TAXATION LAW 10/2/2019

Foreign Currency Deposit System/ Offshore Banking Units

RR 10-76
Regulations Governing Taxation of Offshore Banks and Foreign Currency Deposit
Units of Depository Banks

SECTION 2. Definition of Terms. —

(1) "Offshore Banking" shall refer to the conduct of banking transactions in foreign
currencies involving the receipt of funds principally from external sources and the
utilization of such funds as provided in Presidential Decree No. 1034.

(2) "Offshore Banking Unit" hereinafter referred to as OBU, shall mean a branch,
subsidiary or affiliate of a foreign banking corporation which is duly authorized by the
Central Bank of the Philippines, as a separate accounting unit, to transact offshore
banking business in the Philippines in accordance with the provisions of P.D. 1034 as
implemented by Central Bank Circular No. 546.

(3) "Deposits" shall mean funds in foreign currencies which are accepted and held
by an off-shore banking unit in the regular course of business, with the obligation to
return an equivalent amount to the owner thereof, with or without interest.

(4) "Resident" shall mean —

(a) an individual citizen of the Philippines residing therein; or
(b) an individual who is not a citizen of the Philippines but is permanently residing
therein; or
(c) a corporation or other juridical person organized under the laws of the
Philippines.
(d) a branch, subsidiary, affiliate, extension office or any other unit of corporations or
juridical persons organized under the laws of any foreign country operating in the
Philippines.

(5) "Non-resident" shall mean an individual, corporation or other juridical person

not included in the above definition of "residents".

(6) "Foreign Currency Deposit Unit" (FCDU) shall mean an accounting unit or
department in a local bank or in an existing local branch of foreign banks, which is
authorized by the Central Bank of the Philippines to operate under the expanded
foreign currency deposit system, in accordance with the provisions of P.D. 1035, as
implemented by Central Bank Circular No. 547. The FCDU authority shall be
distinguished from the authority to accept foreign currency deposits under R.A. No.
6426, as implemented by Central Bank Circular No. 343.

(7) "Gross offshore income" shall mean all income arising from transactions
allowed by the Central Bank of the Philippines conducted by and between —
 (a) in the case of an offshore banking unit with another offshore banking unit or with
an expanded Foreign Currency Deposit unit or with a non-resident;
(b) in the case of an expanded Foreign Currency Deposit Unit with another
expanded Foreign Currency Deposit Unit or with an Offshore Banking Unit or with a
non-resident.

(8) "Gross onshore income" shall mean gross interest income arising from foreign
currency loans and advances to and/or investments with residents made by Offshore
Banking Units or expanded Foreign Currency Deposit Units. Such gross interest
income shall include all fees, commissions and other charges which are integral parts
of the income from the above transactions.

SECTION 3. Rates of income tax to be imposed. —

The rates or income tax to be imposed, which shall be in lieu of all other taxes such as,
but not limited to privilege tax, gross receipts tax, documentary and science stamp tax
and profit remittance tax, are as followers:
(a) On offshore income, there shall be imposed an income tax of five percent (5%)
based on net offshore income as computed in Section 4. Income realized by
offshore banking units on transactions with local commercial banks including
branches of foreign banks that may be authorized by the Central Bank of the
Philippines to transact business with offshore banking units shall likewise be subject
to the same tax, except net income from such transactions as may be specified by
the Secretary of Finance, upon recommendation of the Monetary Board, to be subject
to the usual income tax payable by banks.

(b) In the case of gross onshore income as defined in Section 2(h) above, the tax
shall be ten percent (10%) thereof and shall be a final tax.

(c) Income not covered by paragraphs (a) and (b) above shall be subject to the
usual corporate taxes imposed by the National Internal Revenue Code, as
amended.

SECTION 4. Manner of computation of net income. —

(1) Net offshore income for purposes of Section 3, paragraph (a) above, shall be
the amount remaining after deducting from the gross offshore income during the
taxable year the following items:
(a) the proportion of total interest expenses for the same period based on the ratio of
offshore interest income which bears to the total gross interest income;
(b) the proportion of general administrative expenses based on the ratio of net
offshore income which bears to the total net income after deducting only interest
expenses mentioned in sub-paragraph (1) above.
(c) Likewise, there shall be allowed a reasonable amount of head office expenses in
accordance with the ratio specified in sub-paragraph (2) above.
(2) In the case of onshore income, the gross interest income without the benefit of
any deduction corresponding to the allocable onshore income, shall be the amount
upon which the ten percent (10%) withholding income tax shall be computed.

SECTION 5. Manner of filing returns and payment of taxes. —

Within sixty (60) days after the end of each of the first three quarters of the calendar or
fiscal year.
(a) for offshore income and other income mentioned In Section 3(c) —a return of
net taxable offshore income shall be filed with, and the tax due thereon paid, to the
Commissioner of Internal Revenue, Revenue Regional Director, Revenue District
Officer or the Collection Agent of the City or Municipality where the corporation's
principal office is located and where its books of accounts and other data from which
the return is prepared are kept, by every offshore banking units and expanded
Foreign Currency Deposit Units, regardless of whether there is tax due or not. For
these purposes, B.I.R. Form No. 17.02-Q shall be used and the appropriate rates, as
enumerated in Section 3 above, shall be applied accordingly.

(b) for onshore income —in the case of onshore income realized by an offshore
banking unit or by an expanded Foreign Currency Deposit Unit, the income need not be
included in the quarterly income tax return to be filed as required above as the payor-
borrower under Section 53, in relation to Section 54, of the National Internal Revenue
Code, is constituted as the withholding agent charged with the obligation of deducting,
withholding and remitting to the Commissioner of Internal Revenue the income tax due
thereon within the period prescribed by law with the appropriate return in accordance
with existing revenue and Central Bank regulations.
A copy of the quarterly return filed, together with the copy of the official receipt denoting
payments thereon, shall be furnished direct to the offshore banking unit or foreign
currency deposit unit concerned, which shall in turn submit to the Bureau of Internal
Revenue said documents accompanied by statement showing a list of all its domestic
borrowers, amount borrowed and interest income thereon. The statement with its
attachments, shall be filed together with the quarterly return required above.
A final consolidated return or an adjustment return on B.I.R. Form 1702 covering the
total taxable onshore and offshore income for the preceding calendar or fiscal year shall
be filed on or before the 15th day of the fourth month following the close of the calendar
or fiscal year.
The return shall include all the items of gross income and deductions for the whole
taxable year. The tax shown on the final or adjustment return, after deducting therefrom
the quarterly income taxes paid and withheld during the preceding three quarters of the
same taxable year, shall either be paid upon filing, or refunded as the case may be.
RR 14-77
Amending Revenue Regulations No. 10-76

SEC. 2(h).
Gross onshore income shall mean gross interest income arising from foreign currency
loans and advances to and/or investments with residents made by offshore banking
units or expanded foreign currency deposit units. In the case of foreign currency loan
transactions, such gross interest income shall refer only to the stipulated interest and
shall not include any and all fees, commissions and other charges which are integral
parts of the income from the above transactions.

SEC. 3(b).
In the case of gross onshore income as defined in Section 2(h) above, the tax shall be
ten percent (10%) thereof and shall be a final tax. Any and all fees, commissions and
other charges which are integral parts of the charges imposed on foreign currency loan
transactions are exempt from the tax herein imposed.

SEC. 5(b).
For onshore income — In the case of onshore income realized by an offshore banking
unit or by an expanded Foreign Currency Deposit Unit, the income need not be included
in the quarterly income tax return to be filed as required above as the payor-borrower
under Section 53, in relation to Section 54, of the National Internal Revenue Code, is
constituted as the withholding agent charged with the obligation of deducting,
withholding and remitting to the Commissioner of Internal Revenue the income tax due
thereon within the period prescribed by law with the appropriate return in accordance
with existing revenue and Central Bank regulations. Regardless, therefore, of whether
the accounting method of an OBU-creditor in cash or accrual basis, the withholding tax
will be withheld and remitted only after the due date of payment of the interest incurred
by an onshore borrower.
RR 10-98

Prescribes the regulations to implement RA No. 8424 relative to the imposition of

income taxes on income derived under the Foreign Currency Deposit and
Offshore Banking Systems.

Specifically, interest income which is actually or constructively received by a resident

citizen of the Philippines or by a resident alien individual from a foreign currency bank
deposit will be subject to a final withholding tax of 7.5%.

The depository bank will withhold and remit the tax. If a bank account is jointly in the
name of a non-resident citizen, 50% of the interest income from such bank deposit will
be treated as exempt while the other 50% will be subject to a final withholding tax of
7.5%.

The Regulations will apply on taxable income derived beginning January 1, 1998
pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were
made in 1997, only that portion of interest which was actually or constructively received
by a depositor starting January 1, 1998 is taxable.
RA 9294
AN ACT RESTORING THE TAX EXEMPTION OF OFFSHORE BANKING UNITS
(OBUs) AND FOREIGN CURRENCY DEPOSIT UNITS (FCDUs), AMENDING FOR
THE PURPOSE SECTION 27 (D) AND SECTION 28, PARAGRAPHS (A) (4) AND (A)
(7) (b) OF THE NATIONAL INTERNAL REVENUE CODE AS AMENDED.

