BASTRTAX
1TAY2122
Strategic Tax Management
Preferential Taxation
Special Economic
Zone Act
THE SPECIAL ECONOMIC ZONE ACT OF 1995
Under Republic Act No. 7916, as amended by Republic Act No. 8748, otherwise known as "The Special Economic Zone Act of
1995" administered by the Philippine Economic Zone Authority (PEZA), Ecozones or "special economic zones" (SEZ) are
established as a separate customs territory to promote flow of local and foreign investments that would generate employment
opportunities, simulate the repatriation of Filipino capital by providing attractive climate and incentives for business activity,
and for other purposes.
PURPOSES
Its main purpose is to turn the country into a principal destination for investment. Specifically, it aims:
1.
To establish the legal framework and mechanisms for the integration, coordination, planning and monitoring of special
economic zones, industrial estates/parks, export processing zones and other economic zones;
2.
To transform selected areas in the country into highly developed agro-industrial, industrial, commercial, tourist, banking,
investment, and financial centers, where highly trained workers and efficient services will be available to commercial
enterprises;
3.
To promote the flow of investors, both foreign and local, into special economic zones which would generate employment
opportunities and establish backward and forward linkages among industries in and around the economic zones;
4.
To stimulate the repatriation of Filipino capital by providing attractive climate and incentives for business activity;
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5.
To promote financial and industrial cooperation between the Philippines and industrialized countries through technologyintensive industries that will modernize the country’s industrial sector and improve productivity levels by utilizing new
technological and managerial know-how; and
6.
To vest the special economic zones on certain areas thereof with the status of a separate customs territory within the
framework of the Constitution and the national sovereignty and territorial integrity of the Philippines.
SPECIAL ECONOMIC ZONES
Commonly referred to as the Ecozones, these are selected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial tourist/recreational, commercial, banking, investment and financial centers.
An Ecozone may contain any or all of the following:
An Industrial Estate refers to a tract of land subdivided and developed according to a comprehensive
Industrial Estates
plan under a unified continuous management and with provisions for basic infrastructure and utilities,
with or without pre-built standard factory buildings and community facilities for the use of the
community of industries.
Export Processing
Zones
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This is a specialized industrial estate located physically and/or administratively outside customs
territory, predominantly oriented to export production.
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This is an isolated policed area adjacent to a port of entry (as a seaport) and/or airport where imported
goods may be unloaded for immediate transshipment or stored, repacked, sorted, mixed, or otherwise
Free Trade Zones
manipulated without being subject to import duties.
Movement of these imported goods, however, from the free-trade area to a non-free-trade area in the
country shall be subject to import duties.
This refers to a tract of land with defined boundaries, suitable for development into an integrated resort
complex, with prescribed carrying capacities of tourist facilities and activities, such as, but not limited
Tourist/Recreational to, sports and recreation centers, accommodations, convention and cultural facilities, food and beverage
Centers
outlets, commercial establishments and other special interest and attraction activities/establishments,
and provided with roads, water supply facilities, power distribution facilities, drainage and sewage
systems and other necessary infrastructure and public utilities.
Criteria for Establishment
All areas initially identified as the sites of the Ecozones and other areas where Ecozones may be established
General Criteria
shall conform to the following general criteria to ensure their viability and geographic dispersal:
• Identification of the proposed area as a regional growth center in the Medium-Term Philippine
Development Plan or by the Regional Development Council;
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• The existence of required infrastructure in the proposed Ecozone, such as roads, railways, telephones,
ports, airports, etc., and the suitability and capacity of the proposed site to absorb such improvements;
• The availability of water source and electric power supply for use of the Ecozone;
• The extent of vacant lands available for industrial and commercial development and future expansion
of the Ecozone as well as of lands adjacent to the Ecozone available for development of residential areas
for the Ecozone workers;
• The availability of skilled, semi-skilled and non-skilled trainable labor force in and around the Ecozone;
• The area must have a significant incremental advantage over the existing Ecozones and its potential
profitability can be established;
• The area must be strategically located; and
• The area must be situated where controls can easily be established to curtail smuggling activities.
The PEZA Board shall formulate specific criteria, priorities and guidelines to implement the general criteria,
Specific Criteria
including the application of the various schemes under Republic Act No. 6957 (the Build-Operate-Transfer
Law), as amended, for the guidance of the PEZA or of the applicant for registration as an Ecozone
Developer/Operator in the establishment of the Ecozones.
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Evaluation and
Recommendation
to the President
Upon submission of all the requirements, the PEZA shall evaluate the application for Ecozone development
and if found viable in its technical, financial, marketing and management aspects, the Board shall
recommend to the President of the Philippines the issuance of a proclamation delineating the metes and
bounds of an Ecozone.
