The Case for the Unconstitutionality of RR 9-2021 and Other Issues

Atty. Rami Hourani

This article will not be terribly accessible to my normal readership, you will need a deep understanding of Tax Law or be a practicing Accountant/Lawyer to understand most of the statements here. This article functions as more of a quick explainer to try and get the spotlight on this issue.

To my colleagues in the profession, I must state my personal biases in writing this short article. I am currently the President of PhilExport – Cebu Chapter and tasked with advocating on behalf of our interests. This article is my own personal opinion though and not that of the organization I represent.

Photo by Kelly Sikkema on Unsplash

The Premise:

The BIR has recently issued Revenue Regulation 9-2021. In substance, the Revenue Regulation paves the way for the removal of the Zero-Rated status of indirect export transactions. Indirect Export transactions are those sales of goods and services to persons who are Exporters.


RR 9-2021 would make indirect export transactions subject to the normal 12% VAT rate. The state of regulation previously was that suppliers of goods and services to exporters were zero-rated so that exporters did not incur input VAT. The reason from a Tax Administration perspective is that because exporters, whose customers are abroad, would incur little to no output VAT. If the transactions from their suppliers were not Zero-Rated, the exporters would need to file returns every quarter claiming their input VAT as a refund with the VAT Credit Audit Division. The burden, presumably, was placed with the suppliers because they would have more diverse sources of output VAT and could likely set these off against the sales they made to exporters.

Photo by Kelly Sikkema on Unsplash

The Problem RR 9-2021 tries to solve:

As most matters of tax administration, there are people who attempt to cheat the system. The current NEDA Chief, Karl Chua, while still with the DOF was able to undertake a comprehensive study of leakages in the VAT system of the Philippines and found that there were certain entities based in economic zones which were declaring sales as exports but in truth were selling locally. He was able to conclude that there were substantial losses on the part of the government by virtue of the exemption of indirect export transactions. It was decided in the deliberations of the TRAIN Law to grant the BIR the power to remove the exception of indirect export subject to the following conditions:

First, the establishment of an enhanced VAT refund system which can process refund applicaitons in 90 days.

Second, for the above condition to be deemed fulfilled all applications filed from January 1, 2018 shall be processed within 90 days.

Third, all pending VAT refund claims as of December 31st, 2017 shall be fully paid in cash by December 31, 2019. [Sec. 33 of TRAIN Law]

The Implementation:

The state of regulation currently is that the VAT Credit Audit Division [VCAD] of the BIR, which handled VAT refunds previously, has simply been assigned the task of processing refunds. The VCAD only operates in Manila and requires hard copies to be submitted there for all the VAT refunds in the entire country.

The Constitutional Issues:

There are four issues that jump out to me based on the foregoing circumstances: Compliance with the Requirements, Administrative Feasibility and the Cross Border Doctrine.

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Compliance with the Requirements

The above requirements for the removal of the exemption have not been complied with. As it currently stands, the VCAD is doubtful as to the state of regulation regarding indirect exports. Further, we have not seen that the refund applications made prior to the passage of RR 9-2021 were efficiently handled pursuant to the law. Further still, assuming arguendo that the 90 day performance period of the VCAD is possible, this only shows that it could process VAT Refund applications prior to RR 9-2021 and not when the number of applications will increase substantially as a result of the regulation. Therefore, a cogent argument can be made that the conditions for the removal of the zero-rating have not been complied with.

Administrative Feasibility

The tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. This is generally thought of as a general principle than a rule of action that the BIR must conform to. However, in the case of Diaz v. Executive Secretary (2011) the Supreme Court made the statement that if the law violated any law or the Constitution then a challenge might then be made. In this case, the only place where a VAT refund application can be made is a single office in Manila, but VAT regressive is a tax that covers the entire Philippines. It is my position that this is a violation of the equal protection clause under the 1987 Constitution because it is only those businesses in the NCR which can conveniently obtain a refund from the BIR. The rest will likely simply eat the cost then shoulder the burden of constantly filing VAT refund applications in Manila.

Cross Border Doctrine

The problem with the enactment of TRAIN is that it did not repeal Sec. 8 of the Special Economic Zone Act or the Cross-Border Doctrine. This means that from a legal perspective, the special economic zones are still treated as a separate customs territory. This means that there is a serious constitutional challenge to the validity of RR 9-2021 with regard the intended subjects of the regulation, the locators inside special economic zones. VAT functions on the premise of taxing domestic consumption. Under the law, PEZA and other Special Economic Zones are deemed to be a separate customs territory outside the jurisdiction of the Philippines. This means a good argument can be made that VAT cannot be passed on to those who operate therein.

Practical Considerations

The previous system was not perfect. Even exporters who had a Certificate of Zero-Rating were often hard pressed to get suppliers to acknowledge the exemption. It also made it possible for people to game the system. However, the new system which might address the problems imposes a heavy regulatory burden on Micro/Small/Medium Enterprises engaged in export. It pushes the burden of getting back their own money on them because there were some large players cheating the system. This creates a disincentive to making Filipino Products for global consumption.

Further, if the experience of the business community with regard the Anti-Red Tape Act is at all instructive. Periods for government action, like the 90 day guarantee found in TRAIN and its sister provisions in ARTA, will likely not guarantee government action within the allotted time.

I hope this small explainer helps you understand the issues surrounding RR 9-2021. If you have observations, please don’t hesitate to comment them below!

Atty. Hourani practices law in Cebu City, PhilippinesIf you would like to set an appointment with him, you may reach him here.

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