Whether Clark Devt. Corp. Is Subject to the 5% Preferential Tax Imposed under RA 7227

September 10, 2001 BIR RULING NO. 038-01 R.A. 7227; E.O. 80 BIR Rlng 046-95 Clark Development Corporation Clark Special Economic Zone Bldg. 2127, E. Quirino Cor. C.P. Garcia Ave. Clark Field, Pampanga Gentlemen : This refers to the request for a definitive ruling by Clark Development Corporation (CDC) to the effect that it is subject to the 5% preferential tax imposed under RA 7227, in lieu of all national or local taxes, fees and charges, including but not limited to, withholding taxes, value added taxes and documentary stamp tax. Historical Background The Clark Special Economic Zone (CSEZ) was created pursuant to Section 15 of Republic Act No. 7227, otherwise known as "The Bases Conversion and Development Act of 1992" and Proclamation No. 163, Series of 1993. The CSEZ consists of parcels of land formerly occupied by the Clark military reservations and its contiguous extensions as covered by the 1947 Military Bases Agreement between the Philippines and the United States of America. Same Section 15 further provides for the establishment of the governing body of CSEZ, which shall have powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66, as amended. Furthermore, Section 16 of the same Act granted the Bases Conversion and Development Authority (BCDA) the power to form, establish, organize and maintain a subsidiary corporation or corporations to be formed in accordance with Philippine Corporation Law and existing rules and regulations promulgated by the Securities and Exchange Commission (SEC). Likewise, pursuant thereto, such subsidiaries shall be exempt from the coverage of the Civil Service Laws, rules and regulations By virtue of Executive Order No. 80 (E.O. 80) dated April 1993, the CDC was established as the implementing arm of BCDA for the CSEZ. On April 19, 1993, CDC was duly registered with the SEC. Likewise, on April 8, 1994, by virtue of E.O. 174, CSEZ was designated as the future site of a premiere Philippine International Airport. Thus, on July 27, 1994, E.O. 192 was promulgated authorizing the establishment of the Clark International Airport Corporation (CIAC) to operate and manage the Clark Aviation Complex as a wholly owned subsidiary of CDC formed under the Corporation Code. Realizing the need for the BCDA to be the direct stockholder of CIAC in compliance with RA 7227 which mandated BCDA to be the holding company of the subsidiaries pursuant to RA 7227, EO 360 was passed declaring that the CIAC shall be the wholly owned subsidiary of BCDA and shall be formed in accordance with the Philippine Corporation Law. Notwithstanding the organization of CIAC, CDC remains the implementing arm of BCDA to manage the CSEZ. CDC is recognized as the sole authority within CSEZ by virtue of E.O. 80. On June 14, 1996, Proclamation No. 805 further redefined the area of CSEZ to include the 5,724 hectares of property more commonly known as the Sacobia area. On the same date, E.O. 344 was issued authorizing the transfer of the Sacobia Development Authority (SDA) and the jurisdiction over the area to CDC. The primary purpose for which the CDC was created is " to operate, administer, manage and develop the CSEZ, including but not limited to the Civil Aviation Complex, Industrial Estate, Tourism Estate, and the Agro-Industrial Processing Centers situated therein. Likewise, among others, CDC is authorized to acquire or obtain from any government or authority; national, provincial, municipal or otherwise; or any corporation, company or partnership or person/s such charter, contracts, franchise, privileges, exemptions, licenses and concessions as may be conducive to any of the objects of the CDC" . Incentives Granted to CSEZ-registered Enterprises Guided by R.A. 7227, E.O. 62 was promulgated on February 27, 1993, directing BCDA, among others, to develop Clark Air Base as a special economic zone with such incentives and privileges granted to the Subic Special Economic and Free Port Zone and Export Processing Zone . The CSEZ is envisioned as a new industrial townsite and a major civil aviation complex for international passengers and/or cargo. Pursuant to Section 3 of Proclamation No. 163 dated April 3, 1993, BCDA is the governing body of the CSEZ. BCDA shall promulgate all necessary policies, rules and regulations to govern and regulate the CSEZ through the operating and implementing arm it shall establish, i.e., CDC. On the same date, by virtue of E.O. No. 80, Clark Development Corporation was established as the implementing arm of BCDA for the CSEZ and was registered with the SEC on April 19, 1993. Also, pursuant to Section 12 (b) of RA 7227, CSEZ shall be operated and managed as a separate customs territory ensuring the free flow or movement of goods and capital within, into and exported out of CSEZ, as well as provide incentives such as tax and duty free importation of raw materials, capital and equipment . However, exportation or removal of goods from CSEZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under relevant tax laws of the Philippines. Executive Order No. 80 authorized BCDA to promulgate all necessary policies, rules and regulations governing the CSEZ, including the investment incentives, in consultation with the local government units and pertinent government departments for implementation by CDC. Further, it also directed the investment climate in the CSEZ to the effect that all incentives granted in Subic Special Economic and Free Port Zone under R.A. 7227 and those applicable incentives granted in Export Processing Zones (PD 66 and RA 7916), the Omnibus Investments Code of 1987 (E.O. No. 226), as amended, the Foreign Investments Act of 1991 and new investments laws which may thereafter be enacted shall be applicable to it. Further, E.O. 80 clarified that the CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investments incentives (full incentives), while CSEZ Sub-Zone covering the rest of CSEZ shall have limited incentives. Furthermore, the tax and duty free incentive within the Subic Economic Zone which is likewise applicable to the CSEZ was clarified by EO No. 97 issued on June 10, 1993 