ECOZONE TAXATION Charles C. Onda, CPA Assistant Professorial Lecturer, Accountancy Department College of Business Administration, DLSU-Dasmariñas Dasmariñas, Cavite
1.0 Introduction
Ecozones are areas designated by the government for development into balanced agricultural, industrial, commercial, and tourist/recreational regions. Each Ecozone is to be developed as an independent community with minimum government interference. It shall administer its own economic, financial, industrial and tourism development without help from the national government. It shall also provide adequate facilities to establish linkages with surrounding communities and other entities within the country. Ecozones are among the measures adopted by the Government to implement its policy of promoting the preferential use of Filipino labor, domestic materials and locally produced goods, and to help them make them internationally competitive. They are established in strategic locations in the country designed to effectively attract legitimate and productive foreign investments. Ecozones are created by virtue of EO 226 otherwise known as Omnibus Investment Code which becomes effective on July 1997 and by Presidential Decree No. 66 otherwise known as PEZA law. The present laws affecting ecozones includes RA 7916 or the Special Economic Zone Act of 1995 which was signed into law on February 24, 1995 which was later amended by RA 8748. An ecozones are managed and operated by the Philippine Economic Zone Authority (PEZA) “ as a separate customs territory.”
2.0 Nature and type of ECOZONES
Ecozones are divided into the following types : 1. Industrial Estates (IEs) are tracts of land developed for the use of industries. They have basic infrastructure such as roads, water and sewage systems, pre-built factory buildings, and residential housing for the use of the community. 2. Export Processing Zones (EPZs) are special IEs whose locator companies are mainly export-oriented. EPZ incentives include tax- and duty-free importation of capital equipment, raw materials and spare parts. The government has designated 4 EPZs; Bataan, Cavite, Baguio City and Mactan Island in the Visayas. There are about 250 registered companies in the EPZs, most of which are involved in the manufacture and export of electronics, garments, rubber products, fabricated metals, plastics, electrical machinery, transport equipment and industrial chemicals.
3. Free Trade Zones are areas nearby ports of entry, such as seaports and airports. Imported goods may be unloaded, repacked, sorted and manipulated without being subjected to import duties. However, if these goods are moved into a non-free trade zone, they will be subjected to customs duties. ASEAN has agreed to create an Free Trade Zones by 2003. 4. Tourist & Recreational Centers contain establishments that cater to both local and foreign visitors to the Ecozones. Such businesses include hotels, resorts, apartments and sports facilities.
Business establishments located and operating inside ecozones are referred to as “ecozone enterprises.” An enterprise maybe operated by an individual, association, partnership or a corporation. The brief descriptions of each type of Ecozone Enterprise follows: - Export Enterprise - manufactures, assembles, or processes products which are 100% exported, unless a lower percentage is approved by PEZA. - Free Trade Enterprise - imports and markets tax- and duty- free goods within the free trade area in the Ecozone. Goods brought outside the free trade area will be subject to customs and tariff duties. - Service Enterprise - is engaged in any one or a combination of the following activities : customs brokerage, trucking/forwarding, janitorial, security, insurance and/or banking, consulting or any such service approved by PEZA. - Domestic Market Enterprise – manufacturer, assembler or processor if goods that cannot export at least 50% of their output for a period of three years if majority-owned by Filipinos and at least 70% if majority-owned by foreign nationals. -Pioneer Enterprise, with any of the following conditions: -
Manufactures, processes or produces goods not produced in a Commercial scale in the country;
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Uses a design, formula, scheme, method or process which is new and Untried in the Philippines;
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produces non-conventional fuels or manufactures equipment that utilizes nonconventional sources of energy ;
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develops areas for agri-export processing development; or
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given such a status under the Investment Priorities Plan.
- Utilities Enterprise - contracted to provide light and power, water supply and distribution, communications and transportation systems in the Ecozone. - Facilities Enterprise - contracted to build and maintain necessary infrastructure such as warehouses, buildings, road networks, ports, sewerage and drainage systems, and other facilities considered as necessary by PEZA in the development and operations of the Ecozone. - Tourism Enterprise - operates tourist accommodation facilities, restaurants, and sports and recreational facilities in the Ecozone. - Ecozone Developer/Operator – develops, operates, and maintains the Ecozone, all component sectors (i.e. IEs, EPZs, Free Trade Zones, and Tourist/Recreational Centers) and all related infrastructure (roads, light and power systems, drainage facilities, etc.)
3.0 Salient features of taxation in ECOZONES
Ecozones will be granted the following incentives only during the period of their registration with PEZA, to wit: 1) Business and income taxation of “ enterprises “, except service enterprise, is covered by special tax rules( rates, tax base, et al) different from thje general tax laws (NIRC, RA 8424, Local Government Code, Customs and Tariff Code, et al). 2) Covered enterprises also enjoy the following incentives: A. Income Tax Holiday (ITH) for a period of 3-6 years extendible to not more tan 3 years. It does not cover income from unregistered activities. “Income Tax Holiday” (ITH) means a period of years of operation wherein the taxpayer is exempted from the payment of any income tax whether the taxpayer reports a taxable income or not. ITH has a limited period and is available only to “export” and “free trade enterprises.” Income Tax Holiday Period Basic (a) For Pioneer Enterprise
- 6 years
(b) For Non-Pioneer Enterprise (c) Expanding Enterprise
- 4 years - 3 years
It can be extended to another three(3) years but the total number of years including basic should not exceed 8 years.
