Pending rules on taxability of ecozone companies

Pending new rules on taxability of ecozone companies

Revenue memorandum circulars (RMCs) are issued by the Bureau of Internal Revenue (BIR) to clarify tax issues arising from interpretations of the provisions of a law.  Although the BIR has the power to interpret tax laws, they cannot impose or collect taxes beyond the intention of the law.

Recently, the BIR made public a draft RMC to clarify the taxation of companies that are registered with the Philippine Economic Zone Authority (PEZA) under Republic Act (RA) No. 7916 as amended, and under the Bases Conversion and Development Act or RA No. 7227.  Ecozone companies under BCDA include locators in Subic, Clark, Poro Point, John Hay, Morong special economic zones and freeport and other zones that may be proclaimed.

Among the significant clarifications proposed by the RMC are as follows:

• Ecozone companies shall be subjected to documentary stamp tax (DST).  As explained by BIR, DST is a tax levied on the document or upon the transaction that gave rise to the execution of a document.  As such, its imposition is not reckoned on the realization of income relating to the registered activity of the registered enterprise.
  
• Ecozone companies shall be subjected to excise tax.  It is not a tax levied on the income realized by an enterprise from its registered activity which is covered by the preferential tax treatment but rather, it is a tax levied on excisable products locally extracted or produced, which liability accrues at the time of removal or extraction of the products from the place of production/extraction, or excisable products imported, which liability accrues at the time of removal of the goods from the custody of the Bureau of Customs.
  
• Ecozone companies shall be subjected to VAT on its importation since this tax is levied not on the basis of the gross sales/revenues or income realized by the registered enterprise but is imposed on the importation of goods.
  
  

Let us revisit the laws that granted tax incentives to Ecozone-registered enterprises.

Under Section 24 of RA No. 7916, as amended, no taxes, local and national, except real property taxes on land owned by developers, shall be imposed on business establishments operating within the Ecozone. In lieu of those taxes, 5% of the gross income earned by all businesses and enterprises within the Ecozone shall be remitted to the national government and 3% and 2% respectively, to the municipality or city where the enterprise is located . Enterprises registered and operating pursuant to RA No. 7227 are accorded the same 5% preferential tax rate treatment.

The interpretation of these rules as expounded by BIR in various tax rulings has been quite clear.  While an ecozone-registered enterprise is still enjoying the income tax holiday incentive, it cannot avail itself of the “in lieu of all taxes” provision. Hence, it is still liable to pay DST and other taxes even if the taxable transactions or documents are intended for the registered activity of such company.

On the other hand, under the 5% gross income tax which is in lieu of all taxes, ecozone-registered enterprises are exempt from taxes, like the DST on transactions which are intended for its registered activity such as loan agreements, lease contracts, letters of credit, and issuance of shares of stocks during the period when it is already registered and enjoying the incentive.  The rulings and decisions also uphold the rule that whenever one party to the taxable document enjoys exemption from DST, the other party who is not exempt shall be the one directly liable for the tax.  Decisions issued by the tax court and even by the Supreme Court acknowledge the “in lieu” clause that should be enjoyed by ecozone locators.

It is, thus, understandable why ecozone locators are alarmed by the provisions of the proposed RMC.  Such new positioning of the BIR is now contradictory to the various court de cisions which had in terpreted the tax provisions in favor of the Ecozone companies.  It is also against the well-settled rule in law that “where the law does not distinguish, we ought not to distinguish”.

Initial information obtained from the BIR indicates that the proposed RMC is intended to cover only transactions of locators that are not registered for incentives.  However, such intent is not clearly provided in the RMC.  Based on experience, such vague rules may be subject to varying interpretations and, thus, may give rise to contentious assessments.

The effort of the BIR to improve its tax collection and meet its collection target is well appreciated because it will ultimately help improve our economy.  Such drive, however, should not push the BIR to continue to change its interpretations of the tax rules at the expense of the taxpayers.  There are indeed certain aspects of operations of ecozone enterprises where taxation is still not clear.  The clarifications should focus on these areas as they will help improve taxpayer’s compliance and, it is hoped, tax collections for BIR.