IF THE “busy season” for an accounting firm’s audit and accounting departments is from December to April, January and February are among the busiest months for the Enterprise Services Division (ESD) and Incentives Management Division (IMD) of the Philippine Economic Zone Authority (PEZA). During this time, PEZA-registered enterprises renew their certificate of incentives and value-added tax (VAT) zero-rating certificate.
The primary tax incentives enjoyed by a PEZA-registered enterprise are:
• Four- or six-year income tax holiday (ITH) for pioneer or non-pioneer registered activities, respectively
• 5 percent gross income tax (GIT) incentive, which can be availed any time after the ITH has lapsed, and is in lieu of all national and local taxes
• VAT zero-rating on local purchases of goods and services
• VAT-free and duty free importations of capital equipment and machineries, among others
The grant of these incentives is subject to the following special conditions provided under the PEZA Registration Agreement (and/or Supplemental Agreement, as the case may be):
• Validation of actual date of SCO
When a company registers with PEZA, it is required to submit a project brief indicating the estimated date of the start of commercial operations (SCO). Since the reckoning of the ITH period is based on the date of the SCO, PEZA needs to validate the actual SCO date (as opposed to the estimated date). For PEZA’s purposes, the actual SCO date is when the registered enterprise issues its first billing or commercial invoice to its customer.
Within seven days from said SCO date, the registered enterprise is required to submit to the PEZA Zone Manager a notarized certification on the date of actual SCO, which will be validated and attested by the latter. The attested certification will then be submitted to PEZA-IMD. A copy of the attested actual SCO date will also be submitted to PEZA Enterprise Registration Division (ERD).
The important supporting documents that must be submitted along with the certification on the date of actual SCO are:
• copy of the first commercial invoice
• copy of the occupancy permit (OP), or at least proof of submission of the application for the OP
While the copy of the first commercial invoice is readily available, securing the OP from PEZA Head Office Building Official (PEZA-HOBO) can easily be overlooked. When a PEZA-registered enterprise constructs its facility or fits out its office premises, the function of ensuring compliance with the requirements of the National Building Code are transferred from the Local Government Unit (LGU) to the PEZA-HOBO. Prior to construction or fit-out, the PEZA-registered enterprise should apply for a construction permit with the PEZA HOBO. Upon completion of construction or fit-out, PEZA-HOBO will conduct an inspection and thereafter, issue the OP. Even if a facility is site-hosted, the registered enterprise is still required to secure an OP.
In addition to being a requirement to secure SCO validation, a registered enterprise that subsequently transfers to a new office space will not be allowed by PEZA-HOBO to construct or fit-out the new premises unless it has already secured an OP for the old site.
• Validation of ITH entitlement
The grant of ITH is premised on investment by the registered enterprise of brand new equipment and machineries that are included as part of the information indicated in the project brief. Within 45 days after the first year of its commercial operations reckoned from the attested actual SCO date, the registered enterprise is required to file an application for validation of its investment in new equipment.
The most important supporting document that must be submitted together with the application for validation of investment is a certified list of the machines and equipment acquired for the project within the first year along with the corresponding invoices and/or PEZA import permits. PEZA-EOD will first conduct an inspection of the equipment and thereafter attest the certified listing. The attested list will then be submitted to PEZA-IMD which will process the application for validation. The report on validation will then be reviewed by PEZA-ERD before the final review by the Deputy Director General (Deputy DG) and signature by the PEZA DG.
In the case of call center activity, in addition to the validation of investment in IT equipment, the registered enterprise is also required to file for validation of the required investment cost per seat as stated in its PEZA Registration Agreement. Investment cost includes cost of equipment (hardware and software), office furniture and fixture, building improvements and renovations, and fixed assets, excluding cost of land, building and working capital.
As with validation of investment in equipment, the most crucial supporting document to validate investment cost per seat is the listing of equipment, furniture, improvements and other fixed assets. The same time period and process is applicable to validation of investment cost per seat.
• Validation of base figure in case of expansion projects
PEZA may grant a separate three-year expansion ITH on incremental revenues for an expansion project (subsequent to the original registered project) that involves investment in new equipment and improvements. The expansion ITH is subject to a base figure equivalent to the highest sales value for the past three years of the PEZA enterprise’s existing registered activity. This base figure shall be subject to validation by PEZA-ERD and must be filed not later than the last day of filing with the Bureau of Internal Revenue (BIR) of the final ITR for the first taxable year of the expansion project.
The application for validation of base figure shall be submitted to PEZA-IMD together with the sales summary for the last three years prior to the registration of the expansion project, and audited financial statements for the said last three years. PEZA-IMD will prepare the report on validation which shall be reviewed by PEZA-ERD before final review by the Deputy DG and signature by the DG.
In recent years, in order to enhance their compliance monitoring, PEZA has required the submission of applications for validation of the above-mentioned special conditions prior to renewing the certificate of incentives and VAT zero-rating certificate. Other than validation of actual date of SCO (which must be accomplished within seven days), most of the special conditions have to be complied with after the first year from actual SCO date. As such, a PEZA-registered enterprise renewing its certificate of incentives and VAT zero-rating certificate after the first year of operations will encounter challenges in the renewal process if, at that time, it has not yet complied with the special conditions. In addition, all PEZA quarterly and annual reports must be submitted to PEZA-ESD before PEZA-IMD can process the renewal of said certificates.
Delay in securing the certificates can have significant consequences on the part of a PEZA-registered enterprise. Under the new BIR ITR forms, particularly, the ITR form for mixed income taxpayers, the certificate of entitlement to incentives should be attached to the ITR. Also, some LGUs require the submission of the certificate of incentives prior to issuing the assessment or billing for the annual mayor’s permit. More importantly, most suppliers of goods and services will require presentation of the latest VAT zero-rating certificate before they issue their billing at 0 percent VAT to the PEZA-registered enterprise.
To ensure that their certificates are renewed promptly, PEZA-registered enterprises would do well to enhance their understanding of the special conditions and thereby improve their compliance with the same. These validations need to be complied with not only for purposes of renewing the certificates, but more importantly, for establishing condition precedents in the event that the registered enterprise will apply for extension of its ITH under applicable provisions of the PEZA law.
As can be seen from the foregoing, the most important document that will facilitate compliance by a registered enterprise with the required validations is the fixed asset register and supporting invoices and PEZA import permits. If a registered enterprise has multiple projects across several sites, each of which are entitled to their respective new or expansion ITH, keeping a well-maintained fixed asset register and separate tagging of assets for each project becomes even more crucial to its ability to comply with the validations required by PEZA for its entitlement to incentives.
Tata Panlilio-Ong is a Director with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
sourcE: Businessworld
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