only of ITH, SCIT (or the 5% gross income tax under special laws), and enhanced deductions. Since the law was silent as to any period applicable to non-income-related tax incentives, RBEs should be entitled to such incentives for the duration of their registration. For existing RBEs, it means that they should continue to enjoy the non-income-related tax incentives granted under their existing registrations and not repealed by CREATE.

It is also worth noting that, even before the amendment, Rule 2 Section 5 on VAT Zero-Rating and Exemption was inconsistent with CREATE. Following the definition of the terms under CREATE and its IRR, RBEs are classified as either export enterprises or domestic market enterprises. Section 295(D) of CREATE provides that RBEs are entitled to the VAT incentives, yet the IRR restricted these incentives to registered export enterprises only. Sadly, this interpretation was retained under the amended IRR.

Undoubtedly, the validity of the rule-making power of administrative agencies or “subordinate legislation” is well-recognized under our legal system. Administrative agencies may promulgate rules and regulations to implement laws enacted by the Legislative Branch. No less than the Supreme Court has declared that these rules and regulations have the force and effect of law. However, delegated legislative authority does not come unbridled. Equally recognized is the principle that IRRs should not modify, expand, or restrict the statute they seek to implement. To be a valid exercise of the rule-making power, IRRs must not contradict but should conform to the provisions of the law.

With due respect, the limitations imposed on the period within which non-income-related tax incentives may be enjoyed and the distinction created between export and domestic market enterprises on the eligibility for the VAT incentives amount to an undue expansion of the law.

Time and again, the Supreme Court has struck down provisions of IRRs that conflict with the law they are supposed to implement. The raison d’état lies in the old legal maxim that the spring cannot rise higher than its source. Thus, there may be a need to revisit the amended IRR.