Sec. 27. Rates of Income Tax on Domestic Corporations. -

(D) Rates of Tax on Certain Passive Incomes. -
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit
System. - Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system shall be exempt from all
taxes, EXCEPT net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation by the Monetary Board to be subject to the
regular income tax payable by banks: Provided, however, that interest income from
foreign currency loans granted by such depository banks under said expanded system
to residents other than offshore banking units in the Philippines or other depository
banks under the expanded system shall be subject to a final tax at the rate of ten
percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with

depository banks under the expanded system shall be exempt from income tax.

Sec. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -
(1) In General.- Except as otherwise provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to thirty
five percent (35%) of the taxable income derived in the preceding taxable year from all
sources within the Philippines: Provided. That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall
be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).

Provided, however, that a resident foreign corporation shall be granted the option to
be taxed at fifteen percent (15%) on gross income under the same conditions, as
provided in Sec. 27(A).

Minimum Corporate Income Tax on Resident Foreign Corporations. –

A minimum corporate income tax of two percent (2%) of gross income, as prescribed
under Sec. 27(E) of this Code, shall be imposed, under the same conditions, on a
resident foreign corporation taxable under paragraph (1) of this Sub Sec.
International Carrier. –
An international carrier doing business in the Philippines shall pay a tax of two and one-
half percent (2 1/2%) on this 'Gross Philippine Billings' as defined hereunder.

Gross Philippine Billings

International Air Carrier:
- refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment
shall form part of Gross Philippine Billings.

International Shipping
- means gross revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or payments of
the passage or freight documents.

Any income of nonresidents, whether individuals or corporations, from transactions

with said offshore banking units shall be exempt from income tax.

(6) Regional or Area Headquarters and Regional Operating Headquarters of

Multinational Companies. -
(a) Regional or area headquarters as defined in Sec. 22(DD) shall not be subject to
income tax.
(b) Regional operating headquarters as defined in Sec. 22 (EE) shall pay a tax of ten
percent (10%) of their taxable income.
PD 1354
IMPOSING FINAL INCOME TAX ON SUBCONTRACTORS AND ALIEN EMPLOYEES
OF SERVICE CONTRACTORS AND SUBCONTRACTORS ENGAGED IN
PETROLEUM OPERATIONS IN THE PHILIPPINES UNDER PRESIDENTIAL
DECREE NO. 87

Section 1.
Tax on subcontractors.
Every subcontractor, whether domestic or foreign, entering into a contract with a service
contractor engaged in petroleum operations in the Philippines shall be liable to a final
income tax equivalent to eight percent (8%) of its gross income derived from
such contract, such tax to be in lieu of any and all taxes, whether national or local:
Provided, however, that any income received from all other sources within and without
the Philippines in the case of domestic subcontractors and within the Philippines in the
case of foreign subcontractors shall be subject to the regular income tax under the
National Internal Revenue Code. The term "gross income" means all income earned
or received as a result of the contract entered into by the subcontractor with a
service contractor engaged in petroleum operations in the Philippines under
Presidential Decree No. 87.

Section 2.
Taxation of aliens employed by petroleum service contractors and
subcontractors.
Aliens who are permanent residents of a foreign country but who are employed and
assigned in the Philippines by service contractors or by subcontractors engaged in
petroleum operations in the Philippines, shall be liable to a final income tax equal to
fifteen percent (15%) of the salaries, wages, annuities, compensations,
remunerations and emoluments received from such contractors or
subcontractors. Any income earned from all other sources within the Philippines by
the said alien employees shall be subject to the income tax imposed under the
National Internal Revenue Code.

Section 4.
Registration of service contracts.
All contracts relating to oil operations entered into between the service contractor and a
subcontractor engaged in petroleum operations in the Philippines shall be registered
with the Bureau of Energy Development.
RA 7227
Bases Conversion and Development Act of 1992

Sec. 4. Purposes of the Conversion Authority.

(a) To own, hold and/or administer the military reservations of John Hay Station,
Wallace Air Station, O’Donnell Transmitter Station, San Miguel Naval
Communication Station, Mt. Sta. Rita Station and those portions of Metro Manila,
military camps which may be transferred to it by the President.
RA 7916
PEZA Act of 1995 Philippine Economic Zone Act

"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
agroindustrial, 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.

"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.

"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 materials free from duties, taxes and other import restrictions.

"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.

SECTION 6. Criteria for the Establishment of Other ECOZONES. –

In addition to the ECOZONES identified in Section 5 of this Act, other areas may be
established as ECOZONES in a proclamation to be issued by the President of the
Philippines subject to the evaluation and recommendation of the PEZA, based on a
detailed feasibility and engineering study which must conform to the following criteria:

a) The proposed area must be identified as a regional growth center in the Medium
Term Philippine Development Plan or by the Regional Development Council;

b) The existence of required infrastructure in the proposed ECOZONE, such as roads,

railways, telephones, ports, airports, etc., and the suitability and capacity of the
proposed site to absorb such improvements;

c) The availability of water source and electric power supply for use of the ECOZONE;
d) The extent of vacant lands available for industrial and commercial development and
future expansion of the ECOZONE as well as lands adjacent to the ECOZONE
available for development of residential areas for the ECOZONE workers;

e) The availability of skilled, semi-skilled and non-skilled trainable labor force in and
around the ECOZONE;

f) The area must have a significant incremental advantage over the existing economic
zones and its potential profitability can be established;

g) The area must be strategically located; and

h) The area must be situated where controls can easily be established to curtail
smuggling activities. The areas which do not meet the foregoing criteria may be
established as ECOZONES: Provided, That the said area shall be developed only
through local government and/or private sector initiative under any of the schemes
allowed in Republic Act. No. 6957 (the build-operate-transfer law), and without any
financial exposure on the part of the national government: Provided, further, that the
area can be easily secured to curtail smuggling activities: Provided, finally, That after
five (5) years the area must have attained a substantial degree of development, the
indicators of which shall be formulated by the PEZA.
RR 1-95
Rules and Regulations to implement the tax incentives provisions under
paragraphs (b) and (c) of Section 12, Republic Act No. 7227 otherwise known as
the Bases Conversion and Development Act of 1992.

SECTION 3. Definition.
SBMA — refers to the Subic Bay Metropolitan Authority

Zone — refers to the Subic Special Economic and Freeport Zone, (SSEFZ), outside the
Customs Territory and the authority of the customs laws, consisting of the City of
Olongapo and the municipality of Subic, Province of Zambales, the lands occupied by
the Subic Bay Naval Base and its contiguous extensions, embraced, covered, and
defined by the 1947 Philippine U.S. Military Base Agreement, whose metes and bounds
shall be delineated in a Proclamation to be issued by the President of the Republic of
the Philippines, (or any portion of the foregoing designated by the Subic Bay
Metropolitan Authority as an area to which duty and tax-free benefits are limited pending
the establishment of a secure perimeter around the entire Zone.)

SECURED AREA — refers to the presently fenced-in former Subic Naval Base which
shall be the only completely tax and duty-free area in the Zone and within which there
shall be a free and unimpeded flow of goods and merchandise from one registered
enterprise to another or to residents and along the boundaries of the area shall be set
up a Customs checkpoint through which goods authorized to leave or enter the Secured
Area for some destination inside or outside the Zone must pass. The boundaries of the
secured area may be readjusted from time to time jointly by the SBMA and the
Department of Finance as the requirements of the business in the Zone may demand or
permit.

Articles — refers to any goods, wares, merchandise and in general, any things may,
under the Tariff and Customs Code of the Philippines, as amended, be made the
subject of importation or exportation.

Domestic Articles — refers to articles which are the growth, product, or manufacture of
the Philippines on which all national internal revenue taxes have been paid, if subject
thereto, and upon which no drawback or bounty has been allowed; and articles of
foreign origin on which all duties and taxes have been paid and upon which no
drawback or bounty has, been allowed, or which have previously been entered into
Customs Territory free of duties or taxes.

