BIR Ruling [DA-271-99]

May 7, 1999 BIR RULING [DA-271-99] The Department Of Finance Roxas Boulevard Corner Vito Cruz Street Manila 1004 Attention: Ms. Ma. Lourdes B. Recente Director IV Gentlemen : This refers to your letter dated March 25, 1999 requesting for our comments and recommendations on the following bills, viz : 1. House Bill No. 394 entitled "An Act Creating A Special Economic Zone and Free Port in Southern Palawan, Creating for the Purpose the Southern Palawan Special Economic Zone Authority, Appropriating Funds Therefor, and for Other Purposes"; and 2. House Bill No. 6266 and Senate Bill No. 762, both entitled "An Act Amending Certain Provisions of Republic Act No. 7922, otherwise known as the "Cagayan Special Economic Zone Act of 1995, and for Other Purposes". ADScCE Thus, HB 394 :" An Act Creating a Special Economic Zone and Free Port in Southern Palawan, Creating for the Purpose the Southern Palawan Special Economic Zone Authority, Appropriating Funds Therefor, and for Other Purposes ." "SEC. 4. Governing Principles .....The Zone shall be governed by the following principles: "xxx xxx xxx; "(f) Any provision of existing law, rules or regulations to the contrary notwithstanding, no taxes, local and national, including final withholding taxes on dividends and branch profit remittances to a business establishment's mother company, shall be imposed on business establishments operating within the Zone. In lieu of all local and national taxes ,said business establishment shall pay a final tax of eight percent (8%) of their net income , to be divided among the National government, the Province of southern Palawan, the municipalities affected by the declaration of the Zone and the Southern Palawan Special Economic Zone Authority, in proportion to their sharing as provided for under Section 24 of Republic Act No. 7196. (Emphases supplied.) "xxx xxx xxx; Comments/Recommendations : In RA 7916, the tax incentives regime is 5% of gross income earned in lieu of all taxes with the following breakdown: 3% to the national government; 1% to the LGU's affected by the declaration of the Ecozone in proportion to their population, land area and equal sharing factor; and 1% for the establishment of the development fund for the development of the municipalities outside and contiguous to each Ecozone. Under the proposed bill, there is no percentage of distribution. IHcSCA Likewise, this Office would like to pose our objection to the increase in the tax incentive regime from 5% of gross income earned to 8% of net. Our Revenue Accounting Division estimates that we collect less than 10% in proportion to the gross revenue collections from these Ecozones. While the national government allocated share in the 8% Ecozone preferential rate may probably increase from 3% to 4%,it makes no difference considering that the tax base is reduced to net income. (i) All income derived by persons and all service establishments in the Zone shall be subject to taxes under the National Internal Revenue Code; Comments/Recommendations : This is basically the same provision as those provided for under the PEZA law and other Special Ecozones law. We posed no objection to this. (l) Goods manufactured by zone enterprise shall be made available for retail sales in the domestic market, subject to payment of taxes on raw materials and other regulations that may be formulated by the Authority together with the PEZA, the Bureau of Customs and the Department of Trade and Industry. However, in order to protect the domestic industry, there shall be negative list of industries that will be drawn up and regularly updated by the PEZA. Enterprises engaged in industries included in such negative list shall not be allowed to sell their products locally;" SCDaHc Comments/Recommendations : This is basically the same as those provided for under various Ecozones law. We posed no objection to this provision. "SEC. 9. Non-Profit Character of the Southern Palawan Special Economic Authority . The Authority shall be non profit and shall devote the use of its returns from capital investments, as well as excess revenues from its operations, for the development, improvement and maintenance and other related expenditures of the Authority to pay its indebtedness and obligations and in furtherance and effective implementation of the policies provided for in this Act. In consonance with this, the Authority is hereby declared exempt from the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party. (Emphases supplied.) The foregoing exemptions may, however, be entirely or partially lifted by the President of the Philippines upon the recommendation of the Secretary of Finance not earlier than (5) years from the effectivity of this Act, if the President shall find the Authority to be