ECOZONE TAXATION

Charles C. Onda, CPA

Assistant Professorial Lecturer, Accountancy Department
College of Business Administration, DLSU-Dasmarias
Dasmarias, Cavite


1.0 Introduction

Ecozones are areas designated by the government for development into balanced
agricultural, industrial, commercial, and tourist/recreational regions. Each Ecozone is to
be developed as an independent community with minimum government interference. It
shall administer its own economic, financial, industrial and tourism development without
help from the national government. It shall also provide adequate facilities to establish
linkages with surrounding communities and other entities within the country.

Ecozones are among the measures adopted by the Government to implement its
policy of promoting the preferential use of Filipino labor, domestic materials and locally
produced goods, and to help them make them internationally competitive. They are
established in strategic locations in the country designed to effectively attract legitimate
and productive foreign investments.

Ecozones are created by virtue of EO 226 otherwise known as Omnibus
Investment Code which becomes effective on July 1997 and by Presidential Decree No.
66 otherwise known as PEZA law. The present laws affecting ecozones includes RA
7916 or the Special Economic Zone Act of 1995 which was signed into law on February
24, 1995 which was later amended by RA 8748. An ecozones are managed and operated
by the Philippine Economic Zone Authority (PEZA) as a separate customs territory.


2.0 Nature and type of ECOZONES

Ecozones are divided into the following types :

1. Industrial Estates (IEs) are tracts of land developed for the use of industries. They
have basic infrastructure such as roads, water and sewage systems, pre-built factory
buildings, and residential housing for the use of the community.

2. Export Processing Zones (EPZs) are special IEs whose locator companies are
mainly export-oriented. EPZ incentives include tax- and duty-free importation of
capital equipment, raw materials and spare parts. The government has designated 4
EPZs; Bataan, Cavite, Baguio City and Mactan Island in the Visayas. There are about
250 registered companies in the EPZs, most of which are involved in the manufacture
and export of electronics, garments, rubber products, fabricated metals, plastics,
electrical machinery, transport equipment and industrial chemicals.

3. Free Trade Zones are areas nearby ports of entry, such as seaports and airports.
Imported goods may be unloaded, repacked, sorted and manipulated without being
subjected to import duties. However, if these goods are moved into a non-free trade
zone, they will be subjected to customs duties. ASEAN has agreed to create an Free
Trade Zones by 2003.

4. Tourist & Recreational Centers contain establishments that cater to both local and
foreign visitors to the Ecozones. Such businesses include hotels, resorts, apartments
and sports facilities.


Business establishments located and operating inside ecozones are referred to as
ecozone enterprises. An enterprise maybe operated by an individual, association,
partnership or a corporation.

The brief descriptions of each type of Ecozone Enterprise follows:

- Export Enterprise - manufactures, assembles, or processes products which are 100%
exported, unless a lower percentage is approved by PEZA.

- Free Trade Enterprise - imports and markets tax- and duty- free goods within the free
trade area in the Ecozone. Goods brought outside the free trade area will be subject to
customs and tariff duties.

- Service Enterprise - is engaged in any one or a combination of the following
activities : customs brokerage, trucking/forwarding, janitorial, security, insurance
and/or banking, consulting or any such service approved by PEZA.

- Domestic Market Enterprise manufacturer, assembler or processor if goods that
cannot export at least 50% of their output for a period of three years if majority-owned
by Filipinos and at least 70% if majority-owned by foreign nationals.

-Pioneer Enterprise, with any of the following conditions:

- Manufactures, processes or produces goods not produced in a
Commercial scale in the country;

- Uses a design, formula, scheme, method or process which is new and
Untried in the Philippines;

- produces non-conventional fuels or manufactures equipment that utilizes non-
conventional sources of energy ;

- develops areas for agri-export processing development; or

- given such a status under the Investment Priorities Plan.

- Utilities Enterprise - contracted to provide light and power, water supply and
distribution, communications and transportation systems in the Ecozone.