Foreign Articles — refers to articles of foreign origin on which duties and taxes have
not been paid, or if paid, upon which drawback or a bounty has been allowed, or which
have not previously been entered into Customs Territory; or articles which are the
growth, product, or manufacture of the Philippines on which not all national internal
revenue taxes have been paid, if subject thereto, or if paid, upon which drawback or a
bounty has been allowed.
SECTION 4. Exemptions and Incentives. —
A. All SBMA registered enterprises doing business within the Secured Area in the
Zone shall enjoy the following:

a. Exemption from customs and import duties and national internal revenue
taxes on importations of raw materials for manufacture into finished products and capital
goods and equipment needed for their business operation within the Secured Area.
Consumption items, however, must be consumed within the Secured Area. Removal of
raw materials, capital goods, equipment and consumer items out of the Secured Area
for sale to non-SMBA registered enterprises shall be subject to the usual taxes and
duties, except as may be provided herein:

a.1 Residents of the ZONE living outside the Secured Area can enter
the Secured Area and consume any quantity of consumption items in hotels and
restaurants within the Secured Areas. However, these residents can purchase
and bring out of the Secured Area to other parts of the Philippine territory tax and
duty free, consumer items worth not exceeding US$100 per month per person.
Only residents age 15 and over are entitled to this privilege.

a.2 Filipinos not residing within the ZONE can enter the Secured Area
and consume any quantity of consumption items in hotels and restaurants within
the Secured Area. However, they can purchase and bring out of the Secured
Area to other parts of the Philippine territory tax and duty free consumer items
worth not exceeding US$200 per year per person. Only Filipinos age 15 and over
are entitle to this privilege.

a.3 There shall be no pooling, tacking, or advance use of the US$100

or US$200 entitlement which is a privilege similar to the entitlement enjoyed by
returning residents who shop at existing government-owned tourist duty-free
shops.

a.4 The sale of tax and duty-free consumer items in the Secured Area
shall only be allowed in duly authorized duty-free shops. Duty-free shops shall be
subject to the joint regulations of the Bureau of Customs and the SMBA to insure
proper accounting of imports and sales.

a.5 Foreign tourists, balikbayans and returning residents (from abroad)

passing through the Secured Area shall be entitled to the same prevailing tax
and duty-free privileges they presently enjoy. However, the selling of duty and tax
free goods to individuals other than tourists, balikbayan and returning residents
shall be held in abeyance pursuant to E.O. 97-A until a control system shall have
been approved by the SBMA and Customs authorities as a condition precedent
to a duty free outlet being allowed to operate.
 a.6 A control system shall be set up by duty-free shop operators at their
own expense. This system shall be approved by the SMBA and Customs
authorities before any duty-free outlet is permitted to operate.
In the meantime that control measures have not been defined and set in place, the
SMBA shall order duty free shops located within the Secured Area to desist from further
selling duty and tax free goods to individuals other than tourist, balikbayans and
returning residents.

a.7 The SBMA shall install a computerized identification system to

insure compliance with the guidelines governing the SSEFPZ, particularly the
Secured Area.

b. Exemption from the internal revenue taxes, such as gross receipts tax,
VAT, ad valorem and excise taxes on their sales of goods and services for which they
shall otherwise have been directly liable.

c. Exemption from franchise, common carrier or value added taxes and other
percentage taxes on public and service utilities and enterprises within the Secured Area
in the Zone.

d. Preferential income tax treatment on income earned/derived from

business operations within the Secured Area or from foreign sources. However, in the
case of telecommunications service, the income of the enterprise within the Secured
Area shall be net of the share of the foreign telecommunications company, and in the
case of common carriers by land, air or water, only that portion of the income and
expenses for the transport of cargoes and passengers within the Secured Area shall be
covered by the preferential income tax treatment and what is not covered shall be
subject to the regular corporate income tax.

e. Purchases of raw materials, capital goods and equipment and services by

the SBMA and SBF accredited enterprises from enterprises in the Customs Territory
shall be considered effectively zero-rated for VAT purposes. However, the VAT
registered enterprises in the Customs Territory shall apply for effective zero-rating of
their sales of goods and services to SBMA and to SBF enterprises pursuant to Revenue
Regulations No. 5-87 as amended.

f. Registered Enterprises may generate income from sources within the

Customs Territory of up to Thirty Percent (30%) of its total income from all sources;
provided, that should the registered Enterprise's income from sources within the
Customs Territory exceed Thirty Percent (30%) of its total income from all sources, then
the entire income from within the Customs Territory and the Secured Area shall be
subject to the internal revenue laws of the Customs Territory.

g. Carriers who undertake to tranship articles to and/or from the Secured

Area to a Customs Bonded warehouse within the Customs Territory shall be bonded in
an amount to be determined by the SBMA and Bureau of Customs which shall not be
less than fifty thousand (P50,000) pesos conditioned that the carrier shall transport and
deliver without delay, and in accordance with rules and regulations in effect in the
Customs Territory, to the Collector of Customs at the port of destination/export. The
provisions of the Tariff and Customs Code, as amended, on transshipment, and its
implementing regulations shall govern cases of transshipment for foreign articles to
and/or from the Secured Area.

h. Articles which are manufactured in the Secured Area and exported

therefrom to a foreign country shall, upon subsequent importation into customs territory,
be subject to the laws import applicable to like articles manufactured in a foreign
country.

B. Business enterprises operating within the Secured Area, but which are not
registered by or accredited with SBMA, shall not be entitled to the preferential income
tax treatment provided for in the Act.

SECTION 5.
Notwithstanding the above-mentioned tax and duty exemptions, foreign articles
removed, withdrawn or otherwise disposed to the customs territory, shall be subject to
the payment of customs duties and internal revenue taxes as ordinary importations in
accordance with the provisions of the Tariff and Customs Code of the Philippines, as
amended and National Internal Revenue Code and other applicable laws. Articles
removed customs territory will be presumed to be foreign unless there is sufficient
evidence presented to satisfy Customs officials that they are domestic articles, as
defined in these regulations.

a. Articles which are admitted to the Secured Area from the Customs territory under
proper permit shall considered to be effectively zero-rated. Articles which under proper
permit are returned to the customs territory from the Secured Area shall be considered
imported.

b. Foreign articles to be used in the production, manufacture, processing of finished

products may be brought from the Secured Area to designated Special Economic
Zones, Bonded Warehouses, Export Processing Zones, or under other duty or tax-
exempt treatment in the Customs Territory by accredited subcontractors under bond
acceptable to the SBMA and the Bureau of Customs which shall not be less than fifty
thousand pesos (P50,000) to guaranty the return of the finished goods to the Secured
Area, for export or for sale within the Secured Area and to protect government
revenues.

c. Foreign articles sold by enterprises established within the Secured Area to

residents of the Secured Area and to travelers, tourists, and investors under Section 12
(g) of the Act shall be exempt from duties and taxes, provided that they are actually
exported to a foreign country upon their departure or are actually consumed within the
Secured Area.
d. Foreign articles purchased within the Secured Area worth not exceeding
US$200, and brought out of the Secured Area and entered into the Customs Territory
for personal use shall not be subject to customs duties and taxes as ordinary
importations, provided that this privilege shall be availed of only once a year.

e. Foreign articles withdrawn, transported or taken in commercial quantities from

the Secured Area to the Customs Territory without payment of duties and taxes shall be
subject to seizure and forfeiture pursuant to the pertinent provisions of the Tariff and
Customs Code and the National Internal Revenue Code, without prejudice to the
criminal/administrative actions that may be instituted against the person/persons
liable/responsible therefor.
RR 20-2002
Clarifying the Tax Treatment of Income Earned from Unregistered Activities by
Enterprises Registered under the Bases Conversion and Development Act of
1992 and the Philippine Economic Zone Act of 1995

TAX TREATMENT –
Income derived by an enterprise registered with the Subic Bay Metropolitan Authority
(SBMA), the Clark Development Authority (CDA), or the Philippine Economic Zone
Authority (PEZA) from its registered activity/ies shall be subject to such tax treatment as
may be specified in its terms of registration (i.e., the 5% preferential tax rate, the income
tax holiday, or the regular income tax rate, as the case may be). Nonetheless, whatever
the tax treatment of said enterprise with respect to its registered activity/ies, income
realized by such registered enterprise that is not related to its registered activity/ies shall
be subject to the regular internal revenue taxes, such as the 20% final income tax on
interest from Philippine Currency bank deposits and yield or any other monetary benefit
from deposit substitutes, and from trust funds and similar arrangements, the 7.5% tax
on foreign currency deposits and the 5%/10% capital gains tax or ½ % stock transaction
tax, as the case may be, on the sale of shares of stock.

Income payments made by a registered enterprise to an entity in the Customs Territory

shall not be subject to the preferential tax rates or tax exemption enjoyed by the
registered enterprise. Thus, dividends paid to the shareholders of a registered
enterprise, interest payments to creditors of such registered enterprise (regardless of
any tax provision for grossing up of taxes), and other such payments shall be subject to
the appropriate rate of tax imposable on the recipient of such income.
RR 2-2005
Income payments made by a registered enterprise to an entity in the Customs
Territory shall not be subject to the preferential tax rates or tax exemption
enjoyed by the registered enterprise. Thus, dividends paid to the shareholders of
a registered enterprise, interest payments to creditors of such registered
enterprise (regardless of any tax provision for grossing up of taxes), and other
such payments shall be subject to the appropriate rate of tax imposable on the
recipient of such income.

