TAXATION

FAR EASTERN UNIVERSITY – MANILA

SPECIAL ECONOMIC ZONE ACT (801)

Definition of ECOZONES

ECOZONES or "Specific Economic Zones" (SEZ) shall refer to selected areas with highly developed or which have the
potential to be developed into agri-industrial, industrial, tourist, recreational, commercial, banking, investment and
financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations.

An ECOZONE may contain any or all of the following: Industrial estates (IEs), export processing zones (EPZ), free
trade zones and tourist/recreational centers.
Start of Commercial Operations

For purposes of the income tax holiday shall be the 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.
Policy and the Philippine Economic Zone Authority (PEZA)

The state recognizes the indispensible role of the private sector, encourages private enterprise, and provide incentives
to needed investments.

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
balance 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.
Registration of Investment

Applying and registration of Investment with the Board of Investments requires submission of a notarized application
indicating the type of projects, how the activities relates to those listed in the Investment Priorities Plan, the
production capacity geared to export, the capital structure of the enterprise, and the nationality of its investors. In
addition, the company must submit a feasibility report, containing five-year projected financial statements.
Fiscal incentives to PEZA-registered economic zone enterprises

A. Exemption from Duties and Taxes on Importation of Merchandise

1.Importation of Capital Equipment
2.Importation of Construction Materials
3.Importation of Specialized Office Equipment and Furniture
4.Importation of Specialized Vehicles and Other Transportation Equipment
5.Importation of Professional Instruments and Household Effects

B. Exemption from National and Local Taxes and Licenses

C. Tax Credit for Import Substitution

D. Exemption from Wharfage Dues, Export Tax, Impost or Fee

E. Additional Deduction for Training Expenses –

F. Other Incentives under the Code

1. Income Tax Holiday

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.

2. 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 projects, shall apply only to the extent of the
actual increase in production.

Expansion – Expansion may include modernization or rehabilitation which, to be registrable, may

or may not result in increased capacity but in any case, subject to the following conditions:
a. Phases / stages of production sought to modernized / rehabilitated must be identified; and
b.It must result in any of the following:

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 1) substantial reduction of production cost; and
2) significant increase in production efficiency including debottlenecking;
3) meaningful upgrading of product quality;
4) 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.

3. In general, modernization and rehabilitation shall not be entitled to income tax holiday.

4. 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 of 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 entitled to income tax holiday.

5. 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 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.

6. 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.

G. 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

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 Export or Free Trade Enterprise sells, transfers or disposes of these machinery, equipment, and spare parts, the
provisions of Section 1 (A.2) of this Rule shall apply.

The period of availment of this incentive shall be determined in accordance with Section 3 and 5 Rule XIII of
these Rules.

H. 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 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, poulty, 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
aquisiton 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.

I. 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.

J. 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:
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.

K. 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

L. Incentives Under the Decree –

An ECOZONE Export or Free Trade Enterprise not availing of the incentives under the Section 6 herein may avail
of the incentives under the Decree subject to the regulations that shall be prescribed by the Board and by the
Department of Finance / Bureau of Internal Revenue.

MULTIPLE CHOICE
1. The short title of Republic Act 7916 is
a. The Special Economic Zone Act of 1995
b. The Special Economic Zone Act of 2005
c. The Philippine Economic Zone Act of 1995
d. The Export Processing Zone Authority Act of 1995

2. The chairman of the PEZA Board is

a. PEZA Director General
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b. Undersecretary of Trade and Industry
c. Secretary of Tourism
d. Secretary of Trade and Industry

3. It is the Philippine government agency tasked to promote investments extend assistance, register, grant incentives
to and facilitate the business operations of investors in export-oriented manufacturing and service facilities
a. Board of Investments
b. Bureau of Customs
c. Philippine Economic Zone Authority
d. National Economic Development Authority

4. Fiscal Incentives may be granted to pioneer project for a maximum period of

a. 4 years
b. 6 years
c. 8 years
d. 2 years

5. The following is a non-fiscal incentive to PEZA registered enterprise

a. Income tax holiday
b. Tax and duty free importation of raw materials, capital equipment, machineries and spare parts
c. Exemption from wharfage dues and export tax, impost or fees
d. Ready-to-occupy business locations in world-class economic zones and IT parks or buildings

6. Which statement is false? An enterprise which is registered with PEZA is

a. As a general rule, subject to real estate tax while it is enjoying income tax holiday
b. Exempt from real property taxes on production equipment not attached to real estate
c. Exempt from real estate taxes for the first three (3) years of operation of machineries installed and operated in the
economic zone, for manufacturing, processing or for industrial purposes
d. Exempt from real estate tax while it is enjoying income tax holiday

7. Upon the expiration of income tax holiday, a PEZA registered enterprise may avail of the following fiscal incentive,
except
a. 5% Special tax on Gross Income and exemption from all national and local taxes
b. VAT- zero-rating of local purchases subject to compliance with BIR and PEZA requirements
c. Exemption from wharfage dues and export tax, and impost or fees
d. Four (4) years of exemption from income tax for non-pioneer project