- Facilities Enterprise - contracted to build and maintain necessary infrastructure such
as warehouses, buildings, road networks, ports, sewerage and drainage systems, and
other facilities considered as necessary by PEZA in the development and operations of
the Ecozone.

- Tourism Enterprise - operates tourist accommodation facilities, restaurants, and
sports and recreational facilities in the Ecozone.

- Ecozone Developer/Operator develops, operates, and maintains the Ecozone, all
component sectors (i.e. IEs, EPZs, Free Trade Zones, and Tourist/Recreational
Centers) and all related infrastructure (roads, light and power systems, drainage
facilities, etc.)



3.0 Salient features of taxation in ECOZONES

Ecozones will be granted the following incentives only during the period of their
registration with PEZA, to wit:

1) Business and income taxation of enterprises , except service enterprise, is
covered by special tax rules( rates, tax base, et al) different from thje general
tax laws (NIRC, RA 8424, Local Government Code, Customs and Tariff
Code, et al).

2) Covered enterprises also enjoy the following incentives:

A. Income Tax Holiday (ITH) for a period of 3-6 years extendible to not
more tan 3 years. It does not cover income from unregistered
activities.

Income Tax Holiday (ITH) means a period of years of operation
wherein the taxpayer is exempted from the payment of any income tax
whether the taxpayer reports a taxable income or not. ITH has a
limited period and is available only to export and free trade
enterprises.

Income Tax Holiday Period

Basic
(a) For Pioneer Enterprise - 6 years
(b) For Non-Pioneer Enterprise - 4 years
(c) Expanding Enterprise - 3 years

It can be extended to another three(3) years but the total number of
years including basic should not exceed 8 years.


Bases of extension:

(a) Ratio of capital equipment to number of workers of the project
does not exceed US$ 10,000.
(b) Average cost of indigenous materials is at least 50% of the
total material cost in the preceding year
(c) Net foreign exchange savings is at least US$ 500,000 for the
last 3 years of operations.

B. Duty and Tax free importation and exports

C. Tax Credit on local material substitutes (25%) and capital equipment
(100%)

D. Exemption from all national internal revenue taxes such as gross
receipts tax, value-added tax, ad valorem tax, excise tax, income tax,
documentary stamp tax, percentage taxes, and all other taxes found in
the National Internal Revenue Code.

E. Exemption from the payment of all local government impost, fees,
licenses or taxes including local business tax, transfer tax on the sale
of real property, real estate taxes, community tax, mayors permit fee,
sanitary fee, other regulatory fees and other taxes and fees found in the
Local Government Code and particularly in the Tax Ordinance of the
local government unit where the economic zone is located.
F. Other non-monetary incentives

3) If not entitled to or upon expiry or lapse of the ITH, enterprises are subject to
a special income taxation at a preferential rate of 5% on gross profit,
otherwise known as Gross Income Taxation(GIT), which shall be shared and
distributed as follows:

(a) To the national Government - 3%
(b) To the Treasurers Office of the Municipality or City - 2 %
where the registered enterprise is located

For an ECOZONE export enterprise, the following are considered to be
allowable deductions from net sales:
Direct salaries, wages or labor expenses
Service or production supervision salaries
Raw materials
Goods in process
Finished goods
Supplies and fuels used in production
Depreciation of machinery, equipment and buildings owned and/or
constructed
Financing charges associated with fixed assets
Rent and utility charges for buildings, equipment, and warehouses, or
handling goods

4.0 Tax treatment of transactions of with PEZA-registered enterprises

Generally, products manufactured or produced within the ECOZONES are
destined for export to foreign countries. While such products, under certain conditions,
maybe sold to buyers in the Customs Territory, i.e., outside the ecozones, such sales are
technically considered as another separate Customs Territory, the buyer is treated as an
importer and is imposed with the corresponding import taxes and customs duties on his
purchase of products from within the ecozones.

While all ECOZONE enterprises are not necessarily manufacturer-importers of
products considering that there are also service enterprises registered as Ecozone
enterprises, however, taken as a whole, all their integrated activities eventually translate
into manufactured products which are either actually exported to foreign countries, in
which case, no VAT must form part of its export price; or actually sold to buyers from
the Customs territory, in which case, 10% VAT shall be paid thereon by such buyers,
consistent with the Cross Border Doctrine of the VAT system.