Section 3. National Tax Exemption and Incentives to Zone Registered Enterprises

All ECOZONE-registered enterprises who are registered enterprises and ZAMBO-
ECOZONE registered enterprises who are covered by the special tax regime of 5%,
including all SUBIC-ECOZONE registered enterprises doing business within the Zone
shall enjoy the following:

CANT COPY PASTE.

https://www.bir.gov.ph/images/bir_files/old_files/pdf/16735rr05_02.pdf
 JOHN HAY PEOPLES ALTERNATIVE COALITION
vs.
VICTOR LIM
G. R. No. 119775 October 24, 2003

FACTS:
R.A. No. 7227 "Bases Conversion and Development Act of 1992," sets out the
policy of the government to accelerate the sound and balanced conversion into
alternative productive uses of the former military bases under the 1947 Philippines-
United States of America Military Bases Agreement, namely, the Clark and Subic
military reservations as well as their extensions including the John Hay Station (Camp
John Hay or the camp) in the City of Baguio.

R.A. No. 7227 created the Subic Special Economic [and Free Port] Zone (Subic
SEZ) the metes and bounds of which were to be delineated in a proclamation to be
issued by the President of the Philippines.

R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free
importations, exemption of businesses therein from local and national taxes, to other
hallmarks of a liberalized financial and business climate.

And R.A. No. 7227 expressly gave authority to the President to create through
executive proclamation, subject to the concurrence of the local government units
directly affected, other Special Economic Zones (SEZ) in the areas covered respectively
by the Clark military reservation, the Wallace Air Station in San Fernando, La Union,
and Camp John Hay.

On August 16, 1993, BCDA entered into a Memorandum of Agreement and

Escrow Agreement with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and
Asiaworld Internationale Group, Inc. (ASIAWORLD), private corporations registered
under the laws of the British Virgin Islands, preparatory to the formation of a joint
venture for the development of Poro Point in La Union and Camp John Hay as premier
tourist destinations and recreation centers. Four months later or on December 16, 1993,
BCDA, TUNTEX and ASIAWORD executed a Joint Venture Agreement whereby they
bound themselves to put up a joint venture company known as the Baguio International
Development and Management Corporation which would lease areas within Camp John
Hay and Poro Point for the purpose of turning such places into principal tourist and
recreation spots, as originally envisioned by the parties under their Memorandum of
Agreement.

Sangguniang Panlungsod of Baguio City officially asked BCDA to exclude all the
barangays partly or totally located within Camp John Hay from the reach or coverage of
any plan or program for its development.
 The sanggunian sought from BCDA an abdication, waiver or quitclaim of its
ownership over the home lots being occupied by residents of nine (9) barangays
surrounding the military reservation.

Still by another resolution passed on February 21, 1994, the sanggunian adopted
and submitted to BCDA a 15-point concept for the development of Camp John Hay.
BCDA, Tuntex and AsiaWorld agreed to some, but rejected or modified the other
proposals of the sanggunian.11 They stressed the need to declare Camp John Hay a
SEZ as a condition precedent to its full development in accordance with the mandate of
R.A. No. 7227.

President Ramos issued Proclamation No. 420, declaring an area of 288.1

hectares of the camp as a SEZ, which established a SEZ on a portion of Camp John
Hay.

The issuance of Proclamation No. 420 spawned the present petition17 for
prohibition, mandamus and declaratory relief which was filed on April 25, 1995
challenging, in the main, its constitutionality or validity as well as the legality of the
Memorandum of Agreement and Joint Venture Agreement between public respondent
BCDA and private respondents Tuntex and AsiaWorld.

ISSUES:
1. Whether or not Proclamation No. 420 is constitutional by providing for national
and local tax exemption within and granting other economic incentives to the
John Hay Special Economic Zone?
2. Whether or not Proclamation No. 420 is constitutional for limiting or interfering
with the local autonomy of Baguio City?

RULING:
1.
Section 3 of Proclamation No. 420, the challenged provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section
5(m) and Section 15 of R.A. No. 7227, the John Hay Poro Point Development
Corporation shall implement all necessary policies, rules, and regulations governing the
zone, including investment incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the applicable incentives of the
Special Economic Zone under Section 12 of R.A. No. 7227 and those applicable
incentives granted in the Export Processing Zones, the Omnibus Investment Code of
1987, the Foreign Investment Act of 1991, and new investment laws that may
hereinafter be enacted.

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which
was granted by Congress with tax exemption, investment incentives and the like. There
is no express extension of the aforesaid benefits to other SEZs still to be created at the
time via presidential proclamation.
 The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax
and investment privileges accorded it under the law, as the following exchanges
between our lawmakers show during the second reading of the precursor bill of R.A. No.
7227 with respect to the investment policies that would govern Subic SEZ which are
now embodied in the aforesaid Section 12 thereof.

As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges
given to Subic SEZ consist principally of exemption from tariff or customs duties,
national and local taxes of business entities therein (paragraphs (b) and (c)), free
market and trade of specified goods or properties (paragraph d), liberalized banking and
finance (paragraph f), and relaxed immigration rules for foreign investors (paragraph g).
Yet, apart from these, Proclamation No. 420 also makes available to the John Hay SEZ
benefits existing in other laws such as the privilege of export processing zone-based
businesses of importing capital equipment and raw materials free from taxes, duties and
other restrictions; tax and duty exemptions, tax holiday, tax credit, and other incentives
under the Omnibus Investments Code of 1987; and the applicability to the subject zone
of rules governing foreign investments in the Philippines.

While the grant of economic incentives may be essential to the creation and
success of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ
cannot be sustained. The incentives under R.A. No. 7227 are exclusive only to the
Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support
therein. Neither does the same grant of privileges to the John Hay SEZ find support in
the other laws specified under Section 3 of Proclamation No. 420, which laws were
already extant before the issuance of the proclamation or the enactment of R.A. No.
7227.

If it were the intent of the legislature to grant to the John Hay SEZ the same tax
exemption and incentives given to the Subic SEZ, it would have so expressly provided
in the R.A. No. 7227.

2.
With such broad rights of ownership and administration vested in BCDA over
Camp John Hay, BCDA virtually has control over it, subject to certain limitations
provided for by law. By designating BCDA as the governing agency of the John Hay
SEZ, the law merely emphasizes or reiterates the statutory role or functions it has been
granted.
The unconstitutionality of the grant of tax immunity and financial incentives as
contained in the second sentence of Section 3 of Proclamation No. 420 notwithstanding,
the entire assailed proclamation cannot be declared unconstitutional, the other parts
thereof not being repugnant to law or the Constitution. The delineation and declaration
of a portion of the area covered by Camp John Hay as a SEZ was well within the
powers of the President to do so by means of a proclamation The requisite prior
concurrence by the Baguio City government to such proclamation appears to have been
given in the form of a duly enacted resolution by the sanggunian. The other provisions
of the proclamation had been proven to be consistent with R.A. No. 7227.
 Where part of a statute is void as contrary to the Constitution, while another part
is valid, the valid portion, if separable from the invalid, may stand and be enforced. This
Court finds that the other provisions in Proclamation No. 420 converting a delineated
portion of Camp John Hay into the John Hay SEZ are separable from the invalid second
sentence of Section 3 thereof, hence they stand.
 COCONUT OIL REFINERS ASSOCIATION, INC.
vs.
Exec. Sec. RUBEN TORRES
G.R. No. 132527. July 29, 2005

FACTS:
This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the
Executive Branch, through the public respondents Ruben Torres in his capacity as
Executive Secretary, the Bases Conversion Development Authority (BCDA), the Clark
Development Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA),
from allowing, and the private respondents from continuing with, the operation of tax
and duty-free shops located at the Subic Special Economic Zone (SSEZ) and the Clark
Special Economic Zone (CSEZ), and to declare the following issuances as
unconstitutional, illegal, and void:
1. Section 5 of Executive Order No. 80, dated April 3, 1993, regarding the CSEZ.
2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.
3. Section 4 of BCDA Board Resolution No. 93-05-034, dated May 18, 1993, pertaining
to the CSEZ.

Petitioners contend that the aforecited issuances are unconstitutional and void as
they constitute executive lawmaking, and that they are contrary to Republic Act No.
7227 and in violation of the Constitution, particularly Section 1, Article III (equal
protection clause), Section 19, Article XII (prohibition of unfair competition and
combinations in restraint of trade), and Section 12, Article XII (preferential use of Filipino
labor, domestic materials and locally produced goods).

On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among
other things, the sound and balanced conversion of the Clark and Subic military
reservations and their extensions into alternative productive uses in the form of special
economic zones in order to promote the economic and social development of Central
Luzon in particular and the country in general.

Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section
5 of Executive Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034)
constitute executive legislation, in violation of the rule on separation of powers.
Petitioners argue that the Executive Department, by allowing through the questioned
issuances the setting up of tax and duty-free shops and the removal of consumer goods
and items from the zones without payment of corresponding duties and taxes, arbitrarily
provided additional exemptions to the limitations imposed by Republic Act No. 7227

ISSUE:
Whether or not RA No. 7227 limits the grant of tax incentives to the importation of raw
materials, capital and equipment only?
RULING:
A careful reading of Section 12 of Republic Act No. 7227, which pertains to the
SSEZ, would show that it does not restrict the duty-free importation only to "raw
materials, capital and equipment."

“The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into and
exported out of the Subic Special Economic Zone, as well as provide incentives such as
tax and duty-free importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special Economic Zone
to the other parts of the Philippine territory shall be subject to customs duties and taxes
under the Customs and Tariff Code and other relevant tax laws of the Philippines.”

