Legal basis: PEZA and VAT regime
- The tax treatment rules in this Circular are grounded on Republic Act No. 7916, as amended by Republic Act No. 8748, which establishes the Philippine Economic Zone Authority (PEZA) and the ECOZONE framework.
- Republic Act No. 7916 provides that ECOZONE enterprises are generally subject to a 5% special tax based on “gross income earned”, in lieu of all taxes, except real property tax.
- Republic Act No. 7916 treats the ECOZONE as a separate customs territory managed and operated by PEZA.
- The Circular applies the Value Added Tax (VAT) “Cross Border Doctrine,” under which exports are free of VAT, while transactions for use or consumption within the Philippines are subject to 10% VAT.
Definitions and territorial framework
- The term “Customs Territory” means the national territory of the Philippines outside the proclaimed boundaries of the ECOZONES, excluding areas declared by other laws and/or presidential proclamations to have the status of special economic zones and/or free ports.
- ECOZONES are selected areas with the potential to be developed into specified economic centers, and may include industrial estates, export processing zones, free trade zones, and tourist/recreational centers.
- The Circular treats the ECOZONE as a separate customs territory, so movements of goods/services between the ECOZONE and the Customs Territory are treated as cross-territory transactions for VAT purposes.
Coverage: who and what transactions
- The Circular governs VAT and income tax treatment for:
- Sales of goods, property and services made by suppliers from the Customs Territory to PEZA-registered enterprises, and
- Sales made by PEZA-registered enterprises involving buyers within and without the ECOZONE.
- The zero-VAT treatment rules for suppliers from the Customs Territory apply to sales made to PEZA-registered enterprises, regardless of the class or type of PEZA registration of the buyer.
- The VAT/income tax outcomes for PEZA-registered enterprises depend on whether the enterprise seller (or buyer) is within the 5% special tax regime or subject to tax under the National Internal Revenue Code (NIRC).
- The VAT outcomes vary by whether the transaction is:
- Indirect export (goods/property sold to ECOZONE enterprises),
- Cross-border services,
- Domestic sales by PEZA enterprises (treated as technical importation), or
- Intra-ECOZONE sales (sales between PEZA-registered entities).
VAT and income tax rules: Customs Territory → PEZA
- If the buyer is a PEZA-registered enterprise subject to the 5% special tax regime under Republic Act No. 7916 (except real property tax), then:
- Sale of goods (merchandise) from the Customs Territory to the PEZA enterprise is treated as indirect export, and therefore subject to zero percent (0%) VAT under Section 106(A)(2)(a)(5) of the NIRC, in relation to Section 23 of Republic Act No. 7916 and Article 77(2) of the Omnibus Investments Code.
- Sale of services from the Customs Territory to the PEZA enterprise is treated as subject to zero percent (0%) VAT under the Cross Border Doctrine, consistent with VAT Ruling No. 032-98 dated Nov. 5, 1998.
- If the buyer is a PEZA-registered enterprise not embraced by the 5% special tax regime (thus subject to taxes under the NIRC), then:
- Sale of goods (merchandise) is treated as indirect export subject to zero percent (0%) VAT under Section 106(A)(2)(a)(5) of the NIRC and Section 23 of Republic Act No. 7916, in relation to Article 77(2) of the Omnibus Investments Code.
- Sale of services is treated as subject to zero percent (0%) VAT under the Cross Border Doctrine, consistent with VAT Ruling No. 032-98 dated Nov. 5, 1998.
- Any sale of goods, property or services by a VAT-registered supplier from the Customs Territory to a registered enterprise operating in the ECOZONE is legally entitled to zero percent (0%) VAT, regardless of the buyer’s PEZA class or type.
- Under this Circular’s “final analysis” rule:
- Sales of goods or property to such ECOZONE enterprise are treated as subject to 0% VAT under Section 106(A)(2)(a)(5) of the NIRC, in relation to Article 77(2) of the Omnibus Investments Code; and
- Sales of services are treated effectively subject to 0% VAT under Section 108(B)(3) of the NIRC, in relation to Republic Act No. 7916 and the Cross Border Doctrine.
- VAT-registered suppliers are entitled to the zero percent (0%) VAT benefit by relying on this Circular as a sufficient basis, and it operates as sufficient compliance to the prior approval requirement for zero-rating under Revenue Regulations No. 7-95, effective as of the date of issuance of this Circular.
VAT and income tax rules: VAT-exempt supplier → PEZA
- Sales of goods, property and services by a VAT-exempt supplier from the Customs Territory to a PEZA-registered enterprise are treated as exempt from VAT under Section 109 in relation to Section 236 of the NIRC.
- The VAT exemption applies regardless of whether the PEZA-registered buyer is:
- Subject to taxes under the NIRC,
- Enjoying the 5% special tax regime, or
- A registered manufacturer-exporter.
- The VAT exemption is applied notwithstanding the Cross Border Doctrine of the VAT system as invoked by the Circular’s discussion.
VAT and income tax rules: PEZA enterprise → Customs Territory
- Sale of goods (merchandise) by a PEZA-registered enterprise to a buyer from the Customs Territory (domestic sales) is treated as a technical importation by the buyer.
- The buyer is treated as an importer and is imposed with the corresponding import tax/es (either VAT or VAT plus excise tax, as applicable) under Section 107 (Title IV and Title VI) of the NIRC, in relation to Section 26 of Republic Act No. 7916.
- The PEZA-registered seller’s “gross income earned” from domestic sales is subject to the 5% special tax under Section 24 of Republic Act No. 7916, subject to PEZA rules that limit the amount of domestic sales through a threshold.
- If domestic sales exceed the threshold permitted under PEZA rules, the portion of income from such excess sales is subject to the normal income tax under Title II of the NIRC.
- For income tax computation on excess sales, the seller must determine net income from excess sales using the general apportionment method under Section 50 of the NIRC (excess sales ÷ total sales × total net income from total sales equals net income from excess sales).
- Sale of services by a PEZA registered enterprise to a buyer from the Customs Territory is not covered by the 5% special tax regime; the seller is subject to:
- 10% VAT under Section 108 of the NIRC, or
- percentage tax under Title V, whichever is applicable,
- plus the normal income tax on such income under Title II of the NIRC computed using the general apportionment method.
- Sale of goods or property by a PEZA-registered enterprise to another PEZA-registered enterprise (intra-ECOZONE sales of goods) is exempt from VAT under Section 109(q) of the NIRC, in relation to Section 24 of Republic Act No. 7916, implemented by Section 1, Rule VIII, Part V of PEZA’s implementing rules.
- Sale of services between ECOZONE enterprises (intra-ECOZONE enterprise sale of service) depends on the seller’s tax regime:
- If the PEZA-registered seller is subject to the 5% special tax regime, the service sale is exempt from VAT and any percentage tax under Section 24 of Republic Act No. 7916.
- If the PEZA-registered seller is subject to taxes under the NIRC, the service sale is subject to zero percent (0%) VAT under the Cross Border Doctrine, regardless of the seller’s PEZA registration class or type.
- When the Circular addresses intra-ECOZONE service transactions under the NIRC, it ties the 0% VAT treatment to the eventual conversion of benefits from the service purchase into export of goods, either as actual export or as technical export.
Repeal, modification, and conflicts
- This Circular amends, modifies, or revokes any BIR ruling that is inconsistent with these rules.