8. Which option is wrong? To avail of tax breaks and incentives being offered by PEZA, an enterprise
a. Must register with PEZA and locate their operation in one of the PEZA zones, buildings, IT Parks, or Technology
Parks
b. Must be export-oriented
c. Located inside the zones are required to export at least 30% of their production.
d. Maybe 100% foreign ownership, provided they are not engaged in activities that appear on the Foreign Investment
Negative List

9. Which document is not required to be submitted in applying for registration with the PEZA?
a. Mayor’s Permit
b. Project feasibility study
c. Project brief
d. Articles of Incorporation and By-laws

10. The system launched for on-line application and registration with the PEZA is known as
a. eddaps@peza.gov.ph
b. e-ARS
c. erddaps@peza.gov.ph
d. www.peza.gov.ph

11. ABC Corporation secured an income tax holiday for 4 years as a pioneer enterprise. On the third year of the tax
holiday, ABC Corporation declared and paid cash dividends to its stockholders, all of whom are individual. Are the
dividends taxable?
a. The dividends are tax exempt because of ABC Corporation's income tax holiday.
b. The dividends are taxable if they exceeded 50% of ABC Corporation's retained earnings.
c. The dividends are exempt if paid before the end of ABC Corporation's fiscal year.
d. The dividends are taxable, the tax exemption of ABC does not extend to its stockholders.

12.
Statement 1: ECOZONES or "Special Economic Zones" (SEZ) shall refer to selected areas with highly developed
or which have the potential to be developed into agri-industrial, industrial, tourist, recreational, commercial,
banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential
Proclamations.

8. SPECIAL ECONONIC ZONE ACT Page 4 of 6

 Statement 2: An ECOZONE may contain any or all of the following: industrial estates (IEs); export processing
zones (EPZ), free trade zones and tourist / recreational centers.

Statement 3: For purposes of the income tax holiday, it shall be the 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.

Statement 4: The State recognizes the indispensable role of the private sector, encourages private enterprise,
and provides incentives to needed investments.
a. True;True;True;True b True;False;False:True c. True;False;False;False d. True;True;False;False

13.
Statement 1: The State shall promote the preferential use of Filipino labor, domestic materials and locally
produced goods and adopt measures that help make them competitive.

Statement 2: Applying and registration of investment with the Board of Investments requires submission of
notarized application indicating the type of projects, how the activity relates to those listed in the Investment
Priorities Plan, the production capacity geared to export, the capital structure of the enterprise, and the nationality
of its investors.

Statement 3:In addition, the company must submit a feasibility report, containing five-year projected financial
statements.

Statement 4: PEZA-registered economic zone enterprise shall enjoy exemption from duties and taxes on
importation of merchandize as well from national taxes and local taxes and licenses, among other fiscal incentives.
a. True;True;True;True b True;False;False:True c. True;False;False;False d. True;True;False;False

14.
Statement 1: Newly-registered pioneer firms shall enjoy income tax holiday for six (6) years from commercial
operations.

Statement 2: Newly-registered non-pioneer firms shall enjoy income tax holiday for four (4) years from
commercial operations.

Statement 3: Expanding firms shall enjoy income tax holiday for three (3) years from commercial operation of
the expansion.

Statement 4: 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.
a. True;True;True;True b True;False;False:True c. True;False;False;False d. True;True;False;False

15.
Statement 1: In cases where an enterprise is undertaking new activities distinct from their registered operations,
the income tax holiday shall apply only to sales of the new products.

Statement 2: The income tax holiday for expansion projects, shall apply only to the extent of the actual increase
in production.

Statement 3: In general, modernization and rehabilitation shall not be entitled to income tax holiday.

Statement 4: For ECOZONE Export or Free Trade Enterprises, the income tax holiday incentive may be extended
for an extra year in certain cases but in no case to exceed a total period of eight (8) years for pioneer registered
enterprises.
a. True;True;True;True b True;False;False:True c. True;False;False;False d. True;True;False;False

16.
Statement 1: 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.

Statement 2: 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).

Statement 3: The approval of the application for registration as an ECOZONE Export of Free Trade Enterprise
shall indicate such status and the corresponding incentives the ECOZONE Export of Free Trade Enterprise may avail
of under the Act.

8. SPECIAL ECONONIC ZONE ACT Page 5 of 6

 Statement 4: Pioneer status may be extended to an ECOZONE Export or Free Trade Enterprise only after the
evaluation of their application for such status.
a. True;True;True;True b True;False;False:True c. True;False;False;False d. True;True;False;False

17.
Statement 1: A tax credit equivalent to one hundred percent (100%) of the value of national internal
revenue taxes and custom 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 manufacture.

Statement 2: The importation of breeding stocks and genetic materials by an ECOZONE Export Enterprise shall
be exempt to taxes and duties.

Statement 3: 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 certain
conditions.

Statement 4: The use of consigned machinery, equipment and spare parts which are reasonably needed in the
registered operations and 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 is another fiscal incentive given to
PEZA-registered economic zone enterprises.

Statement 5: An ECOZONE Export or Free Trade Enterprise not availing of the incentives under Section 6 herein
may avail of the incentives under the Decree subject to the regulations that shall be prescribed by the Board of
Investment and by the Department of Finance / Bureau of Internal Revenue.
a. True;True;True;True;True
b. True;False;False:True;True
c. True;False;False;False;False
d.True;True;False;False;False

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