While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw
materials, capital and equipment, this does not necessarily mean that the tax and duty-
free buying privilege is limited to these types of articles to the exclusion of consumer
goods. It must be remembered that in construing statutes, the proper course is to start
out and follow the true intent of the Legislature and to adopt that sense which
harmonizes best with the context and promotes in the fullest manner the policy and
objects of the Legislature.

To limit the tax-free importation privilege of enterprises located inside the special
economic zone only to raw materials, capital and equipment clearly runs counter to the
intention of the Legislature to create a free port where the "free flow of goods or capital
within, into, and out of the zones" is insured.

The phrase "tax and duty-free importations of raw materials, capital and
equipment" was merely cited as an example of incentives that may be given to entities
operating within the zone. It is obvious from the wording of Republic Act No. 7227,
particularly the use of the phrase "such as," that the enumeration only meant to illustrate
incentives that the SSEZ is authorized to grant, in line with its being a free port zone.
Indeed, it is well-established that opinions expressed in the debates and proceedings of
the Legislature, steps taken in the enactment of a law, or the history of the passage of
the law through the Legislature, may be resorted to as aids in the interpretation of a
statute with a doubtful meaning.

In the present case, while Section 12 of Republic Act No. 7227 expressly
provides for the grant of incentives to the SSEZ, it fails to make any similar grant in
favor of other economic zones, including the CSEZ. Tax and duty-free incentives being
in the nature of tax exemptions, the basis thereof should be categorically and
unmistakably expressed from the language of the statute. Consequently, in the absence
of any express grant of tax and duty-free privileges to the CSEZ in Republic Act No.
7227, there would be no legal basis to uphold the questioned portions of two issuances:
Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-
05-034, which both pertain to the CSEZ.
 The term "Residents" mentioned in item c above shall refer to individuals who, by
virtue of domicile or employment, reside on permanent basis within the freeport area.
The term excludes (1) non-residents who have entered into short- or long-term property
lease inside the freeport, (2) outsiders engaged in doing business within the freeport,
and (3) members of private clubs (e.g., yacht and golf clubs) based or located within the
freeport. In this regard, duty free privileges granted to any of the above individuals (e.g.,
unlimited shopping privilege, tax-free importation of cars, etc.) are hereby revoked.

A perusal of the above provisions indicates that effective January 1, 1999, the
grant of duty-free shopping privileges to domestic tourists and to residents living
adjacent to SSEZ and the CSEZ had been revoked. Residents of the fenced-in area of
the free port are still allowed unlimited purchase of consumer goods, "as long as these
are for consumption within these freeports." Hence, the only individuals allowed by law
to shop in the duty-free outlets and remove consumer goods out of the free ports tax-
free are tourists and Filipinos traveling to or returning from foreign destinations, and
Overseas Filipino Workers and Balikbayans as defined under Republic Act No. 6768.

Equal Protection of the Laws

This Court finds no violation of the right to equal protection of the
laws. First, contrary to petitioners’ claim, substantial distinctions lie between the
establishments inside and outside the zone, justifying the difference in their treatment.
Certainly, there are substantial differences between the big investors who are being
lured to establish and operate their industries in the so-called "secured area" and the
present business operators outside the area. On the one hand, we are talking of billion-
peso investments and thousands of new jobs. On the other hand, definitely none of
such magnitude. In the first, the economic impact will be national; in the second, only
local. Even more important, at this time the business activities outside the "secured
area" are not likely to have any impact in achieving the purpose of the law, which is to
turn the former military base to productive use for the benefit of the Philippine economy.
There is, then, hardly any reasonable basis to extend to them the benefits and
incentives accorded in R.A. 7227. Additionally, as the Court of Appeals pointed out, it
will be easier to manage and monitor the activities within the "secured area," which is
already fenced off, to prevent "fraudulent importation of merchandise" or smuggling.

Prohibition against Unfair Competition and Practices in Restraint of Trade

The mere fact that incentives and privileges are granted to certain enterprises to
the exclusion of others does not render the issuance unconstitutional for espousing
unfair competition. Said constitutional prohibition cannot hinder the Legislature from
using tax incentives as a tool to pursue its policies.

If petitioners had wanted to avoid any alleged unfavorable consequences on their

profits, they should upgrade their standards of quality so as to effectively compete in the
market. In the alternative, if petitioners really wanted the preferential treatment accorded
to the private respondents, they could have opted to register with SSEZ in order to
operate within the special economic zone.
Preferential Use of Filipino Labor, Domestic Materials and Locally Produced
Goods
The mere fact that said issuance authorizes the importation and trade of foreign
goods does not suffice to declare it unconstitutional on this ground.

The Constitution indeed mandates a bias in favor of Filipino goods, services,

labor and enterprises, at the same time, it recognizes the need for business exchange
with the rest of the world on the bases of equality and reciprocity and limits protection of
Filipino enterprises only against foreign competition and trade practices that are unfair.
In other words, the Constitution did not intend to pursue an isolationist policy. It did not
shut out foreign investments, goods and services in the development of the Philippine
economy. While the Constitution does not encourage the unlimited entry of foreign
goods, services and investments into the country, it does not prohibit them either. In
fact, it allows an exchange on the basis of equality and reciprocity, frowning only on
foreign competition that is unfair.

This Court notes that the Executive Department, with its subsequent issuance of
Executive Order Nos. 444 and 303, has provided certain measures to prevent unfair
competition. In particular, Executive Order Nos. 444 and 303 have restricted the special
shopping privileges to certain individuals. Executive Order No. 303 has limited the range
of items that may be sold in the duty-free outlets, and imposed sanctions to curb abuses
of duty-free privileges.

WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order

No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034 are hereby
declared NULL and VOID and are accordingly declared of no legal force and
effect. Respondents are hereby enjoined from implementing the aforesaid void
provisions. All portions of Executive Order No. 97-A are valid and effective,
except the second sentences in paragraphs 1.2 and 1.3 of said Executive Order,
which are hereby declared INVALID.
RA 9400
AN ACT AMENDING REPUBLIC ACT NO. 7227, AS AMENDED, OTHERWISE
KNOWN AS THE BASES CONVERSION AND DEVELOPMENT ACT OF 1992, AND
FOR OTHER PURPOSES

"SEC. 12. Subic Special Economic Zone. –

"(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into and
exported out of the Subic Special Economic Zone, as well as provide incentives such as
tax and duty-free importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special Economic Zone
to the other parts of the Philippine territory shall be subject to customs duties and taxes
under the Tariff and Customs Code of the Philippines, as amended, the National
Internal Revenue Code of 1997, as amended, and other relevant tax laws of the
Philippines;

"(c) The provision of existing laws, rules and regulations to the contrary notwithstanding,
no national and local taxes shall be imposed within the Subic Special Economic Zone.
In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all
business enterprises within the Subic Special Economic Zone and shall be remitted as
follows: three percent (3%) to the National Government, and two (2%) percent to the
Subic Bay Metropolitan Authority (SBMA) for distribution to the local government units
affected by the declaration of and contiguous to the zone, namely: the City of Olongapo
and the municipalities of Subic, San Antonio, San Marcelino and Castillejos of the
Province of Zambales; and the municipalities of Morong, Hermosa and Dinalupihan of
the Province of Bataan, on the basis of population (50%), land area (25%), and equal
sharing (25%).

SEC 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). –
The CFZ shall be operated and managed as a separate customs territory ensuring free
flow or movement of goods and capital equipment within, into and exported out of the
CFZ, as well as provide incentives such as tax and duty-free importation of raw
materials and capital equipment. However, exportation or removal of goods from the
territory of the CFZ to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Tariff and Customs Code of the Philippines, as
amended, the National Internal Revenue Code of 1997, as amended, and other relevant
tax laws of the Philippines.

"The provisions of existing laws, rules and regulations to the contrary notwithstanding,
no national and local taxes shall be imposed on registered business enterprises within
the CFZ. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be
paid by all registered business enterprises within the CFZ and shall be directly remitted
as follows: three percent (3%) to the National Government, and two percent (2%) to the
treasurer's office of the municipality or city where they are located.
SEC. 15-A. Poro Point Freeport Zone (PPFZ). –
PPFZ shall be operated and managed as a freeport and separate customs territory
ensuring free flow or movement of goods and capital equipment within, into and
exported out of the PPFZ. The PPFZ shall also provide incentives such as tax and duty-
free importation of raw materials and capital equipment. However, exportation or
removal of goods from the territory of the PPFZ to the other parts of the Philippine
territory shall be subject to customs duties and taxes under the Tariff and Customs
Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as
amended, and other relevant tax laws of the Philippines.

"The provisions of existing laws, rules and regulations to the contrary notwithstanding,
no national and local taxes shall be imposed on registered business enterprises within
the PPFZ. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be
paid by all registered business enterprises within the PPFZ and shall be directly
remitted as follows: three percent (3%) to the National Government, and two percent
(2%) to the treasurer's office of the municipality or city where they are located.

