UNIT 1: PREFERENTIAL TAXATION

Unit Learning
INTRODUCTION
Objectives
“If everyone is special, then we
are all special, and the whole idea By the end of this unit you
just lost all of its meaning.” - should be able to:
George Carlin

The unit covers the special • Identify the privileges

treatment bestowed by the
Philippine Government to the so-
granted to the special
called “special taxpayers” that may taxpayers;
range from taxpayers who served the • Compute the tax effects of
State well during their prime to
special type of businesses that the said privileges.
help drive the economy and
everything in between.

Welcome to Preferential Taxation.

TIMING

This unit is expected to consume 30 study hours - 25 hours for

reading and comprehension, and 5 hours for answering the
assessments.

EXPANDED SENIOR CITIZENS ACT (R.A.

9994, as amended)
DECLARATION OF POLICIES AND OBJECTIVES

As provided in the Constitution of the

Philippines:

a. It is the declared policy of the

State to promote a just and
dynamic social order that will
ensure the prosperity and independence
of the nation and free the people from
poverty through policies that provide adequate social
services, promote full employment, a rising standard of
living, and an improved quality of life for all.
b. It is further declared that the State shall promote social
justice in all phases of national development and values the

Page 7
 dignity of every human person and guarantees full respect for
human rights.
c. In all matters relating to the care, health, and benefits of
the elderly, the State shall adopt an integrated and
comprehensive approach to health development which shall
endeavor to make essential goods, health and other social
services available to all people at affordable costs giving
priority for the needs of the underprivileged sick, elderly,
disabled, women and children.
d. Further, it is declared that though the family has the duty to
take care for its elderly members, the State may also help
through just programs of social security.

Who is a senior citizen?

The term “senior citizen” or “elderly” refers to any Filipino

citizen who is a resident of the Philippines, and who is sixty
(60) years old or above. It may apply to senior citizens with
“dual citizenship” status provided they prove1 their Filipino
citizenship and have at least six (6) months residency in the
Philippines. (Article 5.1, R.R. 7-2010)

A senior citizen may prove his/her status in order to avail of

the benefits through any of the the following identification
documents:

a. Senior Citizens’ Identification Card issued by the Office of

Senior Citizens Affairs (OSCA) in the city or municipality
where the elderly resides;
b. The Philippine passport of the elderly person or senior
citizen concerned; and
c. other valid documents that establish the senior citizen or
elderly person as a citizen of the Republic and at least 60
years of age, which shall include but not be limited to the
following government-issued identification documents
indicating an elderly’s birthdate or age: driver’s license,
voters ID, SSS/GSIS ID, PRC card, postal ID. (Article 5.5,
R.R. 7-2010)

PRIVILEGES FOR THE SENIOR CITIZENS

TWENTY PERCENT (20%) DISCOUNT AND VAT EXEMPTION

The senior citizens shall be entitled to the grant of twenty

percent (20%) discount and to an exemption from the value-added
tax, IF APPLICABLE, on the sale of the goods and services, from
all establishments for the exclusive use and enjoyment or
availment of senior citizens. (Article 7, R.R. 7-2010)

1 A senior citizen who establishes his residency in a particular locality may request a barangay clearance
or certificate that he has established his residency for over 6 months in a particular residence within the
jurisdiction of the barangay.

Page 8
Commentary:

1. A senior citizen shall be entitled to a VAT-exemption and a

20% discount;
2. For purchases of goods and services enumerated by law;
3. For his/her exclusive use and enjoyment or availment2.

ITEMS SUBJECT TO DISCOUNTS AND VAT EXEMPTION

MEDICAL RELATED PRIVILEGES

a. MEDICAL AND DRUG PURCHASES - 20% discount and VAT exemption

shall apply to the purchase of generic or branded medicines
and drugs by or for senior citizens, including the purchase of
influenza and pneumococcal vaccines. The 20% discount and VAT
exemption shall also be granted to the purchase of vitamins
and mineral supplements which are medically prescribed by an
attending physician for prevention and treatment of diseases,
illness, or injury;

b. ESSENTIAL MEDICAL SUPPLIES, ACCESSORIES AND EQUIPMENT - the

20% discount and VAT exemption privilege shall also apply to
the purchase of eyeglasses, hearing aids, dentures,
prosthetics, artificial bone replacements like steel, walkers,
crutches, wheelchairs, whether manual or electric-powered,
canes/quad canes, geriatric diapers, and other essential
medical supplies, accessories and equipment by or for senior
citizens.3

c. MEDICAL AND DENTAL SERVICES IN THE PRIVATE FACILITIES -

Medical and dental services, diagnostic and laboratory tests
such as but not limited to X-rays, computerized tomography
scans, and blood tests, that are requested by a physician as
necessary for the diagnosis and/or treatment of an illness or
injury are subjected to the 20% discount and VAT exemption;

d. PROFESSIONAL FEES OF ATTENDING PHYSICIAN/S in all private

hospitals, medical facilities, outpatient clinics and home
health care facilities shall be subjected to the 20% discount
and VAT exemption;

e. PROFESSIONAL FEES OF LICENSED HEALTH WORKERS PROVIDING HOME

HEALTH CARE SERVICES as endorsed by private hospitals or
employed through home health care employment agencies are
entitled to the 20% discount and VAT exemption. The burden of
the discount shall be borne solely by the employment agency

2 Consistent with the intent of the Act, the phrase “exclusive use and enjoyment” of the senior citizen
shall mean “for the senior citizen’s personal consumption” only.

3Subject to the guidelines issued by the DOH in coordination with the FDA and the PHILHEALTH. Said
guidelines shall indicate what constitutes discounted essential medical supplies, accessories and
equipment, and will be subject to a regular review as deemed necessary in keeping with the changes,
demands and needs of senior citizens.

Page 9
 given the health worker’s very minimal share compared to the
agency fee. (Section 1, Article 7, R.R. 7-2010)

The sale of drugs and medicines prescribed for DIABETES, HIGH-CHOLESTEROL,

HYPERTENSION, CANCER, MENTAL ILLNESS, and KIDNEY DISEASE shall be
exempted from VAT whether sold to a SENIOR CITIZEN or NOT.

DOMESTIC TRANSPORTATION PRIVILEGES

The Department of Transportation and Communication (DOTC), in

coordination with the Maritime Industry Authority (MARINA),
Philippine Ports Authority (PPA), the Civil Aeronautics Board
(CAB), Light Rail Transit Authority (LRTA), Philippine National
Railways (PNR), Mass Rail Transit Authority (MRTA) and Land
Transportation Franchising and Regulatory Board (LTFRB), shall
within thirty (30) days from effectivity of these Rules issue
the necessary circulars or directives on the following
transportation privileges of senior citizens:

a. AIR AND SEA TRANSPORTATION PRIVILEGES - Fare for domestic4

air, and sea travel, including advanced booking, shall be
subject to the 20% discount and VAT exemption if applicable;
b. PUBLIC LAND TRANSPORTATION PRIVILEGES - Fare in the public
railways including LRT, MRT, and PNR, fares in buses (PUB),
jeepneys (PUJ), taxi and shuttle services (AUV), are likewise
subject to the 20% discount and VAT exemption, if applicable.
(Section 2, Article 7, R.R. 7-2010)

TOLL FEES are not the same as “fares.” It is not subject to the
20% senior citizens discount. When a tollway operator takes a
toll fee from a motorist, the fee is in effect for the latter’s
use of the tollway facilities over which the operator enjoys
private proprietary rights that its contract and the law
recognize. In the sense, the tollway operator is no different
from the service providers under Section 108 like lessors,
common carriers, warehousing, operators of hotels, etc., who
allow others to use their properties or facilities for a fee.
(Diaz v. Secretary of Finance)

HOTELS, RESTAURANTS, RECREATIONAL CENTERS, AND PLACES OF

LEISURES, AND FUNERAL SERVICES

The Department of Interior and Local Government (DILG) and

Department of Tourism (DOT) shall, within thirty (30) days from
effectivity of these Rules, issue the necessary circulars or
directives to establishments for its implementation to ensure
compliance herewith.

4 Does not include FOREIGN TRANSPORTATION

Page 10
a. HOTELS AND SIMILAR LODGING ESTABLISHMENTS - The discount shall
be for room accommodation and other amenities offered by the
establishment such as but not limited to hotel-based parlors
barbershops, restaurants, massage parlor, spa, sauna, bath,
aromatherapy rooms, workout gyms, swimming pools, Jacuzzis,
ktv bars, internet facilities, food, drinks, and other
services offered. The term “hotel” shall include beach and
mountain resorts;
b. RESTAURANTS - The discount shall be for the purchase of food,
drinks, dessert, and other consumable items served by the
establishments offered for the consumption of the general
public. (Section 3, Article 7, R.R. 7-2010)

DISCOUNT AND VAT EXEMPTION INAPPLICABLE TO:

1. C h i l d r e n ’ s m e a l s w h i c h a r e p r i m a r i l y p r e p a r e d and
intentionally marketed for children;
2. Pre-contracted party packages or bulk orders;
3. Purchases of basic necessities and prime commodities.

Other conditions:

1. The 20% discount shall apply to take-out/take-home/drive-thru

orders as long as it is the senior citizen himself/herself who
is present and personally ordering, and he/she cam show a
valid senior citizen ID card;
2. For delivery orders, the 20% discount shall likewise apply
subject to certain conditions: i.e., senior citizen ID card
number must be given while making the order over the
telephone; the senior citizen ID card must also be presented
upon delivery to verify the identity of the senior citizen
entitled to the 20% discount;
3. For the above-mentioned transactions, the Most Expensive Meal
Combination (MEMC) shall apply to food purchases by senior
citizens. The MEMC is an amount corresponding to the
combination of the most expensive and biggest single-serving
meal with beverage served in a quick service restaurant, is
deemed flexible and is adjusted accordingly by food
establishments to estimate a single food purchase for an
individual senior citizen.

FOOD, DRINKS, AND OTHER CONSUMABLE ITEMS PROVIDED ABOVE

PURCHASED BY THE SENIOR CITIZENS SHALL BE PROCESSED SEPARATELY
AS AN INDEPENDENT TRANSACTION FROM HIS/HER NON-ELIGIBLE
COMPANIONS TO ENSURE THAT IT IS FOR HIS/HER EXCLUSIVE
CONSUMPTION AND TO ENABLE COMPUTATION OF THE 20% DISCOUNT AND
THE EXEMPTION FROM THE VALUE ADDED TAX (VAT), WHICH ONLY THE
SENIOR CITIZEN IS ENTITLED TO.

Page 11
NON-ESSENTIAL GOODS
ALCOHOLIC PRODUCTS

Generally, alcoholic beverages are not subject to

the 20% discount and VAT exemption especially if
purchased “in bulk”, “in buckets” or “in cases”.
However, IF SERVED AS A SINGLE DRINK,, its
purchase by a Senior Citizen is entitled to the
20% disCount and VAT exemption.

However, alcoholic beverages purchased in a bar, club

or cabaret are exempt from VAT but subject to
amusement tax of 18% under Section 125 of the NIRC,
as amended. A Senior Citizen may still avail of the
20% discount on the purchase of an alcoholic drink
but the discount SHALL BE LIMITED ONLY TO A SINGLE
SERVING OF AN ALCOHOLIC BEVERAGE. (A.14, RMC 038-12)

CIGARS AND CIGARETTES

Cigarettes/cigars are not the food or essential items deemed

subject to the 20% discount.

It must be emphasized that one of the objectives of R.A. No.

9994 is to promote the health and benefits of the elderly. Thus,
the State adopted an integrated and comprehensive approach to
health development which endeavors to make essential goods,
health and other social services available to the elderly people
at affordable costs. Cigars and cigarettes, although considered
consumables, are not essential goods and are considered
hazardous to the health of the Senior Citizens.(A.15, RMC
038-12)
Illustration:

Bulbasaur, 70 years old, together with his four great

grandchildren, ate in Charizard, a famous restaurant in the
Philippines. The total price before the benefits, if any,
amounted to P 3,000.

How much should Balbasaur pay Charizard after considering all of

the former’s statutory privileges?

P 2,828.57

Supporting calculations:

Step 1 - Separation of bills

₱ 3,000.00 /5 ₱ 600.00 each

Step 2 - Application of benefits to the Lolo’s purchase alone

Step 2.1 - Removal of VAT

Page 12
₱ 600.00 /1.12 ₱ 535.71

Step 2.2 - Application of discount

₱ 535.71 x ₱ 428.57 Super Lolo

80%

RECREATION CENTERS

The discounts shall be for the utilization of services in the

form of fees, charges and rental for sport facilities or
equipment, including golfcart rentals and green fees, or venues
for ballroom dancing, yoga, badminton courts, bowling lanes,
table or lawn tennis, workout gyms, martial arts facilities.

Non-profit, stock gold and country clubs which are not open to
the general public, and are private and for exclusive membership
only as duly proven by their official Securities and Exchange
(SEC) registration papers, are not mandated to give the 20%
senior citizens discount. However, should restaurants and food
establishments inside these country clubs be independent
concessionaires and food sold are not consumable items under
club membership dues, they must grant the 20% senior citizen
discount. (Section 4, Article 7, R.R. 7-2010)

ADMISSION FEES PRIVILEGE

The discount shall be applied to admission fees charged by

theaters, cinema houses and concert halls, circuses, carnivals,
and other similar places of culture, leisure and amusement such
as museums and parks. (Section 5, Article 7, R.R. 7-2010)

FUNERAL AND BURIAL SERVICES

The beneficiary or any person who shall shoulder

the funeral and burial expenses of the
deceased senior citizen, shall claim the
discount under this Rule for the deceased
senior citizen upon presentation of the
death certificate. Such expenses shall
cover the purchase of casket or urn,
embalming, hospital morgue, transport
of the body to intended burial site
in the place of origin, but shall
exclude obituary publication and
the cost of the memorial lot.
(Section 6, Article 7, R.R. 7-2010)

Page 13
CREDIT CARD PAYMENTS

The 20% discount and VAT exemption shall also apply to purchases
of goods and services by senior citizens paying through credit
cards. (Section 8, Article 7, R.R. 7-2010)

NO DOUBLE DISCOUNT DEDUCTION RULE

In the purchase of goods and services which are on promotional

discount, the senior citizen can avail of the establishment’s
offered discount or the 20% discount provided herein, whichever
is higher and more favorable.

In cases where the senior citizen is also a person with

disability (PWD) to a 20% discount under his/her valid PWED
identification card (ID), the senior citizen shall use either
his/her OSCA-issued ID card or PWD identification card (ID).
(Section 9, Article 7, R.R. 7-2010)

Illustration:

To celebrate the Valentine’s day, Blastoise’s Resort offered

40% discount to all senior-citizen couples who will avail of
their diner and room services from February 12 - 15.. Caterpie
and Weedle, a married couple of 70 years availed of the promo
and celebrated their perhaps final Valentine’s day together in
the said resort. The couple made total payments of P20,000.

Question 1:

How much discount did Blastoise extend to the couple?

P 13,333.33

Payments made ₱ 20,000.00

Payment rate 60%

Total Price, net of VAT ₱ 33,333.33

Discount rate 40%

Discount granted ₱ 13,333.33

The discount granted to Senior Citizen’s should be the higher

between what is statutory provided (20%) or the promotional
rate.

Page 14
Question 2:

How much should you pay Blastoise, if you and your

boy(girl)friend visited it after the promo period?

P 37,333.33

Payments made ₱ 20,000.00

Payment rate 60%

Total Price, net of VAT ₱ 33,333.33

VAT rate 12%

VAT ₱ 4,000.00

Price, gross of VAT ₱ 37,333.33

While R.A. No. 9994 expressly provides for the VAT exemption of
senior citizens on their purchase of certain goods and services,
THE LAW DOES NOT INCLUDE EXEMPTION FROM THE PAYMENT OF
PERCENTAGE TAX. It is a settled rule that tax exemption must be
clear and unequivocal. It cannot arise from vague inference. A
taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain
terms, exemption from a common burden. Any doubt whether a tax
exemption exists is resolved against the taxpayer. (Digital
Telecommunications, Inc. v. City of Government of Batangas)

INCOME TAX EXEMPTION

The senior citizen shall be entitled to exemption from the

payment of the inidividual income tax, provided he/she is
considered to be a minimum wage earner in accordance with R.A.
No. 9504. (Section 1, Article 11, R.R. 7-2010)

This is actually not an added benefit as all minimum wage

earners, regardless of age, are exempt from income taxes with
respect to their basic wages, holiday pay, overtime pay, and
nightshift differential pay.

UTILITY DISCOUNTS

Five (5%) Discount - The grant of a minimum of 5 percent (5%)

discount relative to the monthly utilization of water and
electricity by households with senior citizens; Provided, That
the individual meters for the foregoing utilities are registered
in the name of the senior citizen residing therein: Provided,
further, that the monthly consumption does not exceed one
hundred kilowatt hours of electricity and thirty cubic meters of
water: Provided, furthermore, that the privilege is granted per
household regardless of the number of senior citizens residing
therein. (Section 1, Article 12, R.R. 7-2010)

Page 15
Commentary:

1. There is a discount of 5% relative to the monthly

utilization of WATER and ELECTRICITY;
2. The household must be with senior citizens;
3. The meter must be registered in the name of the senior
citizen residing therein;
4. The monthly consumption does not exceed 100 kilowatt hours
(electricity) or 30 cubic meters (water);
5. The privilege is granted PER HOUSEHOLD regardless of the
number of senior citizens residing therein.

Although qualified senior citizens availing of water and electricity services

are entitled to a 5% discount, such transactions are STILL VATABLE.
Observe that the provision does not mention of any VAT exemption, only
discount.

Illustration:

Pidgeotto, an octogenarian war-veteran, lives with his only son

Pidgey. Both meters with respect to the household’s utility
consumption is under the name of Pidgeotto. Total consumption of
the household for the month of November reached 100 killowatt
hours for electricity and 30 cubic meters for water.

The prevailing costs of the aforementioned utilities are: P9/KwH

for electricity and P2 per cubic meter. Both amounts are
exclusive of VAT.

How much should the household pay the public utility companies
for the month of November?

P 1,021.44

Electricity

Consumption (100 x 9) ₱ 900.00

Discount (900 x 5%) ₱ (45.00)

Bill net of discount ₱ 855.00

VAT (855 x 12%) ₱ 102.60

Total electricity bill payable ₱ 957.60

Water

Consumption (30 x 2) ₱ 60.00

Discount (60 x 5%) ₱ (3.00)

Bill net of discount ₱ 57.00

VAT (57 x 12%) ₱ 6.84

Page 16
 Total water bill payable ₱ 63.84

TOTAL UTILITIES PAYABLE ₱ 1,021.44

Notice that the discount is only 5% instead of the usual 20%

Assume:

In addition, Raticate, Pidgeotto’s best friend also lived in the

household. Will the answer differ? Will the discount double?

No. The answer will remain the same. The privilege is

granted per household irrespective of the number of senior
citizens living therein.

SPECIAL DISCOUNTS IN SPECIAL PROGRAMS

To the extent possible, the government may grant special

discounts in special programs for senior citizens on purchase of
basic necessities5 and prime commodities6, subject to the
guidelines to be issued for the purpose by the DTI and the DA.
(Section 7, Article 11, R.R. 7-2010)

BENEFITS GRANTED TO PERSONS SUPPORTING AND TAKING

CARE OF SENIOR CITIZENS
TAX DEDUCTION

The establishment may claim the discounts provided under the

Expanded Senior Citizens Act, as amended, as tax deductions
based on the cost of the goods sold or services rendered:
Provided, That the cost of the discount shall be allowed as
deduction from the gross income for the same taxable year that
the discount is granted: Provided, further, That the total
amount of the claimed tax deduction net of vat, if applicable,
shall be included in their gross sales receipts for tax purposes
and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code (NIRC), as
amended. (Article 10, R.R. 7-2010)

The income statement of the seller must reflect the discount,

not as a reduction of sales to arrive at net sales, but as a

5 Refer to rice, corn, bread, fresh, dried and canned fish and other marine products, fresh pork, beef and
poultry, meat, fresh eggs, fresh and processed milk, fresh vegetables, root crops, coffee, sugar, cooking
oil, salt, laundry soap, detergents, and drugs classified as essential by the DOH and other commodities
as maybe classified by the Department of Trade and Industry (DTI) and the Department of Agriculture
(DA) according to Republic Act No. 7581 or the Price Act.

6 Refer to fresh fruits, flour, dried, processed and canned pork, beef and poultry, meat, dairy products not
falling under basic necessities; noodles, onions, garlic, and all drugs not classified as essential drugs by
the DOH and other commodities that may be classified by the DTI and the DA according to Republic Act
No. 7581 or The Price Act.

Page 17
deduction from its gross income (sales less cost of sales).
Thus, the 20% Senior Citizen Discount shall be treated as a
necessary and ordinary expense duly deductible from the gross
income, provided that the seller does not opt for the Optional
Standard Deduction during the taxable quarter/year. (A.27, RMC
038-12)

UTILITY DISCOUNT

Fifty (50%) Discount - The grant of a 50% discount on all

electricity, water, telephone consumption for DSWD-accredited
senior citizen centers and residential care institutions or
group homes that are government-run or organized and operated by
non-stock, non-profit domestic corporations, primarily for the
purpose of promoting the well-being of abandoned, neglected,
unattached or homeless senior citizens.

Such senior citizens centers and residential care or group homes

must have been in operation for at least six (6) months and must
have a separate meter for said utilities/services. (Section 2,
Article 12, R.R. 7-2010)

Commentary:

1. Discount of 50% on ELECTRICITY, WATER, TELEPHONE consumption;

2. The center must be DSWD-accredited; or government-run; or
organized and operated by a non-stock, non-profit domestic
corporations;
3. The entity must have for its primary purpose the promotion of
the well-being of senior citizens;
4. The entity must have been in operation for at least 6 months;
and
5. The must be a separate meter for the utilities or services
used for senior citizens.

