TAX EXEMPTIONS AND TAXABILITY OF PEZAREGISTERED ENTERPRISES AND SERVICE ESTABLISHEMENTS OPERATING WITHIN THE ECOZONE

Rules of Interpretation
(Section 5, Local Government Code)

a) Any provision on the power of LGU shall be liberally interpreted in its favor, and in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the lower LGU. Any fair and reasonable doubt as to the existence of the power shall be interpreted in favor of LGU concerned. b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption, incentive or relief granted by any local government unit pursuant to the provisions of this Code shall be construed strictly against the person claiming it. c) The general welfare provision in this Code shall be liberally interpreted to give more powers to LGUs in accelerating economic development and upgrading the quality of life for the people in the community.

Limitations of Taxing Powers of LGUs

(Local Government Code)

Section 16. General Welfare. - Every LGU shall exercise the powers expressly granted, those necessary implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and effective governance, and those which are essential to the promotion of the general welfare.

Section 133. Common Limitations of the Taxing Powers of LGUs. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years respectively from the date of registration.

Fiscal Incentives on Businesses Located within the Ecozone (RA 7916 as amended by RA 8748)

SEC. 23. Fiscal Incentives. Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987.
Two (2) sets of fiscal incentives granted under the afore-cited provisions of law can be summarized as follows: 1) Those provided for under Book VI of Executive Order No. 226, including but not limited to an Income Tax Holiday (ITH) of 4 to 6 years depending on whether an entity is registered as a pioneer or non-pioneer enterprise. Those under P. D. No. 66, as amended, and Section 24 of R. A. 7916 which includes the 5% preferential tax on gross income earned, which is in lieu of the national and local taxes.

2)

Fiscal Incentives on Businesses Located within the Ecozone (RA 7916 as amended by RA 8748)

Articles 39 and 78 of E. O. 226 provides as follows:

Article 39. Incentives to Registered Enterprises. All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment: (a) Income Tax Holiday. (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, x x x.

Fiscal Incentives on Businesses Located within the Ecozone (RA 7916 as amended by RA 8748)

SEC. 24. Exemption from National and Local Taxes.Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: a. Three percent (3%) to the National Government; b. Two percent (2%) which shall be directly remitted by the business establishments to the treasurers office of the municipality or city where the enterprise is located.

Fiscal Incentives on Businesses Located within the Ecozone (RA 7916 as amended by RA 8748)

Article 78. Additional Incentives. A zone registered enterprise shall also enjoy all the incentive benefits provided in Article 39 hereof under the same terms and conditions stated therein. In addition zone registered enterprises shall also be entitled to the following: (a) Exemption from Local Taxes and Licenses. Notwithstanding the provisions of law to the contrary, zone registered enterprises shall, to the extent of their construction, operation or production inside the zone be exempt from the payment of any and all local government imposts, fees, licenses or taxes except real estate taxes x x x.

Applicable National and Local Taxes

(RA 7916 as amended by RA 8748)

SEC. 25. Applicable National and Local Taxes. All persons and services establishments in the ECOZONE shall be subject to national and local taxes under the National Internal Revenue Code and the Local Government Code.

Service establishments refers to business entity or concerned within the ECOZONE such as but not limited to customs brokerage, trucking/forwarding services, parcel services, janitorial services, security services, insurance, and/or banking services, consultancy services, restaurants or such other services within the ECOZONE, xxx, duly registered and/or licensed by the PEZA x x x. (PEZA letter dated 06 March 2013 addressed to BLGF)

Applicable National and Local Taxes

(RA 7916 as amended by RA 8748)

Income from activities not entitled to ITH or the 5% GIT incentive refers to income derived from activities unrelated to the PEZA-registered business and therefore, subject to national and local taxes. (PEZA letter dated 06 March 2013 addressed to the Executive Director, BLGF)

Taxability of Machinery and Equipment

1) An eligible enterprise is exempted from payment of real property taxes on machineries and equipment they acquire for use in their production operations, during the first 3 years use of such machinery and equipment. 2) An eligible enterprise will have to pay the real property tax on a machinery and equipment only on the fourth year of use/operation of such machinery and equipment, except in cases where the eligible economic zone enterprise is already exempted from payment of the real property tax on the machinery and equipment by virtue of it having graduated to the availment of the 5% GIT incentive.