Unless a longer period is required by the Board, the development of the whole Ecozone must be completed
within a period of five (5) years. Unless otherwise provided by the Board, the phasing of development shall
be allowed in the following manner:
a. Phase I - 30% of the area
b. Phase II - 30% of the area
Timetable of
c. Phase III - 20% of the area
Development
d. Phase IV - 10% of the area
e. Phase V - 10% of the area
At the end of each phase, the area must be provided with the basic infrastructure facilities and utilities as
required in the guidelines to be issued by the PEZA ready for immediate use and occupancy. Areas that are
not developed an completed within the five-year period unless extended by the Board shall be reverted to
agricultural or other uses in accordance with existing land use and zoning laws and regulations.
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Areas which do not meet the criteria, priorities and guidelines may be established as Ecozones, provided
the following are met:
a. That the said areas shall be developed only through local government and/or private sector initiative
under any of the schemes allowed in Republic Act No. 6957, as amended, (the Build-Operate-Transfer
Law), and without any financial exposure on the part of the national government/PEZA:
Other Areas
b. That the area can be easily secured to curtail smuggling activities;
c. That after five (5) years the area must have attained a substantial degree of development, the indicators
of which shall be formulated by the PEZA;
d. That the operation of Ecozones which have failed to attain the degree of development as required
herein may be assumed by the PEZA or transferred to other interested Ecozone Developers/Operators
under such terms and conditions as the Board may prescribe.
Application as Ecozone Enterprise
Any person, firm, association, partnership, corporation, or any other form of business organization, regardless of nationality,
control and/or ownership of the working capital thereof may apply for registration as an Export or Free Trade Enterprise within
the Ecozone in any sector of industry, international trade and commerce, except duty-free retailing and wholesale trading of
imported finished products for purposes of serving the domestic market. Furthermore, if the area of investments of the said
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enterprises falls within Lists A and B of the Foreign Investments Act of 1991, then the applicable nationality, ownership or
control requirements of the said law shall be observed.
However, applicants for Domestic Enterprise shall be limited to new or expanding business entities subject to the guidelines
that shall be promulgated by the Board in addition to the nationality requirements under existing laws and regulations.
Upon submission of required forms and supporting documents and paying the applicable fees, it shall be the PEZA Board’s
resolution deemed as approval of the application unless otherwise required by appropriate circulars and/or memoranda taking
into consideration the decentralization policy in the management, operation and maintenance of each Ecozone.
The Certificate of Registration shall be issued only upon the execution of the Registration Agreement by the PEZA and the
applicant.
ELIGIBLE ENTERPRISES
Ecozone Export
This includes manufacturing, assembly or processing activity resulting in the exportation of at
Manufacturing Enterprise least 70% of production.
Information Technology
IT service activities, of which 70% of total revenues is derived from clients abroad.
Enterprise
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Tourism Economic Zone
Locator Enterprise
Medical Tourism
Enterprise
This is for the establishment and operation within PEZA Tourism Special Economic Zones of
sports and recreation centers, accommodation, convention, and cultural facilities and their special
interest attraction activities/establishments, with foreign tourists as primary clientele.
They provide medical health services, endorsed by the Department of Health, with foreign
patients as primary clientele.
This involves processing and or manufacturing of agricultural products resulting in the
Agro-Industrial Economic exportation of its production. It shall also include specialized manufacturing of agricultural crops
Zone Enterprise
and eventual commercial processing which shall result in the production of clean energy such as
bio-fuels and the like.
This would include (a) operation of a warehouse facility for the storage, deposit, safekeeping of
goods for PEZA-registered Economic Zone Export Manufacturing Enterprises, and or (b)
importation or local sourcing of raw materials, semi-finished goods for resale to or for
Economic Zone Logistics
packing/covering (including marking/labeling) cutting or altering to customers’ specification,
Services Enterprise
mounting and/or packaging into kits or marketable lots for subsequent sale to PEZA-registered
Export Manufacturing Enterprises for use in their export manufacturing activities, or for direct
export, or for consignment to PEZA-registered Export Manufacturing Enterprises and eventual
export.
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This would include the development, operation and maintenance of:
a. an economic zone for export manufacturing enterprises;
b. an area as a complex capable of providing infrastructures and other support facilities required
by IT Enterprises;
Economic Zone
Developers and Operators
c. an integrated resort complex, with prescribed carrying capacities of tourist facilities and
activities;
d. a Medical Tourism Park or Medical Tourism Center;
e. an agro-industrial economic zone planned and designed to have support facilities and
services required for processing and agro-based manufacturing facilities; and
f. a Retirement Economic Zone Park or Center.