EMPLOYMENT

Private entities that shall employ senior citizens as employees

upon effectivity of the Act, shall be entitled to an additional
deduction from their gross income, equivalent to fifteen percent
(15%) of the total amount paid as salaries and wages to senior
citizens subject to the provision of Section 34 of the National
Internal Revenue Code (NIRC), as amended and the Revenue
Regulations to be issued by the BIR and approved by the DOF;
Provided, however, That such employment shall continue for a
period of at least six (6) months; Provided, further, That the
net annual income of the senior citizen does not exceed the
poverty level for that year as determined by NEDA thru the NSCB.
(Section 2, Article 13, R.R. 7-2010)

Page 18
Commentary:

1. Private entities shall enjoy an additional deduction from

their gross income of 15% of the total amount paid as salaries
and wages to senior citizens;
2. The senior citizen must have been employed for a period of at
least 6 months; and
3. The net annual income of the senior citizen does not exceed
the poverty level.

Illustration:

Spearow employs senior citizens as their crew and waiters, the

owner deems it proper to assist those senior citizens in need
and pays them at the prevailing minimum wage. The restaurant
revealed the following data for the year:

Gross revenue ₱ 10,000,000.00

Operating expenses, excluding the following items: ₱ 5,000,000.00
Salaries paid to senior citizens ₱ 500,000.00
Salaries paid to other employees ₱ 200,000.00
Discounts granted to senior citizens ₱ 50,000.00

How much is Spearow’s allowable deductions?

P5,825,000

Operating expenses ₱ 5,000,000.00

Salaries paid to senior citizens ₱ 500,000.00
Special deductions for employing senior citizens (P500,000 x 15%) ₱ 75,000.00
Salaries paid to other employees ₱ 200,000.00
Discounts granted to senior citizens ₱ 50,000.00
Total allowable deductions ₱ 5,825,000.00

SENIOR CITIZEN'S LAW AS AN EXERCISE OF POLICE POWER

The Senior Citizens Act was enacted primarily to maximize the

contribution of senior citizens to nation-building, and to grant
benefits and privileges to them for their improvement and well-
being as the State considers them an integral part of our
society. (Carlos Superdrug Corporation v. Department of Social
Welfare and Development)

To implement the above policy, the law grants a twenty percent

discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar
places of culture, leisure and amusement; fares for domestic
land, air and sea travel; utilization of services in hotels and
similar lodging establishments, restaurants and recreation

Page 19
centers; and purchases of medicines for the exclusive use or
enjoyment of senior citizens. As a form of reimbursement, the
law provides that business establishments extending the twenty
percent discount to senior citizens may claim the discount as a
tax deduction. The law is a legitimate exercise of police power
which, similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an exact
definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and
provide enough room for an efficient and flexible response to
conditions and circumstances, thus assuring the greatest
benefits. Accordingly, it has been described as "the most
essential, insistent and the least limitable of powers,
extending as it does to all the great public needs." It is
"[t]he power vested in the legislature by the constitution to
make, ordain, and establish all manner of wholesome and
reasonable laws, statutes, and ordinances, either with penalties
or without, not repugnant to the constitution, as they shall
judge to be for the good and welfare of the commonwealth, and of
the subjects of the same." For this reason, when the conditions
so demand as determined by the legislature, property rights must
bow to the primacy of police power because property rights,
though sheltered by due process, must yield to general welfare.

Police power as an attribute to promote the common good would be

diluted considerably if on the mere plea of petitioners that
they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence
demonstrating the alleged confiscatory effect of the provision
in question, there is no basis for its nullification in view of
the presumption of validity which every law has in its favor.
Given these, it is incorrect for petitioners to insist that the
grant of the senior citizen discount is unduly oppressive to
their business, because petitioners have not taken time to
calculate correctly and come up with a financial report, so that
they have not been able to show properly whether or not the tax
deduction scheme really works greatly to their disadvantage. In
treating the discount as a tax deduction, petitioners insist
that they will incur losses because, referring to the DOF
Opinion, for every ₱1.00 senior citizen discount that
petitioners would give, P0.68 will be shouldered by them as only
P0.32 will be refunded by the government by way of a tax
deduction. To illustrate this point, petitioner Carlos Super
Drug cited the anti-hypertensive maintenance drug Norvasc as an
example. According to the latter, it acquires Norvasc from the
distributors at ₱37.57 per tablet, and retails it at ₱39.60 (or
at a margin of 5%). If it grants a 20% discount to senior
citizens or an amount equivalent to ₱7.92, then it would have to
sell Norvasc at ₱31.68 which translates to a loss from capital
of ₱5.89 per tablet. Even if the government will allow a tax
deduction, only ₱2.53 per tablet will be refunded and not the
full amount of the discount which is ₱7.92. In short, only 32%
of the 20% discount will be reimbursed to the drugstores.
Petitioners’ computation is flawed. For purposes of
reimbursement, the law states that the cost of the discount
shall be deducted from gross income, the amount of income

Page 20
derived from all sources before deducting allowable expenses,
which will result in net income. Here, petitioners tried to show
a loss on a per transaction basis, which should not be the case.
An income statement, showing an accounting of petitioners'
sales, expenses, and net profit (or loss) for a given period
could have accurately reflected the effect of the discount on
their income. Absent any financial statement, petitioners cannot
substantiate their claim that they will be operating at a loss
should they give the discount. In addition, the computation was
erroneously based on the assumption that their customers
consisted wholly of senior citizens. Lastly, the 32% tax rate is
to be imposed on income, not on the amount of the discount.

Page 21
MAGNA CARTA FOR DISABLED PERSONS (R.A.
7277, as amended)
DECLARATION OF POLICY

The grant of the rights and privileges for

disabled persons shall be guided by the
following principles:

A. D i s a b l e d p e r s o n s a r e p a r t o f
Philippine society, thus the State
shall give full support to the
improvement of the total well-being
of disabled persons and their
integration into the mainstream of
society. Toward this end, the State shall adopt policies
ensuring the rehabilitation, self-development and self-
reliance of disabled persons. It shall develop their skills
and potentials to enable them to compete favorably for
available opportunities.
B. Disabled persons have the same rights as other people to take
their proper place in society. They should be able to live
freely and as independently as possible. This must be the
concern of everyone — the family, community and all government
and nongovernment organizations. Disabled persons' rights must
never be perceived as welfare services by the Government.
C. The rehabilitation of the disabled persons shall be the
concern of the Government in order to foster their capacity to
attain a more meaningful, productive and satisfying life. To
reach out to a greater number of disabled persons, the
rehabilitation services and benefits shall be expanded beyond
the traditional urban-based centers to community based
programs, that will ensure full participation of different
sectors as supported by national and local government
agencies.
D. The State also recognizes the role of the private sector in
promoting the welfare of disabled persons and shall encourage
partnership in programs that address their needs and concerns.
E. To facilitate integration of disabled persons into the
mainstream of society, the State shall advocate for and
encourage respect for disabled persons. The State shall exert
all efforts to remove all social, cultural, economic,
environmental and attitudinal barriers that are prejudicial to
disabled persons.

WHO IS A PERSON WITH DISABILITY?

Disabled persons are those suffering from restriction or

different abilities, as a result of a mental, physical or
sensory impairment, to perform an activity in the manner or
within the range considered normal for a human being. (Section
4.a)

Page 22
IMPAIRMENT; DISABILITY; HANDICAP

Impairment refers to any loss, diminution or aberration of

psychological, physiological, or anatomical structure or
function. (Section 4.b)

Disability shall mean:

1. A physical or mental impairment that substantially limits one

or more psychological, physiological or anatomical function of
an individual or activities of such individual;
2. A record of such an impairment; or
3. Being regarded as having an impairments. (Section 4.c)

Handicap refers to a disadvantage for a given individual,

resulting from an impairment or a disability, that limits or
prevents the function or activity, that is considered normal
given the age and sex of the individual. (Section 4.d)

POOR EYESIGHT?
The National Council on Disability
Affairs has issued as statement to
clarify the qualifications under
“visual impairment,” after reports of
people allegedly with “poor eyesight”
are being granted PWD IDs have
circulated online.

On Twitter, a certain user posted and shared a photo of her PWD

ID with a caption, “Filipinos with 300+ eye grade are entitled
to PWD privileges. Know your rights.” This started a whole
controversy.

Visual Disability is defined as one who has impairment of visual

functioning even after treatment and/or standard refractive
correction, and has a visual acuity of the better eye of less
then 20/70 for Low Vision and/or worse than 20/200 for Blind, or
a visual of less than 10 degrees from the point of fixation.

A certain level of visual impairment is defined as Legal

Blindness. One is Legally Blind when your best corrected central
vision acuity in your better eye is 20/200 or worse or your side
vision is 20 dress or less in the better eye.” (Department of
Health Administrative Order 2009-0011; NCDA Board Resolution No.
1, 2006)

Thus, only persons with a 20/70 best corrected visual acuity on

the better eye to be labeled low vision, and 20/200 visual
acuity on the better eye to be labelled legally blind are
qualified for a PWD ID.

Only persons with poor vision that cannot be corrected with

spectacles, contact lenses, medication or surgery are eligible

Page 23
for a PWD Card. (Dra. Grance Adriano, Allied Care Experts
Medical Center)

RIGHTS AND PRIVILEGES OF DISABLED PERSONS

PURCHASES OF CERTAIN GOODS AND SERVICES

Persons with disability shall be entitled to the following:

a. At least 20 percent (20%) discount from all establishments

relative to the utilization of all services in hotels and
similar lodging establishments; restaurants and recreation
centers for the exclusive use or enjoyment of persons with
disability;
b. A minimum of twenty percent (20%) discount on admission fees
charged by theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture, leisure and
amusement for the exclusive use or enjoyment of persons with
disability;
c. At least twenty percent (20%) discount for the purchase of
medicines in all drugstores for the exclusive use or enjoyment
of persons with disability;
d. At least twenty percent (20%) discount on medical and dental
services including diagnostic and laboratory fees such as, but
not limited to, x-rays, computerized tomography scans and
blood tests, in all government facilities, subject to
guidelines to be issued by the Department of Health (DOH), in
coordination with the Philippine Health Insurance Corporation
(PHILHEALTH);
e. At least twenty percent (20%) discount on medical and dental
services including diagnostic and laboratory fees, and
professional fees of attending doctors in all private
hospitals and medical facilities, in accordance with the rules
and regulations to be issued by the DOH, in coordination with
the PHILHEALTH;
f. At least twenty percent (20%) discount on fare for domestic
air and sea travel for the exclusive use or enjoyment of
persons with disability;
g. xxx
h. xxx
i. To extent possible, the government may grant special discounts
in special programs for persons with disability on purchase of
basic commodities, subject to guidelines to be issued for the
purpose by the Department of Trade and Industry (DTI) and the
Department of Agriculture (DA) (Section 32, R.A. 7277)

Most of the privileges and rules granted to PWDs are the same as
those granted to senior citizens as provided and discussed in
the immediately preceding sub-unit.

EMPLOYMENT

Equal Opportunity for Employment. - No disabled person shall be

denied access to opportunities for suitable employment. A

Page 24
qualified disabled employee shall be subject to the same terms
and conditions of employment and the same compensation,
privileges, benefits, fringe benefits, incentives, or allowances
as a qualified able bodied person.

Five percent (5%) of all casual emergency and contractual

positions in the Departments of Social Welfare and Development;
Health; Education, Culture and Sports; and other government
agencies, offices or corporations engaged in social development
shall be reserved for disabled persons. (Section 5, R.A. 7277)

RIGHTS AND PRIVILEGES GRANTED TO THOSE CARING OF PWDs

Those caring for and living with a person with disability shall
be granted the following incentives:

a. xx (Superseded)
b. Individuals or nongovernmental institutions establishing
homes, residential communities or retirement villages solely
to suit the needs and requirements of persons with disability
shall be accorded the following:

i. Realty tax holiday for the first five years of operation;

and
ii.Priority in the building and/or maintenance of provincial
or municipal roads leading to the aforesaid home,
residential community or retirement village. (Section 33,
R.A. 7277)

EMPLOYMENT

Incentive for Employers. - To encourage the active participation

of the private sector in promoting the welfare of disabled
persons and to ensure gainful employment for qualified disabled
persons, adequate incentive shall be provided to private
entities which employe disabled persons.

Private entities that employ disabled persons who meet the

required skills or qualifications, either as regular employee,
apprentice or learner, shall be entitled to an additional
deduction, from their gross income, equivalent to twenty-five
percent (25%) of the total amount paid as salaries and wages to
disabled persons: Provided, however, That such entities present
proof as certified by the Department of Labor and Employment
that disabled persons are under their employ: Provided, further,
That the disabled employee is accredited with the Department of
Labor and Employment and the Department of Health as to his
disability, skills and qualifications. (Section 8(b) R.A. 7277)

PHYSICAL FACILITIES

Private entities that improve or modify their physical

facilities in order to provide reasonable accommodation for

Page 25
disabled persons shall also be entitled to an additional
deduction from their net taxable income, equivalent to fifty
percent (50%) of the direct costs of the improvements or
modifications. This Section, however, does not apply to
improvements or modifications of facilities required under Batas
Pambansa Bilang 344.

Illustration:

Ekans employs persons with disabilities as its crew and

receptionists, the owner deems it proper to assist those persons
with disabilities in dire need of funds. The entity revealed the
following data for the year:

Gross revenue ₱ 10,000,000.00

Operating expenses, excluding the following items: ₱ 5,000,000.00
Salaries paid to persons with disabilities ₱ 500,000.00
Salaries paid to other employees ₱ 200,000.00
Discounts granted to persons with disabilities ₱ 50,000.00
Modification of facilities to accommodate PWDs ₱ 100,000.00

How much is Ekans’ allowable deductions?

P 6,025,000

Operating expenses ₱ 5,000,000.00

Salaries paid to persons with disabilities ₱ 500,000.00
Special deductions for employing persons with disabilities ₱ 125,000.00
(P500k x 25%)
Salaries paid to other employees ₱ 200,000.00
Discounts granted to persons with disabilities ₱ 50,000.00
Modification of facilities ₱ 100,000.00
Special deduction on modification of facilities (P100,000 x ₱ 50,000.00
50%)
Total allowable deductions ₱ 6,025,000.00

Observe that the special deduction granted to employers of

PWDs is higher than that of Senior Citizens.

Page 26
Page 27
AN ACT TO PROMOTE THE ESTABLISHMENT OF BARANGAY
MICRO-BUSINESS ENTERPRISE LAW (R.A. 9178)

DECLARATION OF POLICY

It is hereby declared to be the policy of the State to hasten

the country’s economic development by encouraging the formation
and growth of barangay micro business enterprises which
effectively serve as seedbeds of Filipino entrepreneurial
talents, and integrating those in the informal sector with the
mainstream economy, through the rationalization of bureaucratic
restrictions, the active intervention of the government
specially in the local level, and the granting of incentives and
benefits to generate much-needed employment and alleviate
poverty. (Section 2, R.A. 9178)

BARANGAY MICRO BUSINESS ENTERPRISE (BMBE)

Refers to any business entity or enterprise engaged in the

production, processing, or manufacturing of products or
commodities, including agro-processing, trading and services,
whose total assets7 including those arising from loans but
exclusive of the land on which the particular business entity’s
office, plant and equipment are situated, shall not be more than
Three Million Pesos (P3,000,000.00).

The above definition, however, is subject to review and upward

adjustment by the SMED Council, as mandated under R.A. 6977, as
amended by R.A. 8289.

7Refers to personal and real properties that are OWNED and USED/TO BE USED, or even if NOT
OWNED BUT USED/ TO BE USED.

Page 28
For the purpose of this Act, “services” shall exclude those
rendered by any one, who is duly licensed by the government
after having passed a government licensure examination, in
connection with the exercise of one’s profession. (Section 3,
R.A. 9178)

Commentary:

1. The applicant must be a business entity;

2. Whose total assets8 including those arising from loans does
not exceed P 3,000,000.00;
3. The cited “assets” in the immediately preceding number
EXCLUDES LAND on which the particular business entity’s
office, plant and equipment are situated.
4. Entities rendering services in connection with the exercise of
one’s profession by a person duly licensed by the government
after having passed a government licensure examination are
disqualified from applying for a BMBE Certificate of
Authority.

Illustration:

A small startup engaged in the piggery business applied for BMBE

registration under the business name Clefairy submitted the
necessary documentation for processing, among them are certain
financial reports substantially reproduced below:

Cash (50% from bank loans) ₱ 400,000.00

Accounts Receivables ₱ 100,000.00

Inventory ₱ 400,000.00

Transport & Delivery vehicle ₱ 60,000.00

Biological Assets ₱ 100,000.00

Office building ₱ 1,500,000.00

Land ₱ 2,000,000.00

Investment Property - Land ₱ 1,500,000.00

Accounts Payable ₱ 240,000.00

Notes Payable (Bank) ₱ 500,000.00

Wages payable ₱ 20,000.00

8 Cash consisting of Philippine currency shall be valued at actual currency value; if in foreign currency, it
shall be valued at the official exchange rate as prescribed by the BSP. Other assets shall be generally
valued at acquisition cost, net of a reasonable amount for depreciation as determined under GAAP if the
asset is depreciable, or book value whichever is higher. Real property shall be valued at acquisition cost,
net of depreciations: however, if no sufficient proof is submitted as to its acquisition cost, the same shall
be valued at current zonal value as established by the BIR.

Page 29
If you are the approving officer, will you approve Clefairy’s
application for BMBE Certificate of Authority?

NO. Clefairy is disqualified to be a BMBE.

Cash ₱ 400,000.00

Accounts Receivables ₱ 100,000.00

Inventory ₱ 400,000.00

Transport & Delivery vehicle ₱ 60,000.00

Biological Assets ₱ 100,000.00

Office building ₱ 1,500,000.00

Investment Property - Land ₱ 1,500,000.00

TOTAL RELEVANT ASSETS ₱ 4,060,000.00

Note:

1. The BMBE’s assets must not exceed P3,000,000;

2. In the consideration of the asset limitation, assets arising
from loans are included;
3. In the consideration of the asset limitation, the Land on
which the office building is located is excluded;
4. Liabilities are excluded since the law refers to Assets and
not Net Assets.

Assume:

Instead of engaging in the piggery business, Claefairy is

engaged in bookkeeping business composed of CPAs. Also, assume
that the assets are within the 3M limit. Will your answer to the
above question differ?

No. Entities rendering services in connection with the

exercise of one’s profession by a person duly licensed by the
government after having passed a government licensure
examination are disqualified from applying for a BMBE
Certificate of Authority.

REGISTRATION AND OPERATION OF BMBEs

REGISTRATION AND FEES

The Office of the Treasurer of each city or municipality shall

register the BMBEs and issue a Certificate of Authority to
enable the BMBE to avail of the benefits under this Act. Any
such application shall be processed within fifteen (15) working
days upon submission of complete documents. Otherwise, the BMBEs
shall be deemed registered.

Page 30
The Municipal or City Mayor may appoint a BMBE Registration
Officer who shall be under the Office of the Treasurer. Local
government units (LGUs) are encouraged to establish a One-Stop-
Business Registration Center to handle the efficient
registration and processing of permits/licenses of BMBEs.
Likewise, LGUs shall make a periodic evaluation of the BMBEs’
financial status for monitoring and reporting purposes.

The Certificate of Authority shall be effective for a period of

two (2) years, renewable for a period of two (2) years for every
renewal.

As much as possible, BMBEs shall be subject to minimal

bureaucratic requirements and reasonable fees and charges.
(Section 4, R.A. 9178)

The registration and issuance of the Certificate of Authority

shall be free of charge. (Section 8, D.A. No. 16-01)

WHO CAN REGISTER AS A BMBE?

One can register as a BMBE if it is a business or enterprise,

whether operated as a sole proprietorship or a corporation,
partnership, cooperative or association, organized/incorporated
and existing under Philippine laws:

a. Engaged in the production, processing or manufacturing of

products or commodities, including agro-processing, trading
and services, and which activities are barangay-based and
micro-business in nature and scope: Provided, That “services
shall exclude those rendered by:

i. natural persons who are duly licensed by the government

after having passed a government licensure examination in
connection with the exercise of one’s profession;
ii.Juridical persons such as partnerships or corporations
engaged in consultancy, advisory and similar services where
the performance of such services are essentially carried
out through licensed professionals;

b. Whose total assets, real or personal, inclusive of those

arising from loans but exclusive of the land on which the
particular business entity’s office, plant and equipment are
situated, shall not be more than Three Million Pesos
(P3,000,000) or as may be adjusted by the Small and Medium
Enterprises Development (SMED) Council as mandated under R.A.
6977 as amended by R,.A. 8289: Provided, That for the purpose
of registering as a BMBE, the assets must be owned and used
for the conduct of its business as such BMBE. (Section 1, Rule
2, DO No 17-04)

WHAT IS A BARANGAY-BASED ENTERPRISE?

A business enterprise shall be considered “barangay-based” if:

Page 31
 a. the majority of its employees are residents of the
municipality where its principal place of business is
located; or
b. its principal activity consists in the application/use of a
particular skill peculiar to the locality or of raw
materials predominantly sourced from the area; or
c. its business operations are confined within the territorial
jurisdiction of the municipality or LGU in which its
principal place of business is located.

Provided, however, that the enterprise may establish warehouses,

buying stations, sales outlets, and booking administrative
officer anywhere in the Philippines, subject to pertinent rules
and registration requirements of the concerned LGUSs and other
governmental agencies where such warehouses, outlets stations or
offices are established. (Section 1, Rule 2, DO No 17-04)

WHEN IS A BUSINESS MICRO-BUSINESS IN NATURE AND SCOPE?

A business shall be considered “micro-business in nature and

scope” if:

a. its principal activity is primarily for livelihood, or

determined by the SMED Council or DTI as a priority area
for development or government assistance;
b. the enterprise is not a branch, subsidiary, division, or
office of a large scale enterprise;
c. its policies and business modus operandi are not determined
by a large scale enterprise or by persons who are not
owners or employees of the enterprise. (Section 1, Rule 2,
DO No 17-04)

TRANSFER OF OWNERSHIP

The BMBE shall report to the city or municipality of any change

in the status of its ownership structure, and shall surrender
the original copy of the BMBE Certificate of Authority for
notation of the transfer. (Section 6, R.A. 9178)

INCENTIVES AND BENEFITS

EXEMPTION FROM TAXES AND FEES

All BMBEs shall be exempt from income tax for income arising
from the operations of the enterprise.

The LGUs are encouraged either to reduce the amount of local

taxes, fees and charges imposed or to exempt the BMBEs from
local taxes, fees and charges. (Section 7, R.A. 9178)

Page 32
A duly registered BMBE shall be exempt from income tax on income
ARISING PURELY FROM OPERATIONS AS SUCH BMBE: Provided, That this
income tax exemption shall not apply to the following:

a. Interest, including those from any currency bank deposit and

any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements;
b. Royalties;
c. Prizes and other winnings;
d. Cash and/or property dividends;
e. Capital gains from the sale of shares of stock not traded
through the stock exchange;
f. Capital gains from the sale or other disposition of real
property;
g. The share of an individual in the net income after tax of an
association, a joint account, or a joint venture or
consortium;
h. The share of an individual in the distributable net income
after tax of a taxable partnership of which he is a partner;
i. Income from the practice of profession directly from the
clients or from the professional partnership of which the
individual is a partner;
j. Compensation; and
k. All other forms of passive income and income from revenues not
effectively connected with or arising from operations of the
BMBE as such. (Section 1, Rule 3, DO No 17-04)

BMBEs are not EXEMPT from local taxes, fees and charges. The LGUs are
merely encouraged to exempt them from such.

ARE BMBEs STILL REQUIRED TO FILE RETURNS?

Every BMBE entitled to full income tax exemption is required to

file an ANNUAL INFORMATION RETURN, together with an Account
Information Form, or its equivalent, containing data lifted from
audited financial statements and a sworn statement of assets
owners and/or used in business.

Except in cases where the Commissioner otherwise permits, the

return shall be filed with the Revenue District Officer or the
Revenue Collection Officer or the duly authorized Treasurer of
the city or municipality in which the BMBE has its principal
place of business.

The Return specified above shall be filed on or before the

fifteen (15th) day of the fourth month following the close of
the taxable year. (Section 4, Rule 3, DO No 17-04)

OTHER INCOME?

All BMBE shall be subject to all other taxes and compliance

requirements prescribed under the National Internal Revenue Code

Page 33
(NIRC) of 1997, as amended, and its implementing rules and
regulations. It shall also update its registration information/
status with the BIR in case it or any of its affiliates
transfers its principal place of business, any other officer, or
branches. (Section 6, Rule 3, DO No 17-04)

EXEMPTION FROM THE COVERAGE OF THE MINIMUM WAGE LAW

The BMBEs shall be exempt from the coverage of the Minimum Wage
Law: Provided, That all employees covered under this Act shall
be entitled to the same benefits given to any regular employee
such as social security and healthcare benefits. (Section 8,
R.A. 9178)

CREDIT DELIVERY

Upon the approval of this Act, the land Bank of the Philippines
(LBP), the Development Bank of the Philippines (DBP), the Small
Business Guarantee and Finance Corporation (SBGFC), and the
People's Credit and Finance Corporation (PCFC) shall set up a
special credit window that will service the financing needs of
BMBEs registered under this Act consistent with the Banko
Sentral ng Pilipinas (BSP) policies; rules and regulations. The
Government Service Insurance System (GSIS) and Social Security
System (SSS) shall likewise set up a special credit window that
will serve the financing needs of their respective members who
wish to establish a BMBE. The concerned financial institutions
(FIs) encouraged to wholesale the funds to accredited private
financial institutions including community-based organizations
such as credit, cooperatives, non-government organizations
(NGOs) and people's organizations, which will in turn, directly
provide credit support to BMBEs.

All loans from whatever sources granted to BMBEs under this Act
shall be considered as part of alternative compliance to
Presidential Decree no, 717,, otherwise known as the Agri-Agra
Law, or to Republic Act. No. 6977, known as the Magna Carta for
Small and Medium Enterprises, as amended. For purposes of
compliance with presidential Decree no. 717 and Republic Act No.
6977, as amended, loans granted to BMBEs under this Act shall be
computed at twice the amount of the face value of the loans.

To minimize the risks in lending to the BMBEs, the SBGFC and the
Quedan and Rural Credit Guarantee Corporation (QUEDANCOR) under
the Department of Agriculture, in case of agribusiness
activities, shall set up a special guarantee window to provide
the necessary credit guarantee to BMBEs unde rtheir respective
guarantee programs.

The LBP, DBP. PCFC, SBGFC, SSS, GSIS, and QUEDANCOR shall
annually report to the appropriate Committee of Both Houses of
Congress on the status of the implementation of this provision.
(Section 9, R.A. 9178)

Page 34
Interests, commissions and discounts derived from the loans
granted by the LBP, DBP, PCFC and SBGFC to duly-registered
BMBEs, as well as loans extended by the GSIS and SSS to their
respective member-employees for the purpose of establishing
BMBEs, shall be EXEMPT FROM GROSS RECEIPTS TAX. (Section 1, Rule
4, DO No 17-04)

In case the amount of loan extended by the above-mentioned

credit institution/s to a BMBE borrower resulted to the BMBE’s
total assets exceeding the P3M asset threshold, the said credit
institution/s is/are disqualified to enjoy exemption from GRT.
(Section 2, Rule 4, DO No 17-04)

To avail of the exemption, certified copy of the BMBE’s

registration with the bIR as such BMBE shall be submitted to the
lending institution concerned. The BIR shall also devise a
reporting scheme to be followed by all concerned credit
institutions on all loan transactions with the BMBEs for
purposes of availing the GRT exemption within thirty (30) days
from the effectivity of this Order. (Section 3, Rule 4, DO No
17-04)

TECHNOLOGY TRANSFER, PRODUCTION AND MANAGEMENT TRAINING, AND

MARKETING ASSISTANCE

A BMBE Development Fund shall be set up with an endowment of

Three Hundred Million pesos (P300,000,000.00) from the
Philippine Amusement and Gaming Corporation (PAGCOR) and shall
be administered by the SMED Council.

The Department of Trade and Industry (DTI), the Department of

Science and Technology (DOST), the university of the Philippines
Institute for Small Scale Industries (UP ISSI), Cooperative
Development Authority (CDA), Technical Education and Skills
Development Authority (TESDA), and Technology and Livelihood
Resource Center (TLRC) may avail of the said Fund for technology
transfer, production and management training and marketing
assistance to BMBEs.

The DTI, in coordination with the private sector and non-

government organization (NGOs), shall explore the possibilities
of linking or matching-up BMBEs with small, medium and large
enterprises and likewise establish incentives therefor.

The DTI, in behalf of the DOST, UP ISSI, CDA. TESDA and TLRC
shall be required to furnish the appropriate Committees of both
Houses of Congress a yearly report on the development and
accomplishments of their projects and programs in relation to
technology transfer, production and management training and
marketing assistance extended to BMBEs. (Section 10, R.A. 9178)

Page 35
TRADE AND INVESTMENT PROMOTIONS

The data gathered from business registration shall be made

accessible to and shall be utilized by private sector
organizations and non-government organizations for purposes of
business matching, trade and investment promotion. (Section 11,
R.A. 9178)

CANCELLATION OF REGISTRATION

The Office of the City or Municipal Treasure shall cancel the

registration of a BMBE for cause, such as:

a. When the BMBE transfers its place of business to another

locality;
b. When the value of its total assets as determined pursuant to
this Order exceeds P 3,000,000;
c. When the BMBE voluntarily surrenders its Certificate of
Authority to the Office of the City or Municipal Treasurer;
d. In case of death of the registered individual owner of the
BMBE, if it is a sole proprietorship;
e. In case of violation or non-compliance with the provisions of
R.A. 9178, the implementing Rules and this Order;
f. In case of merger or consolidation with an entity which is not
eligible to be a BMBE;
g. In case of sale or transfer of the BMBE, if it is a sole
proprietorship, without prejudice to the transferee applying
for registration should it be qualified under the terms of
this Order;
h. Submission of fake or false or falsified documents;
i. In case of retirement from business, or cessation/suspension
of operations for one year; and
j. Making false or omitting required declarations or statements.

In cancellation of registration, the BMBE shall surrender its

Certificate of Authority to the Treasurer. (Section 8, Rule 2,
DO No 17-04)

Page 36
THE SPECIAL ECONOMIC ZONE ACT (R.A. 7916)

DECLARATION OF POLICY

It is declared policy of the government to translate into

practical realities the following State policies and mandates in
the 1987 Constitution, namely:

a. The State recognizes the indispensable role of the private

sector, encourages private enterprise, and provides incentives
to needed investments.
b. The State shall promote the preferential use of Filipino
labor, domestic materials and locally produced goods, and
adopt measures that help make them competitive.

In pursuance of these policies, the government shall actively

encourage, promote, induce and accelerate a sound and balanced
industrial, economic and social development of the country in
order to provide jobs to the people especially those in the
rural areas, increase their productivity and their individual
and family, income, and thereby improve the level and quality of
their living condition through the establishment, among others,
of special economic zones in suitable and strategic locations in
the country and through measures that shall effectively attract
legitimate and productive foreign investments. (Section 2, R.A.
7916, as amended)

OPERATIONS AND ESTABLISHMENT OF ECOZONES

Special economic zones (SEZ) hereinafter referred to as the

ECOZONES, are selected areas with highly developed or which have

Page 37
the potential to be developed into agro-industrial, industrial
tourist/recreational, commercial, banking, investment and
financial centers. An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing zones
(EPZs), free trade zones, and tourist/recreational centers.

ECOZONES are identified and provided for by law. They are

governed and regulated by a body known as the Philippine
Economic Zone Authority (PEZA). The development, however, shall
be done with minimum government interference. It shall
administer its own economic, financial, industrial and tourism
development without help from the national government. It shall
also provide adequate facilities to establish linkages with
surrounding communities and other entities within the country.

Other areas may be established as ECOZONES in a proclamation to

be issued by the President of the Philippines subject to the
evaluation and recommendation of the PEZA, based on a detailed
feasibility and engineering study which must conform to several
criteria provided by law, i.e., existence of infrastructure, the
availability of skilled, semi-skilled and non-skilled trainable
labor force in and around the ECOZONE, the area’s strategic
location, among others.

The strategy and priority of development of each ECOZONE

established pursuant to this Act shall be formulated by the
PEZA. in coordination with the Department of Trade and Industry
and the National Economic and Development Authority: Provided,
That such development strategy is a consistent with the
priorities of the national government as outlined in the medium-
term Philippine development plan.

It shall be the policy of the government and the PEZA to

encourage and provide incentives and facilities private sector
participation in the construction and operation of public
utilities and infrastructure in the ECOZONE, using any of the
schemes allowed in Republic Act No. 6957 (the build-operate-
transfer law).

Relevant terms:

a. Industrial Estates. Refers to a tract of land subdivided and

developed according to a comprehensive plan under a unified
continuous management and with provisions for basic
infrastructure and utilities, with or without pre-built
standard factory buildings and community facilities for the
use of the community of industries.
b. Export Processing Zones. A specialized industrial estate
located physically and/or administratively outside customs
territory, predominantly oriented to export productions.
Enterprises located in export processing zones are allowed to
import capital equipment and raw materials free from duties,
taxes and other import restrictions.
c. Free Trade Zones. An isolated policed are adjacent to a port
of entry (as a seaport) and/or airport where imported goods
may be unloaded for immediate transshipment or stored,

Page 38
 repacked, sorted, mixed, or otherwise manipulated without
being subject to import duties. However, movement of these
imported goods from the free-trade are to a non-free-trade
area in the country shall be subject to import duties.
d. Customs Territory. Shall mean the national territory of the
Philippines outside of the proclaimed boundaries of the
ECOZONES except those areas specifically declared by other
laws and/or presidential proclamations to have the status of
special economic zones and / or free ports. (Section 2, (g),
Rule I, R.A. 7916 IRR)

WHO MAY APPLY FOR REGISTRATION?

Business enterprises within a designated ECOZONE shall register

with the PEZA to avail of all incentives and benefits provided
for in this Act. (Section 35, R.A. 7916, as amended)

The PEZA shall establish a one stop shop center for the purpose
of facilitating the registration of new enterprises in the
ECOZONE. Thus, all appropriate government agencies that are
involved in registering, licensing or issuing permits to
investors shall assign their representatives to the ECOZONE to
attend to investor’s requirements. (Section 36, R.A. 7916, as
amended)

Any person, firm, association, partnership, corporation, or any

other form of business organization, regardless of nationality,
control and/or ownership of the working capital thereof may
apply for registration as an Export or Free Trade Enterprise
within the ECOZONE in any sector of industry, international
trade and commerce, except duty-free retailing and wholesale
trading of imported finished products for purposes of serving
the domestic market. Furthermore, if the area of investments of
the said enterprises falls within Lists A and B of the Foreign
Investments Act of 1991, then the applicable nationality,
ownership or control requirements of the said law shall be
observed.

Applications for ECOZONE Developer/Operator, Domestic Market

Utilities, Facilities, Tourism or Service Enterprises shall
comply with the applicable nationality, control and/or ownership
requirements of the working capital thereof in accordance with
the pertinent provisions of the Philippine Constitution, Foreign
Investments Act of 1991 and other existing laws and regulations.
(Section 1, Rule III, R.A. 7916 IRR)

Page 39
FISCAL INCENTIVES ON BUSINESS ESTABLISHMENTS
OPERATING WITHIN THE ECOZONE
All applications for availment of incentives shall be filed with
PEZA. (Section 1, Rule XIII, R.A. 7916 IRR)

INCOME TAX HOLIDAY

Ecozone Export and Free Trade Enterprises are exempted from

INCOME TAXES levied by the National Government for the period as
follows:

a. New Registered Pioneer Firms - Six (6) years from commercial

operations.
b. New Registered Non-Pioneer Firms - Four (4) years from
commercial operations.
c. Expanding Firms - Three (3) years from commercial operation of
the expansion. (Section 6, Rule XV, R.A. 7916 IRR)

WHAT IS A PIONEER ENTERPRISE?

“ECOZONE Pioneer Enterprise” shall mean an ECOZONE enterprise:

1. engaged in the manufacture, processing or production and not

merely in the assembly of packaging of goods, products,
commodities or raw materials that have not been or are not
being produced in the Philippines on a commercial scale; or
2. which uses a design, formula, scheme, method, process or
system or production of transformation of any element,
substance or raw materials into another raw material or
finished goods which is new and untried in the Philippines; or
3. which produces non-conventional fuels or manufactures
equipment which utilizes non-conventional sources of energy or
uses or converts to coal or other non-conventional fuels or
sources of energy in its production, manufacturing or
processing operations; or
4. engaged in the pursuit of agri-export processing zone
development or (5) given such status under the Investment
Priorities Plan: Provided, That the final product in any of
the foregoing instances involves or will involve substantial
use and processing of domestic raw materials, whenever
available, taking into account the risk and magnitude of
investment. (Section 1(k), Rule I, R.A. 7916 IRR)

Page 40
Illustration:

Pikachu, a merchandising entity registered a portion of its

business under PEZA. Relevant data are as follows:

Gross income:

Registered transactions ₱ 20,000,000.00

Unregistered transactions ₱ 50,000,000.00

Determine the amount of gross income subject to income tax

holiday:

P 20,000,000. Only transactions registered under PEZA may

be covered by the income tax holiday benefit. Unregistered
transactions are subject to the regular internal revenue taxes
as may be provided by the National Internal Revenue Code, as
amended or tax treaties.

Determination of Pioneer / Non-Pioneer Status

a. Investment Priorities Plan - As a general policy, the basis

for determining whether an area of economic activity may be
considered pioneer or non-pioneer shall be the Investment
Priorities Plan prepared yearly by the Board of Investments.
In the absence thereof, the applicable criteria shall be
formulated by PEZA.
b. Non-Pioneer Status - An area of activity shall be accorded
non-pioneer status if it may be determined categorically as
falling in such classification using the Investment Priorities
Plan (IPP). Accordingly, the approval of the application for
registration as an ECOZONE Export or Free Trade Enterprise
shall indicate such status and the corresponding incentives
the ECOZONE Export or Free Trade Enterprise may avail of under
the Act.
c. Pioneer Status - Pioneer status may be extended to an ECOZONE
Export or Free Trade Enterprise only after the evaluation of
their application for such status.

ENTITLEMENT FOR NEW EXPANSION PROJECTS

a. New Projects - In exceptional cases, ECOZONE Export or Free

Trade Enterprises undertaking new activities distinct from
their registered operations may qualify as new projects
subject to the setting up of separate books of accounts. In
such cases, the income tax holiday shall apply only to sales
of the new products.
b. Expansion Projects - The income tax holiday for expansion
projects9 shall apply only to the extent of the actual
increase in production.

9 shall mean installation of additional facilities and / or equipment that will result in the increase of
production capacity. It may include modernization and rehabilitation.

Page 41
EXPANSION

Expansion may include modernization or rehabilitation which, to

be registrable, may or may not result in increase in capacity
but in any case, subject to the following conditions:

a. Phases/stages of production sought to be modernized/

rehabilitated must be identified; and
b. It must result in any of the following:

i. substantial reduction of production cost; and

ii.significant increase in production efficiency including
debottlenecking;
iii.meanignful upgrading of product quality;
iv.keeping abreast with the state of the art in the production
of the registered product.

The rate of exemption from income tax of expansion projects

shall be computed as follows:

Incremental Sales of the Registered Product

Rate of Exemption =
Total Sales of the Registered Product

The term “Sales” as indicated in the above formula shall be

expressed in volume in case of homogenous products and value in
case of heterogeneous products. (Section 6, Rule XV, R.A. 7916
IRR)

Illustration:

Sandshrew, a PEZA-registered entity has, for a long-time,

planned to increase its production capacity of manufacturing
keyboard keycaps. The projection team presented the following
data:

Present Sales @ P3,000/unit ₱ 36,000,000.00

Expected increase in sales @ P2500 ₱ 7,500,000.00

Gross income ₱ 20,000,000.00

How should the income tax holiday be applied?

Situation 1:

The product is mass produced and homogenous in nature.

P4,000,000 gross income is exempt from income taxation.

Supporting calculations:

Rate of exemption (3,000/15,000) 20%

Gross income ₱ 20,000,000.00

Page 42
Gross income exempt from taxation (ITH) ₱ 4,000,000.00

Notice that the ratio was derived using the sales in units,
this is so because the products are homogenous in nature.

Situation 2:

The product is customized and heterogenous in nature.

P 3,448,000 gross income is exempt from income taxation.

Supporting calculations:

Rate of exemption (7.5M/43.5M) 17.24%

Gross income ₱ 20,000,000.00

Gross income exempt from taxation (ITH) ₱ 3,448,000.00

Notice that the ratio was derived using the sales in value,
this is so because the products are heterogenous in nature.
Situation 3:

Sandshrew is a first-time PEZA-registered enterprise.

The entire gross income of P20,000,000 is exempt from

income tax provided the current taxable year is still within the
income tax holiday period, subject to whether Pikachu is pioneer
or non-pioneer enterprise.

START OF COMMERCIAL OPERATIONS DOES NOT COINCIDE WITH THE FIRST

MONTH OF THE TAXABLE YEAR

Where the start of commercial operations does not coincide with

the first month of the taxable year of the ECOZONE Enterprise,
the rate of exemption from income tax shall be computed in the
following manner:

a. Get the total sales for the whole taxable year;

b. Deduct the base figure from the total sales (a) to get the
incremental sale;

c. The rate of exemption is determined by dividing the

incremental sales (b) by the total sales (a.);
d. The rate of exemption shall apply only to the total income tax
due arising from sales of the registered product;
e. For this purpose, the base figure shall mean the highest
attained sales in volume in case of homogenous products or
value in case of heterogeneous products of the ECOZONE Export
or Free Trade Enterprise for any one (1) year within the last
three (3) years prior to the year of expansion.
f. The rate of exemption shall be further computed in proportion
to the number of months of the expanding firms commercial
operations during a given year.

Page 43
g. The rate of exemption for the last taxable year of availment
shall be computed in the same manner as above-mentioned:
Provided, However, That the rate of exemption shall be applied
on the income tax due on sales during the months that the
ECOZONE Export or Free Trade Enterprise is entitled to income
tax holiday. (Section 6, Rule XV, R.A. 7916 IRR)

ADDITIONAL PERIOD OF AVAILMENT

For ECOZONE Export or Free Trade enterprises, the income tax

holiday incentive may be extended for an extra year in each of
the following cases but in no case to exceed a total period of
eight (8) years for pioneer registered enterprises:

a. If the ratio of the total imported and domestic capital

equipment to the number of workers for the project does not
exceed US$10,000.00 to one worker, or as prescribed by the
Board;
b. If the average cost of indigenous raw materials used in the
manufacture of the registered product is at least fifty
percent (50%) of the total cost of raw materials for the
preceding years prior to the extension unless the Board
prescribes a higher percentage;
c. If the net foreign exchange savings or earnings amount to at
least US$500,000.00 average annually during the first three
(3) years of operations to be determined by the Board at the
end of such three-year period: Provided, That the foregoing
foreign exchange savings criterion shall apply, as a general
rule, to ECOZONE Export or Free Trade Enterprises whose
products are totally imported into the country at the time of
registration and duly indicated as imports substation in
firm's approved project proposal.