SITUS OF THE TAX

Enterprises operating within the EOCOZONEs with principal office outside of ECOZONE (factory/plant)
o

If no sales are made and recorded in the Head/Principal Office, a corporation should pay its business taxes in full to the local government unit where the ECOZONE is located and where the sales are made and recorded. The 30%-70% rule applies only where the principal office conducts sales transactions and records the said sales therein.

SITUS OF THE TAX

Enterprises operating within the EOCOZONEs with principal office outside of ECOZONE (factory/plant)
o

If Liaison office is maintained, LGU concerned shall not share in the business tax paid by a PEZA enterprise/taxpayer, considering that said office is not included among those mentioned in the law (LGC) and the Implementing Rules and Regulations (IRR) as entitled to a share of the tax.

LGU Office may collect Mayors permit fee and other regulatory fees provided for under existing local tax ordinance of that city.

CASE 1: Affinity Express Philippines, Inc.

Facts: For the taxable years 2007 to November 2009, Affinity maintained its office, operation and conducted its business within the territorial jurisdiction of the City Government of Pasig, specifically at the Orient Square Bldg., Ortigas Centre, Pasig City, a PEZA registered office building under PEZA Certificate of Registration No. -07-43-IT; Starting November 2009 up to present, Affinity ceased to hold its office in Pasig City and start to conduct its business and/or operation at UP Science and Technology Park (North), Quezon City under PEZA Certificate of Registration No. -07-43-IT;

CASE 1: Affinity Express Philippines, Inc.

Facts: For On the other hand, the Office of the City Treasurer-Pasig City required Affinity to secure and/or pay its Mayors permit, local business taxes and/or permit fees for taxable years 2009 to 2010; An assessment was issued by the Office of the City Treasurer-Pasig City and required Affinity to pay (1) P124,925.92 for deficiency tax for the year 2009; and (2) P1,350,014.04 for taxable year 2010;

CASE 1: Affinity Express Philippines, Inc.

Facts: Accordingly, Affinity paid a total amount of One Million Four Hundred Seventy Four Thousand Nine Hundred Thirty Nine Pesos and 96/100 (P1,474,939.96), broken down as follows: Date Paid Deficiency tax for 15 March 2010 2009 Taxable Yea 2010 15 March 2010 Amount and Purpose P124,925.92 P1,350,014.04 for LBT & and permit fees P1,474,939.96

TOTAL

CASE 1: Affinity Express Philippines, Inc.

Issues: WON Affinity as a PEZA-registered non-pioneer enterprise is entitled for a refund for LBT and regulatory fees paid to Pasig City in 2009-2010; and Whether Affinity is entitled to a cash refund. Ruling: Affinity as PEZA-registered non-pioneer enterprise should not have been assessed for regulatory fees and LBT for the period 2009-1010 considering it still enjoy ITH exemption under its PEZA Certificate of Registration in relation to Section 23 of R.A. No. 7916 and Articles 39 and 78 of E.O. No. 226, the Omnibus Investment Code.

CASE 1: Affinity Express Philippines, Inc.

Ruling: Affinity is entitled to a cash refund for the amount paid to Pasig in 2009-2010 considering that it no longer operates within Pasig City hence no future obligation in the form of taxes and regulatory fees may be envisaged. Provided, however, that the requirements under Section 196 of the LGC had been complied with. Legal basis:

Section 196, LGC Article 286, IRR of LGC Sec. 23 of RA 7916 Arts. 39 & 78, EO 226

PEZA MC No. 2004-24 MOA between PEZA and City of Pasig dated 29 January 2010

CASE 2: Affinity Express Philippines, Inc.

Facts: Affinity Is a PEZA-registered non-pioneer IT enterprise with Certificate of Registration No. 07-43-IT. It previously operated in Pasig City and terminated its operation in November 2009 when it transferred to UP Science and Technology Park (UP Technohub) in Quezon City. Notwithstanding RA No. 7916 and PEZA MC No. 2004-24, Affinity was required by Pasig City to pay LBT from 2nd quarter of 2007 to 4th quarter of 2009 and the Quezon City Treasurers Office also assessed Affinity for LBT from 2010 to 2012, which the enterprise both paid.

CASE 2: Affinity Express Philippines, Inc.

Facts: Affinity, in view of incentives and exemptions provided under RA 7916 as amended by RA 8748 on PEZAregistered IT enterprises, claimed for refund based on its view that it was erroneously assessed by the Treasurers Offices of Quezon City for payment maid, as follows: Year 2010 2011 Official Receipt OR #A3CORO764217-3 OR # AOCOR1526845-0 TOTAL Amount Paid P1,308,759.67 1,287,176.45 P2,595,935.92

CASE 2: Affinity Express Philippines, Inc.

