Quick Notes PEZA

QUICK NOTES PEZA 

The Special Economic Zone Act of 1995 Republic Act No. 7916 Presidential Decree No. 66 Executive Order No. 226

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ECOZONE or Special Economic Zone - selected areas with highly developed or which have the  potential to be developed developed into agri-industrial, agri-industrial, industrial, industrial, tourist, recreational, commercial, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations.

An ECOZONE may contain any of the following: i. ii. iii. iv. 

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Industrial Estate Export Processing Zone Free Trade Zone Tourist/Recreational Center

Customs territory - shall mean the national territory of the Philippines outside of the proclaimed  boundaries of the ECOZONES ECOZONES except those areas specifically specifically declared by other laws and/or and/or  presidential proclamations proclamations to have the status status of special economic economic zones and / or free ports. TYPES OF ECOZONE ENTERPRISES: i.

ii.

Export Enterprise engaged in manufacturing, assembling or processing activity o exporting 100% of its production (unless a lower percentage is allowed by the PEZA o Board subject to conditions) Domestic Market Enterprise engaged in manufacturing, assembling or processing activity o fails to export 100% of its production o at least 60% of capital c apital is owned by Philippine nationals - fails to export at least 50% of its production for a period of 3 years less 60% of capital is owned by Philippine nationals - fails to export at least 70% of its production for a period of 3 years 

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iii.

Pioneer Enterprise engaged in the manufacture, processing or production and not merely in the assembly o of packaging of goods, products, commodities or raw materials that have not been or are not being produced in the Philippines P hilippines on a commercial scale or which uses a design, formula, scheme, method, process or system or production of o transformation of any element, substance or raw materials into another raw material or finished goods which is new and untried in the Philippines o which produces non-conventional fuels or manufactures equipment which utilizes non-conventional sources of energy or uses or converts to coal or other nonconventional fuels or sources of energy in its production, manufacturing or processing operations: or engaged in the pursuit of agri-export processing zone development or o o given such status under the Investment Priorities Plan: Provided, That the final  product in any of the foregoing foregoing instances involves involves or will involve involve substantial use use and  processing of domestic domestic raw materials, whenever available, available, taking into account account the risk and magnitude of investment. i nvestment.

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iv.

v.

vi.

vii.

viii.

ix.

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Free Trade Enterprise Engaged in importation within the a free trade zone for immediate transshipment or o for storage, repacking, sorting, mixing or manipulation and subsequent exportation Utilities Enterprise o Contractors/operators of light and power systems, water supply and distribution systems, communications and transportation systems within the ECOZONE With or without tax incentives o o Operates under the Build-Operate-Transfer Law Facilities Enterprise contractors / operators of buildings, structures, warehouses, site development and road o network, ports, sewerage and drainage system and other facilities for t he development, operation and maintenance of the ECOZONE o With or without tax incentives o Operates under the Build-Operate-Transfer Law Developer/operator develop, operate and maintain an ECOZONE o Service Enterprise engaged in customs brokerage, trucking / forwarding services, parcel services, o  janitorial services, security services, insurance, and / or banking services, consultancy services, restaurants o shall be subject to taxes imposed under NIRC Tourism Enterprise engaged in the establishment and operation of tourist-oriented accommodations, o restaurants operated as an integral part of a tourism facility (e.g., hotels, resorts, recreational centers), sports and recreational facilities within the ECOZONE.

REGISTRATION WITH THE PEZA

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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  Exceptions:

i. ii.

iii.

duty-free retailing and wholesale trading of imported finished products  for purposes of  serving the domestic market 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.

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iv.

-

-

-

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applicants for  Domestic Enterprise shall be limited to new or expanding business entities  subject to the guidelines that shall be promulgated by the Board in addition to the nationality requirements under existing laws and regulations.

Certificate of Registration - certificate issued by the PEZA to an ECOZONE Enterprise upon its registration Date of Registration - date appearing in the certificate of registration Registration Agreement - final agreement executed by the PEZA and the ECOZONE Enterprise setting forth the terms and conditions for the latter's operation of business or engaged of economic activity within the ECOZONE Start of commercial operations (SCO) - date specified in the Registration Agreement or the date when the particular ECOZONE export enterprise actually begins production of the registered  product for commercial purposes, whichever comes first, irrespective of phases or modules or schedule of development. Requirements upon application: i. Project feasibility study, unless dispensed with and in lieu thereof, the applicant shall submit basic data / information on its technical, financial, marketing and management capability / competence to undertake the proposed project or business within the ECOZONE; *NO LONGER REQUIRED* ii. Copies of articles of incorporation and by-laws; iii. Resolution of the applicant's board of directors authorizing the filing of the application; list of its directors, principal officers, and major stockholders, including their bio-data; iv. List of machinery and equipment to be used by the applicant with a statement of their capacity, ownership and/or mode of procurement; v. Company brochures and / or photographs of product(s); and vi. Other supporting documents / papers / clearances as may be required by the PEZA depending upon the nature of the business and the type of business organization of the applicant.

TYPES OF MERCHANDISE

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Domestic - articles which are the growth, origin or manufacture of the Philippines Foreign – articles imported into the Philippines  Exception:

“those previously exported therefrom and returned having been advanced in value or improved in condition by any process of manufacture or other similarly artificial means or processes and upon which no drawback or bounty has been allowed.”

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Prohibited – goods, wares, merchandise, equipment or machineries the importation of which are  prohibited by law as enumerated in Section 102, Book 1 of the Republic Act No. 1937, otherwise known as the Tariff Customs Code of the Philippines, as amended by Presidential Decree No. 34, and such other goods or merchandise which may be prohibited by special laws or by the PEZA.

EXPORT SALES

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Actual

i.

Philippine port F.O.B. value, determined from invoices, bills or lading, inward letters of credit, landing certificates and other commercial documents of export products exported directly by an ECOZONE Export or Free Trade Enterprise or

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ii.

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Constructive

i. ii. iii. iv.

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the net selling price of the export products sold by an ECOZONE Export or Free Trade Enterprise to another export producer or to an export trader that subsequently exports the same

sales to the bonded manufacturing warehouses of export-oriented manufacturers; sales to registered ECOZONE Export or Free Trade Enterprises; sales to registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products; and sales to diplomatic missions and other agencies and / or instrumentalities granted tax immunities of locally manufactured, assembled or repacked products, whether paid for in foreign currency or not.

INCENTIVES A. Export and Free Trade Enterprises/IT Enterprise i.

Duty and tax-free importation of machinery and equipment that will be exclusively used in its registered activity Disposal of capital equipment General rule: Require prior PEZA Board approval to be without penalty.

If disposed/transferred within 5 years without PEZA approval - the ECOZONE Export or Free Trade Enterprise and the vendee, transferee, or assignee shall be solidarily liable to  pay twice the amount of the tax exemptions granted.

ii.

Exemption from Wharfage Dues, Export Tax, Impost or Fee

iii.

Additional Deduction for Training Expenses

iv.

Income Tax Incentives a. Income Tax Holiday 

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 New Registered Pioneer Firms - Six (6) years from commercial operations. (can be extended)  New Registered Non-Pioneer Firms - four (4) years from commercial operations. (can be extended) Expanding Firms - Three (3) years from commercial operation of the expansion. (cannot be extended)

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How to compute:

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. 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 e ntitled to income tax holiday. Illustration: 24/7 Inc., a PEZA-registered export service enterprise, has the following sales for its first three years in operation: Year 1 – 1,000,000 Year 2 – 900,000 Year 3 – 1,100,000 In the beginning of Year 4, 24/7 Inc. introduced a process which significantly reduced its cost and increased efficiency in delivering services. As a result, 24/7 Inc. applied with the PEZA for expansion of its project and was granted 3 years ITH on the incremental sales. By the end of year 4, 24/7 recorded sales amounting to 2,500,000 and net income of 500,000. A. Get the total sales for the whole taxable year – 2,500,000 B. Get the base figure – 1,100,000 (highest) C. Determine rate of exemption using the formula: (2,500,000 – 1,100,000) / 2,500,000 = .56

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D. Determine net income exempt from income tax: 500,000 * .56 = 280,000

b. ITH extension

ITH Extension years may be granted if Project complies with the following criteria, (one criterion is equivalent to one ITH e xtension year), provided that the total ITH entitlement period shall not exceed eight (8) years: 

The average net foreign exchange earnings of the project for the first three (3) years of operations is at least US$500,000.00 Formula: Sales:   Total Local Export

Year 1

Year 2

Year 3

X

X

X

X

Less: Foreign exchange costs Raw Materials-Imported Indirect Materials-Imported Depreciation-imported machinery Others (pls. specify)

X X X X

X X X X

X X X X

X X X X

Total Foreign Exchange Costs

X

X

X

X

 Net Foreign Exchange Earnings [Export Sales-Total Exchange Costs]

X

X

X

X

Average NFEE [Total NFEE/3]

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The capital equipment to labor ratio of the project does not exceed US$10,000.00 to 1 for the year immediately preceding the ITH extension year being applied for.

X

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v.

The average cost of indigenous raw materials used in the manufacture of the registered product is at least fifty per cent (50%) of the total cost of raw materials for the preceding years prior to the ITH extension year. (not applicable to ITH enterprises)

Upon expiry of the Income Tax Holiday - 5% Special Tax on Gross Income and exemption from all national and local taxes (“Gross Income” refers to gross sales or gross revenues derived from the registered activity , net of sales discounts, sales returns

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and allowances and minus cost of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period) vi.

VAT zero-rating of local purchases subject to compliance with BIR and PEZA requirements

vii.

Exemption from payment of any and all local government imposts, fees, licenses or taxes. However, while under Income Tax Holiday, no exemption from real estate tax, but machineries installed and operated in the economic zone for manufacturing, processing or for industrial purposes shall be exempt from real estate taxes for the first three (3) years of operation of such machineries. Production equipment not attached to real estate shall  be exempt from real property taxes

viii.

Exemption from expanded withholding tax – no withholding on revenues, but required to withhold on payments to vendors

B. Other Enterprises Incentive

4 years ITH 5% GIT* Tax and duty free importation VAT zero rating Exemption from EWT

Tourism/Medical Tourism/Agroindustrial X X X

Logistic/Services

X

X X

X

X

X

*upon expiry of ITH

X

Developer /Operator /Facilities/Utilities