For the purpose of availment of this incentive, the ECOZONE

Export or Free Trade Enterprise shall apply in writing to PEZA
for the additional period and shall submit proof of compliance
with the criteria above-mentioned. (Section 6, Rule XV, R.A.
7916 IRR)

EXEMPTION FROM TAXES UNDER THE NATIONAL INTERNAL REVENUE CODE

Any provision of existing laws, rules and regulations to the

contrary notwithstanding, no taxes, local and national, shall be
imposed on business establishments operating within the ECOZONE.
In lieu of paying taxes, five percent (5%) of the gross income
earned by all business and enterprises within the ECOZONE shall
be remitted to the national government. This five percent (5%)
shall be shared and distributed 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 treasurer’s office of the
municipality or city where the enterprise is located. (Section
24, R.A. 7916, as amended)

Page 44
All persons and service establishments in the ECOZONE shall be
subject to national and local taxes under the National Internal
Revenue Code and the Local Government Code. (Section 25, R.A.
7916, as amended)

Goods manufactured by an ECOZONE enterprise shall be made

available for immediate retail sales in the domestic market,
subject to the payment of corresponding taxes on the raw
materials and other regulations that may be adopted by the Board
of the PEZA.

However, in order to protect the domestic industry, there shall

be a negative list10 of industries that will be drawn up by the
PEZA. Enterprises engaged in the industries included in the
negtive list shall not be allowed to sell their products
locally. Said negative list shall be regularly updated by the
PEZA. The PEZA, in coordination with the Department of Trade and
Industry and the Bureau of Customs, shall jointly issue the
necessary implementing rules and guidelines for the effective
implementation of this section. (Section 2, R.A. 7916, as
amended)

After the Income Tax Holiday Period, PEZA-registered enterprises

are subject to 5% Special Tax on Gross Income in lieu of all
taxes, national and local, except real property tax. (RMC 74-99)

Illustration:

Nidorina, a PEZA-registered entity focused on the business of

selling various gadgets in Cebu, revealed the following
information with respect to its transactions during its 10th-
year anniversary:

Sales ₱ 10,000,000.00

Direct Costs ₱ 4,000,000.00

Allowable deductions ₱ 3,000,000.00

Losses from typhoon ₱ 300,000.00

Question 1:

How much is Nidorina’s tax liability?

P 300,000.00

Support:

Sales ₱ 10,000,000.00

10shall refer to the list of industries drawn up and regularly updated by the PEZA under which ECOZONE
Enterprises engaged in any industry listed therein shall not be allowed to sell their products or any
portion thereof in the custom territory.

Page 45
Direct Costs ₱ (4,000,000.00)

Gross income ₱ 6,000,000.00

Preferential tax rate 5%

Gross income tax liability ₱ 300,000.00

After the lapse of the PEZA-registered entity’s income tax

holiday, the 5% special gross income tax takes effect.

Question 2:

Is Nidorina subject to MCIT?

No. An entity under a preferential tax regime is not

subject to the minimum corporate income tax. Only taxpayers
subject to the ordinary corporate income tax are subject to the
minimum corporate income tax.

Question 4:

How much should be remitted to the BIR?

P 180,000

Support:

Sales ₱ 10,000,000.00

Direct Costs ₱ (4,000,000.00)

Gross income ₱ 6,000,000.00

Preferential tax rate 3%

Gross income tax liability ₱ 180,000.00

3% of the 5% gross income tax shall be remitted to the national

government.

Question 5:

How much should be remitted to the treasurer’s office of the

local government of Cebu?

P 120,000

Supporting calculations:

Sales ₱ 10,000,000.00

Direct Costs ₱ (4,000,000.00)

Gross income ₱ 6,000,000.00

Preferential tax rate 2%

Page 46
Gross income tax liability ₱ 120,000.00

2% of the 5% gross income tax shall be remitted to the local

government.

ADDITIONAL DEDUCTION FOR TRAINING EXPENSES

Additional Deduction for Training Expenses - One-half (1/2) of

the value of training expenses incurred in developing skilled or
unskilled labor or for managerial or other management
development programs incurred by an ECOZONE Developer / Operator
may be deducted from the 5% final tax due from the ECOZONE
Developer / Operator but not to exceed the national governments
share of three percent (3%) as provided in Section 24 of the
Act, under such guidelines as may be prescribed by PEZA in
coordination with the Department of Labor and Employment and the
Department of Finance.

EXEMPTION FROM PROFIT REMITTANCE TAX

PEZA-registered branches of foreign corporations are exempted

from Branch Profit Remittance tax.

TAX CREDIT ON DOMESTIC CAPITAL EQUIPMENT

A tax credit equivalent to one hundred percent (100%) of the

value of national internal revenue taxes and customs duties that
would have been waived on the machinery, equipment and spare
parts, had these items been imported shall be given to the new
or expanding ECOZONE Export or Free Trade Enterprise which
purchases machinery, equipment and spare parts from a domestic
manufacturer: Provided, (1) That the said equipment, machinery
and spare parts are reasonably needed and will be used
exclusively by the registered enterprise in its registered
activity; (2) That the equipment would have qualified for tax
and duty exemption under Section 1 of this Rule; and 93) That
the approval of the Board was obtained by the registered
enterprise. In case the registered ECOZONE Export or Free Trade
Enterprise sells, transfers, or disposes of these machinery,
equipment an spare parts, the provisions of Section 1(A.2) of
this Rule shall apply. (Section 6, Rule XV, R.A. 7916 IRR)

IMPORTATION OF BREEDING STOCKS AND GENETIC MATERIALS

1. Extent of Availment - The importation of breeding stocks and

genetic materials by an ECOZONE Export Enterprise shall be
exempt from taxes and duties. Such importation shall cover
breeding stocks and genetic materials necessary for expansion
or improvement or for replacement of proven unproductive
breeding stock and genetic materials. The period of availment

Page 47
 of this incentive shall be determined in accordance with
Sections 3 and 5, Rule XIII of these Rules.

2. Conditions for Availment - Tax and duty free importation of

breeding stocks and genetic materials shall be authorized
under the following conditions:

a. That the strains / breeding stocks to be imported are not

domestically available at reasonable prices;
b. That they shall be used exclusively by the registered
producer for the improvement of the strains / breeding
stocks of its livestocks, poultry, fish and / or plants;
and
c. That prior approval of the Board must have been obtained by
the registered enterprise before the purchase order was
made or before the opening of the corresponding letters of
credit.

3. Prior Approval of Sale or Disposition of Breeding Stocks and

Genetic Materials - Any sale, transfer or disposition of the
breeding stocks and genetic materials purchased under Article
39(I) of the Code shall require prior Board approval if such
sale, transfer or disposition is made within: (a) four (4)
years from date of acquisition in cases of large cattle as the
term is understood in agriculture; or (b) two (2) years from
date of acquisition in cases of poultry as the term is
understood in agriculture. (Section 6, Rule XV, R.A. 7916 IRR)

TAX CREDIT ON DOMESTIC BREEDING STOCK AND GENETIC MATERIALS

1. Extent of Entitlement - An ECOZONE Export Enterprise which

purchases breeding stocks and genetic materials from a
domestic producer shall be entitled to a tax credit equivalent
to one hundred percent (100%) of the value of national
internal revenue taxes and customs duties that would have been
waived on the breeding stocks and genetic materials had these
items been imported.
2. Prior Approval of Sale, Transfer or Disposition - Any sale,
transfer or disposition of breeding stocks and genetic
materials purchased from domestic producers shall be subject
to the same conditions provided for the sale, transfer or
disposition of imported breeding stocks and genetic materials
under Section 6(C.3) of this Rule.

LABOR EXPENSE

Additional Deduction for Labor Expense - For the first five (5)
years from registration, a qualified ECOZONE Export or Free
Trade Enterprise shall be allowed to deduct from its taxable
income an amount equivalent to fifty percent (50%) of the wages
corresponding to the increment in the number of direct labor for
skilled and unskilled workers subject to the following
conditions:

Page 48
1. That the ratio of imported and domestic capital equipment to
the number of workers of the firm does not exceed US$10,000.00
to one worker;
2. The ECOZONE Export or Free Trade Enterprise does not avail of
this incentive simultaneously with the income tax holiday
incentive; and
3. That in the event the ECOZONE Export or Free Trade Enterprise,
except those engaged in mining or forestry-based activities,
should be located in a less-developed area as defined in Title
IV of the Code, it shall be allowed to deduct one hundred
percent (100%) of the wages above-mentioned. (Section 6, Rule
XV, R.A. 7916 IRR)

UNRESTRICTED USE OF CONSIGNED EQUIPMENT

The use of consigned machinery, equipment and spare parts which

are reasonably needed in the registered operations and for the
exclusive use the ECOZONE Export or Free Trade Enterprise beyond
the period permitted under other laws, rules and regulations may
be permitted by PEZA. (Section 6, Rule XV, R.A. 7916 IRR)

INCENTIVES TO SPECIFIC ENTITIES

INCENTIVES TO ECOZONE DEVELOPERS / OPERATORS

ECOZONE Developers/Operators - shall be entitled to the

following incentives:

a. Exemption from National and Local Taxes and Licenses - An

ECOZONE Developer/operator shall, to the extent of its
construction and operation, be exempt from payment of all
national internal revenue taxes and all local government
impost, fees, licenses or taxes, including but not limited to
the following:

1. Internal revenue taxes such as gross receipts tax, Value

Added Tax, ad valorem and excise taxes; and
2. Franchise, common carrier or value added taxes and other
percentage taxes on public service utilities and
enterprises.

b. Additional Deduction for Training Expenses - One-half (½) of

the value of training expenses incurred in developing skilled
or unskilled labor or for managerial or other management
development programs incurred by an ECOZONE Developer/Operator
may be deducted from the 5% final tax due from the ECOZONE
Developer/Operator but not to exceed the national governments
share of three percent (3%) as provided in Section 25 of the
Act, under such guidelines as may be prescribed by PEZA in
coordination with the Department of Labor and Employment and
the Department of Finance.

c. Incentives under the BOT Law - Incentives provided under R.A.

6957 as amended by R.A. 7718, otherwise known as the Build-

Page 49
 Operate-and-Transfer Law, subject to such conditions as may be
prescribed by the Board.

d. Other Incentives Under the Code - Other incentives available

under the Code, as may be determined by the Board subject to
the conditions provided under the Rules.

INCENTIVES TO ECOZONE DOMESTIC MARKET, FACILITIES, UTILITIES AND

TOURISM ENTERPRISES

Domestic Market Enterprise - ECOZONE Domestic Market Enterprise

shall be entitled to the following incentives:

a. Exemption from national and local taxes in lieu thereof,

payment of a special tax rate of five percent (5%) on gross
income in accordance with Section 1(A) of Rule XIV and Rule XX
of these Rules;
b. Additional Deduction for Training Expenses - The same
incentive as provided for under Section 1(B) of Rule XIV of
these Rules shall also apply to ECOZONE Domestic Market
Enterprises; and
c. Other incentives available under the Code, as may be
determined and subject to the conditions that may be
prescribed by the Board in accordance with Sections 3 and 5
Rule XIII of these Rules. (Section 1, Rule XVI, R.A. 7916 IRR)

ECOZONE Facilities, Utilities and Tourism Enterprises - ECOZONE

Facilities, Utilities and Tourism Enterprises shall be entitled
to the following incentives:

a. Exemption from national and local taxes and lieu thereof

payment of a special tax rate of five percent (5%) on gross
income in accordance with Section 1(A) of Rule XIV and Rule XX
of these Rules;
b. Additional Deduction for Training Expenses - The same
incentives as provided for under Section 1(B) of Rule XIV of
these Rules shall also apply to ECOZONE Facilities, Utilities
and Tourism Enterprises;
c. Incentives provided under R.A. 6957 as amended by R.A. 7718,
otherwise known as the Build Operate and Transfer Law, subject
to such conditions as may be prescribed by the Board; and
d. Other incentives available under the Code, as may be
determined by the Board subject to the conditions provided
under Sections 3 and 5 of Rule XIII of these Rules. (Section
2, Rule XVI, R.A. 7916 IRR)

PUBLIC AND SERVICE UTILITIES WITHIN THE ECOZONE

Public & service utilities and enterprises are exempt from

franchise, common carrier or value added taxes and other
percetage taxes within the ECOZONE for services rendered
therein. (Section 3(c), R.R. No 02-05)

Page 50
TAX TREATMENT OF MERCHANDISE IN THE ECOZONES (Rule VIII, R.A.
7916 IRR)

EXEMPTIONS

Merchandise brought to the restricted areas in the ECOZONES by

registered Export or Free Trade Enterprises, except prohibited
merchandise, shall not be subject to all customs and internal
revenue laws and regulations of the Philippines nor to local tax
ordinances: Provided, That they are to be sold, stored, broken-
up, replaced, assembled, manipulated, manufactured and/or mixed
with foreign or domestic merchandise within the restricted areas
in the ECOZONES. (Section 1, Rule VIII, R.A. 7916 IRR)

Restricted Area shall mean a specific area within the ECOZONE

which has been classified and/or fenced-in as export processing
zone, free trade zone or such other areas as may be declared by
the Board. (Section 2, (h), Rule I, R.A. 7916 IRR)

DOMESTIC MERCHANDISE

Domestic Merchandise sent from the restricted areas of the

ECOZONES by registered Export or Free Trade Enterprises to the
custom territory shall, whether or not combined with or made
part of other articles likewise the growth, product or
manufacture of the Philippines while in the ECOZONE subject to
the internal revenue laws of the Philippines as domestic goods
sold, transferred or disposed of for local consumption.

FOREIGN MERCHANDISE

Merchandise of foreign origin brought to the restricted areas in

the ECOZONES by registered Export of Free Trade Enterprises
which has not undergone any processing, manufacturing or
manipulation while in the said areas of the ECOZONES, shall when
sent therefrom to the customs territory, be subject to the laws
and regulations governing imported merchandise: Provided, That
where said foreign merchandise is combined with or made part of
the domestic article, the duties and taxes to be assessed on the
final product shall be based on the value of such imported
merchandise (except when the final product is exempt) and
internal revenue taxes on the value added: Provided, further,
That foreign merchandise included in the negative list shall not
be sent from the restricted areas of the ECOZONE to the customs
territory.

TRANSFER OF MERCHANDISE

Domestic merchandise on which all internal revenue taxes have

been paid if subject thereto, and foreign merchandise on which
duty or tax has been paid, or which have been admitted free of
duty and tax, may be taken into restricted areas of the ECOZONES
from the customs territory of the Philippines and brought back

Page 51
thereto free of quota, duty or tax: Provided, however, That said
merchandise shall be preserved its identity at the time of
transfer from the ECOZONE to the customs territory. A
merchandise shall be deemed to have lost its identity when, at
the time of transfer there has been a change in the physical or
mechanical characteristics and/or electro-magnetic or chemical
properties of such merchandise.

DOMESTIC SALE

Finished products of registered Export of Free Trade Enterprises

not included in the negative list shall be made available of
domestic sale in the customs territory or retail stores/
shopping malls within the commercial/tourist or other authorized
areas of the ECOZONES, subject to all applicable rules and
regulations including the payment of customs duties and internal
revenue taxes, to the applicable provisions of the Retail Trade
Nationalization Law, as amended, and to such other regulations
or limitations as may be adopted by the Board.

IDENTITY

When the identity of an article taken to the restricted areas of

the ECOZONES defined in Section 4 above has been lost, such
article shall, when taken from the ECOZONE to the customs
territory or to the non-restricted areas of the ECOZONE, be
treated as foreign merchandise entering the country for the
first time.

SUBSEQUENT IMPORTATION

Goods or merchandise produced or manufactured in the restricted

areas of the ECOZONE and exported therefrom shall, on subsequent
importation into the customs territory, be subject to the import
laws applicable to like articles manufactured in a foreign
country.
UNACCOUNTED ARTICLES WITHIN THE ECONOMIC ZONE

Zone registered enterprises operating within the Zone shall be

responsible for the safekeeping and accounting of all articles
received by them. Articles which are missing or cannot be
accounted for in the Zone shall be presumed to have been
transferred to the Customs Territory without permit and
therefore subject to taxes and duties.

Articles which are found in the Zone but cannot be accounted for
in the records of a zone registered enterprise shall be treated
as having been received in the Zone without permit and therefore
should be reported to the SBMA, PEZA, ZAMBO-ECOZONE Authority or
CEZA and the Bureau of Customs.

Page 52
LINK TO VAT ZERO-RATING

Sales of goods or property to persons or entities who are tax-

exempt under special laws, e.g. sales to enterprises duly
registered and accredited with the Subic Bay Metropolitan
Authority (SBMA) pursuant to R.A. No. 7227, sales to enterprises
duly registered and accredited with the Philippine Economic Zone
Authority (PEZA) or international agreements to which the
Philippines is signatory, such as, Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc., shall be
effectively subject to VAT at zero-rate.

Illustration:

Nidorino, a VAT-registered entity, is a supplier of supplies and

materials to several entities, the following may be relevant to
your evaluation of the former’s VAT liabilities:

Sales to entities operating within the customs territory, net of VAT ₱ 13,000,000.00

Sales to entities operating within the ECOZONE, net of VAT ₱ 24,000,000.00

VAT-exempt sales ₱ 10,000,000.00

Input VAT related to:

Sales to entities operating within the customs territory ₱ 300,000.00

Sales to entities operating within the ECOZONE ₱ 700,000.00

VAT-exempt sales ₱ 350,000.00

How much is Nidorino’s net VAT payable(refundable)?

P 560,000.

OUTPUT VAT

Customs territory sales (13M x 12%) ₱ 1,560,000.00

ECOZONE Sales (24M x 0%) ₱ 0.00

TOTAL OUPUT VAT ₱ 1,560,000.00

Input VAT

Customs territory sales ₱ 300,000.00

ECOZONE Sales ₱ 700,000.00

TOTAL INPUT VAT ₱ (1,000,000.00)

NET VAT PAYABLE ₱ 560,000.00

Note:

1. Customs territory refers to the national territory of the

Philippines outside the boundaries of the ECOZONE, simply

Page 53
 stated, Philippine soil. Thus, customs territory sales only
refer to domestic sales;
2. ECOZONES are select portions of the Philippine soil that is
deemed foreign by fiction of law, thus, all sales to ECOZONES
are deemed exports;
3. Input VAT related to VAT-exempt sales are not creditable from
output VAT.
4. Even though export sales does not give birth to output VAT,
input VAT related thereto are creditable from output VAT.

Regulations No. 2-88, which applied to zero-rated export sales

to export-oriented BOI-registered enterprises, should not be
applied to the applications for refund/credit of input VAT filed
by petitioner corporation since it based its applications on the
zero-rating of export sales to enterprises registered with the
EPZA and located within export processing zones.

Page 54
THE OMNIBUS INVESTMENT CODE (E.O. 226)

DECLARATION OF POLICY
To accelerate the sound development of the national economy in
consonance with the principles and objectives of economic
nationalism and in pursuance of a planned economically feasible
and practical dispersal of industries and the promotion of small
and medium scale industries, under conditions which will
encourage competition and discourage monopolies, the following
are declared policies of the State:

1. The State shall encourage private Filipino and foreign

investments in industry, agriculture, forestry, mining,
tourism and other sectors of the economy which shall: provide
significant employment opportunities relative to the amount of
the capital being invested; increase productivity of the land,
minerals, forestry, aquatic and other resources of the
country, and improve utilization of the products thereof;
improve technical skills of the people employed in the
enterprise; provide a fountain for the future development of
the economy; meet the tests of international competitiveness;
accelerate development of less developed regions of the
country; and result in increased volume and value of exports
for the economy.
2. T h e S t a t e s h a l l e n s u r e t h e h o l i s t i c d e v e l o p m e n t b y
safeguarding the well-being of the social, cultural and
ecological life of the people. For this purpose, consultation
with affected communities will be conducted whenever
necessary.

Page 55
3. The State shall extend to projects which will significantly
contribute to the attainment of these objectives, fiscal
incentives without which said projects may not be established
in the locales, number and/or pace required for optimum
national economic development. Fiscal incentive system shall
be devised to compensate for market imperfections, to reward
performance contributing to economic development, be cost-
efficient and be simple to administer.
4. The State considers the private sector as the prime mover for
economic growth. In this regard, private initiative is to be
encouraged, with deregulation and self-regulation of business
activities to be generally adopted where dictated by urgent
social concerns.
5. The State shall principally play a supportive role, rather
than a competitive one, providing the framework, the climate
and the incentives within which business activity is to take
place.
6. The State recognize that there are appropriate roles for local
and foreign capital to play in the development of the
Philippine economy and that it is the responsibility of
Government to define these roles and provide the climate for
their entry and growth.
7. The State recognizes that industrial peace is an essential
element of economic growth and that it is a principal
responsibility of the State to ensure that such condition
prevails.
8. Fiscal incentives shall be extended to stimulate the
establishment and assist initial operations of the enterprise,
and shall terminate after a period of not more than 10 years
from registration or start-up of operation unless a specific
period is otherwise stated.

