The cost of VAT uncertainty: What the Subic Bay Freeport case clarifies

By Ronald V. Bernas and Paolo Guzman

A single value-added tax (VAT) line item can change the economics of a project. For registered enterprises in freeports and ecozones, the difference between a purchase treated as zero-rated versus 12-percent VAT is not just a technicality. It can mean millions tied up in working capital, shaping pricing decisions, procurement terms and the pace of expansion — cash, cost, and competitiveness.

This is why the Supreme Court’s ruling in the Subic Bay Freeport Chamber of Commerce Inc. v. Department of Finance (G.R. No. 266016, February 4, 2025) is more than a legal footnote. It is a business clarity  decision that affects cost build-up, supplier negotiations and cash management for registered enterprises.

At the center of the case was a policy shift introduced through the implementing rules and regulations of the Corporate Recovery and Tax Incentives for Enterprises Act (Create) and related revenue regulations from the Bureau of Internal Revenue (BIR).

Although a later law, the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (Create More), has since updated the VAT incentive framework, the ruling addressed the earlier Create rules and issuances, which effectively confined VAT zero-rating on local purchases to registered export enterprises (REEs, i.e., businesses that export at least 70 percent of the goods or services they produce) and excluded domestic market enterprises (DMEs or businesses that sell their goods or services mainly within the Philippines). This is despite the fact that both fall under the law’s broader category of registered business enterprises (RBEs).

In plain terms, the petitioners argued that the government agencies implementing the law were no longer just filling in the details. By excluding DMEs, the issuances narrowed an incentive that Congress granted in the Create Act.

The Supreme Court agreed. It ruled that the assailed portions were void to the extent they excluded DMEs from the benefit, emphasizing a basic principle: agencies may issue rules to implement a law, but they cannot amend it or reduce what the law itself provides. Create grants VAT zero-rating to RBEs, covering both REEs and DMEs, subject to the law’s conditions.

Currently, under the newer Create More law, DMEs can still avail of the benefit, but the availment has since been narrowed down to “high-value” DMEs — generally those with investment capital exceeding P15 billion in import-substituting sectors or with prior-year export sales of at least $100 million (or equivalent).

For businesses in freeports and ecozones, the immediate implication is practical. VAT is not just a tax issue — it is a working-capital issue. A 12-percent VAT charge on large local purchases forces companies to fund additional cash up front. Even where recovery is possible, timing matters. Cash tied up in VAT is cash not deployed for growth.

The decision may also reduce commercial friction. Many suppliers hesitate to apply zero-percent VAT without strong comfort that the buyer qualifies, because the supplier bears risk if the zero-rating is later questioned. With clearer judicial guidance that DMEs are not automatically excluded, discussions can shift away from enterprise labels and toward documentation and eligibility proof.

That said, the ruling is not a free pass and it is important to be balanced about what it does and does not do.

First, VAT zero-rating under Create, as amended by Create More, remains conditional. The incentive is tied to purchases that are “directly attributable” to the registered project or activity. That requirement remains a key audit pressure point because it demands operational evidence, meaning how the goods or services were actually used, not just a registration certificate.

Second, organizations may face transition risk. Many companies built their invoice-checking routines, Enterprise resource planning (ERP) tax codes and vendor onboarding processes around earlier interpretations. If legal clarity changes but internal controls do not, the result can be inconsistent VAT treatment across sites and vendors. This can lead to disputes, delayed payments, and avoidable exposure.

What should businesses do now? They should start by treating VAT zero-rating as an end-to-end control, not a last-minute billing request. Confirm the enterprise’s registration details and define the scope of covered projects or activities. Then map procurement categories and vendors against what is “directly and exclusively used” for those registered activities and document the policy in a way that finance and procurement teams can execute consistently.

Next, they should standardize supplier support. A practical approach is to prepare a uniform evidence pack for vendors, including proof of registration, project linkage, required invoice language and internal approvals. This helps suppliers apply zero-rating with confidence and consistency.

Third, companies should align systems and workflows. Update purchase order templates, ERP tax codes and approval steps so VAT treatment is decided upstream, before invoices arrive. This reduces manual overrides and provides a cleaner audit trail.

Finally, businesses should quantify what happened historically. Where 12-percent VAT was charged on purchases that appear to qualify under the clarified rule, management should measure the financial impact and evaluate potential remedies. This should be done carefully, with attention to documentation completeness, timing constraints and supplier coordination, which is often the practical gating factor.

The takeaway is straightforward: the Supreme Court decision reinforces that incentives should be implemented as written in the law and that registered enterprises should not lose benefits through administrative narrowing. Realizing the benefit still depends on execution discipline, including clear eligibility boundaries, complete documentation, and consistent controls.

Ronald Bernas is a tax and legal partner at Deloitte Philippines, a member firm of the Deloitte network. Paolo Guzman is an assistant manager with the Tax & Legal practice of Deloitte Philippines.