Bureau of Local Government Finance Opinion

March 18, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Eufemia H. Biscocho Special Assistant to the Division Head Finance Division Yazaki-Torres Manufacturing, Inc. YTMI Realty Special Economic Zone Brgy. Makiling Calamba City Madam : This refers to your letter dated January 21, 2013 relative to the final demand made by the City of Calamba for the settlement of the purported deficiency in the payment of business tax from 2006-2012 in the aggregate amount of SIXTEEN MILLION SIX HUNDRED EIGHT THOUSAND TWO HUNDRED SEVENTY PESOS and fifty-eight centavos (PhP16,608,270.58) of Yazaki-Torres Manufacturing, Inc. (YTMI). HCSAIa It is alleged that such assessment was made based on Section 25 of R.A. No. 7916, the Special Economic Zone Act, as amended, which provides: "Section 25. Applicable National and Local Taxes . All persons and service establishments in the ECOZONE shall be subject to national and local taxes under the National Internal Revenue Code and the Local Government Code." YTMI submits that such demand has no legal basis as it is not in full accord with the letter and spirit of R.A. No. 7916, considering that as a duly registered enterprise within the jurisdiction of PEZA, YTMI enjoys fiscal incentives to include exemption from national and local taxes as specifically provided under Section 24 thereof, quoted as follows: "Section 24. Exemption from National and Local taxes. Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: "(a) Three percent (3%) to the National Government; "(b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." YTMI claimed further that in the inquiry made by it from PEZA, said agency confirmed the exemption of the company from the payment of the business taxes being assessed by said City, the pertinent portion of which is quoted as follows: "As regards local government permits, fees, taxes, etc., YTMI continues to be exempt. This is because the enterprise does not shed its PEZA-registered status just because it has realized income from non-PEZA registered, albeit related, activities. For as long as YTMI conducts its business inside the ecozone, it remains exempt from LGU permits/taxes." In view of the foregoing, YTMI requests this Bureau to confirm or clarify if the action of said City is valid and proper. aEHADT In this connection, the above letter was referred to the ICO-City Treasurer of Calamba for comment under a 1st Indorsement dated January 28, 2013, copy furnished YTMI. Under a letter dated February 5, 2013, the ICO-City Treasurer reiterated its legal basis for the imposition of deficiency assessment of business taxes on income of YTMI classified as "regular rate" in the Annual Income Tax Returns, which is Section 25 of RA 7916. It is contended that based on the said provisions of Section 25, the sales/revenues from YTMI's operation declared as "regular rate" may be subjected to corresponding local taxes. To support the above claim, quoted hereunder is the position of the ICO-City Treasurer. "Section 24 cannot apply to YTMI's revenue declared as 'regular rate'. If Sec. 24 applies, then; the 'in lieu' 5% income tax exemption under Sec. 24 should also apply to such income declared as 'regular rate'. But it did not. The income was charged by the BIR with the regular rate of 30% and not the 5% (3% + 2%) as amended by Section 24 of RA 7916, as amended. "xxx xxx xxx "However, in the case of income from activities otherwise or NOT entitled to ITH or the GIT of 5%, it is implied that the exemption in Section 24 cannot apply. Thus, if Sec. 24 will not apply, such income (regular rate) will have to be treated as a regular corporate income and therefore treated in no special way as the income from activities qualified under Section 24. Its legal basis is Section 25 of the law. "Section 25 is clear. Not all activities within the Ecozone are exempted from all national and local taxes. As titled, the Section (25) speaks of 'Applicable National and Local Taxes' . In other words, even if the person or service establishment is found within the ecozone, if he or the establishment is not covered by the exemption in Section 24, they are subject to national and local taxes. This is the reason, we suppose, why Section 25 was enacted. It is a catch-all provision which generally imposes all applicable national and local taxes to persons and establishments who derive income NOT entitled to the benefits under Section 24 of the same Code. If business tax is applicable, then, we believe, it should be imposed in a regular way. STcEIC "The taxpayer YTMI contends that because it has not shed its PEZA-registered status, then it is no longer liable to pay applicable local taxes, as long as it stays within the ECOZONE, even for those income which are not exempt under the PEZA law . The fact that such income declared as 'regular rate' are not exempt under Tax-Holiday scheme or the 5% GIT (special rate), means that such income is NOT QUALIFIED to enjoy the special treatment of the PEZA Law. Thus, as it is. YTMI paid the regular 30% Corporate Income Tax on such Gross Income to the BIR as per attached Annual Income Tax Return CY 2005 to 2011." In relation with the above, quoted hereunder is the interpretation of Section 25 of R.A. No. 7916 embodied in a letter dated March 6, 2013, copy enclosed, of the Manager, Legal Service Group, Philippine Economic Zone Authority. "The word 'persons' refers to individual persons while the term 'service enterprises' is defined in Rule I of the Rules and Regulations Implementing R.A. No. 7916, as amended, to wit: "SEC. 2. Definition of Terms. For purposes of these Rules and Regulations, the following definitions shall apply: xxx xxx xxx p. "ECOZONE Service Enterprise" shall refers to a business entity or concern within the ECOZONE such as but not limited to those engaged in customs brokerage, trucking/forwarding services, parcel service, janitorial services, security services, insurance, and/or banking services, consultancy services, restaurants or such other services within the ECOZONE as may be determined by the Board, duly registered and/or licensed by the PEZA whose income derived within the ECOZONE shall be subject to taxes under the National Internal Revenue Code pursuant to Section 25 of the Act." In view of the foregoing, this Bureau cannot agree with the position of the ICO-City Treasurer that Section 25 of R.A. No. 7916, as amended is a catch-all provision considering that it pertains only to persons and service establishments within the ECOZONE. Considering therefore that YTMI is a manufacturer, said Section 25 shall not apply. Be that as it may, while Section 25 is not applicable, it will not render YTMI exempt from local taxes on its income declared as "regular rate". Hence, this Bureau finds the position of the ICO-City Treasurer that income of YTMI taxed by the BIR under the regular rate is not covered by PEZA Incentive, tenable. The fact that YTMI paid the regular 30% Corporate Income Tax on such Gross Income to the BIR is a clear admission that such income is not entitled to ITH or the 5% GIT incentive. EaIcAS It is worth mentioning that in the same letter dated March 6, 2013, PEZA states that: "Income from activities not entitled to ITH or the 5% GIT incentive refers to income derived from activities unrelated to the PEZA-registered business. Since this type of income is not covered by any PEZA Incentive, it is subject to national and local taxes . (Emphasis ours) Accordingly, this Bureau expressed the view that income of YTMI classified as "regular rate" shall be subject to the local business tax imposed under a duly-enacted tax ordinance of the City of Calamba. This Bureau therefore, finds the assessment made by the ICO-City Treasurer in full accord of the law. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director