Bureau of Local Government Finance Opinion

April 8, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the OIC/Regional Director for Local Government Finance, Department of Finance, Region IV-A, People's Mansion Compound, Batangas City. This refers to the letter dated October 23, 2002 of the Provincial Assessor of Cavite, Trece Martires City, in effect requesting opinion relative to the provisions of Section 24 of R.A. No. 7916, entitled: "AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISM FOR THE CREATION, OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN THE PHILIPPINES, CREATING FOR THIS PURPOSE, THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA), AND FOR OTHER PURPOSES," as amended by R.A. No. 8748, which is quoted hereunder: "SEC. 4. Chapter III, Section 24 of Republic Act No. 7916 is hereby amended to read as follows : "SEC. 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." Apparently, a research had been conducted by a special committee created by the Governor of Cavite, which consequently reveals that there are business enterprises or locators of Economic Zones in the Province of Cavite who have shed the Income Tax Holiday (ITH) Privilege, as provided for under the abovementioned provision of law, and opted instead to pay the 5% on gross income earned in lieu of paying all other local and national taxes including real property tax. The said Provincial Assessor now alleges that the "Gross Income Loss" Scheme has been resorted to by some locators in that province in order to evade the payment of both the real property tax and the 5% on gross income earned provided in Section 24 of R.A. No. 8748. In this regard, that Office submitted, among others, that: "it is believed that considering the payment of the five percent (5%) tax by the business establishments operating within the ECOZONE shall be based on the gross income earned by said enterprises, their financial status should first be determined as to whether or not the business establishments concerned are earning or losing as alleged, and in case of the latter, they may still be entitled to enjoy ITH privilege." In this connection, attention is invited to Section 4 of DOF Revenue Regulations No. 1-00 dated November 11, 1999, clarifying the extent of tax exemption of registered economic enterprises, amending Section 4 of Revenue Regulations No. 12-97. Section 4 of Revenue Regulations No. 1-00 provides as follows: "SEC. 4. Nature of the 5% Tax and Extent of Tax Exemption . " The above 5% tax is imposed on "gross income earned" hence, income tax in nature and a national internal revenue law in character . Registered ECOZONE enterprises shall be exempt from all other taxes, national or local, except the real property tax on land owned by developers, pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748." (Emphasis supplied) It is evident, therefore, that: 1. The 5% tax imposed on gross income earned referred hereto are income tax in nature and a national internal revenue law in character, and not local tax; 2. ECOZONE registered enterprises, particularly developers, are exempt from national and local taxes; 3. The exemption of registered ECOZONE enterprises from "national and local taxes" does not include the exemption from real property tax on land owned by developers; and 4. The buildings, machineries and improvements of the ECOZONE registered enterprises are exempt from real property taxes. However, the exemption of machineries of PEZA registered enterprises prior to R.A. No. 7916, as amended by R.A. No. 8748, shall be governed by paragraph (a), Article 78, Book VI of the Omnibus Investments Code of 1987 (E.O. No. 226). R.A. No. 7916, as amended by R.A. No. 8748 has been very specific as to what real properties of the ECOZONE registered enterprises are considered exempt from real property taxation. It is emphasized, however, that the issue on the alleged "Gross Income Loss" Scheme being resorted to by some ECOZONE Enterprises operating in that province should be properly addressed to the Bureau of Internal Revenue (BIR) for proper interpretation. CDcHSa Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director