Let's Talk Tax

Dear PEZA... Love, unregistered activities

February 14, Valentine’s Day. To some of us, it’s the most romantic day of the year. Others dread it. But to Philippine Economic Zone Authority (PEZA)-registered entities, it’s a mere 14 days before the submission of its latest requirement.

PEZA doesn’t like playing Cupid as its Enterprise Operations Department (EOD) recently issued EOD Advisory No. 2017-001-A, reminding all PEZA-registered entities to strictly adhere to their respective PEZA registration and supplemental agreements or valid letters of approval or authority (LOAs). The advisory also states that they should only engage in their PEZA-registered activities, which shall be undertaken within the confines of the PEZA zone. So no love outside the zone.

The advisory, which stemmed from EOD Advisory No. 2017-001 issued on Jan. 11, further requires erring PEZA entities to inform PEZA in writing about the list of activities and the locations that are beyond the scope of the respective registration and supplemental agreements or the LOAs. Otherwise, a notarized certification shall be submitted as proof of the PEZA entity’s full compliance.

Will incidental activities such as the sale of scrap materials be included in the written notice? According to the Court of Tax Appeals (Hoya Glass Disk Philippines, Inc. [March 2016] and Nidec Copal Philippines Corp. [October 2007]), sale of scraps, rejects and seconds bear the risk of being taxed at the regular corporate income tax rate of 30% instead of the preferential gross income tax rate of 5% or income tax holiday, whichever is applicable. In contrast, PEZA interprets scrap sales that undergo processing or are used in production as subject to 5%. We hope that under PEZA’s new leadership, PEZA entities will be able to fully enjoy their incentives for such types of sale.

Will local sales of some PEZA entities be at risk? Under current rules, PEZA entities can continue to operate within the economic zone, provided that the percentage of local sales with respect to export sales does not exceed the agreed range as stipulated in the respective registration and supplemental agreements.

How will the advisory influence the foreign investor outlook? According to the Philippine National Statistical Coordination Board, foreign direct investment in the Philippines in the last quarter of 2016, averaging P40 billion from 2000 to 2016 with 2012 the peak at P230 billion and 2009 the low at P3 billion. Nevertheless, employment opportunities are boosted and symbiotic networks among foreign and local industries are strengthened over the years through the more than 3,000 PEZA-registered entities nationwide, spread over 73 manufacturing economic zones, 243 information technology parks, 21 agro-industrial economic zones, 19 tourism economic zones and two medical tourism parks.

How will the advisory impact the Bureau of Internal Revenue’s interpretation of taxation for PEZA entities? We hope for a coherent interpretation as BIR and PEZA had their coordinated agreement on this almost a decade ago. The two entities institutionalized their coordination efforts to effectively administer the preferential gross income tax rate of 5% and income tax holiday incentives under a Memorandum of Agreement signed on March 1, 2007.

How will the advisory influence the succeeding rules and regulations of PEZA as the governing body? In this aspect, attaining a sustainable equilibrium between fiscal compliance and investment growth is critical. Roughly six months ago, PEZA mandated the submission of the annual tax incentives report in a collaborative effort with BIR, Department of Finance, Department of Trade and Industry and National Economic and Development Authority to monitor the fiscal and economic impact of the incentives granted to existing PEZA entities while continuously searching for ways to attract more investments.

Interestingly, the new requirement is only still applicable to PEZA entities registered within the Luzon areas, as clarified by PEZA Cebu.

The deadline for submission is Feb. 28, an extension of the original submission date which was Jan. 31.

Sheena Marie D. Daño is a manager of the Cebu and Davao Branches of Punongbayan & Araullo.

 

As published in Business World, dated 14 February 2017