to the effect that the same applies only to raw materials, capital goods and equipment brought in by business enterprises into the CSEZ. Except for said items, importations of other goods by resident individuals are subject to taxes and duties under relevant Philippine laws. Position of CDC Considering that CDC is performing functions proprietary in nature, then CDC should also be entitled to the same privileges as other enterprises operating within the CSEZ. Under RA 7227, all enterprises operating within the CSEZ shall pay the 5% tax on Gross Income Earned (GIE), in lieu of local and national internal revenue taxes. While RA 8424 is obviously intended to remove the income tax exemptions of various government corporations, it is the position of CDC that the same cannot be made to apply to CDC considering that it is not only covered by "general or special law or charter" specifically directed at giving CDC a tax exempt status, but it also pays a 5% tax on GIE similar to all other enterprises within the CSEZ. Also, the fact that CDC has, without the benefit of a special law or charter, enrolled and qualified itself for benefits under RA 7227 and, by BIR Ruling No. 046-95, had in fact been made subject to a preferential tax rate of 5% on GIE. Had CDC been previously exempted by special law or charter as contemplated by RA 8424, then no such tax could have been imposed. Finally, the Office of the Government Corporate Counsel in its Opinion No. 278 dated October 1996, citing the Provision of Adequate Operational Flexibility under Administrative Order No. 59 issued on February 16, 1998, to wit: "Section 4. Provision of Adequate Operational Flexibility . Government Corporations shall be provided with adequate operational flexibility in order to function properly and efficiently, especially under conditions of market competition. Such flexibility shall nevertheless be consistent with the requirements of public accountability. "Section 5. Differential Treatment. To implement the concept of adequate operational flexibility treatment by the various service-wide agencies, such as the Department of Budget and Management (DBM) and the National Economic and Development Authority (NEDA), in exercise of their respective powers and functions. Such agencies shall distinguish corporate organizational and procurement practices from those of bureaus and regular line agencies. "Nothing in this Section shall be construed in any way diminishing or limiting the responsibilities and accountabilities of GOCCs and their respective officers." so stated that CDC, being a government-owned or controlled corporation created by the Corporation Code of the Philippines, has been accorded by said law with "adequate operational flexibility" so that it could achieve its thrusts and objectives as a corporate entity. Tax Status of CDC BIR Ruling No. 046-95 dated March 3, 1995 issued by then Commissioner of Internal Revenue Liwayway Vinzons-Chato confirmed that "CDC is exempt from local and national taxes, including but not limited to, withholding tax and value-added tax. CDC falls within the purview of a business enterprise operating within the CSEZ. CDC's Articles of Incorporation indicate that the activities undertaken by CDC are proprietary in nature. Hence, it was ruled that by undertaking said business activities within the CSEZ, CDC is entitled to preferential tax of 5% based on gross income earned, in lieu of local and national internal revenue taxes. Although the aforesaid BIR Ruling No. 046-95 has not been specifically overruled by another BIR ruling, CDC is being subjected to the normal corporate income tax, as well as to the withholding tax on rental income, payment of value-added tax and documentary stamp tax. Under Section 5, paragraph 2 of Executive No. 80 in relation to Section 12(c) of RA No. 7227 providing for the applicability of incentives granted to Subic Special Economic and Free Port Zone under the RA 7227 and those enterprises located in the Export Processing Zones pursuant to PD 66 and RA 7916, or to the registered enterprises under EO 226 or Foreign Investments Act of 1989, to the CSEZ registered enterprises, this Office hereby opines that CDC, as the operating and implementing arm of the BCDA formed pursuant to Section 16 of R.A. 7227, is entitled to the 5% preferential tax rate based on gross income earned, in lieu of local and national internal revenue taxes. Unlike SBMA, CDC is a corporation formed in accordance with the Philippine Corporation Law and existing rules and regulations promulgated by the SEC. Furthermore, its Articles of Incorporation indicate that the activities being undertaken by CDC are proprietary in nature, hence, it is considered a business enterprise operating within the CSEZ. In this light, it is entitled to the same privileges as other enterprises operating within the CSEZ, i.e., it shall pay 5% of the gross income earned in lieu of paying taxes. There is no basis in saying that the Tax Code of 1997 removed the tax exemptions of CDC. It is noteworthy to mention that CDC is not covered by any "general, special law or charter" directed in giving a tax exempt status since it was incorporated pursuant to the provision of the Corporation Code. In fact, it pays the 5% preferential tax on gross income earned similar to all other enterprises within the Zone. In the light of the above and considering that CDC is not a corporation exempt from tax under 'general or special law' or 'charter', it shall be subject to the 5% preferential tax on GIE. Registration requirement with CDC is equivalent to grant of authority or license to operate within the CSEZ. This registration requirement for enterprises operating and located inside CSEZ done thru CDC, as the registering body, should not be strictly imposed upon CDC considering that that the authority of CDC "to operate and perform such proprietary task" is granted and authorized under Executive Order No. 80. However, pursuant to Section 7 of Rev. Regs. No. 1-95, CDC is not exempt tom the requirement of withholding and remittance of tax under Section 57 (a) and (b) and 58 of the 1997 Tax Code. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue