TAX TREATMENT OF SALES OF GOODS, PROPERTY AND SERVICES MADE BY A SUPPLIER FROM THE CUSTOMS TERRITORY TO A PEZA REGISTERED ENTERPRISE; AND SALE TRANSACTIONS MADE BY PEZA REGISTER…

SECTION 1.       Scope. — This Circular is being issued to
consolidate and harmonize all the pertinent tax laws and their
corresponding implementing rules and regulations in respect of sales of
goods, property and services to and from the ECOZONES, in relation to
the provisions of R.A. No. 7916, as amended by R.A. No. 8748, entitled
“The Special Economic Zone Act of 1995” which created the Philippine
Economic Zone Authority (PEZA).

SECTION 2.       Background . — In general, enterprises
registered and operating under the said Act, otherwise known as ECOZONE
or PEZA registered enterprises, shall only be imposed with a 5% special
tax, based on “gross income earned” in lieu of all taxes, except the real property tax.
However, this tax incentive only applies in respect of the registered
enterprise’s operations within the ECOZONE. The ECOZONES “are selected
areas with highly developed or which have 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, export processing zones, free
trade zones, and tourist/recreational centers.” (SEC. 4 (a), R.A. No.
7916). The ECOZONE “shall be managed and operated by the PEZA as a separate customs territory.”
(SEC. 8, id.) The term “Customs Territory” means “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.” (Sec. 1 (g), PEZA Rules and
Regulations). Generally, products manufactured or produced within the
ECOZONE are destined for export to foreign countries. While such
products, under certain conditions, may also be sold to buyers in the
Customs Territory, i.e., outside the ECOZONE, such sales are technically
considered as importation by such buyer from the Customs Territory.
Since the ECOZONE is technically treated as another separate Customs
Territory, the buyer is treated as an importer and is imposed with the
corresponding import taxes and customs duties on his purchase of
products from within the ECOZONE.

While all ECOZONE enterprises are not necessarily
manufacturer-exporters of products considering that there are also
service enterprises registered as ECOZONE enterprises, however, taken as
a whole, all their integrated activities eventually translate into
manufactured products which are either actually exported to foreign
countries, in which case, no VAT must form part of its export price; or
actually sold to buyers from the Customs Territory, in which case, 10%
VAT shall be paid thereon by such buyers, consistent with the “Cross
Border Doctrine” of the VAT system.

The Philippines’ Value Added Tax (VAT) law adheres to the “Cross
Border Doctrine” of the VAT System, which basically means that no VAT
shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority.
Hence, actual export of goods and services from the Philippines to a
foreign country must be free of the VAT. Conversely, those destined for
use or consumption within the Philippines shall be imposed with the 10%
VAT. Accordingly, interpretation of the provisions of the VAT law has
been harmonized with the “Cross Border Doctrine”.

SECTION 3.       Tax Treatment Of Sales Made By A VAT Registered
Supplier From The Customs Territory, To A PEZA Registered Enterprise. —

(1) If the Buyer is a PEZA registered enterprise which is subject to
the 5% special tax regime, in lieu of all taxes, except real property
tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). — This shall be treated as
indirect export hence, considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in
relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. — This shall be treated subject to zero percent (0%) VAT under the “cross border doctrine” of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced
by the 5% special tax regime, hence, subject to taxes under the NIRC,
e.g., Service Establishments which are subject to taxes under the NIRC
rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). — This shall be treated as
indirect export hence, considered subject to zero percent (0%) VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in
relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. — This shall be treated subject to zero percent (0%) VAT under the “cross border doctrine” of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

3.  In the final analysis, any sale of goods, property or services
made by a VAT registered supplier from the Customs Territory to any
registered enterprise operating in the ecozone, regardless of the class
or type of the latter’s PEZA registration, is actually qualified and
thus legally entitled to the zero percent (0%) VAT. Accordingly, all
sales of goods or property to such enterprise made by a VAT registered
supplier from the Customs Territory shall be treated subject to 0% VAT,
pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the
Omnibus Investments Code, while all sales of services to the said
enterprises, made by VAT registered suppliers from the Customs
Territory, shall be treated effectively subject to the 0% VAT, pursuant
to Section 108(B)(3), NIRC, in relation to the provisions of R.A. 7916
and the “Cross Border Doctrine” of the VAT system.

This Circular shall serve as a sufficient basis to entitle such
supplier of goods, property or services to the benefit of the zero
percent (0%) VAT for sales made to the aforementioned ECOZONE
enterprises and shall serve as sufficient compliance to the requirement
for prior approval of zero-rating imposed by Revenue Regulations No.
7-95 effective as of the date of the issuance of this Circular.

SECTION 4.       Tax Treatment Of Sales Made By A VAT-Exempt
Supplier From The Customs Territory, To A PEZA Registered Enterprise. —
Sale of goods, property and services by VAT-Exempt Supplier from the
Customs Territory, to a PEZA-registered enterprise shall be treated
exempt from VAT, pursuant to Sec. 109, in relation to Sec. 236, NIRC,
regardless of whether or not the PEZA registered buyer is subject to
taxes under the NIRC, or enjoying the 5% special tax regime, or a
registered manufacturer-exporter the “Cross Border Doctrine” of the VAT
System to the contrary notwithstanding.

SECTION 5.       Tax Treatment Of Sales Made By A PEZA Registered Enterprise. —

(1) Sale of goods (i.e., merchandise), by a PEZA-registered
enterprise, to a buyer from the Customs Territory (i.e., domestic
sales). — This case shall be treated as a technical importation
made by the Buyer. Such Buyer shall be treated as an importer thereof
and shall be imposed with the corresponding import tax/es (i.e., VAT or
VAT plus excise tax, as the case may be), pursuant to Sec. 107, Title IV
and Title VI, NIRC, in relation to Sec. 26, R.A. No. 7916, as
implemented by Sec. 2, Rule VIII, PART V of the PEZA rules and
regulations entitled “Rules and Regulations to Implement Republic Act
No. 7916.” The registered enterprise’s “gross income earned” therefrom
shall be subject to the 5% special tax pursuant to Sec. 24 of R.A. No.
7916: Provided, however, that its sales in the Customs Territory do not
exceed the threshold allowed or permitted for such sales, pursuant to
the pertinent provisions of the PEZA rules and regulations: Provided,
further, that for income tax purposes, if such sales should exceed the
aforesaid threshold, its income derived from such excess sales shall be
imposed with the normal income tax pursuant to the provisions of Title
II, NIRC: Provided, further, that in computing for the income tax due on
such excess sales, its net income from such excess sales shall be
determined in accordance with the method of general apportionment
pursuant to the provisions of Sec. 50, NIRC, (i.e., compute its total
net income from total sales, then, compute its net income from such
excess sales by general apportionment, as follows: Excess sales divided
by total sales times total net income from total sales equals net income
from excess sales).

(2) Sale of Services by a PEZA Registered Enterprise to a Buyer from
the Customs Territory. — This type of transaction is not embraced by
the 5% special tax regime governing PEZA-registered enterprises pursuant
to R.A. No. 7916, as implemented by the PEZA rules and regulations
hence, such seller shall be subject to the 10% VAT, pursuant to Section
108 or to the percentage tax, pursuant to Title V, whichever is
applicable, and to the normal income tax on income derived therefrom,
pursuant to Title II, NIRC. Such income tax shall be computed in
accordance with the method of general apportionment provided in the
immediately preceding paragraph.

(3) Sale of Goods, by a PEZA Registered Enterprise, to Another PEZA Registered Enterprise (i.e., Intra ECOZONE Sales of Goods).
— Its sale of goods or property to another zone enterprise shall be
exempt from VAT, pursuant to Sec. 109(q), NIRC, in relation to Sec. 24,
R.A. 7916, as implemented by Sec. 1, Rule VIII, PART V, of the PEZA
implementing rules and regulations.

(4)  Sale of Service by ECOZONE Enterprise, to Another ECOZONE Enterprise (Intra ECOZONE Enterprise Sale of Service):

(a) If PEZA-Registered Seller is Subject to the 5% Special Tax
Regime. — Exempt from VAT or any percentage tax, pursuant to Sec. 24,
R.A. 7916.

(b) If PEZA-Registered Seller is Subject to Taxes Under the NIRC . —
Subject to zero percent (0%) VAT pursuant to the “Cross Border
Doctrine” of the VAT system, regardless of the type or class of PEZA
registration of the PEZA enterprise. Buyer, since the use for or benefit
from such purchase of service shall eventually be translated to actual
export of goods (i.e., shipment of goods to a foreign country, which is
subject to zero percent (0%) VAT, or translated into technical export of
goods (i.e., sale of goods to a buyer from the Customs Territory, which
is treated as importation by such buyer, hence, subject to 10% VAT
against the said buyer).

SECTION 6.       Repealing Clause. — Any BIR Ruling, if inconsistent herewith, is hereby considered amended, modified or revoked accordingly.

Adopted: 15 Oct. 1999

(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue