TAXATION
SPECIAL ECONOMIC ZONES ACT
LECTURE NOTES
A. APPLICABLE LAWS AND ADMINISTRATIVE
ISSUANCES
1. R.A. No. 7916
2. R.A. No. 8748
3. P.D. No. 66
4. E.O. No. 226
5. R.A. No. 7844
B. DECLARATION OF POLICY (SEC. 2, R.A. No. 7916,
AS AMENDED)
It is the declared policy of the government to translate
into practical realities the following State policies and
mandate in the 1987 Constitution, namely:
1) "The State recognizes the indispensable role of the
private sector, encourages private enterprise, and
provides incentives to needed investments." (Sec.
20, Art. II)
2) The State shall promote the preferential use of
Filipino labor, domestic materials and locally
produced goods, and adopt measures that help
make them competitive." (Sec. 12, Art. XII)
In pursuance of these policies, the government shall
actively encourage, promote, induce and accelerate a
sound and balanced 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.
C. DEFINITION OF TERMS (SEC. 4, R.A. No. 7916,
AS AMENDED)
1) Special economic zones (SEZ) — hereinafter
referred to as 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 (IEs), export processing zones (EPZs), free
trade zones, and tourist/recreational centers.
2) Industrial estate (IE) — refers to a tract of land
subdivided and developed according to a
comprehensive plan under a unified continuous
management and with provisions for basic
infrastructure and utilities, with or without pre-
built standard factory buildings and community
facilities for the use of the community of
industries.
3) Export processing zone (EPZ) — a specialized
industrial estate located physically and/or
administratively outside customs territory,
predominantly oriented to export production.
Enterprises located in export processing zones are
allowed to import capital equipment and raw
Page 1 of 1
materials free from duties, taxes and other import
restrictions.
4) Free trade zone — an isolated policed area
adjacent to a port of entry (as a seaport) and/or
airport where imported goods may be unloaded for
immediate transshipment or stored, repacked,
sorted, mixed, or otherwise manipulated without
being subject to import duties. However,
movement of these imported goods from the free-
trade area to a non-free-trade area in the country
shall be subject to import duties.
Enterprises within the zone are granted preferential
tax treatment and immigration laws are more lenient.
D. THE PHILIPPINE ECONOMIC ZONE AUTHORITY
(PEZA) BOARD (SEC. 11, R.A. NO. 7916, AS
AMENDED)
There is hereby created a body corporate to be known
as the Philippine Economic Zone Authority (PEZA)
attached to the Department of Trade and Industry.
The Board shall have a director general with the rank
of department undersecretary who shall be appointed
by the President. The director general shall be at least
forty (40) years of age, of proven probity and
integrity, and a degree holder in any of the following
fields: economics, business, public administration, law,
management or their equivalent, and with at least ten
(10) years relevant working experience preferably in
the field of management or public administration.
The director general, shall be assisted by three (3)
deputy directors general each for policy and planning,
administration and operations, who shall be appointed
by the PEZA Board, upon the recommendation of the
director general. The deputy directors general shall be
at least thirty-five (35) years old, with proven probity
and integrity and a degree holder in any of the
following fields: economics, business, public
administration, law, management or their equivalent.
The Board shall be composed of thirteen (13)
members as follows: the Secretary of the Department
of Trade and Industry as Chairman, the Director
General of the Philippine Economic Zone Authority as
Vice-chairman, the undersecretaries of the
Department of Finance, the Department of Labor and
Employment, the Department of the Interior and Local
Government, the Department of Environment and
Natural Resources, the Department of Agriculture, the
Department of Public Works and Highways, the
Department of Science and Technology, the
Department of Energy, the Deputy Director General of
the National Economic and Development Authority,
one (1) representative from the labor sector, and one
(1) representative from the investors/business sector
in the ECOZONE. In case of the unavailability of the
Secretary of the Department of Trade and Industry to
attend a particular board meeting, the Director
General of PEZA shall act as Chairman."
E. EXEMPTION FROM NATIONAL AND LOCAL TAXES
(SEC. 24, R.A. NO. 7916, AS AMENDED)
TAX
 Except for real property taxes on land owned by
developers, no taxes, local and national, shall be
imposed on business establishments operating within
the ECOZONE. In lieu thereof, five percent (5%) of the
gross income earned by all business enterprises within
the ECOZONE shall be paid and remitted as follows:
1) Three percent (3%) to the National Government;
2) Two percent (2%) which shall be directly remitted
by the business establishments to the treasurer's
office of the municipality or city where the
enterprise is located.
