MODULE 5

Transfer and Business Taxation

SESSION TOPIC: Preferential Taxation

LEARNING OUTCOMES

The following specific learning objectives are expected to be realized at the end of the
session:
1. To be able to describe, analyze and apply preferential taxation
KEY POINTS
Preferential Taxation Disable Person Senior Citizen
PEZA BOI BMBE

CORE CONTENT

Introduction:
This module covers
Senior Citizens Law
Exemption from income tax of qualified senior citizen
Tax incentives for qualified establishments selling goods and services to senior
citizens
Magna Carta for Disabled Persons*
Tax incentives for qualified establishments selling goods and services to disable
persons
Special Economic Zone Act
Policy of the Philippine Economic Zone Authority (PEZA)
Registration of Investments
Fiscal Incentives to PEZA-registered economic zone enterprises
Omnibus Investments Code (Book 1 of Executive Order 226)*
Policy and the Board of Investment (BOI)
Preferred areas of investment
Investment Priority Plan
Registration of investments
Fiscal incentives to BOI registered enterpirses
Barangay Micro Business Enterprises (BMBEs) Act*
Registration of BMBes
Fiscal Incentives to BMBEs
Double Taxation Agreements (DTA)

TAXN03B Transfer and Business Taxation (For Instructional Materials Use Only) 1
 Nature and purpose of DTAs
Mannger of giving relief from double taxation
Procedure for availment of tax treaty benefits
.
IN-TEXT ACTIVITY

1. The Expanded Senior Citizen’s Act of 2003 (RA 9257)

Senior citizen or elderly refers to any resident Filipino citizen aged 60 years old and
above.
Under RA 9257, a senior citizen or elderly is entitled to a 20% discount in certain
establishments such as hotels and similar lodging establishments, restaurants,
recreational centers and other places of culture, leisure and amusements, hospitals,
drugstores, and services such as medical, dental, domestic, air, sea and land transport,
and funeral or burial service providers.
The discounts granted to senior citizens by covered establishments and service
providers are allowed as special deductions against gross income.

Conditions for deductibility of sales discounts to senior citizens

1. Only that portion of the gross sales exclusively used, consumed, or employed by
the senior citizen shall be eligible for the deductible sales discount.
2. The gross selling price and the sales discount must be separately indicated in the
official receipt or sales invoice issued by the establishment for the sale of goods
or services to the senior citizen.
3. Only the actual amount of the discount granted or sales discount not exceeding
20% of the gross selling price can be deducted from gross income, net of VAT, if
applicable.
4. The discount can only be allowed as a deduction from gross income for the same
taxable year that the discount is granted.
5. The business establishment giving sales discount to qualified senior citizens is
required to keep a separate and accurate record of sales which shall include the
name, TIN, ID, gross sales/receipts, discounts granted, date of transaction, and
invoice number for every sale transaction to senior citizen.

Additional Claimable Compensation Expense for Senior Citizen Employees

Under RA 9257, private establishments employing senior citizens shall be entitled to
additional deduction from gross income equivalent to 15%% of the total amount paid as
salaries and wages to senior citizen.

Conditions for deductibility of additional compensation

1. Employment shall have to continue for at least 6 months
2. The annual taxable income of the senior citizen does not exceed the poverty
level determined by NEDA.

2. Discounts to Disabled Persons (RA9257)

TAXN03B Transfer and Business Taxation (For Instructional Materials Use Only) 2
A person with disability pertains to an individual suffering from restrictions or different
abilities as a result of mental, physical, or sensory impairment to perform an activity in a
manger or within the range considered normal for human beings.
Disability pertains to physical or mental impairment that substantially limits one or more
psychological, physiological, or anatomical functions of an individual or activities of such
individuals

Discounts to persons with disability

Similar to senior citizens, persons with disability are entitled to a 20% discount from
certain establishments such as hotels and similar lodging establishments, restaurants,
sports and recreation centers, places of culture, leisure and amusement, drugstores on
the purchase of medicine, medical and dental services I private facilities and domestic
air, sea, and land transport.
The discounts to persons with disability shall be allowed as a special deduction under
the same terms and conditions as those for senior citizens.

Additional Claimable Compensation Expense for Persons With Disability

Private entities that employ disable persons who meet the required skills or
qualifications, either as regular employees, apprentices or learners, shall be entitled to
an additional deduction from their gross income, equivalent to twenty-five percent (25%)
of the total amount paid as salaries and wages to disabled persons.