Bases of extension: (a) Ratio of capital equipment to number of workers of the project does not exceed US$ 10,000. (b) Average cost of indigenous materials is at least 50% of the total material cost in the preceding year (c) Net foreign exchange savings is at least US$ 500,000 for the last 3 years of operations. B. Duty and Tax free importation and exports C. Tax Credit on local material substitutes (25%) and capital equipment (100%) D. Exemption from all national internal revenue taxes such as gross receipts tax, value-added tax, ad valorem tax, excise tax, income tax, documentary stamp tax, percentage taxes, and all other taxes found in the National Internal Revenue Code. E. Exemption from the payment of all local government impost, fees, licenses or taxes including local business tax, transfer tax on the sale of real property, real estate taxes, community tax, mayor’s permit fee, sanitary fee, other regulatory fees and other taxes and fees found in the Local Government Code and particularly in the Tax Ordinance of the local government unit where the economic zone is located. F. Other non-monetary incentives 3) If not entitled to or upon expiry or lapse of the ITH, enterprises are subject to a special income taxation at a preferential rate of 5% on gross profit, otherwise known as Gross Income Taxation(GIT), which shall be shared and distributed as follows: (a) To the national Government (b) To the Treasurer’s Office of the Municipality or City where the registered enterprise is located
- 3% -2%
For an ECOZONE export enterprise, the following are considered to be allowable deductions from net sales:
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Direct salaries, wages or labor expenses
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Service or production supervision salaries
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Raw materials
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Goods in process
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Finished goods
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Supplies and fuels used in production
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Depreciation of machinery, equipment and buildings owned and/or constructed Financing charges associated with fixed assets Rent and utility charges for buildings, equipment, and warehouses, or handling goods
4.0 Tax treatment of transactions of with PEZA-registered enterprises
Generally, products manufactured or produced within the ECOZONES are destined for export to foreign countries. While such products, under certain conditions, maybe sold to buyers in the Customs Territory, i.e., outside the ecozones, such sales are technically considered as another separate Customs Territory, the buyer is treated as an importer and is imposed with the corresponding import taxes and customs duties on his purchase of products from within the ecozones. While all ECOZONE enterprises are not necessarily manufacturer-importers of products considering that there are also service enterprises registered as Ecozone enterprises, however, taken as a whole, all their integrated activities eventually translate into manufactured products which are either actually exported to foreign countries, in which case, no VAT must form part of its export price; or actually sold to buyers from the Customs territory, in which case, 10% VAT shall be paid thereon by such buyers, consistent with the “Cross Border Doctrine” of the VAT system. RMC 74-99 consolidates and harmonizes all the pertinent laws and their implementing rules and regulations in respect to sales of goods, property and services to the Ecozones, to wit: 1. Sales made by a VAT-Registered supplier from the Customs Territory, to a PEZA Registered Enterprise: A. If the buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to RA 7916, as amended: (1) Sale of goods (i.e., merchandise)- This shall be treated as indirect export; hence, considered subject to zero rate(0%) VAT, pursuant to
Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of RA 7916, in relation to Art.77(2) of the Omnibus Investment Code.
(2) Sale of service- This shall be treated subject to zero percent (0%) VAT under the cross border doctrine of the VAT system, pursuant to VAT Ruling N0. 032-98 dated November 5, 1998. B. If buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime; hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime: (1) Sale of goods- This shall be treated as indirect export hence, considered subject to zero percent(0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of RA 7916, in relation to Art.77(2) of the Omnibus Investment Code. (2) Sale of Service- This shall be treated subject to zero percent (0%) VAT under the cross border doctrine of the VAT system, pursuant to VAT Ruling N0. 032-98 dated November 5, 1998.