RMC 74-99 consolidates and harmonizes all the pertinent laws and their
implementing rules and regulations in respect to sales of goods, property and services to
the Ecozones, to wit:

1. Sales made by a VAT-Registered supplier from the Customs Territory, to a
PEZA Registered Enterprise:

A. If the buyer is a PEZA registered enterprise which is subject to the 5%
special tax regime, in lieu of all taxes, except real property tax, pursuant to
RA 7916, as amended:

(1) Sale of goods (i.e., merchandise)- This shall be treated as indirect
export; hence, considered subject to zero rate(0%) VAT, pursuant to
Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of RA 7916, in relation to
Art.77(2) of the Omnibus Investment Code.


(2) Sale of service- This shall be treated subject to zero percent (0%)
VAT under the cross border doctrine of the VAT system, pursuant to
VAT Ruling N0. 032-98 dated November 5, 1998.

B. If buyer is a PEZA registered enterprise which is not embraced by the 5%
special tax regime; hence, subject to taxes under the NIRC, e.g., Service
Establishments which are subject to taxes under the NIRC rather than the
5% special tax regime:

(1) Sale of goods- This shall be treated as indirect export hence,
considered subject to zero percent(0%) VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC and Sec. 23 of RA 7916, in relation to
Art.77(2) of the Omnibus Investment Code.
(2) Sale of Service- This shall be treated subject to zero percent (0%)
VAT under the cross border doctrine of the VAT system, pursuant to
VAT Ruling N0. 032-98 dated November 5, 1998.


2. Sales made by a VAT Exempt Supplier from the Customs Territory, to a
PEZA Registered Enterprise - Sale of goods, property and services by a VAT
exempt supplier from the Customs Territory, to a PEZA registered enterprise
shall be treated exempt from VAT, pursuant to Sec. 109, in relation to Sec.
236, NIRC, regardless of whether or not the PEZA registered buyer is subject
to taxes under the NIRC, or enjoying the 5% special tax regime, or a
registered manufacturer-exporter the Cross Border Doctrine of the VAT
System to the contrary notwithstanding.

3. Sales made by a PEZA Registered Enterprise-

A. Sale of goods by a PEZA registered enterprise, to a buyer from the
Customs Territory ( i.e., domestic sales)- This case shall be treated as a
technical importation made by the buyer. Such buyer shall be treated as
an importer thereof and shall be imposed with the corresponding import
taxes (i. e., VAT or VAT plus excise tax, as the case may be), pursuant to
Sec. 107, Title IV and VI, NIRC, in relation to Sec. 26, RA 7916, as
implemented by Sec. 2, Rule VIII, Part V of the PEZA rules and
regulations. The registered enterprises gross income earned therefrom
shall be subject to the 5% special tax pursuant to Sec. 24 of RA 7916:
Provided, however, that its sales in the Customs Territory do not exceed
the threshold allowed or permitted for such sales , pursuant to the pertinent
provisions of the PEZA rules and regulations: Provided, further, that for
income tax purposes, if such sales should exceed the threshold, its income
derived from such excess sales shall be imposed with the normal income
tax pursuant to the provisions of Title II, NIRC: Provided, further, that in
computing for the income tax due on such excess sales, its net income
from such excess sales shall be determined in accordance with the method
of general apportionment pursuant to provisions of Sec. 50(NIRC).

B. Sale of Services by a PEZA Registered Enterprise to a Buyer from the
Customs Territory - This type of transaction is not embraced by the 5%
special tax regime governing PEZA registered enterprises pursuant to RA
No. 7916, as implemented by the PEZA rules and regulations; hence, such
sellers shall be subject to the 10% VAT, pursuant to Section 108 or to the
percentage tax, pursuant to Title V, whichever is applicable, and to the
normal income tax on income derived therefrom, pursuant to Title II,
NIRC.
Such income tax shall be computed in accordance with the method of
general apportionment provided in the immediately preceding paragraph.