This would include:
a. construction as owner /operator of factory buildings inside a PEZA Special Economic Zone
for lease to PEZA-registered Export Manufacturing Enterprises
Facilities Providers
b. construction as owner/operator of buildings
and other facilities inside IT Parks which are
leased to PEZA-registered IT Enterprises; and
c. establishment, operation and management of retirement facilities and other related activities,
with foreign retirees as primary clientele.
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Economic Zone Utilities
Enterprise
This would include establishment, operation and maintenance of light and power systems, water
supply and distribution systems inside Special Economic Zones.
FISCAL INCENTIVES
The following are the available fiscal incentives to ecozone-registered enterprises.
Income Tax Holiday
Enterprises may avail of the income tax holiday for a 100% exemption from corporate income tax.
Incentives granted by the PEZA shall apply only to registered operations of the Ecozone Enterprise and only during the period
its registration with PEZA.
Six-Year ITH
The six-year period of income tax holiday is applicable to pioneer projects for the following enterprises:
1.
Ecozone Export Manufacturing Enterprise
2.
Information Technology Enterprise
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Pioneer vs. Non-Pioneer Status
As a general policy, the basis for determining whether an area of economic activity may be considered pioneer or non-pioneer
shall be the Investment Priorities Plan prepared yearly by the Board of Investments. In the absence thereof, the applicable
criteria shall be formulated by PEZA.
Generally, the following are the requirements for a pioneer enterprise:
a. Manufacturing of new goods not yet in commercial production in the Philippines
b. Use of process that is unconventional, new or untested in the Philippines
c. Use of non-conventional fuels, energy source or converts coal or other non-conventional energy for its operations
d. Agri-export processing operations
An area of activity shall be accorded non-pioneer status if it may be determined categorically as falling in such classification
using the Investment Priorities Plan (IPP).
Four-Year ITH
The four-year period of income tax holiday is applicable to:
1.
Non-Pioneer Projects of Ecozone Export Manufacturing Enterprise
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2.
Non-Pioneer Projects of Information Technology Enterprise
3.
Tourism Economic Zone Locator Enterprise
4.
Medical Tourism Enterprise on income solely from servicing foreign patients
5.
Agro-Industrial Economic Zone Enterprise
Illustration 1.1
INCOME TAX HOLIDAY
A PEZA-registered pioneer export manufacturer commenced its operations on January 1, 2015. Following are its operating
financials during 2019.
Sales
Direct Export Sales
7,400,000
Sales to Export Traders
3,400,000
Domestic Sales
1,200,000
12,000,000
Less: Cost of Sales
Export Sales (Purchases of P4,700,000)
Domestic Sales (Purchases of P550,000)
Gross Profit
520,000
5,320,000
6,680,000
Other Income: Sale of Scraps
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4,800,000
170,000
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Gross Income
6,850,000
Less: Expenses
Administrative Expenses
2,400,000
Expenses related to Sale of Scraps
Net Income
50,000
2,450,000
4,400,000
The entity has a pioneer status, thus, granted a six-year income tax holiday. The year 2019 is still within said period. The entity
shall only be liable to income tax on the net gain on sale of scraps computation of which would be as follows:
Sale of Scraps
170,000
Related Expenses
50,000
Net Gain
120,000
Regular Income Tax Rate
30%
Regular Income Tax Due
36,000
Extension of ITH
For Ecozone Export or Free Trade enterprises, the income tax holiday incentive may be extended for an extra year in each of the
following cases but in no case to exceed a total period of eight (8) years for pioneer registered enterprises:
a.
If the ratio of the total imported and domestic capital equipment to the number of workers for the project does not
exceed US$10,000.00 to one worker, or as prescribed by the Board;
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b.
If the average cost of indigenous raw materials used in the manufacture of the registered product is at least fifty percent
(50%) of the total cost of raw materials for the preceding years prior to the extension unless the Board prescribes a
higher percentage;
c.
If the net foreign exchange savings or earnings amount to at least US$500,000.00 average annually during the first three
(3) years of operations to be determined by the Board at the end of such three-year period.
For the purpose of availment of this incentive, the Ecozone Export or Free Trade Enterprise shall apply in writing to PEZA for
the additional period and shall submit proof of compliance with the criteria above-mentioned.
Three-Year ITH for Expansion Projects
A three-year income tax holiday from the start of commercial operations may be availed for new expansion projects. The income
tax holiday for expansion projects shall apply only to the extent of the actual increase in production.
Expansion may include modernization or rehabilitation which, to be registrable, may or may not result in increased capacity
but in any case, subject to the following conditions:
a.
Phases/stages of production sought to modernized/rehabilitated must be identified; and
b.