2. Sales made by a VAT Exempt Supplier from the Customs Territory, to a PEZA Registered Enterprise - Sale of goods, property and services by a VAT exempt supplier from the Customs Territory, to a PEZA registered enterprise shall be treated exempt from VAT, pursuant to Sec. 109, in relation to Sec. 236, NIRC, regardless of whether or not the PEZA registered buyer is subject to taxes under the NIRC, or enjoying the 5% special tax regime, or a registered manufacturer-exporter the “Cross Border Doctrine” of the VAT System to the contrary notwithstanding. 3. Sales made by a PEZA Registered EnterpriseA. Sale of goods by a PEZA registered enterprise, to a buyer from the Customs Territory ( i.e., domestic sales)- This case shall be treated as a technical importation made by the buyer. Such buyer shall be treated as an importer thereof and shall be imposed with the corresponding import taxes (i. e., VAT or VAT plus excise tax, as the case may be), pursuant to Sec. 107, Title IV and VI, NIRC, in relation to Sec. 26, RA 7916, as implemented by Sec. 2, Rule VIII, Part V of the PEZA rules and regulations. The registered enterprise’s gross income earned therefrom shall be subject to the 5% special tax pursuant to Sec. 24 of RA 7916: Provided, however, that its sales in the Customs Territory do not exceed the threshold allowed or permitted for such sales , pursuant to the pertinent provisions of the PEZA rules and regulations: Provided, further, that for income tax purposes, if such sales should exceed the threshold, its income
derived from such excess sales shall be imposed with the normal income tax pursuant to the provisions of Title II, NIRC: Provided, further, that in computing for the income tax due on such excess sales, its net income from such excess sales shall be determined in accordance with the method of general apportionment pursuant to provisions of Sec. 50(NIRC). B. Sale of Services by a PEZA Registered Enterprise to a Buyer from the Customs Territory - This type of transaction is not embraced by the 5% special tax regime governing PEZA registered enterprises pursuant to RA No. 7916, as implemented by the PEZA rules and regulations; hence, such sellers shall be subject to the 10% VAT, pursuant to Section 108 or to the percentage tax, pursuant to Title V, whichever is applicable, and to the normal income tax on income derived therefrom, pursuant to Title II, NIRC. Such income tax shall be computed in accordance with the method of general apportionment provided in the immediately preceding paragraph. C. Sale of goods, by a PEZA registered enterprise, to another PEZA registered enterprise (i,e., Intra-Ecozone Sales of Goods) - Its sale of goods or property to another zone enterprise shall be exempt from VAT, pursuant to Sec. 109(q), NIRC, in relation to Sec. 24, RA 7916, as implemented by Sec. 1, Rule VIII, Part V of the PEZA implementing rules and regulations. D. Sale of Service, by Ecozone enterprise, to another ecozone enterprise (Intra-Ecozone Enterprise Sale of Service): (a) If PEZA registered seller is subject to the 5% Special Tax RegimeExempt from VAT or any percentage tax, pursuant to Sec. 24, RA 7916. (b) If PEZA registered seller is subject to taxes under the NIRC- Subject to zero percent (0%) VAT pursuant to the “Cross Border Doctrine” of the VAT System, regardless of the type or class of PEZA registration of the PEZA enterprise buyer, since the use for or benefit from such purchase of service of service shall eventually be translated into actual export of goods (i. e., shipment of goods to a foreign country, which is subject to zero percent(05) VAT, or translated into technical export of goods (i. e., sale of goods to a buyer from the Customs Territory, which is treated as importation by such buyer, hence, subject to 10% VAT against the said buyer).
Figure 1- Transactions with ECOZONE enterprises Foreign Country E
Various Suppliers (A) Transaction 5
Transaction 6
Transaction I
Transaction 2 Supplier of Goods (B)
Transaction 3 ECOZONE Enterprise (D)
Service Contractor (C)
Transaction 4
Transaction 1- VAT registered suppliers (A) sell goods to other VAT registered persons (B) and (C). The output tax shifted by (A) may be claimed as input tax credit by (B) and (C) against their output tax on their respective sales to the Ecozone enterprise (D). Transaction 2- A VAT registered person (B) sells goods to an Ecozone enterprise (D). The sale qualifies for zero rating. The exemption of Ecozone enterprise (D) from direct and indirect internal revenue taxes effectively subjects the sales of the VAT registered person (B) to zero percent. Transaction 3- An Ecozone enterprise (D) sells goods to a VAT registered person (B) in the Customs Territory. The goods are considered as imported from a foreign country ( the Ecozone). It is subject to 10% VAT imposed on imported goods. Transaction 4- A VAT registered contractor (C) supplies service to an Ecozone enterprise (D). The transaction qualifies for zero rating.
Transaction 5- The Ecozone enterprise (D) exports merchandise to a Customer (E) in a foreign country. The transaction is exempt under a special law. It is not eligible for zero rating because the enterprise (D) is not a VAT registered person. Transaction 6- An Ecozone enterprise (D) imports goods from a supplier (E) abroad. This is likewise exempt from VAT under a special law.
4.0 Income tax return filing and payment of income tax
The same rules and regulations of the general law ( RA 8424- Tax Reform Act of 1997) apply to the filing of income tax return and payment of income tax of ecozone enterprises whether entitled to income tax holiday or not. Likewise, the same rules and regulation of the general law applies to the place and mode of payment of income tax. Individuals staying or working inside the Ecozones are subject to taxes under RA 8424 (NIRC) and the Local Government Code. References
Deoferio, Victor A. and Mamalateo, Victorino C.(2000) The Value Added Tax in the Philippines, Info Solutions Research Center, p. 198,200-201 Revenue Memorandum Circular 74-99
Charles C. Onda is a Certified Public Accountant ( CPA ) affiliated as Part-time Faculty (Assistant Professorial Lecturer 5 ) at the Accountancy Department, College of Business Administration of De La Salle University-Dasmariñas (DLSU-D-D/CBA) in Dasmariñas, Cavite. He is also a Revenue Examiner at the Bureau of Internal Revenue (BIR).
