Request for the Repeal of Sec. 12 of D.O. No. 3-08 or the IRR of RA No. 9400 (Bases Conversion and Development Act of 1992)

November 24, 2010 DOF OPINION Secretary Gregory L. Domingo Department of Trade and Industry (DTI) 4/F Industry & Investments Building, 385 Sen. Gil J. Puyat Ave., Makati City 1200 Secretary Nestor S. Mangio Chairman and CEO Subic-Clark Alliance for Development Council (SCADC) Ground Floor, Bldg. 2127, Corporate Headquarters Elpidio Quirino cor. Carlos Garcia Sts., Clark Freeport Zone, Pampanga Dear Sirs : This refers to the letter dated March 04, 2010 of former Trade and Industry Secretary Peter Favila and the letter dated February 22 and April 16, 2010 of former SCADC Chairman Edgardo Pamintuan, requesting for the repeal of Section 12 of Department Order (D.O.) No. 3-08 or the Rules and Regulations to Implement Republic Act (RA) No. 9400, "An Act Amending Republic Act No. 7227, Otherwise known as the Bases Conversion and Development Act of 1992, and for Other Purposes", issued by the Secretary of Finance, which pertinently reads: "Section 12. Exclusivity of Incentives. It is understood that, henceforth, registered Ecozones and Freeport Enterprises already availing of the incentives and benefits under RA 9400 in accordance with these rules, shall be expressly disqualified from availing of the incentives and benefits defined and/or granted, under other laws, rules and regulation." We understand that it is your position that since Republic Act (RA) No. 7916 or the "PEZA law" and Executive Order (EO) 226 or "The Omnibus Investment Code of 1987", as amended, do not provide for exclusivity of incentives granted under it, Section 12 of the DO 3-08 should therefore be repealed. In the SCADC letter dated 22 February 2010 and DTI letter, you requested for reconsideration on the matter of allowing, sequentially, the enjoyment of incentives granted under EO 226 and RA 7916 with RA 9400. However, in the SCADC letter dated 16 April 2010, your request for reconsideration points to the simultaneous enjoyment of incentives under the said laws. ADEHTS The present case involves three (3) laws, more particularly the Bases Conversion Act, the Omnibus Investments Code, and the Special Economic Zone Act, which are being administered by different Investment Promotion Agencies (IPAs). RA 7227 (or the Bases Conversion Act of 1992), as amended by RA 9400, was promulgated to convert former US military bases into industrial and commercial areas. The most significant of these are the Subic and Clark Economic Zones, administered by Subic Bay Metropolitan Authority (SBMA) and the Clark Development Corporation (CDC), respectively. Smaller zones include the John Hay Special Economic Zone and Poro Point Special Economic and Freeport Zone. Registered enterprises operating within these Freeport Zones are entitled to: 1. 5% tax on Gross Income Earned (GIE), in lieu of all national and local taxes; and 2. Tax and duty-free importation of all raw materials, capital equipment, machineries and spare parts, including consumer goods. On the other hand, EO 226 (or the Omnibus Investments Code of 1987) created the Board of Investment (BOI) which is responsible for preparing the Investment Priorities Plan (IPP). The IPP identifies specific activities and categories of economic activity for which the government wants to encourage investment and thus, granted BOI incentives. BOI-registered enterprises are generally entitled to the following tax and duty incentives: 1. Income Tax Holiday (ITH) for six (6) and (4) years for pioneer and non-pioneer projects, respectively. A three (3)-year extension may be allowed for expansion projects; CSHEca 2. Duty-free importation of capital equipment which are directly used in the registered activity; and 3. Tax credit equivalent to the amount of duties and paid on the raw materials used in the production of export products. Moreover, RA 7916, as amended, otherwise known as the Special Economic Zone Act of 1995 established the Philippine Economic Zone Authority (PEZA) and laid the framework for specific areas identified as special economic zones or "ecozones". Ecozones are essentially export oriented, where PEZA-registered entities are required to export 70% of their production. PEZA-registered enterprises are entitled to the following incentives: 1. Income Tax Holiday (ITH) for six (6) and (4) years for pioneer and non-pioneer projects, respectively. A three (3)-year extension may be allowed for expansion projects; 2. 