It must result in any of the following:
(i)
substantial reduction of production cost; and
(ii) significant increase in production efficiency including debottlenecking;
(iii) meaningful upgrading of product quality;
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(iv) keeping abreast with the state of the art in the production of the registered product.
Rate of Exemption
The rate of exemption from income tax of expansion projects shall be computed as follows:
Rate of Exemption =
Incremental Sales of the Registered Product
Total Sales of the Registered Product
The term “Sales” as indicated in the above formula shall be expressed in volume in case of homogenous products and value
in case of heterogeneous products.
Where the start of commercial operations does not coincide with the first month of the taxable year of the Ecozone Enterprise,
the rate of exemption from income tax shall be computed in the following manner:
a.
Get the total sales for the whole taxable year.
b.
Deduct the base figure from the total sales (a) to get the incremental sale.
c.
The rate of exemption is determined by dividing the incremental sales (b) by the total sales (a).
d.
The rate of exemption shall apply only to the total income tax due arising from sales of the registered product.
e.
For this purpose, the base figure shall mean the highest attained sales in volume in case of homogenous products or
value in case of heterogeneous products of the Ecozone Export or Free Trade Enterprise for any one (1) year within the
last three (3) years prior to the year of expansion.
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f.
The rate of exemption shall be further computed in proportion to the number of months of the expanding firms
commercial operations during a given year.
g.
The rate of exemption for the last taxable year of availment shall be computed in the same manner as above-mentioned:
Provided, However, That the rate of exemption shall be applied on the income tax due on sales during the months that
the Ecozone Export or Free Trade Enterprise is entitled to income tax holiday.
Illustration 1.2
EXPANSION PROJECT
In 2020, years after the expiration of its income tax holiday, an ecozone manufacturing enterprise registered an eligible
expansion project with PEZA. Its sales figures are as follows:
2016
2017
2018
2019
Gross Sales in Units
3,800
3,640
3,700
3,550
Gross Sales in Pesos
950,000
1,092,000
1,125,000
1,200,000
Sales made during 2020 were 4,000 units generating P1,500,000 in revenue. Cost of sales were P640,000.
Generally, the enterprise would be taxed at 5% of its gross income.
Sales
1,500,000
Less: Cost of Export Sales
640,000
Gross Income
860,000
Rate
Preferential Taxation
5%
Special Economic Zone Act
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Gross Income Tax
43,000
Scenario 1: The product is heterogeneous.
The base figure shall be based on the peso sales. The rate of exemption shall be computed as follows:
2020 Sales
1,500,000
Base Figure (highest in 2017-2019)
1,200,000
Incremental Sales
300,000
Divide by: Total Sales
1,500,000
Rate of Exemption
20%
Consequently, the income tax payable shall be:
Gross Income Tax
43,000
Less: Income Tax Holiday (43,000 x 20%)
8,600
Income Tax Payable
34,400
Scenario 2: The product is homogeneous.
The base figure shall be based on the unit sales. The rate of exemption shall be computed as follows:
2020 Sales
4,300
Base Figure (highest in 2017-2019)
3,700
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Incremental Sales
300
Divide by: Total Sales
4,000
Rate of Exemption
7.5%
Consequently, the income tax payable shall be:
Gross Income Tax
43,000
Less: Income Tax Holiday (43,000 x 7.5%)
3,225
Income Tax Payable
39,775
5% Gross Income Tax
Upon expiry of the income tax holiday for those who have and immediately for those who do not have, the entity shall have the
option to be taxed at 5% on its gross income in lieu of all national and local taxes, except for real property taxes on land owned
by developers. This is applicable except for Economic Zone Logistics Services Enterprise.
“Gross Income” refers to gross sales or gross revenues derived from the registered activity, net of sales discounts, sales returns
and allowances and minus cost of sales or direct costs but before any deduction is made for administrative expenses or
incidental losses during a given taxable period.
“Cost of Sales/Direct Costs” include, but not limited to:
a. Direct salaries, wages or labor expense
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b. Service supervision salaries
c.
Direct materials, supplies used
d. Depreciation of machinery and equipment used in registered activities
e.
Uncapitalized financing charges related to fixed assets used in registered activities
f.
Rent and utility charges for buildings and capital equipment used in undertaking registered activities
Allocation
The 5% tax shall be allocated and remitted as follows:
a.
Three percent (3%) to the National Government;
b.
Two percent (2%) which shall be directly remitted by the business establishments to the treasurer’s office of the
municipality or city where the enterprise is located.
