BUSINESS
Clarifying the tax treatment of transactions in the Freeports
by Atty. Irwin C. Nidea, Jr.

Clark, Subic and Poro Point Freeport Zones shall be treated as “free ports” for tax purposes pursuant to the clarifications issued by the Bureau of Internal Revenue (BIR) in Revenue Memorandum Circular (RMC) 50-07. The rules were laid down in a manner that upholds their status as “foreign territories” or “separate customs territories” where goods and capital shall freely move within, into and out of their jurisdiction.

The issuance of these tax guidelines following the passage of Republic Act (RA) 9400 should address the danger of losing existing foreign direct investors in the Freeport Economic Zones (FEZ) and re-establish the FEZ as a choice location for investments.

For a long time, the tax treatment of locators within the Clark and Poro Point as well as other Special Economic Zones (SEZs) under the Bases Conversion Development Authority (BCDA) Act was not clear.

The incentives enjoyed by Subic SEZ enterprises under the BCDA Act or Republic Act (RA) 7227 were extended to the Clark, Poro Point and John Hay SEZ enterprises on the basis of Executive Order (EO) No. 80 and Board Resolution No. 93-05-034 of the BCDA. However, these incentives were suddenly expunged by the Supreme Court in its decision in Coconut Refiners Association, Inc. v Hon. Ruben Torres, and John Hay Peoples Alternative Coalition v. Victor Lim. The SC declared null and void the tax incentives enjoyed by the Clark SEZ and John Hay locators and ruled that the incentives under the BCDA Act are exclusive only to locators within the SSEZ.

In a move to redeem itself and to restore the status of these economic zones, the Philippine Congress enacted RA 9400, otherwise known as An Act Amending the BCDA Act, to provide tax incentives to SEZ locators which are similar, to some extent, to those enjoyed by entities registered with the Philippine Economic Zone Authority (PEZA).

To implement this law, the RMC defined the tax implications of the movement of goods and rendering of services between customs territory entities and FEZ enterprises and among the FEZ enterprises themselves, as follows:

• The sale, barter or exchange of goods or properties into the Freeport zones by suppliers from the customs territory shall be considered as export sales.

• The sale of goods and services to an FEZ-registered enterprise shall be VAT zero-rated if the seller is a VAT entity, and exempt if the seller is a non-VAT entity.
• The sale of goods to buyers in the customs territory shall be considered technical importation. Thus, the buyer shall be liable to duties and taxes on such importation.

• The sale of services and lease of properties to a customs territory entity shall be VAT-exempt if rendered within the zone or if the property leased is located within the Freeport zone. If the property is located outside the Freeport zone, the lease payments shall be treated as royalties and subject to 12% withholding VAT.

• The sale, exchange, barter or lease of goods, properties and services within the subject FEZ shall be exempt from VAT. The following transactions are covered under this exemption:
a. All transactions between registered FEZ enterprises or residents;
b.Consumer goods purchased and consumed within the FEZs;
c. Sale/supply of services within the FEZ, including supply of power or electricity for consumption within the FEZ, by an FEZ-registered enterprise or resident, to buyers or customers who are registered FEZ enterprises or residents;
d. Lease of properties owned by FEZ-registered enterprises or residents, provided that such properties are located within the FEZ.

• FEZ enterprises may generate income from sources within the Customs Territory of up to 30% of its total income from all sources. However, if its income from sources within the customs territory exceeds 30% of its total income from all sources, then it shall be subject to the regular income tax.Furthermore, customs duties and taxes must be paid with respect to transactions, receipts, income and sales of articles in the customs territory.

As the tax and legal framework for the full operation of the Freeport zones are now clearly established, the Freeport zones can start to focus more on enhancing their other comparative advantages that should re-establish their full potential in promoting economic and social development.