C. Sale of goods, by a PEZA registered enterprise, to another PEZA
registered enterprise (i,e., Intra-Ecozone Sales of Goods) - Its sale of
goods or property to another zone enterprise shall be exempt from VAT,
pursuant to Sec. 109(q), NIRC, in relation to Sec. 24, RA 7916, as
implemented by Sec. 1, Rule VIII, Part V of the PEZA implementing rules
and regulations.

D. Sale of Service, by Ecozone enterprise, to another ecozone enterprise
(Intra-Ecozone Enterprise Sale of Service):

(a) If PEZA registered seller is subject to the 5% Special Tax Regime-
Exempt from VAT or any percentage tax, pursuant to Sec. 24, RA
7916.
(b) If PEZA registered seller is subject to taxes under the NIRC- Subject
to zero percent (0%) VAT pursuant to the Cross Border Doctrine of
the VAT System, regardless of the type or class of PEZA registration
of the PEZA enterprise buyer, since the use for or benefit from such
purchase of service of service shall eventually be translated into
actual export of goods (i. e., shipment of goods to a foreign country,
which is subject to zero percent(05) VAT, or translated into technical
export of goods (i. e., sale of goods to a buyer from the Customs
Territory, which is treated as importation by such buyer, hence,
subject to 10% VAT against the said buyer).






Figure 1- Transactions with ECOZONE enterprises







Transaction I
Various
Suppliers (A)

Supplier
of Goods
(B)

Service
Contractor
(C)
Transaction 2
Transaction 3
Transaction 5
Transaction 6
Transaction 4

ECOZONE
Enterprise
(D)
Foreign Country
(E)





















Transaction 1- VAT registered suppliers (A) sell goods to other VAT registered
persons (B) and (C). The output tax shifted by (A) may be claimed as input tax credit by
(B) and (C) against their output tax on their respective sales to the Ecozone enterprise
(D).

Transaction 2- A VAT registered person (B) sells goods to an Ecozone enterprise
(D). The sale qualifies for zero rating. The exemption of Ecozone enterprise (D) from
direct and indirect internal revenue taxes effectively subjects the sales of the VAT
registered person (B) to zero percent.

Transaction 3- An Ecozone enterprise (D) sells goods to a VAT registered person
(B) in the Customs Territory. The goods are considered as imported from a foreign
country ( the Ecozone). It is subject to 10% VAT imposed on imported goods.

Transaction 4- A VAT registered contractor (C) supplies service to an Ecozone
enterprise (D). The transaction qualifies for zero rating.

Transaction 5- The Ecozone enterprise (D) exports merchandise to a Customer
(E) in a foreign country. The transaction is exempt under a special law. It is not eligible
for zero rating because the enterprise (D) is not a VAT registered person.

Transaction 6- An Ecozone enterprise (D) imports goods from a supplier (E)
abroad. This is likewise exempt from VAT under a special law.


4.0 Income tax return filing and payment of income tax

The same rules and regulations of the general law ( RA 8424- Tax Reform Act of
1997) apply to the filing of income tax return and payment of income tax of ecozone
enterprises whether entitled to income tax holiday or not. Likewise, the same rules and
regulation of the general law applies to the place and mode of payment of income tax.

Individuals staying or working inside the Ecozones are subject to taxes under RA
8424 (NIRC) and the Local Government Code.

References

Deoferio, Victor A. and Mamalateo, Victorino C.(2000) The Value Added Tax in the
Philippines, Info Solutions Research Center, p. 198,200-201

Revenue Memorandum Circular 74-99











Charles C. Onda is a Certified Public Accountant ( CPA ) affiliated as Part-time Faculty
(Assistant Professorial Lecturer 5 ) at the Accountancy Department, College of Business
Administration of De La Salle University-Dasmarias (DLSU-D-D/CBA) in Dasmarias,
Cavite. He is also a Revenue Examiner at the Bureau of Internal Revenue (BIR).