Illustration 1.3
5% GROSS INCOME TAX
During 2019, a PEZA RBE reported the following a year after expiration of its income tax holiday:
Registered
Unregistered
Gross Receipts
9,600,000
200,000
Cost
4,200,000
20,000
Gross Income
5,400,000
180,000
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Expenses
1,900,000
-
Net Income
3,500,000
180,000
The total income tax will be computed and allocated as follows:
Tax Base
Gross Income Tax
Regular Income Tax
Total Income Tax
Illustration 1.4
Tax Rate
Tax Amount
National Share
Local Share
5,400,000
5%
270,000
162,000
108,000
180,000
30%
54,000
54,000
-
324,000
216,000
108,000
5,580,000
YEARS NOT COINCIDING
A pioneer ecozone enterprise started its commercial operations on July 1, 2014. Following are the quarterly financial
performance for the year 2020.
Q1
Q2
Q3
Q4
Sales
900,000
1,00,000
1,400,000
1,200,000
Less: Cost of Sales
400,000
,450,000
600,000
550,000
Gross Income
500,000
550.000
800,000
650,000
Less: Operating Expenses
200,000
300,000
350,000
250,000
Net Income
300,000
250,000
450,000
400,000
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The entity shall be covered by the 5% GIT starting the third quarter of 2020, thus, still will enjoy the income tax holiday for the
first two quarters. The income tax due shall be computed as follows:
Q1
Q2
Q3
Q4
Tax Base
0
0
800,000
650,000
Tax Rate
30%
30%
5%
5%
0
0
40,000
32,500
Income Tax Due
The gross income tax due on the last two quarters shall be allocated in the same manner as in Illustration 1.3.
Tax and Duty-Free Importation
Importation made by the following are exempt from importations taxes and duties.
Enterprise
Economic Zone Export
Importation
raw materials, capital equipment, machineries and spare parts
Manufacturing Enterprise
Information Technology
equipment and parts
Enterprise
Tourism Economic Zone Locator
capital equipment
Enterprise
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Medical Tourism Enterprise
medical equipment, including spare parts and equipment supplies
Agro-Industrial Economic Zone
production equipment and machineries, breeding stocks, farm implements including
Enterprise
spare parts and supplies of the equipment and machineries
Economic Zone Logistics
raw materials, semi-finished goods for re-sale to - or for packing/covering, cutting,
Services Enterprise
altering for subsequent sale to PEZA-registered Export Manufacturing Enterprises, for
direct export or for consignment to PEZA-registered export enterprise
Exemption from Wharfage Dues, etc.
Importation made by the following are exempt:
Wharfage
Dues
Export Tax, Impost or
Fees
Economic Zone Export
Manufacturing Enterprise
✓
✓
Information Technology
Enterprise
✓
✘
Agro-Industrial Economic Zone
Enterprise
✓
✓
Enterprise
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VAT Zero-Rating
Purchases made by the following shall be zero-rated.
Enterprise
Economic
Zone
Export
Purchases
Manufacturing local purchases subject to compliance with BIR and PEZA requirements
Enterprise
Information Technology Enterprise
local
purchases
of
goods
and
services,
including
land-based
telecommunications, electrical power, water bills, and lease on the building,
subject to compliance with Bureau of Internal Revenues and PEZA
requirements
Tourism Economic Zone Locator Enterprise, local
purchases
of
goods
and
services,
including
land-based
Medical Tourism Enterprise, Agro-Industrial telecommunications, electric power, and water bills
Economic Zone Enterprise
Economic Zone Logistics Services Enterprise
raw materials for checking, packing, visual inspection, storage and shipping to
be sourced locally
Economic Zone Developers and Operators, local purchases
Facilities Providers, Economic Zone Utilities
Enterprise
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An issue has been raised by the Philippine Economic Zone Authority on a related revenue issuance by BIR (Revenue
Regulation 9-2021). RR 9-21 created the impression that local purchases of registered business enterprises are already
subject to 12% VAT rather than being zero-rated. It is understandable that this should have been the case since this
was provided under the TRAIN Law and now that the criterion for such (Establishment of Enhanced VAT Refund
System) has been satisfied. It is argued, however, that the same has been updated under Section 295 (D) of the
CREATE Law and that there were no amendments on the PEZA Law regarding the treatment of the ecozone as a
separate customs territory (also in accordance with the cross-border doctrine). The IRR of Title XIII of CREATE Law,
however, included the preclusion relating to RR 9-2021. This may be considered as an ultra vires VAT since it is not
on the power of the BIR to extend the intent of the law. Currently, the implementation of RR 9-21 has been halted
due to this concern. Let us wait further on the future of this issue.
Illustration 1.5
VAT ZERO-RATING
Assume the same given from Illustration 1.1.
Scenario 1: We follow the given year on the problem.