The foregoing declaration of investment policies shall apply to

all investment incentive schemes. (Article 2, E.O 226)

PREFERRED AREAS OF INVESTMENT

Preferred areas of investments shall mean the economic

activities that the Board shall have declared as such in
accordance with Article 28 which shall be either non-pioneer or
pioneer. (Article 16, E.O. 226)

Pioneer enterprise shall mean a registered enterprise:

1. engaged in the manufacture, processing or production, and not

merely in the assembly or packaging of goods, products,
commodities or raw materials that have not been or are not
being produced in the Philippines on a commercial scale; or
2. which uses a design, formula, scheme, method, process, or
system of production or transformation of any element,
substance or raw materials into another raw material or
finished goods which is new and untried in the Philippines; or
3. engaged in the pursuit of agricultural, forestry and mining
activities and/or services including the industrial aspects of
food processing whenever appropriate, pre-determined by the

Page 56
 Board, in consultation with the appropriate Department, to be
feasible and highly essential to the attainment of the
national goal, in relation to a declared specific national
food and agricultural program for self-sufficiency and other
social benefits of the project; or
4. which produces non-conventional fuels or manufactures
equipment which utilize non-conventional sources of energy or
uses or converts to coal or other non-conventional fuels or
sources of energy in its production, manufacturing or
processing operations. Provided, That the final product in any
of the foregoing instances, involves or will involve
substantial use and processing of domestic raw materials,
whenever available; taking into account the risks and
magnitude of investment: Provided, further, That the foregoing
definitions shall not in any way limit the rights and
incentives granted to less-developed- area enterprises
provided under Title V, Book I, hereof. (Article 17, E.O. 226)

Non-pioneer enterprise shall include all registered producer

enterprises other than pioneer enterprises. (Article 18, E.O.
226)

INVESTMENT PRIORITIES PLAN

Investment Priorities Plan. — Not later than the end of March of

every year, the Board of Investments, after consultation with
the appropriate government agencies and the private sector,
shall submit to the President an Investment Priorities Plan:
Provided, however, That the deadline for submission, may be
extended by the President. (Article 27, E.O. 226)

Criteria in Investment Priority Determination. — No economic

activity shall be included in the Investment Priority Plan
unless it is shown to be economically, technically and
financially sound after thorough investigation and analysis by
the Board.
The determination of preferred areas of investment to be listed
in the Investment Priorities Plan shall be based on long-run
comparative advantage, taking into account the value of social
objectives and employing economic criteria along with market,
technical, and financial analyses.

The Board shall take into account the following:

a. Primarily, the economic soundness of the specific activity as

shown by its economic internal rate of return;
b. The extent of contribution of an activity to a specific
developmental goal;
c. Other indicators or comparative advantage;
d. Measured capacity as defined in Article 20; and
e. The market and technical aspects and considerations of the
activity proposed to be included.

In any of the declared preferred areas of investment, the Board

may designate as pioneer areas the specific products and

Page 57
commodities that meet the requirements of Article 17 of this
Code and review yearly whether such activity, as determined by
the Board, shall continue as pioneer, otherwise, it shall be
considered as non-pioneer and accordingly listed as such in the
Investment Priorities Plan or removed from the Investment
Priorities Plan. (Article 28, E.O. 226)

Approval of the Investment Priorities Plan. — The President

shall proclaim the whole or part of such plan as in effect; or
alternatively, return the whole or part of the plan to the Board
of Investment for revision.

Upon the effectivity of the plan or portions thereof, the

President shall issue all necessary directives to all
departments, bureaus, agencies or instrumentalities of the
government to ensure the implementation of the plan by the
agencies concerned in a synchronized and integrated manner. No
government body shall adopt any policy or take any course of
action contrary to or inconsistent with the plan. (Article 29,
E.O. 226)

INVESTMENTS WITH INCENTIVES

A registered enterprise shall mean any individual, partnership,

cooperative, corporation or other entity incorporated and/or
organized and existing under Philippine laws; and registered
with the Board of Investments.

Provided, however, that the term “registered enterprise” SHALL

NOT INCLUDE:

a. Commercial banks;
b. Savings and mortgage banks;
c. Rural banks;
d. Savings and loan associations;
e. Building and loan associations;
f. Developmental banks;
g. Trust companies;
h. Investment banks;
i. Finance companies;
j. Brokers and dealer in securities;
k. Consumers cooperatives and credit unions;
l. Other organizations whose principal purpose or principal
source of income is to receive deposits, lend or borrow money,
buy and sell or otherwise deal, trade or invest in common or
preferred stocks, debentures, bonds or other marketable
instruments generally recognized as securities, or discharge
other similar intermediary, trust of fiduciary functions.
(Article 11, E.O. 226)

INCENTIVES TO REGISTERED ENTERPRISES

All registered enterprises shall be granted the following

incentives to the extent engaged in a preferred area of
investment:

Page 58
INCOME TAX HOLIDAY

1. For six(6) years from commercial operation for pioneer firms11

and four (4) years for non-pioneer firms12, new registered
firms shall be fully exempt from income taxes levied by the
National Government. (Article 39(a), E.O. 226);
2. For a period of three (3) years from commercial operation,
registered expanding firms shall be entitled to an exemption
from income taxes levied by the National Government
proportionate to their expansion under such terms and
conditions as the Board may determine; Provided, however, That
during the period within which this incentive is availed of by
the expanding firm13 it shall not be entitled to additional
deduction for incremental labor expense. (Article 39(a), E.O.
226)

Registered firms shall not be entitled to any extension of this

incentive.

The Board has the power to:

Extend the period of availment of incentives by any registered

enterprise; Provided, That the total period of availment shall
not exceed ten (10) years, subject to any of the following
criteria:

a. The registered enterprise has suffered operational force

majeure that has impaired its viability;
b. The registered enterprise has not fully enjoyed the incentives
granted to it for reasons beyond its control;

11 "Pioneer enterprise" shall mean a registered enterprise (1) engaged in the manufacture, processing or
production, and not merely in the assembly or packaging of goods, products, commodities or raw
materials that have not been or are not being produced in the Philippines on a commercial scale or (2)
which uses a design, formula, scheme, method, process, or system of production or transformation of
any element, substance or raw materials into another raw material or finished goods which is new and
untried in the Philippines or (3) engaged in the pursuit of agricultural, forestry and mining activities and/
or services including the industrial aspects of food processing whenever appropriate, pre-determined by
the Board, in consultation with the appropriate Department, to be feasible and highly essential to the
attainment of the national goal, in relation to a declared specific national food and agricultural program
for self-sufficiency and other social benefits of the project or (4) which produces non-conventional fuels
or manufactures equipment which utilize non-conventional sources of energy or uses or converts to coal
or other non-conventional fuels or sources of energy in its production, manufacturing or processing
operations. Provided, That the final product in any of the foregoing instances, involves or will involve
substantial use and processing of domestic raw materials, whenever available; taking into account the
risks and magnitude of investment: Provided, further, That the foregoing definitions shall not in any way
limit the rights and incentives granted to less-developed- area enterprises provided under Title V, Book I,
hereof.

12 "Non-pioneer enterprise" shall include all registered producer enterprises other than pioneer
enterprises.

13shall include modernization and rehabilitation and shall mean increase of existing volume or value of
production or upgrading the quality of the registered product or utilization of inefficient or idle
equipment under such guidelines as the Board may adopt.

Page 59
c. The project of the registered enterprise has a gestation
period which goes beyond the period of availment of needed
incentives; and
d. The operation of the registered enterprise has been subjected
to unforeseen changes in government policies, particularly,
protectionalism policies of importing countries, and such
other supervening factors which would affect the
competitiveness of the registered firm

ADDITIONAL DEDUCTION FOR LABOR EXPENSE

For the first five (5) years from registration a registered

enterprise shall be allowed an additional deduction from the
taxable income of fifty percent (50%) of the wages corresponding
to the increment in the number of direct labor for skilled and
unskilled workers if the project meets the prescribed ratio of
capital equipment to number of workers set by the Board:
Provided, That this additional deduction shall be doubled if the
activity is located in less developed areas as defined in Art.
40. (Article 39(b), E.O. 226)

TAX AND DUTY EXEMPTION ON IMPORTED CAPITAL EQUIPMENT

Within five (5) years from the effectivity of this Code,

importations of machinery and equipment and accompanying spare
parts of new and expanding registered enterprise shall be exempt
to the extent of one hundred percent (100%) of the customs
duties and national internal revenue tax payable thereon:
Provided, That the importation of machinery and equipment and
accompanying spare parts shall comply with the following
conditions:

1. They are not manufactured domestically in sufficient

quantity, of comparable quality and at reasonable prices;
2. They are reasonably needed and will be used exclusively by
the registered enterprise in the manufacture of its
products, unless prior approval of the Board is secured for
the part-time utilization of said equipment in a non-
registered activity to maximize usage thereof or the
proportionate taxes and duties are paid on the specific
equipment and machinery being permanently used for non-
registered activities; and
3. The approval of the Board was obtained by the registered
enterprise for the importation of such machinery, equipment
and spare parts.

In granting the approval of the importations under this

paragraph, the Board may require international canvassing but if
the total cost of the capital equipment or industrial plant
exceeds US$5,000,000, the Board shall apply or adopt the
provisions of Presidential Decree Numbered 1764 on International
Competitive Bidding.

Page 60
If the registered enterprise sells, transfers or disposes of
these machinery, equipment and spare parts without prior
approval of the Board within five (5) years from date of
acquisition, the registered enterprise and the vendee,
transferee, or assignee shall be solidarily liable to pay twice
the amount of the tax exemption given it.

The Board shall allow and approve the sale, transfer or

disposition of the said items within the said period of five (5)
years if made:

a. to another registered enterprise or registered domestic

producer enjoying similar incentives;
b. for reasons of proven technical obsolescence; or
c. for purposes of replacement to improve and/or expand the
operations of the registered enterprise. (Article 39(c),
E.O. 226)

TAX CREDIT ON DOMESTIC CAPITAL EQUIPMENT

A tax credit equivalent to one hundred percent (100%) of the

value of the national internal revenue taxes and customs duties
that would have been waived on the machinery, equipment and
spare parts, had these items been imported shall be given to the
new and expanding registered enterprise which purchases
machinery, equipment and spare parts from a domestic
manufacturer: Provided, That (1) That the said equipment,
machinery and spare parts are reasonably needed and will be used
exclusively by the registered enterprise in the manufacture of
its products, unless prior approval of the Board is secured for
the part-time utilization of said equipment in a non-registered
activity to maximize usage thereof; (2) that the equipment would
have qualified for tax and duty-free importation under paragraph
(c) hereof; (3) that the approval of the Board was obtained by
the registered enterprise; and (4) that the purchase is made
within five (5) years from the date of effectivity of the Code.
If the registered enterprise sells, transfers or disposes of
these machinery, equipment and spare parts, the provisions in
the preceding paragraph for such disposition shall apply.
(Article 39(d), E.O. 226)

EXEMPTION FROM CONTRACTOR’S TAX

The registered enterprise shall be exempt from the payment of

contractor's tax, whether national or local. (Article 39(e),
E.O. 226)

SIMPLIFICATION OF CUSTOMS PROCEDURE

Customs procedures for the importation of equipment, spare

parts, raw materials and supplies, and exports of processed
products by registered enterprises shall be simplified by the
Bureau of Customs. (Article 39(f), E.O. 226)

Page 61
UNRESTRICTED USE OF CONSIGNED EQUIPMENT

Provisions of existing laws notwithstanding, machinery,

equipment and spare part consigned to any registered enterprises
shall not be subject to restrictions as
to period of use of such machinery, equipment and spare parts
Provided, that the appropriate re-export bond is posted unless
the importation is otherwise covered under subsections (c) and
(m) of this Article.

Provided, further, that such consigned equipment shall be for

the exclusive use of the registered enterprise.

If such equipment is sold, transferred or otherwise disposed of

by the registered enterprise the related provision of Article 39
(c) (3) shall apply. Outward remittance of foreign exchange
covering the proceeds of such sale, transfer or disposition
shall be allowed only upon prior Central Bank approval. (Article
39(g), E.O. 226)

EMPLOYMENT OF FOREIGN NATIONALS

Subject to the provisions of Section 29 of Commonwealth Act

Number 613, as amended, a registered enterprise may employ
foreign nationals in supervisory, technical or advisory
positions for a period not exceeding five (5) years from its
registration, extendible for limited periods at the discretion
of the Board: Provided, however, That when the majority of the
capital stock of a registered enterprise is owned by foreign
investors, the position of president, treasurer and general
manager or their equivalents may be retained by foreign
nationals beyond the period set forth herein.

Foreign nationals under employment contract within the purview

of this incentive, their spouses and unmarried children under
twenty-one (21) years of age, who are not excluded by Section 29
of Commonwealth Act Numbered 613, as amended, shall be permitted
to enter and reside in the Philippines during the period of
employment of such foreign nationals.

A registered enterprise shall train Filipinos as understudies of

foreign nationals in administrative, supervisory and technical
skills and shall submit annual reports on such training to the
Board. (Article 39(h), E.O. 226)

EXEMPTION ON BREEDING STOCKS AND GENETIC MATERIALS

The importation of breeding stocks and genetic materials within

ten (10) years from the date of registration or commercial
operation of the enterprise shall be exempt from all taxes and
duties: Provided, That such breeding stocks and genetic
materials are (1) not locally available and/or obtainable
locally in comparable quality and at reasonable prices; (2)

Page 62
reasonably needed in the registered activity; and (3) approved
by the Board. (Article 39(i), E.O. 226)

TAX CREDIT ON DOMESTIC BREEDING STOCKS AND GENETIC MATERIALS

A tax credit equivalent to one hundred percent (100%) of the

value of national internal revenue taxes and customs duties that
would have been waived on the breeding stocks and genetic
materials had these items been imported shall be given to the
registered enterprise which purchases breeding stocks and
generic materials from a domestic producer: Provided,

1. that said breeding stocks and generic materials would have

qualified for tax and duty free importation under the
preceding paragraph;
2. that the breeding stocks and genetic materials are reasonably
needed in the registered activity;
3. that the approval of the board has been obtained by the
registered enterprise; and
4. that the purchase is made within ten (10) years from date of
registration or commercial operation of the registered
enterprise. (Article 39(j), E.O. 226)

TAX CREDIT FOR TAXES AND DUTIES ON RAW MATERIALS

Every registered enterprise shall enjoy a tax credit equivalent

to the National Internal Revenue taxes and Customs duties paid
on the supplies, raw materials and semi-manufactured products
used in the manufacture, processing or production of its export
products and forming part thereof, exported directly or
indirectly by the registered enterprise: Provided, however, that
the taxes on the supplies, raw materials and semi- manufactured
products domestically purchased are indicated as a separate item
in the sales invoice.

Nothing herein shall be construed as to preclude the Board from

setting a fixed percentage of export sales as the approximate
tax credit for taxes and duties of raw materials based on an
average or standard usage for such materials in the industry.
(Article 39(k), E.O. 226)

ACCESS TO BONDED MANUFACTURING/TRADING WAREHOUSE SYSTEM

Registered export oriented enterprises shall have access to the

utilization of the bonded warehousing system in all areas
required by the project subject to such guidelines as may be
issued by the Board upon prior consultation with the Bureau of
Customs. (Article 39(l), E.O. 226)

Page 63
EXEMPTION FROM TAXES AND DUTIES ON IMPORTED SPARE PARTS

Importation of required supplies and spare parts for consigned

equipment or those imported tax and duty free by a registered
enterprise with a bonded manufacturing warehouse shall be exempt
from customs duties and national internal revenue taxes payable
thereon, Provided, However, That at least seventy percent (70%)
of production is exported; Provided, further, that such spare
parts and supplies are not locally available at reasonable
prices, sufficient quantity and comparable quality; Provided,
finally, That all such spare parts and supplies shall be used
only in the bonded manufacturing warehouse of the registered
enterprise under such requirements as the Bureau of Customs may
impose. (Article 39(m), E.O. 226)

EXEMPTION FROM WHARFAGE DUES AND ANY EXPORT TAX, DUTY, IMPOST
AND FEE

The provisions of law to the contrary notwithstanding, exports

by a registered enterprise of its non- traditional export
products shall be exempted of its non-traditional export
products shall be exempted from any wharfage dues, and any
export tax, duty, impost and fee. (Article 39(n), E.O. 226)

INCENTIVES TO LESS-DEVELOPED AREA REGISTERED ENTERPRISE

A registered enterprise regardless of nationality located in a

less-developed-area included in the list prepared by the Board
of Investments after consultation with the National Economic &
Development Authority and other appropriate government agencies,
taking into consideration the following criteria: low per capita
gross domestic product; low level of investments; high rate of
unemployment and/or underemployment; and low level of
infrastructure development including its accessibility to
develop urban centers, shall be entitled to the following
incentives in addition to those provided in the preceding
article:

a. Pioneer incentives. — An enterprise in a less-developed-area

registered with the Board under Book I of this Code, whether
proposed, or an expansion of an existing venture, shall be
entitled to the incentives provided for a pioneer registered
enterprise under its law of registration.

b. Incentives for necessary and Major Infrastructure and Public

Utilities. — Registered enterprise establishing their
production, processing or manufacturing plants in an area that
the Board designates as necessary for the proper dispersal of
industry or in area which the Board finds deficient in
infrastructure, public utilities, and other facilities, such
as irrigation, drainage or other similar waterworks
infrastructure may deduct from taxable income an amount
equivalent to one hundred percent (100%) of necessary and
major infrastructure works it may have undertaken with the

Page 64
 prior approval of the Board in consultation with other
government agencies concerned; Provided, That the title to all
such infrastructure works shall upon completion, be
transferred to the Philippine Government: Provided, further,
That any amount not deducted for a particular year may be
carried over for deduction for subsequent years not exceeding
ten (10) years from commercial operation. (Article 30, E.O
226)

EXEMPTION FROM THE MAXIMUM STORAGE PERIOD UNDER THE TARIFF AND
CUSTOMS CODE

The provision of the law in Section 1908 of the Tariff and

Customs Code of the Philippines, as amended, to the contrary
notwithstanding, articles duly entered for warehousing may
remain in the regional warehouses for a period of two (2) years
from the time of their transfer to the regional warehouse, which
period may be extended with the approval of the Board of
Investments for an additional period of one (1) year upon
payment of the corresponding storage fee on the unexported
articles, as provided for under Article 68 paragraph (c) for
each extension until they are re-exported in accordance with the
guidelines implementing Book IV of this Code. Any article,
withdrawn, release or removed contrary to the provisions of said
guidelines shall be forfeited pursuant to the provisions of
Article 69, paragraph (b) hereof. (Article 70, E.O 226)

In sum, all registered enterprises shall be granted the

following primary incentives to the extent engaged in a
preferred are of investment:

1. Income tax holiday;

2. Additional deduction for labor expense;
3. Tax and duty exemption on imported capital equipment;
4. Exemption from Contractor’s tax;
5. Simplification of Customs procedure;
6. Unrestricted Use of consigned equipment;
7. Employment of foreign nationals;
8. Exemption on breeding stocks and genetic materials;
9. Tax credit on domestic breeding stock and genetic
materials;
10.Tax credit for taxes and duties on raw materials;
11.Access to bonded manufacturing/trading warehouse system;
12.Exemption from taxes and duties on imported spare parts;
13.Exemption from wharfage dues and any export tax, impost and
fees.

Page 65
OTHER BASIC RIGHTS AND GUARANTEES
PROTECTION OF INVESTMENTS

All investors and registered enterprises are entitled to the

basic rights and guarantees provided in the Constitution. Among
other rights recognized by the Government of the Philippines are
the following:

a. Repatriation of Investments. — In the case of foreign

investments, the right to repatriate the entire proceeds of
the liquidation of the investment in the currency in which the
investment was originally made and at the exchange rate
prevailing at the time of repatriation, subject to the
provisions of Section 74 of Republic Act No. 265 as amended;
For investments made pursuant to Executive Order No. 32 and
its implementing rules and regulations, remittability shall be
as provided therein.
b. Remittance of Earnings. — In the case of foreign investments,
the right to remit earnings from the investment in the
currency in which the investment was originally made and at
the exchange rate prevailing at the time of remittance,
subject to the provisions of Section 74 of Republic Act No.
265 as amended;
c. Foreign Loans and Contracts. — The right to remit at the
exchange rate prevailing at the time of remittance such sums
as may be necessary to meet the payments of interest and
principal on foreign loans and foreign obligations arising
from technological assistance contracts, subject to the
provisions of Section 74 of Republic Act No. 265 as amended;
d. Freedom from Expropriation. — There shall be no expropriation
by the government of the property represented by investments
or of the property of the enterprise except for public use or
in the interest of national welfare or defense and upon
payment of just compensation. In such cases, foreign investors
or enterprises shall have the right to remit sums received as
compensation for the expropriated property in the currency in
which the investment was originally made and at the exchange
rate at the time of remittance, subject to the provisions of
Section 74 of Republic Act No. 265 as amended;
e. Requisition of Investment. — There shall be no requisition of
the property represented by the investment or of the property
of enterprises, except in the event of war or national
emergency and only for the duration thereof. Just compensation
shall be determined and paid either at the time of requisition
or immediately after cessation of the state of war or national
emergency. Payments received as compensation for the
requisitioned property may be remitted in the currency in
which the investment was originally made and at the exchange
rate prevailing at the time of remittance, subject to the
provisions of Section 74 of Republic Act No. 265 as amended.
(Article 38, E.O 226)

Page 66
REGISTRATION OF ENTERPRISES

Qualifications of a Registered Enterprises. — To be entitled to

registration under the Investment Priorities Plan, an applicant
must satisfy the Board that:

1. He is a citizen of the Philippines, in case the applicant is a

natural person, or in case of a partnership or any other
association, it is organized under Philippine laws and that at
least sixty percent (60%) of its capital is owned and
controlled by citizens of the Philippines; or in case of a
corporation or a cooperative, it is organized under Philippine
laws and that at least sixty per cent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
Philippine nationals as defined under Article 15 of this Code,
and at least sixty per cent (60%) of the members of the Board
of Directors are citizens of the Philippines. If it does not
possess the required degree of ownership as mentioned above by
Philippine nationals, the following circumstances must be
satisfactorily established:

a. That it proposes to engage in a pioneer projects as defined

in Article 17 of this Code, which, considering the nature
and extent of capital requirements, processes, technical
skills and relative business risks involved, is in the
opinion of the Board of such a nature that the available
measured capacity thereof cannot be readily and adequately
filled by Philippine nationals; or, if the applicant is
exporting at least seventy per cent (70%) of is total
production, the export requirement herein provided may be
reduced in meritorious cases under such conditions and/or
limited incentives as the Board may determine;
b. That it obligates itself to attain the status of a
Philippine national, as defined in Article 15, within
thirty (30) years from the date of registration or with
such longer period as the Board may require taking into
account the export potential of the project: Provided, That
a registered enterprise which exports one hundred percent
(100%) of its total production need not comply with this
requirement;
c. That the pioneer are it will engage in is one that is not
within the activities reserved by the Constitution or other
laws of the Philippines to the Philippine citizens or
corporations owned and controlled by Philippine citizens;

2. The applicant is proposing to engage in a preferred project

listed or authorized in the current Investment Priorities Plan
within a reasonable time to be fixed by the Board or, if not
so listed, at least fifty percent (50%) of its total
production is for export or it is an existing producer which
will export part of production under such conditions and/or
limited incentives as the Board may determine; or that the
enterprise is engaged or proposing to engage in the sale
abroad of export products bought by it from one or more export
producers; or the enterprise in engaged or proposing to engage
in rendering technical, professional or other services or in

Page 67
 exporting television and motion pictures and musical
recordings made or produced in the Philippines, either
directly or through a registered trader.