F. FISCAL INCENTIVES
Business establishments operating within the
ECOZONES shall be entitled to the fiscal incentives as
provided for under Presidential Decree No. 66, the law
creating the Export Processing Zone Authority, or
those provided under Book VI of Executive Order No.
226, otherwise known as the Omnibus Investment
Code of 1987.
Furthermore, tax credits for exporters using local
materials as inputs shall enjoy the same benefits
provided for in the Export Development Act of 1994.
G. INCENTIVES UNDER P.D. NO. 66 SECTION 17
AND 18)
1) Except as otherwise provided in this Decree,
foreign and domestic merchandise, raw materials,
supplies, articles, equipment, machineries, spare
parts and wares of every description, except those
prohibited by law, brought into the Zone to be
sold, stored, broken up, repacked, assembled,
installed, sorted, cleaned, graded, or otherwise
processed, manipulated, manufactured, mixed
with foreign or domestic merchandise or used
whether directly or indirectly in such activity, shall
not be subject to Customs and internal revenue
laws and regulations nor to local tax ordinances,
the provisions of law to the contrary
notwithstanding.
2) Merchandise purchased by a registered zone
enterprise from the customs territory, if paid for in
the United States dollar or in any convertible
foreign currency and subsequently brought into
the zone, shall be considered as exported, and the
exporter thereof shall be entitled to the benefits
allowed by law for such transaction.
3) Domestic merchandise sent from the zone to the
customs territory shall, whether or not combined
with or made part of other articles likewise the
growth, product or manufacture of the Philippines
while in the zone, be subject to internal revenue
laws of the Philippines as domestic goods sold,
transferred or disposed of for local consumption.
4) Merchandise sent from the zone to the customs
territory shall, whether or not combined with or
made part of other articles while in the zone, be
subject to laws and regulations governing
imported merchandise. The duties and taxes shall
be assessed on the value of imported materials
(except when the final product is exempt) and the
internal revenue taxes on the value added.
5) Domestic merchandise on which all internal
revenue taxes have been paid, if subject thereto,
and foreign merchandise previously imported on
Page 2 of 3
which duty or tax has been paid, or which have
been admitted free of duty and tax, may be taken
into the zone from the customs territory of the
Philippines and be brought back thereto free of
quotas, duty or tax.
6) Subject to such regulations respecting identity and
the safeguarding of the revenue as the Authority
may deem necessary when the identity of an
article entered into the zone has been lost, such
article when removed from the zone and taken to
the customs territory shall be treated as foreign
merchandise entering the country for the first
time, under the provisions of the Tariff and
Customs Code.
7) Articles produced or manufactured in the zone and
exported therefrom shall, on subsequent
importation into the customs territory, be subject
to the import laws applicable to like articles
manufactured in a foreign country.
8) Unless the contrary is shown, merchandise taken
out of the zone shall be considered for tax
purposes to have been sent to customs territory.
9) A net-operating loss incurred in any of the first
five years of operation inside the zone may be
carried over as a deduction from taxable income
derived in such zone during the five years
immediately following the year of such loss. The
entire amount of the loss and any portion of such
loss which exceeds the taxable income of such first
year shall be deducted in like manner from the
taxable income of the next remaining four years.
The net-operating loss shall be computed in
accordance with the provisions of the National
Internal Revenue Code, any provision of this
Decree to the contrary notwithstanding, except
that income not taxable either in whole or in part
under this Decree or other laws shall be included
in gross income.
10) Fixed assets may be (1) depreciated to the extent
of not more than twice the normal rate of
depreciation or depreciated at the normal rate of
depreciation if the expected life is ten years or
less; or (2) depreciated over any number of years
between five years and expected life if the latter is
more than ten years; and the depreciation thereon
allowed as a deduction from taxable income:
Provided, That the taxpayer notifies the Bureau of
Internal Revenue at the beginning of the
depreciation period which depreciation rate
allowed by this subsection will be used by it.
11) The provisions of law to the contrary
notwithstanding, foreign merchandise transhipped
through the zone or any article which has been
processed, manufactured or manipulated in said
zone and exported therefrom, shall be exempt
from any export tax, imposts or fee, including the
stabilization tax imposed by Republic Act
Numbered Sixty-one hundred twenty-five.
12) Notwithstanding the provisions of law to the
contrary, any business enterprise engaged in the
production, processing, packaging, or
manipulation of export products shall, to the
extent of their construction, operation or
production inside the zone, be exempt from the
payment of any and all local government imposts,
fees, licenses or taxes, except real estate taxes
imposed under Commonwealth Act Numbered Four
TAX
 Hundred seventy and Republic Act Numbered
Fifty-four hundred forty-seven: Provided, That said
business enterprise shall pay in the municipality
where the zone is located real estate taxes on all
its real properties located therein.