SEC. 15-B. Morong Special Economic Zone (MSEZ). –

MSEZ shall be entitled to tax and duty-free importation of raw materials and capital
equipment. In lieu of all national and local taxes except real property tax on land, a five
percent (5%) tax on gross income earned shall be paid by all registered business
enterprises which shall be directly remitted as follows: three percent (3%) to the
National Government, and two percent (2%) to the treasurer's office of the municipality
or city where they are located."

SEC. 15-C. John Hay Special Economic Zone (JHSEZ). –

JHSEZ shall be entitled to the same tax and duty incentives as provided for under
Republic Act No. 7916, as amended: Provided, That for the purpose of administering
these incentives, the PEZA shall register, regulate, and supervise all registered
enterprises within the JHSEZ: Provided, further, That the Conversion Authority and the
John Hay Management Corporation (JHMC) shall only engage in acquiring, owning,
holding, administering or leasing real properties, and in other activities incidental
thereto."

SEC. 6. In case of conflict between national and local laws with respect to the tax
exemption privileges in the CFZ, PPFZ, JHSEZ and MSEZ, the same shall be resolved
in favor of the aforementioned zones: Provided, That the CFZ and PPFZ shall be
subject to the provisions of paragraphs (d), (e), (f), (g), (h), and (i) of Section 12 of
Republic Act No. 7227, as amended.

SEC. 7. Business enterprises presently registered and granted with tax and duty
incentives by the Clark Development Corporation (CDC), Poro Point Management
Corporation (PPMC), JHMC, and Bataan Technological Park Incorporated (BTPI),
including such governing bodies, shall be entitled to the same incentives until the
expiration of their contracts entered into prior to the effectivity of this Act.
RA 9399
AN ACT DECLARING A ONE-TIME AMNESTY ON CERTAIN TAX AND DUTY
LIABILITIES, INCLUSIVE OF FEES, FINES, PENALTIES, INTEREST AND OTHER
ADDITIONS THERETO, INCURRED BY CERTAIN BUSINESS ENTERPRISES
OPERATING WITHIN THE SPECIAL ECONOMIC ZONES AND FREEPORTS

SECTION 1. Grant of Tax Amnesty. - Registered business enterprises operating prior

to the effectivity of this Act within the special economic zones and freeports created
pursuant to Section 15 of Republic Act No. 7227, as amended, such as the Clark
Special Economic Zone created under Proclamation No. 163. series of 1993; Poro Point
Special Economic and Freeport Zone created under Proclamation No. 216, series of
1993; John Hay Special Economic Zone created under Proclamation No. 420, series of
1994; and Morong Special Economic Zone created under Proclamation No. 984, series
of 1997, may avail themselves of the benefits of remedial tax amnesty herein granted
on all applicable tax and duty liabilities, inclusive of fines, penalties, interests and other
additions thereto, incurred by them or that might have accrued to them due to the
rulings of the Supreme Court in the cases of John Hay People's Coalition v. Lim, et al.,
G.R. No. 119775 dated 23 October 2003 and Coconut Oil Refiners Association, Inc. v.
Torres, et al, G.R. No. 132527 dated 29 July 2005, by filing a notice and return in such
form as shall be prescribed by the Commission of Internal Revenue and the
Commissioner of Customs and thereafter, by paying an amnesty tax of Twenty-five
thousand pesos (P25,000.00) within six months from the effectivity of this Act: Provided,
That the applicable tax and duty liabilities to be covered by the tax amnesty shall refer
only to the difference between: (i) all national and local impositions under relevant tax
laws, rules and regulations; and (ii) the five percent (5%) tax on gross income earned by
said registered business enterprises as determined under relevant revenue regulations
of the Bureau of Internal Revenue and memorandum circulars of the Bureau of
Customs during the period covered: Provided, however, That the coverage of the tax
amnesty herein granted shall not include the applicable taxes and duties on articles, raw
materials, capital goods, equipment and consumer items removed from the special
economic zone and freeport and entered in the customs territory of the Philippines for
local or domestic sale, which shall be subject to the usual taxes and duties prescribed in
the National Internal Revenue Code (NIRC) of 1997,as amended, and the Tariff and
Customs Code of the Philippines, as amended.
SEC. 2. Immunities and Privileges. - Those who have availed themselves of the tax
amnesty and have fully complied with all its conditions shall be relieved of any civil,
criminal and/or administrative liabilities arising from or incident to the nonpayment of
taxes, duties and other charges covered by the tax amnesty granted under Section 1
herein.
 CIR
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION
G.R. No. L-66838 December 2, 1991

FACTS:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975
ending 30 June 1975, private respondent Procter and Gamble Philippine Manufacturing
Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole
stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the
35% withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner

Commissioner of Internal Revenue a claim for refund or tax credit in the amount of
P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the
National Internal Revenue Code, as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted was only 15% and not 35%
of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on

13 July 1977, filed a petition for review with public respondent Court of Tax Appeals; the
CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax
credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed
the decision of the CTA and held that:
(a) P&G-USA, and not P&G-Phil., was the proper party to claim the refund or tax
credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference
between the regular tax of 35% on corporations and the tax of 15% on dividends;
and
(c) P&G-Phil. failed to meet certain conditions necessary in order that "the
dividends received by its non-resident parent company in the US (P&G-USA)
may be subject to the preferential tax rate of 15% instead of 35%."

ISSUES:
1. Whether or not P&G can claim the refund or tax credit?
2. Whether or not P&G is allowed credit against US Tax due from P&G-USA under
the US Tax Code of the taxed deemed to have been paid in the Philippines?
3. Whether or not P&G is subject to preferential tax rate of 15% instead of 35%?
RULING:
1.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of
taxes allegedly erroneously or illegally assessed or collected.

Under Section 309 (3) of the NIRC, credit or refund taxes erroneously or illegally
received, “No credit or refund of taxes or penalties shall be allowed unless the taxpayer
files in writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty.”

Since the claim for refund was filed by P&G-Phil., the question which arises is: is
P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is
defined in our NIRC as referring to "any person subject to tax imposed by the Title. It
thus becomes important to note that under Section 53 (c) of the NIRC, the withholding
agent who is "required to deduct and withhold any tax" is made " personally liable for
such tax" and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable for the correct amount of the tax that
should be withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have
been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms liable for tax" and "subject to tax" both
connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually
impossible, to consider a person who is statutorily made "liable for tax" as not "subject
to tax." By any reasonable standard, such a person should be regarded as a party in
interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes
he believes were illegally collected from him.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is
properly regarded as a “taxpayer” within the meaning of Section 309, NIRC, and as
impliedly authorized to file the claim for refund and the suit to recover such claim.

2.
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances
to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen
percent (15%) if the country of domicile of the foreign stockholder corporation "shall
allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the domiciliary country by the foreign stockholder
corporation. In other words, in the instant case, the reduced fifteen percent (15%)
dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for
"taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA.
The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must,
as a minimum, reach an amount equivalent to twenty (20) percentage points which
represents the difference between the regular thirty-five percent (35%) dividend tax rate
and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US
must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived
by the Philippines in making applicable the preferred divided tax rate of fifteen percent
(15%). In other words, our NIRC does not require that the US tax law deem the parent-
corporation to have paid the twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed
paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by
the Philippines.

The parent-corporation P&G-USA is "deemed to have paid" a portion of

the Philippine corporate income tax although that tax was actually paid by its Philippine
subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects
economic reality, since the Philippine corporate income tax was in fact paid and
deducted from revenues earned in the Philippines, thus reducing the amount remittable
as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate
income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the
economic cost of carrying on business operations in the Philippines through the medium
of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G-
USA are not "phantom taxes" but instead Philippine corporate income taxes actually
paid here by P&G-Phil., which are very real indeed.

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit
to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for
taxes paid to the US by the US subsidiary of a Philippine-parent corporation.
The Philippine parent or corporate stockholder is "deemed" under our NIRC to
have paid a proportionate part of the US corporate income tax paid by its US
subsidiary, although such US tax was actually paid by the subsidiary and not by
the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must
be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine
law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for
instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is
no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in
Section 30 (c) (8), NIRC.
3.
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign
equity investment in the Philippines by reducing the tax cost of earning profits here and
thereby increasing the net dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the Philippine dividend tax rate unless
its home country gives it some relief from double taxation (i.e., second-tier taxation) (the
home country would simply have more "post-R.P. tax" income to subject to its own
taxing power) by allowing the investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed
paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend
tax foregone by the Philippines, in the assumption that a positive incentive effect would
thereby be felt by the investor.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax
Code, could offset the US corporate income tax payable on the dividends remitted by
P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still
wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of
Philippine taxes. In the calculation of the Philippine Government, this should encourage
additional investment or re-investment in the Philippines by P&G-USA.

It remains only to note that under the Philippines-United States Convention "With
Respect to Taxes on Income," the Philippines, by a treaty commitment, reduced the
regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount
of dividends paid to US parent corporations.