3. The applicant is capable of operating on a sound and efficient

basis of contributing to the national development of the
preferred area in particular and of the national economy in
general; and

4. If the applicant is engaged or proposes to engage in

undertakings or activities other than preferred projects, it
has installed or undertakes to install an accounting system
adequate to identify the investments, revenues, costs, and
profits or losses of each preferred project undertaken by the
enterprise separately from the aggregate investment, revenues,
costs and profits or losses of the whole enterprise or to
establish a separate corporation for each preferred project if
the Board should so require to facilitate proper
implementation of this Code. (Article 32, E.O 226)

APPLICATION

Applications shall be filed with the Board, recorded in a

registration book and the date appearing therein and stamped on
the application shall be considered the date of official
acceptance.

Whenever necessary, the Board, through the People's Economic

Councils, shall consult the communities affected on the
acceptability of locating the registered enterprise within their
community. (Article 33, E.O 226)

APPROVAL AND REGISTRATION PROCEDURES

The Board is authorized to adopt rules and regulations to

facilitate action on applications filed with it; prescribe
criteria for the evaluation of several applications filed in one
preferred area; devise standard forms for the use of applicants
and delegate to the regional offices of the Department of Trade
and Industry the authority to receive and process applications
for enterprises to be located in their respective regions.
Applications filed shall be considered automatically approved if
not acted upon by the Board within twenty (20) working days from
official acceptance thereof. (Article 34, E.O 226)

CRITERIA FOR EVALUATION OF APPLICATIONS

The following criteria will be considered in the evaluation of

applications for registration under a preferred area:

a. The extent of ownership and control by Philippine citizens

of the enterprises;
b. The economic rates of return;

Page 68
c. The measured capacity Provided, That estimates of measured
capacities shall be regularly reviewed and updated to
reflect changes in market supply and demand conditions;
Provided, Further, That measured capacity shall not result
in a monopoly in any preferred area of investment which
would unduly restrict trade and fair competition nor shall
it be used to deny the entry of any enterprise in any field
of endeavor or activity; (d) The amount of foreign exchange
earned, used or saved in their operations;
d. The extent to which labor, materials and other resources
obtained from indigenous sources are utilized;
e. The extent to which technological advances are applied and
adopted to local condition;
f. The amount of equity and degree to which the ownership of
such equity is spread out and diversified; and
g. Such other criteria as the Board may determine. (Article
35, E.O 226)

Page 69
BASES CONVERSION AND DEVELOPMENT ACT (R.A. 7227)

DECLARATION OF POLICY

It is hereby declared the policy of the Government to accelerate

the sound and balanced conversion into alternative productive
uses of the Clark and Subic military reservations and their
extension (John Hay Station, Wallace Air Station, O'Donnell
Transmitter Station, San Miguel Naval Communications Station and
Capas Relay Station), to raise funds by the sale of portions of
Metro Manila military camps, and to apply said funds as provided
herein for the development and conversion to productive civilian
use of the lands covered under the 1947 Military Bases Agreement
between the Philippines and the United States of America, as
amended. (Section 2)

SUBIC SPECIAL ECONOMIC ZONE

Subject to the concurrence by resolution of the Sangguniang
Panlungsod of the City of Olongapo and the Sangguniang Bayan of
the Municipalities of Subic, Morong and Hermosa, there is hereby
created a Special Economic and Free-port Zone consisting of the
City of Olongapo and the Municipality of Subic, Province of
Zambales, the lands occupied by the Subic Naval Base and its
contiguous extensions as embraced, covered, and define by the
1947 Military Bases Agreement between the Philippines and the
United States of America as amended, and within the territorial
jurisdiction of the municipalities of Morong and Hermosa,
Province of Bataan, hereinafter referred to as the Subic Special
Economic Zone whose metes and bounds shall be delineated in a

Page 70
proclamation to be issued by the President of the Philippines.
(Section 12)

POLICIES
a. Within the framework and subject to the mandate and
limitations of the Constitution and the pertinent provisions
of the Local Government Code, the Subic Special Economic Zone
shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate
employment opportunities in and around the zone and to attract
and promote productive foreign investments;

b. The Subic Special Economic Zone shall be operated and managed

as a separate customs territory ensuring free flow or movement
of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives
such as tax and duty-free importations of raw materials,
capital and equipment. However, exportation or removal of
goods from the territory of the Subic Special Economic Zone to
the other parts of the Philippine territory shall be subject
to customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;

c. The provision of existing laws, rules and regulations to the

contrary notwithstanding, no taxes, local and national, shall
be imposed within the Subic Special Economic Zone. In lieu of
paying taxes, three percent (3%) of the gross income earned by
all businesses and enterprise within the Subic Special
Economic Zone shall be remitted to the National Government,
one percent (1%) each to the local government units affected
by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is
hereby established a development fund of one percent (1%) of
the gross income earned by all business and enterprise within
the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of Olongapo and
the Municipality of Subic, and other municipalities contiguous
to the base areas. In case of conflict between national and
local laws with respect to tax exemption privileges in the
Subic Special Economic Zone, the same shall be resolve in
favor of the latter;

d. No exchange control policy shall be applied and free markets

for foreign exchange, gold, securities and future shall be
allowed and maintained in the Subic Special Economic Zone;

e. The Central Bank, through the Monetary Board, shall supervise

and regulate the operations of banks and other financial
institutions within the Subic Special Economic Zone;

f. B a n k i n g a n d f i n a n c e s h a l l b e l i b e r a l i z e d w i t h t h e
establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks
with minimum Central Bank regulation;

Page 71
g. Any investor within the Subic Special Economic Zone whose
continuing investment shall not beless than Two hundred fifty
thousand dollars ($250,000), his/her spouse and dependent
children under twenty-one (21) years of age, shall be granted
permanent resident status within the Subic Special Economic
Zone. They shall have freedom of ingress and egress to and
from the Subic Special Economic Zone without any need of
special authorization from the Bureau of Immigration and
deportation. The Subic Bay Metropolitan Authority referred to
in Section 13 of this Act may also issue working visas
renewable every two (2) years to foreign executives and other
aliens possessing highly technical skills which liked Filipino
within the Subic Special Economic Zone possesses, as certified
by the Department of Labor and Employment. The names of aliens
granted permanent residence status and working visas by the
Subic Bay metropolitan Authority shall be reported to the
Bureau of Immigration and Deportation within thirty (30) days
after issuance thereof;

h. The defense of the zone and the security of its perimeters

shall be the responsibility of the National Government in
coordination with the Subic Bay Metropolitan Authority. The
Subic Bay Metropolitan Authority shall provide and establish
its own internal security and firefighting forces; and Except
as herein provided, the local government units comprising the
Subic Special economic Zone shall retain their basic autonomy
and identity. The cities shall be governed by their respective
charters and the municipalities shall operate and function in
accordance with republic Act No. 7160, otherwise known as the
Local Government Code of 1991. (Section 12)

THE SUBIC BAY METROPOLITAN AUTHORITY

a. Creation of the Subic Bay Metropolitan Authority A body
corporate to be known as the Subic Bay Metropolitan Authority
is hereby created as an operating and implementing arm of the
Conversion Authority.

b. Powers and functions of the Subic Bay Metropolitan Authority

The Subic Bay Metropolitan Authority, otherwise known as the
Subic Authority, shall have the following powers and function:

1. To operate, administer, manage and develop the ship repair

and ship building facility, container port, oil storage and
refueling facility and Cubi Air Base within the Subic
SpecialEconomic and Free-port Zone as a free market in
accordance with the policies set forth in Section 12 of
this Act;
2. To accept any local or foreign investment, business or
enterprise, subject only to such rules and regulations to
be promulgated by the Subic Authority in conformity with
the policies of the Conversion Authority without prejudice
to the nationalization requirements provided for in the
Constitution;

Page 72
3. To undertake and regulate the establishment, operation and
maintenance of utilities, other services and infrastructure
in the Subic Special Economic Zone including shipping and
related business, stevedoring and port terminal services or
concessions, incidental thereto and airport operations in
coordination with the Civil Aeronautics Board, and to fix
just and reasonable rates, fares charges and other prices
therefor;
4. To construct, acquire, own lease, operate and maintain on
its own or through contract, franchise, license permits
bulk purchase from the private sector and build-operate
transfer scheme or joint-venture the required utilities and
infrastructure in coordination with local government units
and appropriate government agencies concerned and in
conformity with existing applicable laws therefor;
5. To adopt, alter and use a corporate seal; to contract,
lease, sell, dispose, acquire and own properties; to sue
and be sued in order to carry out its duties and functions
as provided for in this Act and to carry exercise the power
of eminent domain for public use and public purpose;
6. Within the limitation provided by law, to raise and/or
borrow the necessary funds from local and international
financial institutions and to issue bonds, promissory notes
and other securities for that purpose and to secure the
same by guarantee, pledge, mortgage deed of trust, or
assignment of its properties held by the Subic Authority
for the purpose of financing its projects and programs
within the framework and limitation of this Act;
7. To operate directly or indirectly or license tourism
related activities subject to priorities and standards set
by the Subic Authority including games and amusements,
except horse racing, dog racing and casino gambling which
shall continue to be licensed by the Philippine Amusement
and Gaming Corporation (PAGCOR) upon recommendation of the
Conversion Authority; to maintain and preserve the forested
areas as a national park;
8. To authorize the establishment of appropriate educational
and medical institutions;
9. To protect, maintain and develop the virgin forests within
the baselands, which will be proclaimed as a national park
and subject to a permanent total log ban, and for this
purpose, the rules and regulations of the Department of
Environment and Natural Resources and other government
agencies directly involved in the above functions shall be
implemented by the Subic Authority;
10.To adopt and implement measures and standards for
environmental pollution control of all areas within its
territory, including but not limited to all bodies of water
and to enforce the same. For which purpose the Subic
Authority shall create an Ecology Center; and
11.To exercise such powers as may be essential, necessary or
incidental to the powers granted to it hereunder as well as
to carry out the policies and objectives of this Act.
(Section 13)

Page 73
Page 74
TAX INCENTIVES (TITLE XIII OF THE NATIONAL INTERNAL
REVENUE CODE14)

SCOPE AND COVERAGE

This Title shall cover all existing Investment Promotion

Agencies15 as defined in this Code or related laws unless
otherwise specifically exempted from coverage of this Code.

The Investment Promotion Agencies shall maintain their functions

and powers as provided under the special laws governing them
except to the extent modified by the provisions of this Code:
Notwithstanding the provisions of this Section, the Department
of Finance, the Bureau of Internal Revenue, and the Bureau of
Customs shall retain their respective mandates, powers and

14 Innovation of the CREATE Law

15 Investment Promotion Agencies refer to government entities created by law, executive order, decree
or other issuance, in charge of promoting investments, granting and administering tax and non-tax
incentives, and overseeing the operations of the different economic zones and freeports in accordance
with their respective special laws. These include the Board of Investments (BOI), Regional Board of
Investments-Autonomous Region in Muslim Mindanao (RBOI-ARMM), Philippine Economic Zone
Authority (PEZA), Bases Conversion and Development Authority (BCDA), Subic Bay Metropolitan
Authority (SBMA), Clark Development Corporation (CDC), John Hay Management Corporation (JHMC),
Poro Point Management Corporation (PPMC), Cagayan Economic Zone Authority (CEZA), Zamboanga
City Special Economic Zone Authority (ZCSEZA), PHIVIDEC Industrial Authority (PIA), Aurora Pacific
Economic Zone and Freeport Authority (APECO), Authority of the Freeport Area of Bataan (AFAB),
Tourism Infrastructure and Enterprise Zone Authority (TIEZA), and all other similar existing authorities or
that may be created by law unless otherwise specifically exempted from the coverage of this Code.

Page 75
functions as provided for under this Act and related laws.
(Section 291, NIRC)

EXTENT OF AUTHORITY TO GRANT TAX INCENTIVES

The Fiscal Incentives Review Board, or the Investment Promotion

Agencies, under a delegated authority from the Fiscal Incentives
Review Board, shall grant the appropriate tax incentives
provided in this Title to be granted to registered business
enterprises16 only to the extent of their approved registered
project or activity under the Strategic Investment Priority
Plan. (Section 292, NIRC)

TAX AND DUTY INCENTIVES

Subject to the conditions and period of availment in Sections

295 and 296, respectively, the following types of tax incentives
may be granted to registered projects or activities:

A. Income Tax Holiday (ITH);

B. Special Corporate Income Tax (SCIT) Rate - For export

enterprise17, a tax rate equivalent to five percent (5%)
effective July 1, 2020, based on the gross income earned, in
lieu of all national and local taxes.

The period of availment of the Special Corporate Income Tax

shall be subject to the conditions set under paragraphs (A) and
(B) of Section 296 of this Act:

Provided, That, if applicable, the shares of the local

government units and the Investment Promotion Agencies under the
special laws governing the latter shall be observed and shall
not result in the diminution of their respective shares.

16 Registered business enterprise refers to any individual, partnership, corporation, Philippine branch of a
foreign corporation, or other entity organized and existing under Philippine laws and registered with an
Investment Promotion Agency excluding service enterprises such as those engaged in customs
brokerage, trucking or forwarding services, janitorial services, security services, insurance, banking, and
other financial services, consumers’ cooperatives, credit unions, consultancy services, retail enterprises,
restaurants, or such other similar services, as may be determined by the Fiscal Incentives Review Board,
irrespective of location, whether inside or outside the zones, duly accredited or licensed by any of the
Investment Promotion Agencies and whose income delivered within the economic zones shall be subject
to taxes under the National Internal Revenue Code of 1997, as amended.

17 Export enterprise refers to any individual, partnership, corporation, Philippine branch of foreign
corporation, or other entity organized and existing under Philippine laws and registered with the
Investment Promotion Agency to engage in manufacturing, assembling or processing activity, and
services such as information technology (IT) activities and business process outsourcing (BPO), and
resulting in the direct exportation, and/or sale of its manufactured, assembled or processed product or
IT/BPO services to another registered export enterprise that will form part of the final export product or
export service of the latter, of at least seventy percent (70%) of its total production or output.

Page 76
C. Enhanced Deductions (ED) - For export enterprise and domestic
market enterprise 18 , the following may be allowed as
deductions:

1. Depreciation allowance of the assets acquired for the

entity’s production of goods and services (qualified
capital expenditure19) - additional ten percent (10%) for
buildings; and additional twenty percent (20%) for
machineries and equipment;
2. Fifty percent (50%) additional deduction on the labor
expense incurred in the taxable year;
3. One hundred percent (100%) additional deduction on research
and development20 expense incurred in the taxable year;
4. One hundred percent (100%) additional deduction on
training21 expense incurred in the taxable year;
5. Fifty percent (50%) additional deduction on domestic input22
expense incurred in the taxable year;
6. Fifty percent (50%) additional deduction on power expense
incurred in the taxable year;
7. Deduction for reinvestment allowance to manufacturing
industry - When a manufacturing registered business
enterprise reinvests its undistributed profit or surplus in
any of the projects or activities listed in the Strategic
Investment Priority Plan, the amount reinvested to a
maximum of fifty percent (50%) shall be allowed as a
deduction from its taxable income within a period of five
(5) years from the time of such reinvestment; and

18Domestic market enterprise refers to any enterprise registered with the Investment Promotion Agency
other than export enterprise.

19 Qualified capital expenditure refers to purchases of capital goods with a useful life or more than one
(1) year acquired for the entity’s production of goods and services to be directly used in the project or
activity of the registered business enterprise.

20Research and development refers to experimental or other related projects or activities:

1. Whose outcome cannot be known or determined in advance on the basis of current knowledge,
information or experience, but can only be determined by applying a systematic progression of work:
i. Based on principles of established science; and
ii. Proceeds from hypothesis to experiment, observation and evaluation, and leads to logical
conclusions.
2. That are conducted for the purpose of generating new knowledge, including new knowledge in the
form of new or improved materials, products, devices, processes or services.

21 Training refers to courses, curricula, certifications or modules provided to Filipino employees that are
directly related to the production of goods or performance of services under the registered project or
activity and that are of a technical nature, which shall develop or improve the specific skills or practical
knowledge of the employee especially in the mechanical, industrial art, scientific field or practical science
of a particular position or job function in the registered project or activity, or in preparation for enhancing
the value chain.

22Domestic input refers to purchases of locally manufactured goods or locally produced raw materials or
domestically outsourced services known as services embedded in manufacturing that are used directly in
the production of goods under the registered project or activity. In the case of locally manufactured
goods, fifty percent (50%) of the value-added of the said good should likewise be locally produced or
manufactured.

Page 77
 8. Enhanced Net Operating Loss Carry-Over (NOLCO). - The net
operating loss of the registered project or activity during
the first three (3) years from the start of commercial
operation, which had not been previously offset as
deduction from gross income, may be carried over as
deduction from gross income within the next five (5)
consecutive taxable years immediately following the year of
such loss.

D. Duty exemption on importation of capital equipment23, raw

materials, spare parts, or accessories; and

E. Value-Added Tax (VAT) exemption on importation and VAT zero-

rating on local purchases. (Section 294)

CONDITIONS OF AVAILMENT

The tax incentives in the preceding Section shall be governed by

the following rules:

A. The income tax holiday shall be followed by the Special

Corporate Income Tax rate or Enhanced Deductions.

B. At the option of the export enterprise, the Special Corporate

Income Tax rate or enhanced deductions shall be granted:
Provided, That in no case shall the enhanced deductions be
granted simultaneously with the Special Corporate Income Tax.
The following conditions for the availment of each enhanced
deductions shall be complied with:

1. The depreciation allowance of the assets acquired for the

entity’s production of goods and services (qualified
capital expenditure) shall be allowed for assets that are
directly related to the registered enterprise’s production
of goods and services other than administrative and other
support services.
2. The additional deduction on the labor expense shall not
include salaries, wages, benefits, and other personnel
costs incurred for managerial, administrative, indirect
labor, and support services.
3. The additional deduction on research and development
expense shall only apply to research and development
directly related to the registered project or activity of
the entity and shall be limited to local expenditure
incurred for salaries of Filipino employees and consumables
and payments to local research and development
organizations.
4. The additional deduction on training expense shall only
apply to trainings, as approved by the Investment Promotion
Agencies based on the Strategic Investment Priority Plan,
given to the Filipino employees engaged directly in the

23 Capital equipment refers to machinery, equipment, major components thereof, tools, devices,
applications or apparatus, which are directly or reasonably needed in the registered project or activity of
the registered enterprise.

Page 78
 registered business enterprise’s production of goods and
services.
5. The additional deduction on domestic input expense shall
only apply to domestic input that are directly related to
and actually used in the registered export project or
activity of the registered business enterprise.
6. The additional deduction on power expense shall only apply
to power utilized for the registered project or activity.
7. The deduction for reinvestment allowance to manufacturing
industry shall be determined in the Strategic Investment
Priority Plan.

C. The duty exemption shall only apply to the importation of

capital equipment, raw materials, spare parts, or accessories
directly and exclusively used in the registered project or
activity by registered business enterprises: Provided, That
the following conditions are complied with:

1. The capital equipment, raw materials, spare parts, or

accessories are directly and reasonably needed and will be
used exclusively in and as part of the direct cost of the
registered project or activity
of the registered business enterprise, and are not produced
or manufactured domestically in sufficient quantity or of
comparable quality and at reasonable prices. Prior approval
of the Investment Promotion Agency may be secured for the
part-time utilization of said capital equipment, raw
materials, spare parts, or accessories
in a non-registered project or activity to maximize usage
thereof: Provided, That the proportionate taxes and duties
are paid on a specific capital equipment, raw materials,
spare parts, or accessories in proportion to the
utilization for non-registered projects or activities. In
the event that the capital equipment, raw materials, spare
parts, or accessories shall be used for a non-registered
project or activity of the registered business enterprise
at any time within the first five (5) years from the date
of importation, the registered business enterprise shall
first seek prior approval of the concerned Investment
Promotion Agency and pay the taxes and customs duties that
were not paid upon the importation; and

2. The approval of the Investment Promotion Agency was

obtained by the registered business enterprise prior to the
importation of such capital equipment, raw materials, spare
parts, or accessories. Within the first five (5) years from
the date of importation, approval of the Investment
Promotion Agency must be secured before the sale, transfer,
or disposition of the capital equipment, raw materials,
spare parts, or accessories, which were granted tax and
customs duty exemption hereunder, and shall be allowed only
under the following circumstances:

Page 79
 a. If made to another enterprise availing customs duty
exemption on imported capital equipment, raw materials,
spare parts, or accessories;
b. If made to another enterprise not availing of duty
exemption on imported capital equipment, raw materials,
spare parts, or accessories, upon payment of any taxes
and duties due on the net book value of the capital
equipment, raw materials, spare parts, or accessories to
be sold;
c. Exportation of capital equipment, raw materials, spare
parts, accessories, source documents24, or those required
for pollution abatement and control;
d. Proven technical obsolescence of the capital equipment,
raw materials, spare parts, or accessories; or
e. If donated to the TESDA, state universities and colleges
(SUCs), or DepEd and CHED-accredited schools: Provided,
That the donation shall be exempt from import duties and
taxes, including donor’s tax.

