Fate of Peza-related tax perks uncertain

Guided by conflicting interpretations, top officials of the Department of Trade and Industry (DTI) could not agree whether Duterte’s recent veto of some provisions of the TRAIN law will remove key tax perks from Peza.

Following the passage of the TRAIN law in December last year, Duterte had vetoed five provisions from the first comprehensive reform package.

These provisions include the zero-rated value-added tax (VAT) for local companies that supply firms under the Philippine Economic Zone Authority (Peza).

Trade Secretary Ramon Lopez said in a recent interview that the veto removed the perk from local suppliers, which means the latter would now had to pay VAT when selling goods and services to Peza-registered companies.

Officials of DTI-attached agency Peza, on the other hand, insisted that the veto could not remove the tax incentive because of a previous Supreme Court decision that essentially said economic zones should be treated as foreign soil.

Local sales made to Peza-registered companies should thus be considered crossborder transactions, therefore rendering them VAT zero-rated, top Peza officials said.

The Philippine VAT system follows the crossborder doctrine, which means that no VAT should be imposed on goods to be consumed outside the country.

It remains to be seen which interpretation will prevail.

What remains at stake is the status of local suppliers to Peza-registered companies, which yearly make P250 billion worth of sales, according to Peza director general Charito Plaza.

Should the perk be slashed, this could be a greater disincentive to Peza-registered companies to source locally, opting instead to depend on imports, which are also currently being granted tax incentives.

This comes as Peza is trying to promote the local supply chain, which only accounts for generally around a quarter of materials used by Peza-registered firms.

“There is a Supreme Court decision that says a separate customs territory is in effect on foreign soil. Peza ecozones are foreign soil by legal fiction,” said Mary Harriet Abordo, Peza deputy director general for operations, in a recent interview with reporters.

Legal fiction refers to something assumed under law to be a fact.

“In effect, any sale from a local supplier to a Peza economic zone which is foreign soil is therefore considered crossborder and therefore VAT zero-rated,” she said.

Under the TRAIN law, such local sales will be subjected to zero-rated VAT only until an enhanced VAT refund system is in place, among other conditions.

Abordo said that this alone is not the only basis for the VAT zero-rating of the Peza’s local suppliers, pointing to section eight of the Peza law which said ecozones should be operated and managed as separate customs territory.

“That is not the provision alone on which our VAT zero-rating is based. We have section 8 of the Peza law. TRAIN did not repeal section eight of Peza law,” she explained.

Trade chief says otherwise

Lopez, however, said that this perk had already been removed by the veto.

“The decision of the Supreme Court was based on the old [law]. This [the zero-rated status] is already superseded,” said Trade Chief Ramon Lopez.

Benedicta Du-Baladad, co-founder and CEO of law firm Du-Balabad and Associates (BDB Law), echoed the interpretation made by Lopez. In an e-mail interview with the Inquirer, she said that there is a “danger” that local suppliers would become vatable.

She, however, clarified that the veto would not be responsible for the possible loss of the tax perk. Rather, it was the TRAIN law itself.

“The Supreme Court decision does not apply if the law relied upon in that decision is no longer the same. It is not the veto. It is because of the amendment in the law that these transactions will be subjected to VAT once an effective vat system is put in place,” she said.

Nevertheless, Plaza insisted with her agency’s interpretation.

“If they are going to implement otherwise, then we’ll fight because we are supported by a Supreme Court decision,” she told reporters.