There shall be no Output VAT as the export sales would be subject to zero-rating and the buyers would pay the VAT on
importation on the domestic sales and other income. Consequently, there shall be no Input VAT as the purchases are zerorated. As such, there shall be no VAT payable for any of the quarters.
Scenario 2: We follow RR 9-2021.
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Still, there will be no Output VAT for the same reasons above. Its input VAT, however will be P630,000 (P5,250,000 x 12%) will
result to an excess input VAT which will be applied for refund.
Exemption from Local Taxes
The exemption shall extend to the following:
Local Tax
Real Property Taxes
ITH Period
General Rule: Taxable.
GIT Period
Exempt (RA 7916)
Exception: Exempt only for the first three
years for EO 226 qualified real properties
Other Local Taxes, and
Exempt (Art. 78 of EO 226)
Exempt (RA 7916)
Fees
Exemption from Expanded Withholding Tax
All ecozone-registered enterprises are exempted.
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Additional Deduction for Training Expenses
An additional deduction equivalent to one-half (½) of the value of training expenses incurred in developing skilled or unskilled
labor or for managerial or other management development programs incurred by enterprises in the ecozone can be deducted
from the national government's share of three percent (3%).
There have been some issues with this incentive as to whether half of the training expenses be a tax deduction or tax credit. In
interpreting and applying ambiguous laws, the legislative intent should be of consideration. As such, the law would allow said
amount to be claimed as deductible against gross income rather than a tax credit. Taking also into consideration that the word
“additional” has been specifically mentioned by the law and its IRR, it would not make sense if it would be construed as a tax
credit as there are no other specific credits mentioned neither in the law nor in its IRR.
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Summary of Fiscal Incentives
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NON-FISCAL INCENTIVES
Simplified Import–Export Procedures
The procedures shall be governed by the Electronic Import Permit System and Automated Export Documentation System.
Permanent Resident Status for Foreign Investors
Any investor within the Ecozone whose initial personal investments shall not be less than one hundred fifty thousand dollars
(US$150,000.00), his/her spouse and dependent children under twenty-one (21) years of age shall be granted permanent resident
status within the Ecozone. They shall have freedom of ingress and egress to and from the Ecozone without need of special
authorization from the Bureau of Immigration.
Employment of Foreign Nationals
Ecozone Enterprises may employ foreign nationals in executive, supervisory, technical and advisory positions, provided:
• Executive positions shall pertain only to the president, vice-president, treasurer and general manager, or their
equivalents;
• The total number of foreign nationals employed by an Ecozone Enterprise in supervisory, technical or advisory positions
shall not at any time exceed five percent (5%) of its workforce unless expressly authorized by the Secretary of Labor and
Employment;
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• Foreign nationals may be employed in supervisory, technical or advisory positions only if it is certified by the Department
of Labor and Employment that no Filipino within the Ecozone possesses the technical skills required therefor.
An Ecozone Enterprise may employ foreign nationals for a period not exceeding five (5) years from its registration, extending
within limited periods depending upon the need of the Ecozone Enterprise as determined by PEZA, provided:
• The Ecozone Enterprise seeking such extension must have satisfactorily complied with the training program required;
• When the majority of the capital stock of an Ecozone Enterprise is owned by foreign nationals, the positions of president,
treasurer and general manager or their equivalents may be retained by foreign nationals.
Special Non-Immigrant Visa
PEZA extends Visa Facilitation Assistance to foreign nationals their spouses and dependents. This is applicable to Special NonImmigrant Visa with Multiple Entry Privileges for the following non-resident Foreign Nationals in a PEZA-registered Economic
Zone Enterprise:
•
•
•
•
Investor/s
Officers
Employees in supervisory, technical or advisory position
Their spouses and unmarried children under twenty-one years of age
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OTHER SPECIAL RULES
Tax Treatments of Merchandise in the Restricted Areas of the Ecozones
Merchandise brought to the restricted areas in the Ecozones by registered Export or Free Trade Enterprises, except prohibited
merchandise, shall not be subject to all customs and internal revenue laws and regulations of the Philippines nor to local tax
ordinances: Provided, That they are to be sold, stored, broken-up, replaced, assembled, manipulated, manufactured and/or
mixed with foreign or domestic merchandise within the restricted areas in the Ecozones.
Domestic Merchandise
Domestic Merchandise sent from the restricted areas of the Ecozones by registered Export or Free Trade Enterprises to the
custom territory shall, whether or not combined with or made part of other articles likewise the growth, product or manufacture
of the Philippines while in the Ecozone subject to the internal revenue laws of the Philippines as domestic goods sold, transferred
or disposed of for local consumption.
