A COMMON misconception for most enterprises registered with the Philippine Economic Zone Authority (PEZA) is that the sale of finished goods, i.e., trading activity, may be considered part of its registered activity entitled to incentives. However, this is not the case.
Strictly speaking, companies engaged in retailing or wholesale trading of finished products cannot apply for registration. Only those engaged in manufacturing, assembling or processing activities for subsequent exportation may be registered with PEZA and qualify for incentives, such as income tax holiday or the 5% special tax on gross income instead of the regular 30% corporate tax. The same eligibility principle applies to Information Technology (IT) Enterprises.
On 29 December 2000, PEZA approved Resolution No. 00-411 providing guidelines on the registration of IT Enterprises and the establishment and operation of IT Parks/Buildings under Republic Act (RA) No. 7916 or otherwise known as the Special Economic Zone Act of 1995 (i.e., the PEZA law). Under the said Resolution, “IT Enterprises” are defined as companies operating/offering IT services while “IT Service Activities” are activities which involve the use of any IT software and/or system for value addition.
IT Service Activities that are eligible for registration with PEZA include:
• Software development and application, including programming and adaptation of system software and middleware, for business, media, e-commerce, education, entertainment, etc.;
• IT-enabled services, encompassing call centers, data encoding, transcribing and processing, directories, etc.;
• Content development for multi-media or internet purposes;
• Knowledge-based and computer-enabled support services, including engineering and architectural design services, consultancies, etc.;
• Business process outsourcing using e-commerce;
• IT research and development; and
• Other IT-related service activities, as may be identified and approved by the PEZA Board.
An IT Enterprise engaging in any of the above-listed IT Service Activities may register with PEZA to avail of incentives granted by law provided it physically locates inside a PEZA-registered IT Park, Building or special economic zone. An IT Park/Building is an area, building or complex capable of providing infrastructures and other support facilities required by IT Enterprises, as well as amenities required by professionals and workers involved in IT Enterprises, or easy access to such amenities.
In addition, a critical requirement to qualify for registration and incentives is that the IT Service Activities must result in a substantial increase in the value of the final product. Under the government’s Investment Priorities Plan, “net value added” refers to the value of the final product less the value of inputs. Inputs, in this case, would refer to the cost of goods (i.e., raw materials or semi-finished goods) and other services (i.e., subcontracted portion of the process flow) to be used in manufacturing/processing/assembling the final product. The proposed activity/project’s net value added should be at least 25% of the cost as determined and approved by the PEZA Board.
Under the rules implementing RA 7916, “manufacturing/processing/manipulation” is the process by which raw or semi-finished materials are converted into a new product through a change in their physical, mechanical or electro-magnetic characteristics and/or chemical properties. On the other hand, “assembly” is the process by which semi-finished parts or materials are put together or combined to form a distinct product without substantially changing its physical or mechanical characteristics or electro-magnetic and/or chemical properties.
Accordingly, the resulting “Export Product” refers to the manufactured, processed and/or assembled product, whether physical or non-physical, belonging to the class of products approved by the PEZA Board to be undertaken by the enterprise.
Given the foregoing, activities that may be registered with PEZA cover only those which involve the manufacture, processing and assembly of raw or semi-finished materials to come up with a finished product for subsequent exportation. The same principle applies to IT Enterprises where processing covers IT-related service activities (i.e., the use of any IT software and/or system for value addition). Without any manufacturing, processing or assembly component, the activity may be construed as a mere trading activity, hence not eligible for registration with PEZA.
Thus, only revenues from IT processing activities shall be entitled to incentives. Those from mere IT trading activities shall not enjoy the incentives granted by PEZA.
PEZA has been encouraging and supporting investments of IT Enterprises as well as the establishment and operation of IT Parks/Buildings to accelerate the growth and development of the Philippine IT sector. IT Enterprises that want to be part of this growth should comply with the rules and regulations set forth by PEZA, most especially the conditions expressed in their Registration Agreement. In addition, it is reasonable for PEZA to expect substantial inputs/activities from registrants in determining the project’s net value added because the incentives granted by law are also considerable.
John Paul M. Vargas is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
john.paul.m.vargas@ph.pwc.com
source: Businessworld
No comments:
Post a Comment