PEZA’s ‘in lieu of all taxes’
UNDER Section 24 of Republic Act No. 7816, also known as the Special Economic Zone Act of 1995, companies registered with the Philippine Economic Zone Authority (PEZA) such as those located in the Mactan Economic Processing Zones shall only be imposed a 5 percent special tax based on gross income earned, in lieu of all taxes, except the real property tax, upon the expiration of their income tax holiday.
The exemption is so broad to the extent that many investors assume that no taxes will be imposed on the transactions that they enter into. The realization that this is not so usually comes out late in the game when the Bureau of Internal Revenue (BIR) has already made an assessment for deficiency taxes.
Generally, the “in lieu of all taxes” provision grants exemption to PEZA-registered enterprises from both local and national taxes including income tax, capital gains tax, documentary stamp tax (DST) and the value added tax (BIR Ruling No. 067-04 dated 12 December 2004).
Tax exemptions in general are to be "strictly construed," that is, they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by Congress in granting the benefit. In a Court of Tax Appeals (CTA) case involving Philippine Airlines (CTA Case No. 45 dated February 28, 1956), however, the CTA has ruled that a provision of law imposing a tax in lieu of all taxes of any kind, nature or description, has been generally considered a commutation tax, which is a combination of two or more taxes, as an excise tax or franchise tax, payment of which would give rise to a privilege exemption from all other taxes (BIR Ruling Nos. UN-075-94 dated 28 February 1994; and DA-253-06 dated 12 April 2006).
What is controversial, however, is that the BIR has recently taken the position that the 5 percent preferential tax only applies to the PEZA registered enterprise’s operations within the Economic Zone relative to the entity’s registered activities. Thus, on March 5, 2008, the BIR made public a draft Revenue Memorandum Circular (RMC) stating that income which is not related to the entity’s PEZA registered activities shall be subject to the 30 percent regular income tax, the documentary stamp tax, excise tax, or the value added tax. The draft RMC however has yet to be finalized and implemented. Thus, the controversy continues.
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