Provided, That if the registered business enterprise sells,

transfers, or disposes the aforementioned imported items without
prior approval, the registered business enterprise and the
vendee, transferee, or assignee shall be solidarily liable to
pay twice the amount of the duty exemption that should have been
paid during its importation: Provided, further, That the sale,
transfer, or disposition of the capital equipment, raw
materials, spare parts, or accessories made after five (5) years
from date of importation shall require that prior notice be
given by the registered business enterprise to the Investment
Promotion Agency: Provided, finally, That even if the sale,
transfer, or disposition of the capital equipment, raw
materials, spare parts or accessories was made after five (5)
years from date of importation with notice to the Investment
Promotion Agency, the registered business enterprise is still
liable to pay the duties based on the net book value of the
capital equipment, raw materials, spare parts, or accessories if
it has violated any of its registration terms and conditions.

D. The VAT exemption on importation and VAT zero-rating on local

purchases shall only apply to goods and services directly and
exclusively used in the registered project or activity by a
registered business enterprise. Notwithstanding the provisions
in the preceding paragraphs, sales receipts and other income
derived from non-registered project or activity shall be
subject to appropriate taxes imposed under this Code.

E. Notwithstanding any law to the contrary, the importation of

COVID-19 vaccine shall be exempt from import duties, taxes and
other fees, subject to the approval or licenses issued by the
Department of Health or the Food and Drug Administration.

24 Source document refers to input materials and documents reasonably needed by information
technology (IT) and IT-enabled industries such as books, directories, magazines, newspapers, brochures,
pamphlets, medical records or files, legal records or files, instruction materials, and drawings, blueprints,
or outlines.

Page 80
F. Persons who directly import petroleum products defined under
Republic Act No. 8479, otherwise known as the ‘Downstream Oil
Industry Deregulation Act of 1998’, for resale in the
Philippine customs territory and/or into free zones as defined
under Republic Act No. 10863, otherwise known as the Customs
Modernization and Tariff Act, shall not be entitled to the
foregoing tax and duty incentives, and shall be subject to
appropriate taxes imposed under this Code. Any law to the
contrary notwithstanding, the importation of petroleum
products by any person, including registered business
enterprises, shall be subject to the payment of applicable
duties and taxes as provided under Republic Act No. 10863,
otherwise known as the Customs Modernization and Tariff Act,
and this Code, respectively, upon importation into the
Philippine customs territory and/or into free zones as defined
under Republic Act. No. 10863, otherwise known as the Customs
Modernization and Tariff Act: Provided, That the importer can
file for claims for the refund of duties and taxes applicable
under Republic Act No. 10863, otherwise known as the Customs
Modernization and Tariff Act, and this Code, respectively, for
direct or indirect export of petroleum products, and/or other
tax-exempt sales under the Customs Modernization and Tariff
Act and other special laws within the period provided therein:
Provided, further, That the importers who subsequently export
fuel, subject to the appropriate rules of the fuel marking
program, may apply for a refund of duties and taxes, as
applicable under Republic Act No. 10863, otherwise known as
the Customs Modernization and Tariff Act, and this Code.

G. Crude oil that is intended to be refined at a local refinery,

including the volumes that are lost and not converted to
petroleum products when the crude oil actually undergoes the
refining process, shall be exempt from payment of applicable
duties and taxes upon importation: Provided, That applicable
duties and taxes on petroleum products shall be payable only
upon lifting of the petroleum products produced from the
imported crude oil, subject to rules and regulations that may
be prescribed by the Bureau of Customs and the Bureau of
Internal Revenue, to ensure that crude oil shall not be lifted
from the refinery without payment of appropriate duties and
taxes. Registered business enterprises, whose performance
commitments include job generation, shall maintain their
employment levels to the extent practicable, and in the case
of reduced employment or when the performance commitment for
job generation is not met, the registered business enterprise
must submit to their respective Investment Promotion Agencies
and the Fiscal Incentives Review Board their justification for
the same. (Section 295)

Page 81
PERIOD OF AVAILMENT

The period of availment of incentive by the registered business

enterprise shall be as follows:

A. For export enterprise: income tax holiday of four (4) to seven

(7) years, depending on location and industry priorities as
specified in this Section, and followed by special corporate
income tax rate or enhanced deductions for ten (10) years.

A qualified expansion or entirely new project or activity

registered under this Act may qualify to avail of incentives
subject to the qualifications set forth in the Strategic
Investment Priority Plan and performance review by the Fiscal
incentives Review Board: Provided, That existing registered
projects or activities prior to the effectivity of this Act may
qualify to register and avail of the incentives grander under
this Act for the prescribed period, subject to the criteria and
conditions set forth in the Strategic Investment Priority Plan;

B. For domestic market enterprise under the Strategic Investment

Priority Plan, income tax holiday for four (4) to seven (7)
years followed by enhanced deductions for five (5) years.

A qualified expansion or entirely new project or activity

registered under this Act may qualify to avail of incentives
subject to the qualifications set forth in the Strategic
Investment Priority Plan and performance review by the Fiscal
Incentives Review Board: Provided, That existing registered
projects or activities prior to the effectivity of this Act may
qualify to register and avail of the incentives granted under
this Act for the prescribed period, subject to the criteria and
conditions set forth in the Strategic Investment Priority Plan.

The period of availment of the foregoing incentives shall

commence from the actual start of commercial operations with the
registered business enterprise availing of the tax incentives
within three (3) years from the date of registration, unless
otherwise provided in the Strategic Investment Priority Plan and
its corresponding guidelines: Provided, That after the
expiration of the transitory period under Section 311(C), export
enterprises registered prior to the effectivity of this Act
shall have the option to reapply and avail of the incentives
granted under Section 294(B) for the same period provided under
this Section, subject to the conditions and qualifications set
forth in the Strategic Investment Priority Plan and performance
review by the Fiscal Incentives Review Board.

For the purpose of this Section, the determination of the

category shall be based on both location and industry of the
registered project or activity, and other relevant factors as
may be defined in the Strategic Investment Priority Plan.

The location of the registered project or activity shall be

prioritized according to the level of development as follows:

Page 82
(1) National Capital Region; (2) metropolitan areas25 or areas
contiguous and adjacent to the National Capital Region; and (3)
all other areas. The metropolitan areas shall be determined by
the National Economic and Development Authority.

The industry of the registered project or activity shall be

prioritized according to national industrial strategy specified
in the Strategic Investment Priority Plan. The Strategic
Investment Priority Plan shall define the coverage of the tiers
and provide the conditions for qualifying the activities:

1. Tier I shall include activities that (i) have high potential

for job creation; (ii) take place in sectors with market
failures resulting in underprovision of basic goods and
services; (iii) generate value creation through innovation,
upgrading or moving up the value chain; (iv) provide essential
support for sectors that are critical
to industrial development; or (v) are emerging owing to
potential comparative advantage.

2. Tier II shall include activities that produce supplies, parts

and components, and intermediate services that are not locally
produced but are critical to industrial development and
import-substituting activities, including crude oil refining.

3. (3) Tier III activities shall include (i) research and

development resulting in demonstrably significant value-added,
higher productivity, improved efficiency, breakthroughs in
science and health, and high-paying jobs; (ii) generation of
new knowledge and intellectual property registered and/or
licensed in the Philippines; (iii) commercialization of
patents, industrial designs, copyrights
and utility models owned or co-owned by a registered business
enterprise; (iv) highly technical manufacturing; or (v) are
critical to the structural transformation of the economy and
require substantial catch-up efforts.

The period of availment of incentives based on the combination

of both location and industry priorities, as determined in the
Strategic Investment Priority Plan, shall be as follows:

25 Metropolitan areas refer to Metro Cebu and Metro Davao or those local government units which are
later qualified or grouped as such by the National Economic and Development Authority or through laws
or executive issuances.

Page 83
FOR EXPORTERS

LOCATION/INDUSTRY TIERS TIER I TIER II TIER III

4 ITH + 10 ED/ 5 ITH + 10 ED/ 6 ITH + 10 ED/

National Capital Region
SCIT SCIT SCIT

Metropolitan areas or areas

5 ITH + 10 ED/ 6 ITH + 10 ED/ 7 ITH + 10 ED/
contiguous and adjacent to the
SCIT SCIT SCIT
NCR

6 ITH + 10 ED/ 7 ITH + 10 ED/ 7 ITH + 10 ED/

All other areas
SCIT SCIT SCIT

FOR DOMESTIC MARKET ACTIVITIES

LOCATION/INDUSTRY TIERS TIER I TIER II TIER III

4 ITH + 5 ED/ 5 ITH + 5 ED/ 6 ITH + 5 ED/

National Capital Region
SCIT SCIT SCIT

Metropolitan areas or areas

5 ITH + 5 ED/ 6 ITH + 5 ED/ 7 ITH + 5 ED/
contiguous and adjacent to the
SCIT SCIT SCIT
NCR

6 ITH + 5 ED/ 7 ITH + 5 ED/ 7 ITH + 5 ED/

All other areas
SCIT SCIT SCIT

In addition to the incentives provided in tiers above, projects

or activities of registered enterprises located in areas
recovering from armed conflict or a major disaster, as
determined by the Office of the President, shall be entitled to
two (2) additional years of income tax holiday.

Projects or activities registered prior to the effectivity of

this Act, or under the incentive system provided herein that
shall, in the duration of their incentives, completely relocate
from the National Capital Region, shall be entitled to three (3)
additional years of income tax holiday: Provided, That the
additional incentive shall commence at the completion of the
relocation of operations.

The industry and locational prioritization specified herein

shall be subject to review and revision every three (3) years in
accordance with the Strategic Investment Priority Plan, subject
to the standards in Section 300 hereof, or in exceptional
circumstances, to attract substantial investment to respond to a
situation or crisis or to target specific industries. (Section
298)

Page 84
QUALIFIED PROJECTS OR ACTIVITIES FOR TAX INCENTIVES
STRATEGIC INVESTMENT PRIORITY PLAN

The Board of Investments, in coordination with the Fiscal

Incentives Review Board, Investment Promotion Agencies, other
government agencies administering tax incentives, and the
private sector, shall formulate the Strategic Investment
Priority Plan to be submitted to the President for approval,
which may contain recommendations for types of non-fiscal
support needed to create high-skilled jobs to grow a local pool
of enterprises, particularly micro, small and medium enterprises
(MSMEs), that can supply to domestic and global value chains, to
increase the sophistication26 of products and services that are
produced and/or sourced domestically, to expand domestic supply
and reduce dependence on imports, and to attract significant
foreign capital or investment. The Strategic Investment Priority
Plan shall be valid for a period of three (3) years, subject to
review and amendment every three (3) years thereafter unless
there would be a supervening event that would necessitate its
review.

The Strategic Investment Priority Plan shall contain the

following:

A. Priority projects or activities that are included in the

Philippine Development Plan or its equivalent, or other
government programs, taking into account any of the following:
B. Scope and coverage of location and industry tiers in Section
296; and
C. Terms and conditions on the grant of enhanced deductions under
Section 294(C).

All sectors or industries that may be included in the Strategic

Investment Priority Plan shall undergo an evaluation process to
determine the suitability and potential of the industry or the
sector in promoting long-term growth and sustainable
development, and the national interest. In no case shall a
sector or industry be included in the Strategy Investment
Priority Plan unless it is supported by a formal evaluation
process or report.

The projects or activities must comply with the specific

qualification requirements or conditions for a particular sector
or industry and other limitations as set and determined by the
Board of Investments, and in coordination with the Fiscal
Incentives Review Board.

In no case shall the Investment Promotion Agencies accept

applications
unless the project or activity is listed in the Strategic
Investment Priority Plan. Projects or activities not listed in

26Sophisticated refers to the state when a product or service requires a high level of technology, human
capital, competencies or know-how, and infrastructure to be produced or offered.

Page 85
the Strategic Investment Priority Plan shall be automatically
disapproved. (Section 300)

POWER OF THE PRESIDENT TO GRANT INCENTIVES

Notwithstanding the provisions of Sections 295 and 296, the

President may, in the interest of national economic development
and upon the recommendation of the Fiscal Incentives Review
Board, modify the mix, period or manner of availment of
incentives provided under this Code or craft the appropriate
financial support package for a highly desirable project or a
specific industrial activity based on defined development
strategies for creating high-value jobs, building new industries
to diversify economic activities, and attracting significant
foreign and domestic capital or investment, and the fiscal
requirements of the activity or project, subject to maximum
incentive levels recommended by the Fiscal Incentives Review
Board: Provided, That the grant of income tax holiday shall not
exceed eight (8) years and thereafter, a special corporate
income tax rate of five percent (5%) may be granted: Provided,
further, That the total period of incentive availment shall not
exceed forty (40) years.

The Fiscal Incentives Review Board shall determine whether the

benefits that the Government may derive from such investment are
clear and convincing and far outweigh the cost of incentives
that will be granted in determining whether a project or
activity is highly desirable.

The exercise by the President of his powers under this Section

shall be based on a positive recommendation from the Fiscal
Incentives Review Board upon its determination that the
following conditions are satisfied:

1. The project has a comprehensive sustainable development plan

with clear inclusive business approaches, and high level of
sophistication and innovation; and

2. M i n i m u m i n v e s t m e n t c a p i t a l o f F i f t y b i l l i o n p e s o s
(P50,000,000,000.00) or its equivalent in US dollars, or a
minimum direct local employment27 generation of at least ten
thousand (10,000) within three (3) years from the issuance of
the certificate of entitlement.

Provided, That the threshold shall be subject to a periodic

review by the Fiscal Incentives Review Board every (3) years,
taking into consideration international standards or other
economic indicators: Provided, further, That if the project
fails to substantially meet the projected impact on the economy
and agreed performance targets, the Fiscal Incentives Review
Board shall recommend to the President the cancellation of the

27Direct local employment refers to the full and decent employment of Filipinos by registered business
enterprises under an employer- employee relationship to perform functions that are directly related to
the production of goods or performance of services under the registered project or activity.

Page 86
tax incentive or financial support package or the modified
period or manner of availment of incentives, after due hearing
and an adequate opportunity to substantially comply with the
agreed performance targets and outputs.

For this purpose, financial support includes utilization of

government resources such as land use, water appropriation,
power provision, and budgetary support provision under the
annual General Appropriations Act.

This power of the President, in as far as it commands additional

public sector expenditures in support of investors, is suspended
during fiscal years when, an unimaginable fiscal deficit is
declared by the President on the advice of the Development
Budget Coordination Committee with a consequence that even core
budgetary obligations, such as, but not limited to, mandatory
revenue allotments for local government units and budget for the
National Economic and Development Authority’s core public
investments program, cannot be fully financed.

Notwithstanding the provisions in the preceding paragraphs, tax

and duty incentives granted through legislative franchises shall
be excepted from the foregoing powers of the President to
review, withdraw, suspend, or cancel tax incentives and
subsidies. (Section 301)

QUALIFICATIONS OF A REGISTERED BUSINESS ENTERPRISE FOR TAX

INCENTIVES

In the review and grant of tax incentives, the registered

business enterprise must:

A. Be engaged in a project or activity included in the Strategic

Investment Priority Plan;

B. Meet the target performance metrics after the agreed time

period;

C. Install an adequate accounting system that shall identify the

investments, revenues, costs and profits or losses of each
registered project or activity undertaken by the enterprise
separately from the aggregate investments, revenues, costs and
profits or losses of the whole enterprise; or establish a
separate corporation for each registered project or activity
if the Investment Promotion Agency should so require;

D. Comply with the e-receipting and e-sales requirement in

accordance with Section 237 and 237(a) of this Code; and

E. Submit annual reports of beneficial ownership of the

organization and related parties. (Section 304)

Page 87
TAX INCENTIVES MANAGEMENT AND TRANSPARENCY

Filing of Tax Returns and Submission of Tax Incentives Reports.

— All registered business enterprises and other registered
entities28 whether taxable or exempt, are required to file their
tax returns and pay their tax liabilities, on or before the
deadline as provided under the National Internal Revenue Code of
1997, as amended, using the electronic system for filing and
payment of taxes with the Bureau of Internal Revenue: Provided,
That for purposes of complying with their tax obligations,
cooperatives and other registered entities, which do not have
access to the electronic facilities, shall file with their
respective revenue district offices.

For registered business enterprises and other registered

enterprises availing of tax incentives administered by the
Investment Promotion Agencies and other government agencies
administering tax incentives, they shall file with their
respective Investment Promotion Agencies or other government
agencies administering tax incentives a complete annual tax
incentives report of their income-based tax incentives, VAT
exemptions and zero-rating, customs duty exemptions, deductions,
credits or exclusions from the income tax base, and exemptions
from local taxes, as provided under Section 294 of this Act361
and in the special laws of the concerned Investment Promotion
Agency or other government agency administering tax incentives,
and respective laws, and a complete annual benefits report which
shall include data such as, but not limited to, the approved and
actual amount of investments, approved and actual employment
level and job creation including information on quality of jobs
and hiring of foreign and local workers, approved and actual
exports and imports, domestic purchases, profits and dividend
payout, all taxes paid, withheld and foregone within thirty (30)
calendar days from the statutory deadline for filing of tax
returns and payment of taxes: Provided, That a copy of the
report shall be simultaneously submitted to the Fiscal
Incentives Review Board in electronic form.

The Investment Promotion Agencies and other government agencies

administering tax incentives shall, within sixty (60) calendar
days from the end of the statutory deadline for filing of the
relevant tax returns, submit to the Bureau of Internal Revenue,
their respective annual tax incentives reports based on the list
of the registered business enterprises and other registered
enterprises, which have filed said tax incentives report:
Provided, That the reportorial requirement under Section 3 of
Republic Act No. 10963 or the ‘TRAIN Law’ shall be covered by
this Section.

The details of the tax incentives reports, as provided in the

preceding paragraphs, shall be provided in the implementing
rules and regulations of this Act.

28 Other registered entities refer to any individual, partnership, organization, corporation, Philippine
branch of a foreign corporation, or other entity incorporated and/or organized and existing under
Philippine laws, and registered with other government agencies administering tax incentives.

Page 88
The foregoing provisions shall be without prejudice to the right
of the Bureau of Internal Revenue and the Bureau of Customs to
assess and/or audit tax liabilities, if any, within the
prescribed period provided in the National Internal Revenue Code
of 1997, as amended, and Republic Act No. 10863, otherwise known
as the Customs Modernization and Tariff Act, as amended,
respectively. (Section 305)

MONITORING, EVALUATION, AND REPORTING OF TAX INCENTIVES

Notwithstanding any law to the contrary, the Bureau of Internal

Revenue and the Bureau of Customs shall submit to the Department
of Finance: (a) all tax and duty incentives of registered
business enterprises and other registered enterprises, as
reflected in their filed tax returns and import entries; and (b)
actual tax and duty incentives as evaluated and determined by
the Bureau of Internal Revenue and the Bureau of Customs.

The Department of Finance shall maintain a single database for

monitoring and analysis of tax incentives granted.

The Fiscal Incentives Review Board is mandated to systematically

collect and store all tax incentives and benefit data from the
Department of Finance, Investment Promotion Agencies, other
government agencies administering tax incentives, registered
business enterprises, and other registered enterprises, as well
as to evaluate and assess the process, outcomes, and impact of
incentives granted to firms to determine whether agreed
performance targets and intended results and outcomes are met.
The method of evaluation may include the conduct of cost-benefit
analysis or other process and impact evaluation methods:
Provided, That for purposes of this Act,363 the term cost-
benefit analysis refers to the systematic evaluation of the
total costs of granting tax incentives vis-à-vis the total
benefits derived from the grant of tax incentives based on the
annual tax incentive report, annual benefits report, and other
related sources, to calculate the net benefit or cost associated
with tax incentives.

For purposes of monitoring and transparency, the Department of

Finance shall submit to the Department of Budget and Management
(DBM) a per firm and per registered project and activity data
arranged on a sectoral and per industry basis: (1) the amount of
tax incentives availed of by registered business enterprises and
other registered enterprises; (2) the estimate claims of tax
incentives immediately preceding the current year; (3) the
programmed tax incentives for the current year; and (4) the
projected tax incentives for the following year.