The Tax Convention, at the same time, established a treaty obligation on the part
of the United States that it "shall allow" to a US parent corporation receiving dividends
from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine [subsidiary]

Clearly, there is here on the part of the Philippines a deliberate undertaking to

reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is
still a differential or additional reduction of five (5) percentage points which compliance
of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes
available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax
credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private
respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the
Decision of the and Division of the Court promulgated on 15 April 1988, and in
lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals
in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review
for lack of merit. No pronouncement as to costs.
 COMMISSIONER OF INTERNAL REVENUE
vs.
WANDER PHILIPPINES, INC.
G.R. No. L-68375 April 15, 1988

FACTS:
This is a petition for review on certiorari of the January 19, 1984 Decision of the
Court of Tax Appeals * in C.T.A. Case No.2884, entitled Wander Philippines, Inc. vs.
Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to
the preferential rate of 15% withholding tax on the dividends remitted to its foreign
parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
Wander Philippines, Inc. is a domestic corporation organized under Philippine laws. It is
wholly-owned subsidiary of the Glaro S.A. Ltd., a Swiss corporation not engaged in
trade or business in the Philippines.

On July 18, 1975, Wander filed its withholding tax return for the second quarter
ending June 30, 1975 and remitted to its parent company, Glaro dividends in the
amount of P222,000.00, on which 35% withholding tax thereof in the amount of
P77,700.00 was withheld and paid to the Bureau of Internal Revenue.

Again, on July 14, 1976, Wander filed a withholding tax return for the second
quarter ending June 30, 1976 on the dividends it remitted to Glaro amounting to
P355,200.00, on which 35% tax in the amount of P124,320.00 was withheld and paid to
the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue
a claim for refund and/or tax credit in the amount of P115,400.00, contending that it is
liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code,
as amended by Presidential Decree Nos. 369 and 778, and not on the basis of 35%
which was withheld and paid to and collected by the government.

Petitioner herein, having failed to act on the above-said claim for refund, on July
15, 1977, Wander filed a petition with respondent Court of Tax Appeals.

Court of Tax Appeals ordered to grant a refund and/or tax credit to petitioner in
the amount of P115,440.00 representing overpaid withholding tax on dividends remitted
by it to the Glaro S.A. Ltd. of Switzerland during the second quarter of the years 1975
and 1976.

ISSUE:
Whether or not Wander is entitled to the preferential rate of 15% withholding tax
on dividends declared and remitted to its parent corporation, Glaro?
RULING:
In any event, the submission of petitioner that Wander is but a withholding agent
of the government and therefore cannot claim reimbursement of the alleged overpaid
taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly
owned subsidiary of Glaro. The fact that it became a withholding agent of the
government which was not by choice but by compulsion under Section 53 (b) of the Tax
Code, cannot by any stretch of the imagination be considered as an abdication of its
responsibility to its mother company. Thus, this Court construing Section 53 (b) of the
Internal Revenue Code held that "the obligation imposed thereunder upon the
withholding agent is compulsory." It is a device to insure the collection by the Philippine
Government of taxes on incomes, derived from sources in the Philippines, by aliens
who are outside the taxing jurisdiction of this Court.

In fact, Wander may be assessed for deficiency withholding tax at source, plus
penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the
Philippine counterpart, Wander is the proper entity who should for the refund or credit of
overpaid withholding tax on dividends paid or remitted by Glaro.

Closely intertwined with the first assignment of error is the issue of whether or not
Switzerland, the foreign country where Glaro is domiciled, grants to Glaro a tax credit
against the tax due it, equivalent to 20%, or the difference between the regular 35% rate
of the preferential 15% rate. The dispute in this issue lies on the fact that Switzerland
does not impose any income tax on dividends received by Swiss corporation from
corporations domiciled in foreign countries.

Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the
dividends received from a domestic corporation liable to tax, the tax shall be 15% of the
dividends received, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) dividends.

Switzerland did not impose any tax on the dividends received by Glaro.
Accordingly, Wander claims that full credit is granted and not merely credit equivalent to
20%. While it may be true that claims for refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax or the dividends
received by Glaro from the Philippines should be considered as a full satisfaction of the
given condition. For, as aptly stated by respondent Court, to deny private respondent
the privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and
intent of said law and definitely will adversely affect foreign corporations" interest here
and discourage them from investing capital in our country.

While it may be true that claims for refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax or the dividends
received by Glaro from the Philippines should be considered as a full satisfaction of the
given condition. For, as aptly stated by respondent Court, to deny private respondent
the privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and
intent of said law and definitely will adversely affect foreign corporations" interest here
and discourage them from investing capital in our country.

Besides, it is significant to note that the conclusion reached by respondent Court

is but a confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss
Government does not impose any tax on the dividends to be received by the said parent
corporation in the Philippines, the condition imposed under the above-mentioned
section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."

Moreover, as a matter of principle, this Court will not set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very nature of
its function, dedicated exclusively to the study and consideration of tax problems and
has necessarily developed an expertise on the subject unless there has been an abuse
or improvident exercise of authority.

WHEREFORE, the petition filed is DISMISSED for lack of merit.

RMC 55-80
Branch Profit Remittance

(b) Tax on branch profits remittances. — Any profit remitted abroad by a branch office to
its mother company shall be subject to a tax of fifteen (15%) per cent (Except those
registered with the Export Processing Zone Authority): Provided, that, any profit remitted
by a branch office to its mother company authorized to engage in petroleum operations
in the Philippines shall be subject to tax at seven and one-half (7.5%) per cent; And
provided, further that fixed or determinable annual periodical gains, profits, and income
or certain gains described in Section 24(b) (1) or 53(b)(2) of this code shall not be
considered as branch profits unless the same are effectively connected with the conduct
of a trade or business in the Philippines by foreign corporation."

Two (2) amendments to Sec. 24(b) (2) (b) of the 1977 Tax Code on branch profit
remittances have been effected by P.D. No. 1705. They are:
1. Reduction of the tax rate on the profits remitted by a branch office to its mother
company authorized to engage in petroleum operations. — The tax on profits remitted
by a branch office to its mother company authorized to engaged in petroleum operations
in the Philippines has been reduced to 7.5%.

2. Imposition of a branch profits tax on income effectively connected with business.

— Fixed or determinable annual periodical gains, profits, and income on certain gains
described in Section 24 (b)(1) or 53(b) (2) of the 1977 Tax Code, (i.e. income earned
from Philippine sources by non-resident foreign corporations) are generally not
considered branch profits subject to the 15% remittance tax unless the same are
effectively connected with the conduct of a trade or business in the Philippines by the
foreign corporation.
To be "effectively connected" it is not necessary that the income be derived from the
actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged.
RR 9-98
Minimum Corporate Income Tax

Prescribes the regulations to implement RA No. 8424 relative to the imposition of the
Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign
corporations.

Specifically, an MCIT of 2% of the gross income as of the end of the taxable year is
imposed upon any domestic corporations beginning the 4th taxable year immediately
following the taxable year in which such corporation commenced its business
operations. The MCIT will be imposed whenever such operation has zero or negative
taxable income or whenever the amount of MCIT is greater than the normal income tax
due from such operation. In the case of a domestic corporation whose operations or
activities are partly covered by the regular income tax system and partly covered under
a special income tax system, the MCIT will apply on operations covered by the regular
income tax system.

The Regulations will apply to domestic and resident foreign corporations on their
aforementioned taxable income derived beginning January 1, 1998 pursuant to the
pertinent provisions of RA 8424, provided, however, that corporations using the fiscal
year accounting period and which are subject to MCIT on income derived pertaining to
any month or months of the year 1998 will not be imposed with penalties for late
payment of the tax.
Improperly Accumulated Earnings Tax

RR 2-2001
Implementing the Provision on Improperly Accumulated Earnings Tax Under
Section 29 of the Tax Code of 1997

SEC. 2. Concept of Improperly Accumulated Earnings Tax (IAET). –

Pursuant to Section 29 of the Code, there is imposed for each taxable year, in addition
to other taxes imposed under Title II of the Tax Code of 1997, a tax equal to 10% of the
improperly accumulated taxable income of corporations formed or availed of for the
purpose of avoiding the income tax with respect to its shareholders or the shareholders
of any other corporation, by permitting the earnings and profits of the corporation to
accumulate instead of dividing them among or distributing them to the shareholders.

The rationale is that if the earnings and profits were distributed, the shareholders would
then be liable to income tax thereon, whereas if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the
corporation. Thus, a tax is being imposed in the nature of a penalty to the corporation
for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the
earnings distributed to them by the corporation.

SEC. 3. Determination of Reasonable Needs of the Business. –

An accumulation of earnings or profits (including undistributed earnings or profits of
prior years) is unreasonable if it is not necessary for the purpose of the business,
considering all the circumstances of the case. To determine the "reasonable needs" of
the business in order to justify an accumulation of earnings, these Regulations hereby
adhere to the so-called "Immediacy Test" under American jurisprudence as adopted in
this jurisdiction.

