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Tax treatment of freeport zone enterprises

Tax treatment of freeport zone enterprises

by Irwin C. Nidea, Jr.

Another knot to warrant the full operation of the Clark, Subic and Poro Point Freeport Zones as  “free ports” has been secured with the issuance of  Revenue Memorandum Circular (RMC) 50-07 by the Bureau of Internal Revenue (BIR).

The RMC clarified the tax treatment of transactions of Freeport enterprises.  The rules  were laid down in a manner that upholds their status as “separate customs territories” and promotes the free flow or movement of goods and capital within, into and out of the zones pursuant to the “cross-border” principle of the Philippine value-added tax (VAT) law .

For a long time, the tax treatment of locators within the Clark and Poro Point  as well as other special economic zones (SEZs) under the  Bases Conversion Development Authority (BCDA) Act was  in a quagmire. 

On the basis of Executive Order (EO) No. 80 and Board Resolution No. 93-05-034 of the BCDA, the incentives enjoyed by Subic SEZ enterprises under the BCDA Act or Republic Act (RA) 7227were extended to the Clark, Poro Point and John Hay SEZ enterprises.

These locators were caught in a surprise when the  Supreme Court, in its July 29, 2006 decision (Coconut Refiners Association, Inc., et.al., v Hon. RubenTorres, et.al., GR 132527) declared null and void the tax incentives enjoyed by the Clark SEZ locators.  The SC reiterated its arguments in the case of John Hay Peoples Alternative Coalition v. Victor Lim, and ruled that the incentives under RA No. 7227 are exclusive only to locators within the SSEZ.

In a move to reverse the impact of the SC decisions and restore the status of these economic zones, the legislature enacted RA 9400, otherwise known as An Act Amending the BCDA Act to provides tax incentives to ecozone locators similar, to some extent, to those enjoyed PEZA entities.

RMC 50-07 clarified the tax treatment of sale, barter or exchange of goods or properties or sale or exchange of services made by suppliers from the customs territory to enterprises registered in the Subic, Clark and Poro Point Freeport zones, and vice versa.

This RMC addressed the  following concerns, among others:
  • The  sale, barter or exchange of goods or properties into the freeport zones by suppliers/contractors from the customs territory shall be considered as export sales.  
  • Sale of goods and services to entities to a freeport zone-registered enterprise shall be  VAT zero-rated if the seller is a VAT entity, and exempt  if the seller is a non-VAT entity. 
  • Sale of goods and services within the zone between freeport zone enterprises or residents shall be  exempt from VAT.
  • Sale of goods to buyers in the customs territory shall be considered technical importation.  Thus, the buyer shall be liable to duties and taxes on such importation.
  • The sale of service and lease of properties to a customs territory entity shall be VAT-exempt if rendered within the zone or if the property leased is located within the freeport.  If the property is located outside the freeport, the sale of service and lease of properties to customs territory is treated as royalties subject to 12% VAT.  It is not clear, however, if the income derived therefrom is subject to withholding VAT.

Freeport enterprises may generate income from sources within the Customs Territory of up to 30% of its total income from all sources; provided, that should an its income from sources within the Customs Territory exceed 30% of its total income from all sources, then it shall be subject to the regular income tax law.  Furthermore, customs duties and taxes must be paid with respect to transactions, receipts, income and sales of articles to the customs territory.

It is hoped that RA 9400 and RMC 50-07 properly addressed the negative impact of the temporary confusion in the status of the zones and restored the  investor’s confidence. 

(The author is a tax manager at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail the author or call 886-5511.)