The aforesaid data shall be reflected by the DBM in the annual

Budget of Expenditures and Sources of Financing (BESF), which
shall be known as the Tax Incentives Information (TII) Section:
Provided, That the tax incentives information shall include a
per firm data related to incentives availed of by registered

Page 89
business enterprises and other registered enterprises based on
the submissions of the Department of Finance and the concerned
Investment Promotion Agencies and other government agencies
administering tax incentives, categorized by sector, by
Investment Promotion Agency or other government agency
administering tax incentives, and by type of tax incentive:
Provided, further, That the results of the cost-benefit analysis
shall be published at the per firm level by the Fiscal
Incentives Review Board and a report shall be submitted to the
President and Congress on an annual basis. (Section 306)

PENALTIES FOR NONCOMPLIANCE WITH FILING AND REPORTORIAL

REQUIREMENTS

Any registered business enterprise or other registered

enterprise, which fails to comply with filing and reportorial
requirements with the appropriate Investment Promotion Agencies
or other government agencies administering tax incentives and/
or, which fails to show proof of filing of tax returns using the
electronic system for filing and payment of taxes of the Bureau
of Internal Revenue under Section 305 hereof, shall be imposed
the following penalties by the appropriate Investment Promotion
Agency or other government agency administering tax incentives:

A. First (1st) Violation - Payment of a fine amounting to One

hundred thousand pesos (P100,000.00);
B. Second (2nd) Violation - Payment of a fine amounting to Five
hundred thousand pesos (P500,000.00); and
C. Third (3rd) Violation - Cancellation by the Fiscal Incentives
Review Board of the registration of the registered business
enterprise or registered entity with the Investment promotion
Agency or other government agency administering tax
incentives.

Provided, That if the failure to show such proof is not due to

the fault of the registered business enterprises or other
registered enterprises, the same shall not be a ground for the
suspension of the Income Tax Holiday (ITH) and/or other tax
incentives availment: Provided, further, That collections from
the penalties shall accrue to the general fund.

After due process, the Fiscal Incentives Review Board or the

concerned Investment Promotion Agency, as the case may be, may
cancel the registration, suspend the enjoyment of incentive
benefits of any registered enterprise, and/or require refund of
incentives enjoyed by such enterprise, including interests and
monetary penalties, for any material misrepresentation of
information for the purpose of availing more incentives than
what it is entitled to under this Code.
Provided, That the Fiscal Incentives Review Board, with the
recommendation of the Commissioner, may revoke or suspend
incentives granted by an Investment Promotion Agency and/or
order a business closure of a registered business enterprise
that violates Title VI (Excise Taxes on Certain Goods) and Title
X (Statutory Offenses and Penalties) of this Code and other

Page 90
related revenue regulations, orders, or issuances of the
government: Provided, further, That such authority shall cover
the acts of the registered business enterprise committed even in
the first year of availment of incentives. Notwithstanding the
provisions of this Section, the Department of Finance, the
Bureau of Internal Revenue, and the Bureau of Customs shall
retain their respective mandates, powers and functions as
provided for under this Act and related laws.

Any government official or employee who fails without

justifiable reason to provide or furnish the required tax
incentives report or other data or information as required under
Sections 306 and 307 of this Act365 shall be penalized, after
due process, by a fine equivalent to the official’s or
employee’s basic salary for a period of one (1) month to six (6)
months or by suspension from government service for not more
than one (1) year, or both, in addition to any criminal and
administrative penalties imposable under existing laws.

Page 91
DOUBLE TAXATION AGREEMENTS

Double taxation refers to the act of taxing the same subject

twice when it should be taxed only once.

However vile it may sound, “there is no Constitutional

prohibition against double taxation in the Philippines.”
(Villanueva v. Ilolio)

It is only direct double taxation that is disallowed in the

Philippines. This kind of double taxation violates the
constitutional provision of uniformity and equal protection, as
well as the principle that tax must not be excessive,
unreasonable, and inequitable. Therefore, such taxation should,
whenever and wherever possible, be avoided to prevent injustice
or unfairness.

The Supreme Court has had the occasion to defined direct double
taxation in the celebrated case of Nursery Care Corporation v.
Treasurer of Manila:

Double taxation is obnoxious when the taxpayer is taxed twice on

the same subject matter, for the same purpose, by the same
taxing authority, within the same jurisdiction, during the same
taxing period; and the taxes must be the same kind or character.

ELEMENTS OF DIRECT DOUBLE TAXATION

There is direct double taxation if the taxpayer is taxed twice:

a. on the same subject matter;

b. for the same purpose;
c. by the same taxing authority;
d. within the same taxing jurisdiction;
e. for the same taxing periods; and
f. of the same kind or character.

Page 92
Any type of double taxation short of the elements mentioned
above is referred to as INDIRECT DOUBLE TAXATION.

INDIRECT DOUBLE TAXATION

Generally, indirect double taxation is perfectly allowed by law.

A good example would be the imposition of national taxes and
local taxes at the same time, this is perfectly valid since the
tax is imposed by different taxing authorities. Another example
is the imposition of international juridical double taxation,
which is referred to as the “imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same
subject matter and for identical grounds. Double taxation
usually takes place when a person is a resident of a contracting
state and derives income from from or owns capital in, the other
contracting state and both states impose tax on that income or
capital.” (Commissioner of Internal Revenue v. S.C. Johnson and
Son)

TYPES OF DOUBLE TAXATION ACCORDING TO EFFECT

JURIDICAL

The juridical type of double taxation happens when comparable

taxes are imposed by two or more taxing jurisdictions on the
same taxpayer in respect of the same taxable income or capital,
i.e., two equal and sovereign taxing jurisdictions in one state
or from an international context wherein two or more countries
impose taxes on the same taxpayer on the same tax base.

ECONOMIC

Economic double taxation occurs when more than one person is

taxed on the same item of income, i.e., taxation of corporate
income at the level of the corporation and at the level of the
shareholder when distributed in the form of dividend.

(Based on the article entitled “Is There Double Taxation in the

Philippine Tax System?” published in Asia-Pacific Tab Bulletin
by Dr. Angel Yingco and DOF Director M.A. Lourdes Recente)

TWO CONCEPTS INVOLVING INTERNATIONAL JURIDICAL

DOUBLE TAXATION
SOURCE CONCEPT

The jurisdiction to impose income tax is based either on the

relationship of the income to the taxing state or the
relationship of the taxpayer to the taxing state based on
residence or nationality.

Page 93
The source of an income is the property, activity, or service
that produced the income. For such source to be considered as
coming from the Philippines, it is sufficient that the income is
derived from the property, activity, or service within the
Philippines. (Commissioner on Internal Revenue v. British
Overseas Airways Corporation)

The activity that creates income and the business in the course
of which an income is realized should not be confused. An income
may be earned by a corporation in the Philippines although such
corporation conducts all its businesses abroad. (Alexander
Howden & Co., Ltd. v. The Collector of Internal Revenue)

Source is not a place, it is an activity or property.

(Commissioner of Internal Revenue v. Baier-Nickel)

RESIDENCE CONCEPT

Under the residence principle, a State’s claim to tax income is

based on its relationship to the person deriving that income.

This concept is normally applied in taxing interest income.

Thus, one case, the Supreme Court held that “the residence of
the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of
payment, is the determining factor of the source of interest
income.” (National Development Company v. Commissioner of
Internal Revenue)

HOW DOES DOUBLE TAXATION OCCUR IN INTERNATIONAL JURIDICAL

TAXATION?

Double taxation may occur for any of the following reasons:

a. RESIDENCE - RESIDENCE CONFLICT

Two sovereign States may tax a taxpayer on his world-wide income

or capital because such states have inconsistent definitions for
determining residence.

Illustration:

Vulpix Corporation, is a corporation duly organized under

Philippine laws, its management, however, is exercised in
Singapore by its Singaporean Directors.

In this case, double taxation may arise since the Philippine

jurisdiction taxes domestic corporations on their worldwide
income, regardless of the place where control is exercised. On
the other hand, the laws of Singapore, consider a entity as a
tax resident when the control and management of the same is
exercised on their soil. Thus, Vulpix in this case may be taxed
by both jurisdictions.

Page 94
b. SOURCE - RESIDENCE CONFLICT

One sovereign State may tax income derived by a taxpayer by

application of the residence or nationality principle, while
another State may tax the same income under the source
principle.

Illustration:

Jigglypuff is a Filipino boxer residing here in the Philippines.

In the recent years, however, he has been fighting abroad to
earn more promotions and the up his game.

Here, double taxation may arise since the Philippine

jurisdiction taxes residents on their worldwide income,
regardless of whether it is earned within or without the
Phlippines. However, another jurisdiction, say, the USA may tax
Jigglypuff on the same income in case the boxing fight was held
in their jurisdiction.

c. SOURCE - SOURCE CONFLICT

Two States may invoke the source principle to tax the same
object of income by reason of conflicts in the determination of
the source of income under domestic legislation.

Illustration:

A domestic airline company with ticketing offices all over the

world operating under the name Zubat Airlines pre-sells tickets
abroad for flights originating in the Philippines.

This case may result to double taxation when a foreign state,

say, Pakistan, where the tickets for flights originating from
the Philippines to another foreign state are sold, taxes the
same because their laws treat the act of selling airlines
tickets as the source of income. On the other hand, the
Philippines taxes revenues from flights originating in the
Philippines, irrespective of the place where tickets are sold.
Thus, Zubat may be taxed by both the Philippines and Pakistan on
the same transaction.

d. TRIANGULAR CASES

Involves three States having any of the conflicts mentioned

above.

CAN WE PREVENT OTHER NATIONS FROM IMPOSING TAXES ON OUR FILIPINO

BRETHREN?

Nope, unfortunately not. Keep in mind the prevailing doctrine in

public international law - “par in parem non habet imperium”
translated to a more friendly language - “as among equals, there

Page 95
can be no sovereignty.” In other words, a sovereign State cannot
impose their will on another sovereign State, regardless of the
imbalance of power (in terms of firepower and economic
development) between them.

Also, among the inherent limitations of our tax laws in the

Philippines is the concept of international comity which
provides that sovereign states should respect one another as
they are sovereign equals. Thus, one cannot impose their will on
another.

However, nothing prevents States from agreeing to some

concessions for their mutual benefit. These agreements are
referred to as treaties or conventions.

RELIEF FROM DOUBLE TAXATION

Being taxed once by a single taxing authority, is already a

heavy hit to some companies. What more if the same company is
taxed twice or worse, thrice by several taxing jurisdictions?
Thus, to curb this evil, several tax treaties and double
taxation agreements are entered into by the Philippines to, at
least, ease the burden carried by taxpayers in general, or those
taxpayers operating in multiple jurisdictions in particular.

The primary purpose of tax treaties is commonly stated or

understood to be for the avoidance of double taxation of income
arising from cross-boarder transactions. However, tax treaties
also address other issues such as the prevention of tax evasion
and non-discrimination. (Ariane Pickering)

In the famous case of Commissioner of Internal Revenue v. S.C.

Johnson and Sons, Inc., the Supreme Court has the following
statements to say about the purpose of tax treaties:

“Tax treaties are entered into to reconcile the national fiscal

legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions.”

“Tax conventions are drafted with a view towards the elimination

of international juridical double taxation, which is defined as
the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with
double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust
and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in
creating such a climate.” the High Court added.

Page 96
GENERAL METHODS OF RELIEF FROM DOUBLE TAXATION

1. Unilaterally. Domestic law is enacted by one state by

unilateral withdrawal or concession to impose taxes on a
particular subject or object within its territorial
jurisdiction.
2. Bilaterally/Multilaterally. Countries enter into tax treaties
or accession to conventions to grant relief or allocate
exclusive taxing rights to particular items of income.

States may grant the following reliefs to mitigate, if not

eliminate, double taxations:

1. Tax Exemption. A State exempts from taxation certain items of

income derived by its residents in another State;
2. Tax Credit. The Resident State may treat foreign income tax
paid to the Source State by its resident, as a deduction from
the tax due by the resident to the Resident State;
3. Tax Deduction. The Resident State may treat foreign income tax
paid to the Source State by its resident, as a deduction from
the gross income of the resident taxpayer;
4. Tax Reciprocity. The Resident State may grant tax benefits to
foreign nationals upon proof that in the country where they
reside, nationals of the Resident State are given an equal tax
benefit.

DOUBLE TAXATION RELIEF UNDER THE NATIONAL INTERNAL REVENUE CODE

TAX TREATIES

Income of any kind, to the extent required by any treaty

obligation binding upon the Government of the Philippines shall
be excluded from gross income. (Section 32(B)(5), NIRC)

TAX DEDUCTION OR CREDIT ON FOREIGN INCOME TAX PAID

Foreign taxes paid or incurred within the taxable year in

connection with the taxpayer’s profession, trade or business may
either be claimed as an allowable deduction from gross income or
a tax credit from the taxpayer’s tax due, subject to the
limitations provided by law. (Section 34(C), NIRC)

INTERNATIONAL CARRIERS

An international carrier doing business in the Philippines shall

pay tax of two and one-half percents (2.5%) on its ‘Gross
Philippine Billings.”

Provided, that international carriers doing business in the

Philippines may avail of a preferential rate or exemption from
the tax herein imposed on their gross revenue derived from the
carriage of persons and their excess baggage on the basis of an
applicable tax treaty or international agreement to which the

Page 97
Philippines is a signatory or on the basis of reciprocity such
that an international carrier, whose home country grants income
tax exemption to Philippine carriers, shall likewise be exempt
from the tax imposed under this provision. (Section 28(A)(3),
NIRC)

DIVIDENDS RECEIVED BY NONRESIDENT FOREIGN CORPORATIONS

A final withholding tax at the rate of fifteen percent (15%) is

hereby imposed on the amount of cash and/or property dividends
received from a domestic corporation, subject to the condition
that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been paid
in the Philippines equivalent to twenty percent (15%), which
represents the difference between the regular income tax of
thirty-five percent (30%) and the fifteen percent (15%) tax on
dividends as provided in this subparagraph. (Section 28(B)(5)
(b), NIRC)

TAX CREDIT ON FOREIGN ESTATE TAXES PAID

Philippine estate taxes due shall be credited with the amounts

of any estate tax imposed by the authority of a foreign country,
subject to the limitations provided by law. (Section 86(E),
NIRC)

TAX CREDIT ON FOREIGN DONOR’S TAXES PAID

Philippine donor’s taxes due of a taxpayer who is a citizen or a

resident of the Philippines at the time of donation shall be
credited with the amount of any donor’s tax of any character and
description imposed by the authority of a foreign country,
subject to the limitations provided by law. (Section 101(C),
NIRC)

INTANGIBLE ASSETS OF A NONRESIDENT ALIEN

The terms ‘gross estate’ and ‘gifts ‘ include real and personal,
property, whether tangible or intangible, or mixed, wherever
situated: Provided, however, That where the decedent or donor
was a nonresident alien at the time of his death or donation, as
the case may be, his real and personal property so transferred
but which are situated outside the Philippines shall not
included as part of his ‘gross estate’ or ‘gross gift.”

There shall be no donor’s or estate tax collected with respect

to the following intangible personal property if the laws of the
country of which the decedent or donor was a citizen and
resident at the time of his death or donation allows a similar
exemption from transfer or death taxes of every character or
description in respect of intangible personal property owned by

Page 98
citizens of the Philippines not residing in that foreign
country:

a. Franchise which must be exercised in the Philippines;

b. Shares, obligations or bonds, issued by any corporation or
sociedad anonima organized or constituted in the Philippines
in accordance with its laws;
c. Shares, obligations or bonds by any foreign corporation
eighty-five (85%) of the business of which is located in the
Philippines;
d. Shares, obligations or bonds issued by any foreign corporation
if such shares, obligations or bonds have acquired a business
situs in the Philippines;
e. Shares or rights in any partnership, business or industry
established in the Philippines.

Page 99
TAX TREATIES AND DOUBLE TAXATION AGREEMENTS

CONCEPT OF PERMANENT ESTABLISHMENT

Permanent establishment is a taxable presence that an enterprise

of one contracting State has in another contracting State. It is
somewhat a compromise between a State of source and State of
residence for purposes of taxation.

As defined in most treaties, it is a fixed place of business

where the enterprise is wholly or partly carried on. It may be a
place of management, office, branch, factory, or even the
presence of employees, agents, or representatives in the
Philippines for a defined number of days and condition on the
extent or nature of activities pursued in the Philippines.

CROSS BORDER TRANSACTIONS

In the context of international double taxation agreements,

cross border transactions refer to the transfer of goods,
services, capital and technology that cuts across national or
territorial borders.

In other words, these are transactions that affect two or more

sovereign States thereby giving rise to conflicting taxation
claims brought about by the application of differing tax
principles.

TAX TREATY versus REVENUE MEMORANDUM ORDER (Deutsche Bank AG

Manila Branch v. CIR)

In this case the petitioner (Deutsche), believing that it made

an overpayment of branch profit remittance tax (BPRT) filed with
the BIR Large Taxpayers Assessment and Investigation Division an

Page 100
administrative claim for refund or issuance of its tax credit
certificate in the total amount of P 22,562,851,17. On the same
date, petitioner requested from the International Tax Affairs
Division (ITAD) a confirmation of its entitlement to the
preferential tax rate of 10% under the RP-Germany Tax Treaty.

The claim however was denied by the BIR on the ground that the
application for a tax treaty relief was not filed with the ITAD
prior to the payment by the former of BPRT or prior to its
availment of the preferential rate of 10% under the RP-Germany
Tax Treaty provision. The cited ground is substantially
reproduced below:

RMO No. 1-2000 issued by the Bureau of Internal Revenue required

any taxpayer, in order to avail fo the tax treaty relief, must
apply with the International Tax Affairs Division at least 15
days before the transaction. This is to streamline the
processing of the application of tax treaty relief in order to
improve the efficiency and service to the taxpayers.

The Supreme Court of the Philippines, however, has following to

say:

“Our Constitution provides for adherence to the general

principles of international law as part of the law of the land.
The time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on
the part of the states that enter into the agreement. Every
treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this
jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son, Inc. further
clarifies that "tax conventions are drafted with a view towards
the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or
more states on the same taxpayer in respect of the same subject
matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is
crucial in creating such a climate."

Simply put, tax treaties are entered into to minimize, if not

eliminate the harshness of international juridical double
taxation, which is why they are also known as double tax treaty
or double tax agreements.

Page 101
A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may
be necessary to ensure the fulfillment of the obligations
undertaken."20 Thus, laws and issuances must ensure that the
reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional
requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the
RP-Germany Tax Treaty does not provide for any pre-requisite for
the availment of the benefits under said agreement.

Likewise, it must be stressed that there is nothing in RMO No.

1-2000 which would indicate a deprivation of entitlement to a
tax treaty relief for failure to comply with the 15-day period.
We recognize the clear intention of the BIR in implementing RMO
No. 1-2000, but the CTA’s outright denial of a tax treaty relief
for failure to strictly comply with the prescribed period is not
in harmony with the objectives of the contracting state to
ensure that the benefits granted under tax treaties are enjoyed
by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of

application for the availment of tax treaty relief as required
by RMO No. 1-2000 should not operate to divest entitlement to
the relief as it would constitute a violation of the duty
required by good faith in complying with a tax treaty. The
denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from
the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence

over the objective of RMO No. 1-2000. Logically, noncompliance
with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other
system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to
the benefit of a treaty for failure to strictly comply with an
administrative issuance requiring prior application for tax
treaty relief.”

TL;DR The obligation to comply with a tax treaty takes primacy

over the objective of RMO No. 1-2000. The BIR cannot impose
additional requirements not included in a treaty agreement to
avail of the benefits included therein. This would negate the
availment of the reliefs provided for under such international
agreements.

Page 102
GENERAL CONCEPTS OF TAX TREATY RELIEF APPLICATION (TTRA)

In order to streamline the processing of TTRA and to prescribe

the documentary requirements for the processing of applications
for relief from double taxation pursuant to existing Philippine
tax treaties in order to improve efficiency and service to the
taxpayers, the following TTRA forms have been adopted by the
BIR:

BIR FORM PURPOSE

BIR Form No. 1901-P Business profit

BIR Form No. 1901-T Profits from shipping and air transport

BIR Form No. 1901-D Dividend income

BIR Form No. 1901-I Interest income

BIR Form No. 1901-R Royalty income

BIR Form No. 1901-C Capital gains

BIR Form No. 1901-S Income from services

BIR Form No. 1901-O Other income earnings

The INTERNATIONAL TAX AFFAIRS DIVISION (ITAD)

ITAD has the sole authority to issue TTRA rulings. All rulings
relative to the application, implementation and interpretation
of the provisions of Philippine tax treaties shall emanate from
ITAD.

It is the sole office charged with the receipt of TTRA, thus,

all applicants are enjoined to submit their TTRA complete with
all the necessary documentary requirements to the Chief of ITAD.

RELEVANT PROCEDURES (Section 3, RMO 72-2010)

1. Within 7 working days from the actual receipt by ITAD of the

TTRA, ITAD shall notify the filer of lacking/missing/
insufficient documentary requirements with an instruction to
submit within fifteen (15) working days from the filer’s
receipt of the Notice of Submission of Documents (NSD);
2. If the taxpayer/applicant fails to submit the necessary
documents on the designated date mentioned in the NSD, the
TTRA shall be archived without prejudice to its refiling to be
reckoned from the date of original TTRA filing covering
exactly the same transactions.
3. An applicant shall not be allowed to withdraw any TTRA/
documents already filed with ITAD including those subjected
for archiving. In the event that the transaction is
discontinued, taxpayer/filer shall file a letter informing
such fact to properly close the TTRA but the filer/taxpayer
shall not be allowed to withdraw as well, all documents

Page 103
 already filed with ITAD, the same shall remain with ITAD for
custodianship and safekeeping.
4. In the course of review of the tax treaty relief applications,
the Bureau thru ITAD reserves the right to require additional
documents/ revise or update documentary requirements to
properly process TTRA’s keeping it abreast with changes/
modernization of way transactions are done by taxpayers
through the issuance of an amendatory RMO to be applied
prospectively.

TTRA NO RULING AREA

Requests for rulings not accompanied by complete documents as

herein prescribed and those which are based on hypothetical
transactions or future transactions are construed and requested
for ruling construed, and identified as such shall not be
accepted by the ITAD. ITAD SHALL STRICTLY IMPLEMENT THIS RULE.
(Section 16, RMO 72-2010)

Page 104