self-sustaining and financially capable by then to pay such taxes, customs duties, fees and other charges after providing for debt service requirements of the Zone Authority and of its projected capital and operating expenditures. Comments/Recommendations : In this context, we want to point out that in the increase of fiscal incentive, i.e.,from 5% of gross to 8% of net, as proposed in two (2) other Bills (SB764 & HB 6266),in relation to next following Section, the authority is getting a share of 2%.In the meantime, the national government is going to waive more than of what it gets. DcCEHI In this connection, it seems that this proposed provision will grant the SPSEZA incentives more than what other existing Special Ecozones get. In view of the proposed increase in the tax regime of the Special Ecozones to be created and the proposed share of the Authority thereof, this Office posed objection to this proposed provision. "SEC. 18. Any incentives, powers, privileges, exemptions and immunities granted to Subic Special Economic Zone and Free Port, the Cagayan Special Economic Zone and Free Port, and the Zamboanga City Special Economic Zone under Republic Act No. 7227, Republic Act No. 7922, and Republic Act No. 7903, respectively, except the operation of any gambling, games, amusement, recreational and sports activities such as racing, dog racing, casinos, and cockfighting, which are not granted to the Southern Palawan Special Economic Zone and Free Port under this Act, shall be deemed extended and granted to the Southern Palawan Special Economic Zone and Free Port, as if such incentives, powers, privileges, exemptions and immunities are granted and embodied in this Act. "Similarly, the incentives, powers, privileges, immunities and exemptions, including the Non-applicability of the Salary Standardization Law and the Revised compensation and Position Classification System under Section 14 hereof, granted in this Act to the Southern Palawan Special Economic Zone and Free Port and Clark Special Economic Zone under Republic Act No. 7922, the Zamboanga City Special Economic Zone under Republic Act No. 7903, and the special economic zones created or to be created under Republic Act No. 7916, as if such incentives, powers, privileges, exemptions and immunities were originally granted to said zones." Comments/Recommendations : In addition to the above comments, even Section 50 of RA 7916 (PEZA Law) provides for Non-applicability of some of its provisions to other Special/Ecozones created under RA 7227. We would like to point out that if this would unqualifiedly be approved together with Section 15 thereof, the national government would be infusing capital to these Special/Ecozones more than what it gets by granting too many incentives, not only to the Ecozones but to the Authority involved. EIASDT Senate Bill 762 :" Act Amending Certain Provisions of Republic Act 7922, Otherwise Known as the Cagayan Special Economic Zone Act of 1995, And For Other Purposes ." " Section 2 . SEC. 4 of Republic Act No. 7922 is hereby amended as follows: "xxx xxx xxx. "THE ZONE SHALL BE OPERATED AND MANAGED AS A SEPARATE CUSTOMS TERRITORY OUTSIDE THE CUSTOMS TERRITORY OF THE PHILIPPINES ENSURING FREE FLOW OR MOVEMENT OF GOODS, ARTICLES AND CAPITAL WITHIN, INTO AND EXPORTED OUT OF THE ZONE. HOWEVER, EXPORTATION OR REMOVAL, OF GOODS, ARTICLES AND CAPITAL FROM THE ZONE TO OTHER PARTS OF THE PHILIPPINE TERRITORY SHALL BE SUBJECT TO CUSTOMS DUTIES AND TAXES UNDER THE CUSTOMS AND TARIFF CODE AND OTHER RELEVANT TAX LAWS OF THE PHILIPPINES; Comment : This Office posed no objection to this provision. "c) Any provision of existing law, rules or regulations to the contrary notwithstanding, no taxes, local and national, INCLUDING FINAL WITHHOLDING TAXES ON DIVIDENDS TO A BUSINESS ESTABLISHMENTS PARENT COMPANY AND BRANCH PROFIT REMITTANCES TO A BUSINESS ESTABLISHMENT'S HEAD OFFICE, shall be imposed on business establishments operating within the Zone. In lieu of [paying taxes] ALL LOCAL AND NATIONAL TAXES, said business establishments shall pay [and remit] to the national government [five per centum (5%) of their gross income] A FINAL TAX OF 8% OF THEIR NET TAXABLE INCOME AS DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, to be divided as follows: CIaDTE (1) [Two per centum (2%) FOUR PER CENTUM (4%) shall accrue to the national government; (2) One per centum (1%) to the province of Cagayan; (3) [One-half per centum (1/2%)] ONE PER CENTUM (1%) to be shared by the municipalities affected by the declaration of the Zone in proportion to their income from business activities within the Zone; and (4) [One and one-half per centum (1 1/2%)] TWO PER CENTUM (2%) to the Cagayan Economic Zone Authority which shall be created under this Act; "PROVIDED, HOWEVER, THAT