An analysis of the legal and economic bases of tax exemptions of PEZA services enterprises

• Main Author: Cariño, Marlon Magno
• Format: text
• Language: English
• Published: Animo Repository 2007
• Subjects: Tax incentives—Law and legislation—Philippines; Service industries—Taxation—Philippines; Economic zoning—Law and legislation—Philippines; Tax Law
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/6866
• Institution: De La Salle University

Republic Act 7916, otherwise known as the Special Economic Zone Act of 1995, was enacted to attract much-needed foreign investments into the country. In order to achieve this objective, Section24 of the said law provided that PEZA-registered enterprises shall enjoy tax incentives such as: (1) preferential tax rate of five percent (5%) on gross income in lieu of all national and local taxes; (2) tax-free importation of capital goods; and (3) income tax holiday for export-oriented and free-trade enterprises as provided under the Omnibus Investment Code. However, Section 25 of the same law further provides that not all PEZA-registered enterprises will enjoy tax incentives provided under Section 24. Particularly excluded in Section 24 tax incentives are all person and service establishments. The exclusion under Section 25 was again reiterated by Congress when it passed Republic Act 8747, “An Act amending Republic Act no 7916, otherwise known as the ‘Special Economic Zone Act of 1995’.” However, in the case of Commissioner of Internal Revenue vs. Philippine Seagate Technology (Philippines), G.R. no. 153866 dated 11 February 2005, the Supreme Court held that all PEZA-registered enterprises are covered by tax incentives provided under Section 24. In spite of this ruling by the Supreme Court, the Bureau of Internal Revenue continues to assess PEZA-registered enterprises, relying on the provisions of Section 35 of Republic Act 7916 and its implementing rules and regulations. The conflicting views between the Supreme Court, on the one hand, and the Bureau of Internal Revenue, on the other, will definitely have a negative impact on the investors’ confidence in the special economic zone. Investors want predictability, especially concerning tax liability since this has a great impact on their strategic business decisions. Proper and consistent application of tax incentives provided under Section 25 should, therefore, be implemented and harmonized together with the existing rules, regulations, and jurisprudence in order to build and strengthen investor confidence. This paper aims to analyze the legal and economic basis of the government in granting the tax incentives given to PEZA-registered enterprises and excluding all PEZA-registered service enterprises