Bureau of Local Government Finance Opinion

August 25, 1999 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Elpidio F. Barzaga, Jr. Municipal Mayor Dasmarias, Cavite S i r : This refers to your letter dated April 29, 1999 requesting to be clarified on the following: a. Whether or not PEZA registered companies notwithstanding Section 24 of R.A. 7916 are exempted from paying five percent (5%) of the gross income earned as taxes. b. Whether or not PEZA registered companies are exempted from paying real estate taxes on their land and other real properties. c. Whether or not PEZA registered companies are exempted from securing business permit or license. On the first query Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995, which provides for exemption from taxes under the National Internal Revenue Code, is by itself already a form of tax incentive. For this reason, the entities subject to the tax imposed therein (5% of the gross income earned) can no longer enjoy exemption from said imposition. Otherwise, the supposed revenues to be generated from taxes paid by business establishments within the ECOZONES would be unduly diminished. The law could not have intended that the 5% tax on the gross income earned still be subject to the grant of tax holidays or any other form of exemption. Nothing therein confers such authority. Hence, following the principle that tax exemptions are construed strictissimi against the taxpayer and liberally in favor of the government, tax exemptions/holidays will not be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention of the legislature. Hence, the business establishments operating within the ECOZONES are subject to five percent (5%) tax on their gross income earnings. On the second query Prior to the amendment of R.A. 7916, this Department holds that the term "local tax" therein includes real property tax. The said ruling, copy attached, is based on Revenue Regulation No. 12-97 which defined local taxes as referring to "all taxes, business taxes, real estate taxes, and other taxes, fees and charges imposed by Local Government Units pursuant to the Local Government Code of 1991, as amended." Please be informed, however, that R.A. 7916 was amended by R.A. 8748 which was signed into law on June 1, 1999. Section 24 thereof now provides as follow: "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 ECOZONES. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONES shall be paid and remitted as follows: As it stands now, the aforestated provisions of the law has very little room for interpretation. The rule established is quite clear and explicit: that only lands owned by developers within the ECOZONEs are subject to real property taxes which provinces are authorized to levy under Section 232 of the Local Government Code of 1991, R.A. No. 7160. Accordingly, provinces where ECOZONEs are situated shall, henceforth, enjoy some benefits in the form of real property taxes that could now be collected from lands owned by developers therein, considering that they share from the proceeds of the said tax. However, the two percent (2%) share from the five percent (5%) of the gross income earned by all business enterprises within an ECOZONEs situated in a municipality or city shall still accrue exclusively to the municipal or city funds as the case may be. On your last query Business permit or license fees are charges imposed under the government's exercise of police power to cover the cost of regulating business activities or privileges. It should, therefore, be differentiated from a tax which is an imposition primarily for revenue purposes and regulation is merely incidental. It is therefore, necessary to determine whether a particular imposition is a tax or a fee considering that some limitations apply only to one and not to the other, and for this reason, exemption from taxes may not necessarily include exemption from payment of license fee. (The fundamental of Taxation, Hector de Leon, p. 17, 1993) Section 24 of R.A. No. 7916 explicitly provides that business entities within the ECOZONES shall not be subject to tax, national and local. It is our opinion, therefore, that the term tax as used therein strictly pertains to taxes for revenue purposes and does not include business permit or license fees which are charges and impositions of a different nature. Hence, based on the above premise, municipalities such as the Municipality of Dasmarias should still collect business or license permit fees from establishments operating within the ECOZONES thereat. cHAaCE We trust that your abovementioned concerns have been properly addressed in this regard. Very truly yours, (SGD.) EDGARDO B. ESPIRITU Secretary