Major export industry sectors urgently await immediate VAT-Zero rating resolution

The three largest export sectors of the Philippines – the IT-BPM, semiconductor/electronics, and garments/wearables industry – keenly await for a resolution on the Value Added Tax (VAT) issue currently being finalized by the government through the Fiscal Incentives Review Board (FIRB). A solution has been promised by the end of the month which also coincides with the end of the first taxable quarter. As exporters, these three industries have claimed VAT zero-rating on their purchases consistent with existing local regulations and globally accepted principles allowing for the sectors to remain competitive.

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% 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.

The same issue has also given rise to confusion on the part of the various industries engaged as suppliers of goods and services to the export sectors, such as the providers of healthcare, power, raw materials, and other integral services. It is believed that the failure to address the VAT issue may have a crippling consequence on the parts localization initiatives of exporters and particularly affect their local suppliers who will be more at risk should they lose their market.

In several meetings among representatives of the three export sectors with government officials, there is strong agreement that this is the biggest issue they are all currently facing. The inability to address this serious and pressing matter by the end of March will have detrimental effects to these three sectors particularly in sustaining their growth potential. In discussions about this issue, the Investment Promotion Agencies (IPAs) such as the Philippine Economic Zone Authority (PEZA), Board of Investments (BOI), Clark Development Corporation (CDC), Authority of the Freeport Area of Bataan (AFAB), among others, are deemed to be in the best position to determine and endorse list of goods and services eligible for VAT zero-rating purchased by exporters from local suppliers.

The combined contribution of these three export industries, 83B USD, account for a substantial 69% of the total goods and services exports, contributing 20% to the country’s overall GDP in 2022. Moreover, there are currently approximately 2.5 million direct and 6.75 million indirect employees who depend on the capacity of these three sectors to survive and compete.

Their ability to further contribute to the country’s GDP and reach their potential to provide employment to millions more Filipinos depend so much on having clear and consistent government policies and regulations. These are essential to ensuring ease of doing business and cost competitiveness, which always rate highly in the decision of existing and prospective investors in choosing their investment locations.