H. INCENTIVES UNDER BOOK VI OF E.O NO. 226
(ARTICLE 77 AND 78)
1) Except as otherwise provided in this Code, foreign
and domestic merchandise, raw materials,
supplies, articles, equipment, machineries, spare
parts and wares of every description, except those
prohibited by law, brought into the zone to be
sold, stored, broken up, repacked, assembled,
installed, sorted, cleaned, graded, or otherwise
processed, manipulated, manufactured, mixed
with foreign or domestic merchandise whether
directly or indirectly related in such activity, shall
not be subject to customs and internal revenue
laws and regulations nor to local tax ordinances,
the provisions of law to the contrary
notwithstanding.
2) Merchandise purchased by a registered zone
enterprise from the customs territory and
subsequently brought into the zone, shall be
considered as export sales and the exported
thereof shall be entitled to the benefits allowed by
law for such transaction.
3) Domestic merchandise sent from the zone to the
customs territory shall, whether or not combined
with or made part of other articles likewise of local
origin or manufactured in the Philippines while in
the export processing zone, be subject to internal
revenue laws of the Philippines as domestic goods
sold, transferred or disposed of for local
consumption.
4) Merchandise sent from the export processing zone
to the customs territory shall, whether or not
combined with or made part of other articles while
in the zone, be subject to rules and regulations
governing imported merchandise. The duties and
taxes shall be assessed on the value of imported
materials (except when the final product is
exempt) and the internal revenue taxes on the
values added.
5) Domestic merchandise on which all internal
revenue taxes have been paid, if subject thereto,
and foreign merchandise previously imported on
which duty or tax has been paid, or which have
been admitted free of duty and tax, may be taken
into the zone from the customs territory of the
Philippines and be brought back thereto free of
quotas, duty or tax.
6) Subject to such regulations respecting identity and
safeguarding of the revenue as the Authority may
deem necessary when the identity of an article
entered into the export processing zone under the
immediately preceding paragraph has been lost,
such article when removed from the zone and
taken to the customs territory shall be treated as
foreign merchandise entering the country for the
first time, under the provisions of the Tariff and
Customs Code.
7) Articles produced or manufactured in the zone and
exported therefrom shall, on subsequent
importation into the customs territory, be subject
Page 3 of 3
to the import laws applicable to like articles
manufactured in a foreign country;
8) Unless the contrary is shown, merchandise taken
out of the zone shall be considered for tax
purposes to have been sent to customs territory.
9) Notwithstanding the provisions of law to the
contrary, zone registered enterprise shall, to the
extent of their construction, operation or
production inside the zone be exempt from the
payment of any and all local government imposts,
fees, licenses or taxes except real estate taxes
which shall be collected by the
Province/City/Municipality responsible for the
collection thereof under the provisions of the Real
Property Tax Code: Provided, That machineries
owned by zone registered enterprises which are
actually installed and operated in the Zone for
manufacturing, processing or for industrial
purposes shall not be subject to the payment of
real estate taxes for the first three (3) years of
operation of such machineries: Provided, further,
That fifty percent (50%) of the proceeds of the
real estate taxes collected from all real properties
located in the Zone and such other areas owned or
administered by the Authority shall be remitted to
the Authority by the province/city/municipality
responsible for the collection of such taxes under
the provisions of the Real Property Tax Code. All
real estate taxes accruing to the Authority as
herein provided shall be expanded for such
community facilities, utilities and/or services as
the Authority may determine.
10) Production equipment or machineries, not
attached to real estate, used directly or indirectly,
in the production, assembly or manufacture of the
registered product of the zone registered
enterprise shall be exempt from real property
taxes.
I. TAX CREDIT UNDER EXPORT DEVELOPMENT ACT
OF 1994 (SEC. 16 (e), R.A. NO. 7844)
For exporters of non-traditional products who use or
substitute locally produced raw materials, capital
equipment and/or spare parts, tax credits equivalent
to twenty-five percent (25%) of the duties that would
have been paid had these inputs been imported:
Provided, That this incentive would be available for a
period of three (3) years upon effectivity of this Act
and can be extended for another three (3) years by
the President upon the recommendation of the
Secretary of Finance: Provided, further, That the
Secretary of Finance, in consultation with the Export
Development Council, shall prepare a list of non-
traditional exports which are entitled to avail of this
incentive. Provided, That these incentives shall be
granted only upon: (1) the presentation of a Bureau
of Export Trade Promotion (BETP) certification of the
exporter's eligibility, in compliance with the minimum
wage and SSS laws; and that (2) in the case of
importations, the items imported shall be used
exclusively for production of export goods.
TAX