Question & AnswerQ&A (BIR REVENUE REGULATIONS NO. 11-2005)
The title is "Regulations Defining 'Gross Income Earned' to Implement the Tax Incentive Provision in Section 24 of Republic Act No. 7916, Otherwise Known as 'The Special Economic Zone Act of 1995.'" Its main purpose is to define "gross income earned" for implementing tax incentives for registered Special Economic Zone (ECOZONE) enterprises under Section 24 of RA 7916.
It revokes Section 7 of Revenue Regulations No. 2-2005.
Sections 3, 4, and 6 of Revenue Regulations No. 2-2005 are suspended as it applies to enterprises registered under RA 7916, pending the issuance of new regulations regarding related matters.
Gross income earned refers to the gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, returns, and allowances, minus costs of sales or direct costs but before any deductions for administrative, marketing, selling, operating expenses, or incidental losses during a taxable period.
Allowable direct costs include direct salaries and wages, production supervision salaries, raw materials used in manufacturing, decreases in goods in process and finished goods accounts, supplies and fuels used in production, depreciation of machinery and equipment used in production (including building portions used exclusively for production), rent and utilities related to production facilities, and financing charges on fixed assets used in production not previously capitalized.
Allowable deductions include direct salaries and wages, service supervision salaries, direct materials and supplies used, depreciation of machinery, equipment and buildings used exclusively in rendering registered services, rent and utilities for buildings and capital equipment used in registered services, and financing charges on fixed assets used in the registered service business not previously capitalized.
The authority derives from Sections 244 and 245 of the National Internal Revenue Code of 1997, as amended.
These regulations took effect beginning March 5, 2005.
The regulation was adopted by Acting Secretary of Finance Cesar V. Purisima and recommended for approval by Commissioner of Internal Revenue Guillermo L. Parayno, Jr.
'Gross income earned' excludes administrative, marketing, selling, and operating expenses as well as incidental losses before deductions.