In my little over a year of experience as a tax professional, I have noted the peculiarities of the  taxation of Philippine Economic Zone Authority (PEZA) registered businesses. This peculiarity creates conflicting resolutions and interpretations of tax rules issued by Bureau of Internal Revenue (BIR) and PEZA. Unfortunately for PEZA entities and taxpayers transacting with PEZA entities, the conflict creates uncertainty in the tax treatment of some of their activities.  

Considering that BIR and PEZA are both government agencies with mandated powers and duties, a good way to resolve the confusion caused by these conflicting interpretations is to determine their respective powers and duties in relation to the taxation of PEZA entities.

In general, the power and duty to assess national internal revenue taxes are lodged with the Commissioner of Internal Revenue (CIR) or his authorized representatives. It follows then that the CIR or his authorized representative has the power to audit and assess PEZA entities. Specifically, Revenue Regulations ("RR") No. 01-00, as amended, has emphasized the CIR’s or his authorized representative’s power to audit the 5% special gross income tax (GIT), as well as his power to abate, cancel, or compromise the payment of the said tax, including his power to implement special voluntary payment program/s for last priority in audit.

In the case of AGM Packaging System Ltd. Corp. vs. Commissioner of Internal Revenue (CTA Case No. 1743 dated 29 March 2019), the court disregarded AGM’s contention that PEZA has the sole authority to declare upon factual compliance that the company is a bona fide PEZA enterprise and its entitlement to tax incentives. The court recognized the CIR’s authority, in the exercise of his power to assess, to determine whether the company is qualified to avail of the preferential income tax rate granted to PEZA entities.

Considering the pronouncement in the said case, what then is the role of PEZA as to the taxation of PEZA entities?

If we look at the listed powers and duties of PEZA under Section 13 of RA 7916, as amended, it does not really mention the specific authority of PEZA when it comes to the taxation of PEZA entities. However, item (h) of the same section provides that PEZA has the authority to recommend to the local government units or other appropriate authorities the location, incentives, basic services, utilities and infrastructure required or to be made available for said entities. Following this provision, we can infer that PEZA’s role in the taxation of PEZA entities is merely recommendatory.

Evidently, PEZA is mandated to issue certification on an annual basis confirming that an entity is a bonafide PEZA establishment entitled to the 5% special tax on gross income pursuant to Section 5(c) of RR No. 01-00.   

Take note, however, that since the distinction of powers and duties between BIR and PEZA is general in nature, certain tax issues remain unresolved up to this date. This is where BIR and PEZA are somehow given flexibility to issue conflicting resolutions and interpretations. An example would be the issue of whether scrap sales are subject to 5% GIT or 30% regular corporate income tax (RCIT).

PEZA, through its Director General, issued PEZA Memorandum Circular No. 032-05 stating that sales of production rejects and seconds and recovered waste/scrap are considered covered by the registered activity of  an export enterprise; hence, they are subject to 5% GIT.

On the other hand, in the CTA case of Subic Water Sewerage Co., Inc. vs. Commissioner of Internal Revenue (CTA Case No. 9074 dated 14 August 2019) adopting the ruling in the case of Commissioner of Internal Revenue vs. Nidec Copal (CTA Case No. 250 dated 1 October 2007), the court held that scrap sales although incidental to the registered activity of the PEZA entity are subject to 30% RCIT pursuant to Section 8 of the PEZA Rules and Regulations.

Notwithstanding these CTA cases, the BIR issued rulings, such as BIR Ruling [DA-(IL-038) 726-09] dated 09 December 2009, adopting the PEZA circular and subjecting the scrap sales to 5% GIT. Furthermore, some PEZA entities have received confirmation from PEZA that their scrap sales are subject to GIT. Thus, PEZA entities are still confused as to the proper tax treatment of their scrap sales resulting in deficiency tax assessments during BIR audit.

Nonetheless, take note also that there are certain tax issues resolved by BIR and PEZA resolutions and interpretations as they clearly define BIR and PEZA’s respective roles and duties in line with their general powers and duties such as in case of the issuance of VAT zero-rating certification.

Prior to CREATE Law and when the “cross border doctrine” was still applicable, securing VAT zero-rating certification was not mandatory. However, with the passage of the CREATE Law which qualified the VAT zero-rating of local purchases of PEZA entities, securing a VAT zero-rating became mandatory.

Initially, local suppliers of PEZA entities had to secure VAT zero-rating certification from BIR in addition to the VAT zero-rating certification issued by PEZA. However, with the effectivity of RR No. 03-2023 on April 28, 2023, they are no longer required to seek approval from BIR. This is without prejudice, however, on the BIR’s authority to conduct post audit investigation or verification as to the validity of the zero-rating.

With the change of BIR rules, the effect of RR No. 03-2023 on pending VAT zero-rating applications with the BIR became unclear to taxpayers. To resolve this, BIR issued Revenue Memorandum Circular (RMC) No. 80-2023. Pursuant to the RMC, applications for VAT zero-rating which have been received by BIR prior to April 28, 2023 and with a VAT zero-rating certificate from Investment Promotion Agency, such as PEZA, will be accorded VAT zero-rating treatment from the date of filing, subject to post audit by BIR. On the other hand, transactions that were already consummated prior to April 28, 2023 but without an approved application for VAT zero-rating and disapproved applications prior to April 28, 2023, will be subject to 12 percent VAT.  

With the issuance of RR No. 03-2023 and RMC No. 80-2023 which clearly defined the respective roles and duties of BIR and PEZA on VAT zero-rating of local purchases of PEZA entities, let us all hope that more regulations will be issued, and cases will be promulgated to resolve all the tax issues peculiar to PEZA entities.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


As published in BusinessWorld, dated 19 September 2023