THE PREFERENTIAL TAX HEREIN GRANTED SHALL NOT APPLY TO OFFSHORE BANKING, FINANCIAL SERVICES, TRUST AND TRADING INSTITUTIONS WHICH SHALL ENJOY TOTAL EXEMPTION FROM PAYMENT OF INCOME TAX FOR PURELY OFFSHORE TRANSACTIONS AS WELL AS TRANSACTIONS WITHIN THE ZONE ITSELF WITH CEZA INVESTORS AND RESIDENTS: PROVIDED, FURTHER, THAT DOMESTIC MANUFACTURING FIRMS OR FOREIGN FIRMS AND THEIR LOCAL SUBSIDIARIES THAT EXPORT MORE THAN THIRTY PERCENT (30%) OF THEIR TOTAL PRODUCTION IN TERMS OF VOLUME PER YEAR TO THE CUSTOMS TERRITORY OF THE PHILIPPINES SHALL NOT BE ALLOWED TO ENJOY THE INCOME TAX INCENTIVE HEREIN GRANTED: PROVIDED, STILL FURTHER, THAT THE FINAL TAX OF EIGHT PERCENTUM (8%) OF NET TAXABLE INCOME MAY BE INCREASED BY THE PRESIDENT OF THE PHILIPPINES AFTER TEN YEARS FROM THE EFFECTIVITY OF THIS ACT UPON THE RECOMMENDATION OF THE SECRETARIES OF FINANCE, AND TRADE AND INDUSTRY, THE CHAIRMAN OF THE NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY, AND THE ADMINISTRATOR OF THE CEZA: AND PROVIDED, FINALLY, THAT IN NO CASE SHALL THE FINAL TAX TO BE IMPOSED EXCEEDED FIFTEEN PERCENTUM (15%) OF NET TAXABLE INCOME AS DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED. "IN CASE OF CONFLICT BETWEEN LOCAL AND NATIONAL TAX LAWS ON THE ONE HAND, AND THE TAX INCENTIVES HEREIN GRANTED ON THE OTHER, THE SAME SHALL BE RESOLVED IN FAVOR OF THE LATTER. aATESD Comments : A cursory reading of the Explanatory Note of SB No. 762 and HB No. 6266 disclosed that the granting of the 8% tax incentives is to attract prospective investors. Accordingly, the present tax regime of 5% of gross income enjoyed by various Special ECOZONE, which is basically between 35-50% of net, scares away investors. This Office, however, is constrained to oppose the proposed 8% tax incentives for the following reasons, in addition to those already discussed (Comments made in SPSEZA): a) Our tax collections in the Ecozones do not contribute much to our overall tax collections. Roughly, the BIR tax collection from these Ecozone is less than 10% of the gross collections. An increase from 5% of gross income to 8% of net income of the tax incentive will further reduce BIR's tax collection. b) While the tax rate increases, the tax base decreases. Thus, an increase of 1% of the national government's share is not proportionate to the reduction made. The spread of the original share of the national government, i.e.,at 3% (in the 5% of gross) as against the proposed share of 4% (in the 8% of net) is now allotted to the Authority. Although the BIR does not pose objection to the Authority sharing in the 8%,but at the outset it does so only because the proposed 8% of net income tax regime will ultimately reduce the tax collection, and further, the Government sustaining the operation of the Ecozone with the view that it is substantially viable to the Philippine economic growth. aDACcH Finally, it is to be remembered that the 8% of net income tax regime is in lieu of local and national taxes. Recommendations : It was determined that the 5% of gross tax regime can amount to anywhere between 35-50% of net, depending upon the specific business activity. It was also discussed in other countries like Malaysia, an Ecozone enjoys a 3% of net or $8,000 fiscal incentives, whichever is lower. We could probably allow this if we can get the breakdown of distribution of the 3%. On the other hand, we also know for a fact that under the 1997 Tax Code, the Philippine domestic corporations, as well as the resident foreign corporations, are being imposed an income tax on their taxable income at a sliding rate of 33% effective January 1, 1999 and 32% effective January 1, 2000 and thereafter. Over and above the income taxes paid by these corporations, they are assessed of various taxes, such as but not limited to VAT, excise taxes on their importation of capital equipment. Compared with the Ecozones, they do not enjoy fiscal incentives. Moreover, a minimum corporate income tax of 2% is imposed on their gross income, in case their operation results to loss. In this connection; we could probably suggest that they should be taxed under the NIRC, but they should get further incentives as may be allowed. HEDaTA "SEC. 10. A new SEC. 12-B is hereby inserted to read as follows: "SEC. 12-B. RETENTION OF ALL EARNINGS .THE CEZA SHALL RETAIN ALL EARNINGS FROM ALL ITS ACTIVITIES, REGULATORY OR PROPRIETARY, AND NEED NOT REMIT THE SAME TO THE NATIONAL TREASURY, SUCH EARNINGS SHALL BE CONSIDERED A CORPORATE INCOME WHICH CEZA MAY INVEST IN ITS VARIOUS INFRASTRUCTURE OR SPECIAL PROJECT, CORPORATE UNDERTAKINGS, PAYMENT OF SALARIES, HONORARIA, PER DIEMS AND/OR OTHER RELATED MATTERS." Comments/Recommendations : This is a new provision. We posed no objection to this. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue