by: Arnold P. Supilanas
(Published in BusinessWorld on October 16, 2007)
The impact of taxation has always been a major consideration why some taxpayers decide to register with the Philippine Economic Zone Authority (PEZA) and locate in a PEZA zone.
The tax savings may indeed be substantial because of the tax incentives accorded to qualified PEZA-registered firms.
Instead of paying the usual 35% income tax, a PEZA-registered enterprise will enjoy an income tax holiday for the first years of its operation. After the lapse of this income tax holiday period, the entity would be subject to 5% tax on gross income. Other firms may opt to be subjected directly to the 5% tax on gross income.
These national taxes are usually the issues considered by taxpayers in evaluating whether or not it is worthwhile to locate in a PEZA zone. What about the local taxes? Are PEZA-registered entities subject to local business taxes and other local charges that these are not usually considered?
In the past, there have indeed been disputes on this matter between PEZA-registered enterprises and some local government units (LGUs) in areas where the PEZA zones are located. Also, some PEZA-registered enterprises are uncertain whether or not they qualify for exemption from local taxes.
For companies paying the 5% tax on gross income, no less than the Special Economic Zone Act of 1995 or the PEZA Law has declared that no taxes, both local and national, shall be imposed on business establishments operating within the ECOZONE. The 5% tax is in lieu of all taxes, including local taxes. It is clear therefore that PEZA-registered enterprises paying the 5% tax on gross income are not liable for local business taxes and other charges normally due to the local government units. However, this exemption only covers companies under the 5% tax regime.
What about the PEZA-registered entities enjoying income tax holiday? Income tax holiday incentives imply exemption from income tax. This would mean that an entity entitled to it enjoys exemption from income tax only, unless also expressly exempted from other taxes.
This is not so for enterprises registered with PEZA and operating within a PEZA zone. As mentioned earlier, a PEZA-registered entity may opt to be subjected directly to the 5% tax on gross income or avail of the income tax holiday incentives first. This income tax holiday incentive is based on Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987. EO 226 exempts zone registered enterprises, to the extent of their construction, operation or production inside the zone, from the payment of any and all local government imposts, fees, licenses or taxes except real property taxes.
There is therefore no distinction between a PEZA-registered entity enjoying an income tax holiday or subject to the 5% tax on gross income in so far as local taxation is concerned. Both are exempt from the payment of any and all local government imposts, fees, licenses or taxes.
The Philippine Economic Zone Authority itself clarified in its Memorandum Circular No. 2004-024, dated September 24, 2004, that PEZA-registered enterprises including those availing of the income tax holiday incentives, are exempted from payment of all local taxes, licenses, imposts, and fees, except real estate taxes.
The said circular even exempts PEZA-registered companies from securing the required local government permits. Despite this pronouncement though, there are still some cities and municipalities requiring PEZA-registered entities to obtain local government permits and pay the corresponding permit fees. If you are a locator within these cities and municipalities, you would still be required to obtain business permits and pay the corresponding permit fees, but not the local business tax.
While local business tax rates are insignificant when compared with the national taxes, the amounts could also be substantial considering that they are based on the gross sales/receipts. Local business taxes should also be considered by these companies in evaluating whether or not to locate in a PEZA zone.
On the part of the local government units, while they have the power to create their sources of revenue, they should grant the PEZA locators the incentives accorded under the law and free these locators from the dilemma of paying or not paying local taxes, fees and charges.