Law Summary
Definitions of Key Terms
- RA 7227: Bases Conversion and Development Act of 1992, as amended.
- RA 9400: Amends RA 7227.
- RA 7916: Special Economic Zone Act of 1995, as amended.
- DOF: Department of Finance.
- BCDA: Bases Conversion and Development Authority, governing body of special economic zones under RA 7227.
- SBMA: Subic Bay Metropolitan Authority, managing Subic Freeport and Special Economic Zones.
- CDC: Clark Development Corporation, implementing arm of BCDA for Clark zones.
- PPMC: Poro Point Management Corporation, implementing arm for Poro Point Freeport.
- JHMC: John Hay Management Corporation, implementing arm for John Hay Special Economic Zone.
- BTPI: Bataan Technological Park Inc., implementing arm for Morong Special Economic Zone.
- PEZA: Philippine Economic Zone Authority, created under RA 7916 to manage PEZA Ecozones.
- Ecozones: Special Economic Zones established under RA 7227.
- Freeport Zones: Fenced zones within Subic, Clark, and Poro Point Freeport Zones with free flow of goods per law.
- Customs Territory: Philippine territory outside Ecozones and Freeport Zones subject to regular customs and tax laws.
- Zone Management Authority: Entity created under RA 7227 to manage Ecozones or Freeport Zones.
- Incentives Administration Authority: Body responsible for registering and granting incentives to enterprises in Ecozones and Freeport Zones.
- Enterprise Classifications: Ecozone Enterprise, PEZA Enterprise, Freeport Enterprise defined by location and incentives.
- Certificate of Registration: Issued to enterprises within zones confirming registration and incentives eligibility.
- National Taxes: Includes all internal revenue, customs duties, and import charges under Philippine laws.
Operation and Management of Incentives
- Ecozones and Freeport Zones are managed by respective Zone Management Authorities created under RA 7227.
- Subic Special Economic Zone: Managed by SBMA, developed as a self-sustaining industrial and commercial center.
- Subic Freeport Zone: Managed by SBMA, developed as a separate customs territory allowing free movement of goods, subject to DOF regulations.
- Clark Special Economic and Freeport Zones: Managed by BCDA with CDC as implementing arm; PO granted PEZA powers except regulatory powers over utilities.
- Poro Point Freeport Zone: Managed by BCDA with PPMC as implementing arm.
- Morong Special Economic Zone: Managed by BCDA with BTPI as implementing arm.
- John Hay Special Economic Zone: Managed by BCDA with JHMC as implementing arm; PEZA acts as Incentives Administrator for new locators.
- Other Ecozones: PEZA serves as the Incentives Administration Authority for Ecozones created by Presidential Proclamation under RA 7916.
Tax Incentives for Enterprises
- Subic Special Economic Zone (SSEZ): Ecozone Enterprises entitled to 5% special tax on Gross Income Earned (GIE) in lieu of national and local taxes.
- Subic Freeport Zone (SFZ): Freeport Enterprises entitled to freeport status and 5% special tax on GIE in lieu of taxes.
- Clark Special Economic Zone (CSEZ): PEZA Enterprises enjoy RA 7916 tax and duty incentives.
- Clark Freeport Zone (CFZ): Freeport Enterprises receive freeport status and 5% special tax; PEZA Enterprises get RA 7916 incentives but no freeport status.
- Poro Point Freeport Zone (PPFZ): Freeport status and 5% special tax on GIE.
- Morong Special Economic Zone (MSEZ): Tax and duty free importation plus 5% special tax on GIE.
- John Hay Special Economic Zone (JHSEZ): PEZA registered enterprises entitled to RA 7916 incentives; considered a PEZA Ecozone for incentives.
- Other SEZs by Presidential Proclamation: Same tax and duty incentives as RA 7916.
Special Five Percent (5%) Tax on Gross Income Earned (GIE)
- 5% tax is in lieu of all national and local taxes for specified Ecozone and Freeport Enterprises.
- GIE defined as gross sales/revenue less discounts, returns, allowances minus cost of sales or direct costs (before other expenses).
- Allowed deductions differ by enterprise type:
- Trading: Cost of sales.
- Manufacturing: Direct labor, raw materials, depreciation, rent, utilities, financing charges related to production.
- Services: Direct labor, materials, depreciation, rent related to services.
- Financial institutions: No deductions allowed.
- PEZA Ecozone Enterprises subject to RA 7916 provisions related to tax incentives.
Payment and Remittance Procedures for the 5% Tax
- Payment for SSEZ and SFZ:
- 3% remitted to the National Government.
- 2% allocated to LGUs based on population, land area, and equal sharing formula.
- Payment for MSEZ, JHSEZ, CFZ, and PPFZ:
- 3% to National Government.
- 2% to LGUs where enterprise is located.
- Filing of quarterly and annual tax returns required with detailed schedules on GIE and tax remittances.
- Multiple copies must be filed with BIR, LGUs, Zone Management Authority, and Incentives Administration Authority.
- Refunds or credits for erroneous payments handled by BIR for national share and respective LGUs for local share.
- PEZA rules apply for PPFZ enterprises.
Tax Treatment of Goods Movement
- Movement of raw materials, capital goods, and consumer items between Ecozones/Freeport Zones and Customs Territory is subject to customs and tax laws.
- Goods of domestic origin entering Customs Territory treated as importations and subject to VAT on importation.
- Ecozone enterprises registered as VAT taxpayers; taxes on local purchases treated as input tax.
- Goods missing or unaccounted for in Freeport Zones presumed smuggled and subject to penalties.
- Articles produced and exported from Ecozones or Freeports are treated as imports upon reentry.
- Foreign articles diverted to Customs Territory also subject to regular import taxes.
Other Tax and Fiscal Obligations
- Enterprises can generate up to 30% of income outside Ecozone/Freeport zone to avail 5% special tax; exceeding this subjects all income to regular taxes.
- Ecozone and Freeport Enterprises act as withholding agents for compensation, expanded withholding tax, and final withholding tax payments.
- Interest income from bank deposits or trust funds not subject to 5% tax; subject to regular taxation.
Bookkeeping and Reporting Requirements
- Enterprises must maintain accurate records and books of accounts as per BIR rules, accessible for inspection.
- BIR authorized to audit and reconcile records with inventory in Freeport Zones.
- Incentives Administration Authorities must submit quarterly and annual reports to DOF, including detailed data on registered firms, activities, incentives, revenues, taxes, importations, and exports.
- DOF to maintain a single database and submit annual report to the President.
Conflict of Laws
- In case of conflicts between national and local laws on tax exemptions, preference is given to the Special Economic and Freeport Zones.
- Specific provisions of RA 7227 apply to certain zones despite conflicts.
Tax Incentives for Current Enterprises
- Enterprises registered prior to RA 9400 maintaining existing contracts continue to enjoy incentives until contract expiration.
Exclusivity of Incentives
- Registered Ecozone and Freeport Enterprises availing RA 9400 incentives cannot avail other incentives under different laws.
Penal Provisions
- Enterprises found guilty of smuggling by final judgment are barred from operating within any Freeport or Special Economic Zone permanently, in addition to existing penalties.
Non-applicability to PEZA Zones and Enterprises
- These Rules do not apply to PEZA-managed Ecozones and Enterprises except where expressly stated; those entities remain governed by RA 7916 and related issuances.
Separability Clause
- If any provision is declared invalid, the rest remain effective.
Repealing Clause
- All inconsistent orders, circulars, and memoranda are repealed or modified accordingly.
Effectivity
- Rules take effect 15 days after publication in two newspapers of general circulation.