Issue: Whether Affinity, as a PEZA-registered non-pioneer IT enterprise entitled for a refund of the amount paid for LBT for CYs 2010-2011. Ruling: There was no basis for the collection of the 2% LBT on the gross receipts of Affinity for CYs 2010 and 2011 considering that it was still enjoying its ITH as a nonpioneer IT enterprise at that time and therefore, entitled for a refund of the amount of P2,595,935.92 it paid to Quezon City.

CASE 2: Affinity Express Philippines, Inc.

Basis: SC Decision (Ramie Textile, Inc. v. Hon, isamel Mathay, Sr., GRN L-32364, April 30, 1979) The quasi-contract of solution-indebiti is one of the concrete manifestations of the ancient principle that no one shall enrich himself unjustly at the expense of another. Hence, it would be unedifying for the government, that knowing it has no right at all to collect or to receive money for alleged taxes paid by mistake, it would be reluctant to return the same.

CASE 2: Affinity Express Philippines, Inc.

Basis: Book VI, EO No. 226:

Section 24. Exemption from National and Local taxes

Corporate income tax holiday (ITH) for four (4) years for original project effective on the committed date of start of commercial operations, or the actual date of start of commercial operations, whichever is earlier; ITH entitlement for the original project can also be extended for another three (3) years provided specific criteria are met for each additional year and prior PEZA approval is obtained; duly approved and registered Expansion and New projects are entitled to a three-year, and four-year ITH, respectively;

CASE 2: Affinity Express Philippines, Inc.

Basis: After the lapse of ITH, the following incentives shall apply: Exemption from national and local taxes, in lieu thereof payment of five percent (5%) final tax on gross income as provided in Section 24 of R. A. No. 7916 and Rule XX of the Rules and Regulations to Implement R. A. No. 7916, x x x. .

CASE 2: Affinity Express Philippines, Inc.

Basis: Sec. 24, RA 7916 as amended: Section 24. Exemption from National and Local taxes Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a) Three percent (3%) to the National Government. (b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurers office of the municipality or city where the enterprise is located.

CASE 3: Yazaki-Torres Manufacturing, Inc.

Facts: The City Treasurer of Calamba assessed YTMI for LBT on its Regular Rate revenue reflected in the Income Tax Returns filed with the BIR applying Section 25 of RA No. 7916 as amended, with provides:

Section 25. Applicable National and Local Taxes. All persons and services establishments in the ECOZONE shall be subject to national and local taxes under the National Internal Revenue Code and the Local Government Code.

CASE 3: Yazaki-Torres Manufacturing, Inc.

Facts: The City Treasurer further claimed that the regular rate revenue is subject to tax considering that it was assessed for such by the BIR based on a regular corporate rate of 30%. It was submitted that the revenue was earned from activities outside of YTMI on the other hand, claimed that Sec. 25, supra, applies only to non-PEZA enterprises which are not entitled to the exemptions under Sec. 24 of the same Law.

CASE 3: Yazaki-Torres Manufacturing, Inc.

Issues: WON the regular rate under the TAXABLE portion of the Annual Income Tax Return of YTMI is subject to local business tax. Ruling: In a letter dated March 18, 2013 of the BLGF addressed to Ms. Eufemia H. Biscocho, Special Assistant to the Division Head, Finance Division, YTMI, BLGF expressed the view that income of YTMI classified as regular rate is subject to LBT imposed under the duly-enacted tax ordinance of the City of Calamba and found the assessment made of the CTO in full accord of the law.

CASE 3: Yazaki-Torres Manufacturing, Inc.

Basis: PEZA MC No. 2005-032 If the gain is derived from activity not entitled to either ITH or 5% GIT then subject to tax. The same rule also applies to other kinds of income realized from other sources by a PEZA-registered enterprise. Note: The regular rate appearing in the ITR was considered by CTO-Calamba as income realized by YTMI from sources not related to its registered activities or earned not within the ECOZONE thus it was subjected to local business tax.

CASE 3: Yazaki-Torres Manufacturing, Inc.

Basis: Letter dated 06 March 2013 of Atty. Procolo M. Olaivar, Manager, Legal Service Group, PEZA, which states: Income from activities not entitled to ITH or the 5% GIT incentive refers to income derived from activities unrelated to the PEZA-registered business and not covered by any PEZA incentive is subject to national and local taxes.