Accordingly, the term "reasonable needs of the business" are hereby construed to mean
the immediate needs of the business, including reasonably anticipated needs. In either
case, the corporation should be able to prove an immediate need for the accumulation
of the earnings and profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be deemed to be not for
the reasonable needs of the business, and the penalty tax would apply.

For purposes of these Regulations, the following constitute accumulation of earnings for
the reasonable needs of the business:

a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up
capital of the corporation as of Balance Sheet date, inclusive of accumulations taken
from other years;
b. Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditure as approved by the Board of Directors or equivalent
body;

c. Earnings reserved for building, plants or equipment acquisition as approved by the

Board of Directors or equivalent body;

d. Earnings reserved for compliance with any loan covenant or pre-existing obligation
established under a legitimate business agreement;

e. Earnings required by law or applicable regulations to be retained by the corporation

or in respect of which there is legal prohibition against its distribution;

f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed

earnings intended or reserved for investments within the Philippines as can be proven
by corporate records and/or relevant documentary evidence.

SEC. 4. Coverage.
The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly
accumulated taxable income earned starting January 1, 1998 by domestic corporations
as defined under the Tax Code and which are classified as closely-held corporations.
Provided, however, that Improperly Accumulated Earnings Tax shall not apply to the
following corporations:

a. Banks and other non-bank financial intermediaries;

b. Insurance companies;

c. Publicly-held corporations;

d. Taxable partnerships;

e. General professional partnerships;

f. Non- taxable joint ventures; and

g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered
under special economic zones declared by law which enjoy payment of special tax rate
on their registered operations or activities in lieu of other taxes, national or local.
SEC. 5. Tax Base of Improperly Accumulated Earnings Tax. –
For corporations found subject to the tax, the "Improperly Accumulated Taxable
Income" for a particular year is first determined by adding to that year’s taxable income
the following:

a. income exempt from tax;

b. income excluded from gross income;

c. income subject to final tax; and

d. the amount of net operating loss carry-over (NOLCO) deducted.

The taxable income as thus determined shall be reduced by the sum of:

a. income tax paid/payable for the taxable year;

b. dividends actually or constructively paid/issued from the applicable year’s taxable

income;

c. amount reserved for the reasonable needs of the business as defined in these
Regulations emanating from the covered year’s taxable income.

The resulting "Improperly Accumulated Taxable Income" is thereby multiplied by 10% to

get the Improperly Accumulated Earnings Tax (IAET).

Once the profit has been subjected to IAET, the same shall no longer be subjected to
IAET in later years even if not declared as dividend. Notwithstanding the imposition of
the IAET, profits which have been subjected to IAET, when finally declared as
dividends, shall nevertheless be subject to tax on dividends imposed under the Tax
Code of 1997 except in those instances where the recipient is not subject thereto.
 CYANAMID PHILIPPINES, INC.,
vs.
CA, CTA, and CIR
G.R. No. 108067 January 20, 2000

FACTS:
Cyanamid disputes the decision of the Court of Appeals which affirmed the
decision of the Court of Tax Appeals, ordering it to pay Commissioner of Internal
Revenue the amount of P3,774,867.50 as 25% surtax on improper accumulation of
profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to
January 30, 1987, under Sec. 25 of the National Internal Revenue Code.

Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a

wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged
in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported
finished goods, and an importer/indentor.

On February 7, 1985, the CIR sent an assessment letter to petitioner and

demanded the payment of deficiency income tax of P119,817.00 pesos for taxable year
1981

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25%
Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of
P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72. Petitioner,
through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others,
that the surtax for the undue accumulation of earnings was not proper because the said
profits were retained to increase petitioner's working capital and it would be used for
reasonable business needs of the company. Petitioner contended that it availed of the
tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and
criminal prosecution granted by the law.

On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to
allow the cancellation of the assessment notices and rendered its resolution

Petitioner appealed to the Court of Tax Appeals. During the pendency of the case,
however, both parties agreed to compromise the 1981 deficiency income tax
assessment of P119,817.00.

Petitioner claimed that CIR's assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the following reasons: (a)
petitioner accumulated its earnings and profits for reasonable business requirements to
meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly
owned subsidiary of American Cyanamid Company, a corporation organized under the
laws of the State of Maine, in the United States of America, whose shares of stock are
listed and traded in New York Stock Exchange. This being the case, no individual
shareholder income taxes by petitioner's accumulation of earnings and profits, instead
of distribution of the same.

ISSUE:
Whether or not Cyanamid is liable for accumulated earnings tax for 1981?

RULING:
Section 25 NIRC 1977 discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income taxes are not paid
on the undeclared dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could, in turn, be taxed.
A review of American taxation history on accumulated earnings tax will show that the
application of the accumulated earnings tax to publicly held corporations has been
problematic. Initially, the Tax Court and the Court of Claims held that the accumulated
earnings tax applies to publicly held corporations.

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly accumulated tax:
(a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank of the Philippines
to hold shares of stocks of banks. Petitioner does not fall among those exempt classes.
The rule on enumeration is that the express mention of one person, thing, act, or
consequence is construed to exclude all others. Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The burden of proof rests upon the
party claiming exemption to prove that it is, in fact, covered by the exemption so
claimed, a burden which petitioner here has failed to discharge.

In order to determine whether profits are accumulated for the reasonable needs
to avoid the surtax upon shareholders, it must be shown that the controlling intention of
the taxpayer is manifest at the time of accumulation, not intentions declared
subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must
be used within a reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish, by clear and convincing evidence that such accumulation of
profit was for the immediate needs of the business.

In the present case, the Tax Court opted to determine the working capital
sufficiency by using the ratio between current assets to current liabilities. The working
capital needs of a business depend upon nature of the business, its credit policies, the
amount of inventories, the rate of the turnover, the amount of accounts receivable, the
collection rate, the availability of credit to the business, and similar factors. Petitioner, by
adhering to the "Bardahl" formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the tax court that the burden of
proof to establish that the profits accumulated were not beyond the reasonable needs of
the company, remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very nature of its
function, is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority. Unless rebutted, all presumptions generally are
indulged in favor of the correctness of the CIR's assessment against the taxpayer. With
petitioner's failure to prove the CIR incorrect, clearly and conclusively, this Court is
constrained to uphold the correctness of tax court's ruling as affirmed by the Court of
Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of
Appeals, sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs
against petitioner.
Fringe Benefits Tax

RR 3-98
REVENUE REGULATIONS NO. 3-98 issued June 4, 1998 implements Section 33 of
the National Internal Revenue Code (NIRC), as amended by RA No. 8424, relative to
the special treatment of fringe benefits granted or paid by the employer to employees,
except rank and file employees, beginning January 1, 1998. The definition of fringe
benefits as well as the determination of the amount subject to the fringe benefits tax are
specified in the Regulations.

RR 8-2000
REVENUE REGULATIONS NO. 8-2000 issued November 22, 2000 amends specific
provisions of RR No. 2- 98 and RR No. 3-98 with respect to the "De Minimis" Benefits,
Additional Compensation Allowance (ACA), Representation and Transportation
Allowance (RATA) and Personal Economic Relief Allowance (PERA). Said
benefits/allowances received by employees are not considered as items of income and,
therefore, are not subject to income tax and, consequently, to the withholding tax.
Effective the Taxable Year 2000, ACA will be classified as part of the "Other Benefits"
excluded from one's gross compensation income, provided that the total amount of such
benefits does not exceed P 30,000. Items of "de minimis" benefits exempt from the
fringe benefits tax are enumerated in the Regulations.

RR10-2000
REVENUE REGULATIONS NO. 10-2000 issued December 29, 2000 amends further
RR Nos. 2-98, 3-98 and 8-98 with respect to the exemption of monetized leave credits
of government officials and employees and the enumeration of "de minimis" benefits
which are exempt from income tax on compensation and from fringe benefits tax.

RR 5-2008
Further Amendments to Revenue Regulations Nos. 2-98 and 3-98, as Last Amended by
Revenue Regulations No. 10-2000, With Respect to “De Minimis Benefits”.

(c) Rice subsidy of P1,500.00 or one (1) sack of 50 kg. rice per month amounting to not
more than P1,500.00;

(d) Uniform and Clothing allowance not exceeding P4,000.00 per annum;

The term “DE MINIMIS” benefits which are exempt from the fringe benefit tax shall, in
general, be limited to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or
efficiency of his employees.
RR 5-2011
Further Amendments to RR Nos. 2-98 and 3-98 as Last Amended by RR No. 5-2008
with respect to De Minimis Benefits.

CANT COPY PASTE

https://www.bir.gov.ph/images/bir_files/old_files/pdf/56846RR%205-2011.pdf

RR 8-2012

REVENUE REGULATIONS NO. 8-2012 issued on May 11, 2012 further amends
Revenue Regulations (RR) No. 2-98, as last amended by RR Nos. 5-2008 and 5-2011,
relative to the “De Minimis Benefit,” uniform and clothing allowance not exceeding P
5,000 per annum, which is exempt from Income Tax on compensation as well as from
fringe benefit tax.

RR 1-2015