Foreign Merchandise
Merchandise of foreign origin brought to the restricted areas in the Ecozones by registered Export or Free Trade Enterprises
which has not undergone any processing, manufacturing or manipulation while in the said areas of the Ecozones, shall, when
sent therefrom to the customs territory, be subject to the laws and regulations governing imported merchandise, provided:
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1.
That where said foreign merchandise is combined with or made part of any domestic article, the duties and taxes to be
assessed on the final product shall be based on the value of such imported merchandise (except when the final product
is exempt) and internal revenue taxes on the value added;
2.
That foreign merchandise included in the negative list shall not be sent from the restricted areas of the Ecozone to the
customs territory.
Transfer of Merchandise
Domestic merchandise on which all internal revenue taxes have been paid if subject thereto, and foreign merchandise on which
duty or tax has been paid, or which have been admitted free of duty and tax, may be taken into restricted areas of the Ecozones
from the customs territory of the Philippines and brought back thereto free of quota, duty or tax: Provided, however, That said
merchandise shall be preserved its identity at the time of transfer from the Ecozone to the customs territory.
A merchandise shall be deemed to have lost its identity when, at the time of transfer, there has been a change in the physical
or mechanical characteristics and/or electro-magnetic or chemical properties of such merchandise.
Domestic Sale
Finished products of registered Export of Free Trade Enterprises not included in the negative list shall be made available for
domestic sale in the customs territory or retail stores/shopping malls within the commercial/tourist or other authorized areas
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of the Ecozones, subject to all applicable rules and regulations including the payment of customs duties and internal revenue
taxes.
Identity
When the identity of an article taken to the restricted areas of the Ecozones has been lost, such article shall, when taken from the
Ecozone to the customs territory or to the non-restricted areas of the Ecozone, be treated as foreign merchandise entering the
country for the first time.
Subsequent Importation
Goods or merchandise produced or manufactured in the restricted areas of the Ecozone and exported therefrom shall, on
subsequent importation into the customs territory, be subject to the import laws applicable to like articles manufactured in a
foreign country.
Rejects, Seconds and Recoverable Wastes
Rejects, seconds and recoverable wastes shall, when taken from the restricted areas of the Ecozones to the customs territory, or
to the non-restricted areas of the Ecozone, be taxed in accordance with the applicable provisions of the customs and internal
revenue laws and regulations of the Philippines.
Abandonment
Any article or merchandise found in the restricted areas of the Ecozone, the ownership of which cannot be known despite
diligent efforts, shall be declared as abandoned in favor of the PEZA.
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Tax Treatments for Unregistered Activities
Income derived by an enterprise registered with the Philippine Economic Zone Authority (PEZA) from its registered activity/ies
shall be subject to such tax treatment as may be specified in its terms of registration (i.e., the 5% preferential tax rate, the income
tax holiday, or the regular income tax rate, as the case may be). Nonetheless, whatever the tax treatment of said enterprise with
respect to its registered activity/ies, income realized by such registered enterprise that is not related to its registered activity/ies
shall be subject to the regular internal revenue taxes, such as the final income taxes on passive income, capital gains tax and
stock transaction tax.
Income payments made by a registered enterprise to an entity in the Customs Territory shall not be subject to the preferential
tax rates or tax exemption enjoyed by the registered enterprise. Thus, dividends paid to the shareholders of a registered
enterprise, interest payments to creditors of such registered enterprise (regardless of any tax provision for grossing up of taxes),
and other such payments shall be subject to the appropriate rate of tax imposable on the recipient of such income.
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Self-Check!
Basing on your readings, answer the following questions.
1.
What is the purpose of the Special Economic Zone Act?
2.
What are the criteria for the establishment of an economic zone?
3.
How can an entity apply as an ecozone enterprise?
4.
What are the eligible enterprises under the law?
5.
Enumerate the different fiscal and non-fiscal incentives available.
6.
Explain the computation of income tax payable before and after the income tax holiday.
7.
What are the different tax treatments of merchandise in the restricted areas of an economic zone?
8.
What is the tax treatment for income derived from unregistered activities?
Exercise 1.1
IDENTIFICATION
Identify the terminologies best described by the following statements.
1.
The government agency mandated to implement provisions of RA7916
2.
Enterprises for establishment, operation and maintenance of light and power systems, water supply and distribution
systems inside Special Economic Zones
3.
They provide medical health services, endorsed by the Department of Health, with foreign patients as primary
clientele.
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4.
This incentive allows for the exemption from corporate income tax for a specific period of time
5.
These are business entities which are qualified to avail the incentive under RA7916
6.
This is the area beyond the boundaries of an economic zone
Exercise 1.2
MULTIPLE CHOICE
Choose the best answer from the choices provided.