5% Gross Income Tax (GIT) upon expiration of its ITH; 3. Tax and duty-free importation of raw materials, capital equipment, machineries and spare parts which are directly used in the registered activity; and 4. Zero percent (0%) Value-Added Tax on sales to PEZA-registered enterprises by a VAT-registered person. It is the contention of the SCADC that there is no provision in EO 226, RA 7916 or RA 7227, as amended by RA 9400, providing for the exclusivity of incentives for PEZA-registered enterprises, BOI-registered enterprises and Freeport Zone locators; thus, simultaneous or sequential application of these incentives granted under these laws should be allowed. DHEcCT The scenario being contemplated by Freeport Zone locators and SCADC involves the availment of two (2) different incentives granted under two (2) different laws, more particularly, the tax and duty-free importation under RA 9400 and the ITH under EO 226. We, however, found no legal basis for the simultaneous availment of incentives granted under these three (3) different laws. The tax incentives granted under these laws are indivisible in nature such that incentives provided under one (1) law cannot be granted separately and combined with those granted under other laws. Under RA 9400, Freeport Zone locators are granted only 5% on GIE because their importations are already tax and duty-free. These incentives cannot be granted individually and availed of with the ITH under EO 226. Tax incentives partake of the nature of tax exemptions and must be strictly construed against the one claiming it because the law does not look with favor on tax exemptions and that he who seeks it must justify it by words too plain to be mistaken and too categorical to be misinterpreted. 1 If it were the intention of Congress to allow Freeport Zone locators to avail of ITH, then it should have been stated in the law similar to that provided in the PEZA Law. With regard, to sequential availment, such may be allowed under the provisions of D.O. 3-08. We wish to clarify that what Section 12 of D.O. 3-08 prohibits is the simultaneous availment of incentives under different laws by enterprises registered under RA 9400. The purpose of Section 12 of D.O. 3-08 is to avoid the double enjoyment of incentives from different IPAs. In other words, an enterprise which is already registered with the SBMA or the CDC, as the case may be, and is availing of the tax incentives under RA 9400 are prohibited from registering with PEZA or BOI and avail of the incentives given by these IPAs unless their incentives under RA 9400 are revoked. EaHcDS Thus, PEZA/BOI-registered enterprises locating or intending to locate in a Freeport Zone, shall retain their incentives granted under RA 7916 or EO 226, as the case may be, until they register and avail of the incentives granted under RA 9400, in which case, their incentives under RA 7916 or EO 226, if the same still exists, shall automatically be revoked. Conversely, locators in the Freeport Zone registered with the SBMA or CDC and are availing of the incentives granted under RA 9400 and who wish to avail of the incentives under RA 7916 or EO 226 may register with PEZA or BOI and avail of the incentives therein, provided their incentives under RA 9400 shall be revoked. At this juncture, we would like to stress that the sequential availment of incentives is not automatic and an enterprise should go through the process of registration and comply with the requirements as prescribed by the corresponding IPA. In view of the foregoing, we resolve to retain Section 12 of Department Order No. 3-08 and clarify that Freeport Zone locators registered under RA 9400 cannot simultaneously avail of the incentives granted under EO 226, RA 7916, as amended. They may, however, be allowed to register with PEZA or BOI and if qualified, avail of the incentives granted by these IPAs subject to registration and compliance requirements and revocation of RA 9400 incentives. For your guidance. By Authority of the Secretary: (SGD.) CARLO A. CARAG Undersecretary Revenue Operations & Legal Affairs Group Footnotes 1. Commissioner of Internal Revenue vs. P.J. Kiener Company, Ltd., 65 SCRA 143.