Cost of Facilities Improvement for Disabled Persons

Under RA 7277, private entities that improve or modify their physical facilities in order to
provide reasonable accommodation for disabled persons shall also be entitled to an
additional deduction from their income equivalent to fifty percent (50%) of the direct
costs of the improvements or modifications.

3. Special Economic Zone Act

PEZA - attached to the Department of Trade and Industry - 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 inside selected areas throughout the country proclaimed by the
President of the Philippines as PEZA Special Economic Zones.
It oversees and administers incentives to developers/operators of and locators in world-
class, ready-to-occupy, environment-friendly, secured and competitively priced Special
Economic Zones

Fiscal Incentives to PEZA-registered economic zone enterprises

1. Income Tax Holiday (ITH) – 100% exemption from corporate income tax 
4 years ITH for Non-pioneer Project
6 years ITH for Pioneer Project
2. 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

TAXN03B Transfer and Business Taxation (For Instructional Materials Use Only) 3
 or gross revenues derived from the registered activity , net of sales discounts,
sales returns 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)
3. Tax and duty free importation of raw materials, capital equipment, machineries
and spare parts.
4. Exemption from wharfage dues and export tax, impost or fees
5. VAT zero-rating of local purchases subject to compliance with BIR and PEZA
requirements
6. 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
7. Exemption from expanded withholding tax

4. Omnibus Investments Code (Book 1 of Executive Order 226)*

Declaration of Investment Policies. - To accelerate the sound development of the
national economy in consonance with the principles and objectives of economic
nationalism and in pursuance of a planned economically feasible and practical dispersal
of industries and the promotion of small and medium scale industries,

Preferred areas of investment

The IPP identifies priority economic areas entitled to incentives under the Omnibus
Investments Code of 1987. The 1999 IPP includes preferred sectors being promoted to
direct capital flows to the best locations in the countryside.
Among these:
a. Agribusiness
b. Halthcare and Wellness Products and Services
c. Information and Communications Technology
d. Electronics
e. Motor Vehicle Products
f. Infrastracture
g. Tourism
h. Shipbuilding/Shipping
i. Jewelry
j. Fashion Garments
k. Machinery and equipment, raw materials and intermediate inputs in support of the
activities listed in the IPP.

Fiscal incentives to BOI registered enterpirses

1. Income Tax Holiday

TAXN03B Transfer and Business Taxation (For Instructional Materials Use Only) 4
 2. Exemption from Taxes and Duties on Imported Spare parts
3. Exemption from Wharfage Dues and Export Tax, Duty, Import and Fees
4. Tax Exemption on Breeding Stocks and Genetic Materials
5. Tax Credits

5. Barangay Micro Business Enterprises (BMBEs)

is a business entity or enterprise engaged in the production, processing or
manufacturing of products or commodities, including agro-processing, trading and
services whose total assets including those arising from loans but exclusive of the land
on which the particular business entity’s office, plant, and equipment are situated do not
exceed P3,000,000

To qualify as a BMBE, an enterprise must not be a branch or subsidiary of a large scale

enterprise and its policies, and modus operandi must not be determined by a large
scale enterprise such as in the case of franchise.

To avail of the benefits and privileges of a BMBE, an applicant must secure a certificate
of authority to operate as a BMBE from the Office of the Treasurer of the city or
municipality that has jurisdiction.

Tax Exemption on Income from Operation

Aside from other incentives afforded by law, the income of BMBE from their operation is
exempt; hence, excluded from the gross income subject to regular income tax. BMBE’s
file an Annual Information Return in lieu of the income tax return. However, their non-
operating, passive, and capital gains are subject to the appropriate type of income tax.

6. Double Taxation Agreements (DTA)

Procedure for availment of tax treaty benefits
The RMO prescribed the documentary requirements for the applications for relief from
double taxation pursuant to existing Philippine tax treaties.
For specific type of income such as business profits, profits from shipping and air
transport, dividend, interest, royalty, capital gains, income from services and other
income earnings, a specific TTRA form is assigned.
Documentary requirements must accompany all duly accomplished TTRAs.
The filer may either be the income earner or the duly authorized representative of the
income earner.
The International Tax Affairs Division (ITAD) receives all submitted TTRAs.

TAXN03B Transfer and Business Taxation (For Instructional Materials Use Only) 5
SESSION SUMMARY

Taxes help the government fund their projects for economic development. It's also the
lifeblood of outstanding government

SELF-ASSESSMENT

Assignment. Computation of gross gift

REFERENCES

Refer to the references listed in the syllabus of the subject.

TAXN03B Transfer and Business Taxation (For Instructional Materials Use Only) 6