1.
2.
3.
Which of the following is not a non-fiscal incentive under RA7916?
a.
Exemption from local taxation
b.
Special non-immigrant visa
c.
Employment of foreign nationals
d.
Simplified trade procedures
Mang Inapal is a restaurant operating in an economic zone. How is its income taxed?
a.
Exempt due to income tax holiday
b.
5% tax on its gross income
c.
regular corporate income tax
d.
final withholding tax on corporate income
Jackie Palubos is an employee of a pioneer PEZA enterprise. How will her compensation income be taxed?
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4.
5.
6.
a.
Exempt due to income tax holiday
b.
5% income tax
c.
35% fringe benefit tax
d.
Progressive tax table
Which of the following is not subject to taxes and duties on qualified importations?
a.
Economic Zone Logistics Services Enterprise
b.
Economic Zone Developers and Operators
c.
Facilities Providers
d.
Economic Zone Utilities Enterprise
Which is not a fiscal incentive provided by the PEZA Law?
a.
Exemption of real property taxes
b.
Exemption from final withholding taxes
c.
Income tax holiday
d.
5% gross income tax
The reckoning date of the income tax holiday is
a.
Date of filing registration
b.
Date of approval of registration
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7.
8.
c.
Date of release of Certificate of Registration
d.
Date of start of commercial operation
The gross income tax due shall be divided as
a.
60% to local government and 40% to national government
b.
40% to local government and 60% to national government
c.
Fully to the national government
d.
Equally to both national and local government
A PEZA enterprise applied for a pioneer status on January 10, 2016. Its Certificate of Registration was dated March 18,
2016, ten days after it was approved by PEZA Board. It started its commercial operation on June 19, 2016. When will
its income tax holiday expire?
9.
a.
March 8, 2020
b.
June 19, 2020
c.
March 8, 2022
d.
June 19, 2022
Income derived from unregistered activities are taxed at, except
a. Final withholding tax
b. Regular income tax
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c.
5% Gross income tax
d. Capital gains tax
10. Visa Facilitation assistance may be offered to the following individuals, except
a.
Investors
b.
Officers
c.
Advisory Employees
d.
21-year-old child of a qualified person
Problem 1.1
INCOME TAX HOLIDAY AND GROSS INCOME TAX
BlueCross Inc. is a PEZA-registered manufacturing enterprise which started its commercial operations on September 1, 2016.
It derived the following for 2020. Assume all are earned and incurred evenly.
Registered Unregistered
Gross Income
5,700,000
1,200,000
Deductible Expenses
3,400,000
350,000
Compute the total income tax liability for 2020 assuming the enterprise has a:
a. Pioneer status
b. Non-pioneer status
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Problem 1.2
GROSS INCOME TAX
GreenBayou Inc. is already past its income tax holiday is currently availing the 5% gross income tax. Following is its financial
performance for 2020.
Gross Sales
17,500,000
Cost of Sales
6,800,000
Deductible Expenses
5,700,000
Compute the national and local share from the tax.
Problem 1.3
EXTENSION OF INCOME TAX HOLIDAY
Yellow Pastures Corp. is a pioneer PEZA enterprise which started its commercial operation in 2013. Following is its financial
performance for 2020.
Registered
Unregistered
Gross Income
22,700,000
4,800,000
Deductible Expenses
14,900,000
1,900,000
Compute its total income tax liability under each of the following independent situations:
a. It satisfied one of the conditions for income tax holiday extension.
b. It satisfied two of the conditions for income tax holiday extension.
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c. It satisfied all three conditions for income tax holiday extension but commercial operations started in 2012.
Problem 1.4
EXPANSION PROJECT
GrayBell Company is already way past its income tax holiday. It registered an expansion project during 2020 which was
immediately approved. Following is its financial performance since 2016.
2016
2017
2018
2019
2020
Gross Sales in Units
39,000
34,000
35,000
38,000
50,000
Gross Sales in Pesos
28,800,000
28,900,000
31,200,000
30,600,000
48,000,000
Cost of Sales
12,300,000
12,500,000
13,250,000
13,150,000
20,150,000
Compute its income tax payable for 2020 assuming its products are:
a. Homogeneous
b. Heterogeneous
Problem 1.5
ADDITIONAL DEDUCTION FOR TRAINING EXPENSES
Red Scale Corp. incurred the following for 2020, a year after its income tax holiday expired.
Gross Sales
4,800,000
Cost of Sales
1,700,000
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Deductible Expenses
1,500,000
Ten percent of the deductible expenses is expenses incurred in developing skilled or unskilled labor.
Compute the 5% gross income tax.
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