C.

TAX ON CORPORATIONS

1. Definition of Corporation

a. Sec 22

d. BIR Ruling 317-92

October 28, 1992

BIR RULING NO. 317-92

Sycip, Gorres, Velayo & Co.

6760 Ayala Avenue, Makati Metro Manila

Attention: Atty. T . A. Tejada

Tax Division

Gentlemen : This refers to your letter dated July 13, 1992 stating that in June 1990, your client, Ayala Land, Inc.
(ALI) and Appleyard Properties, Inc. (API) entered into a Memorandum of Agreement (MOA) for the
construction of an office building on that lot owned by ALI located along Ayala Avenue, Makati, to be known as
6750 Ayala Office Tower (Building) or such other name as the parties may subsequently adopt; that pursuant to
the terms of the MOA, ALI and API each contributed equal amounts to the construction costs of the office
tower and 351 parking stalls, in consideration of each of them acquiring the ownership of such numbers of
specifically designated whole floors in the proportion of 60% (ALI) and 40% (API) respectively, of the net
leasable floor area of 22,335 square meters of the office tower, and the right to use the parking stalls and
storage spaces in the same proportion of 60%/40%; that while there would be separate ownership of
specifically designated whole floors, common areas expenses, maintenance and insurance costs, real estate
taxes, commercial center dues and expenses would be shared by ALI and the API in the same proportion; that
upon the expiration of the 48 year term of the MOA in year 2038, the ownership of all the floors or portions of
the building allocated to API shall automatically be transferred to ALI; that the principal objective of both ALI
and API is to lease out to third party tenants the specific floors separately owned by them; that considering the
present softness in the market, they believe that it would be to their mutual interest to pool together their
respective floors in the Building for the purpose of leasing them under standard rental rate, and to use a
common agent to handle contract negotiations, tenant relations, maintenance, accounting of income and
expenses; that to carry out their common objectives, ALI and API now propose to enter into another
agreement, a Joint Venture Agreement (JVA); that under the JVA, ALI and API will contribute money to a
common fund for the initial and, if necessary, additional working capital of the joint venture; that ALI will be
appointed as manager of the joint venture and subject to the mutual control of ALI and API, shall be
responsible, among others, for the leasing of the Building floors or portions thereof owned by ALI and API; that
irrespective of who owns the floor or floors, or portions of the Building that are leased out, the JV will hold the
rental receipts in a common pool and the net balance every quarter, after deducting all expenses chargeable
thereto, such as salaries of JV personnel and maintenance expenses, shall be distributed to ALI and API in same
proportion of 60%/40% as dividends; that the JV will have a life of three years; and that upon its dissolution,
each party will receive the rentals for the floors owned by it and shoulder its own expenses, independently of
the other. cdtai
In connection therewith, you now pose the following queries:
1. Whether or not the Memorandum of Agreement entered into by and between ALI and API in 1990 providing
for the construction of the office tower has, by itself, created a separately taxable joint venture;
2. Whether or not the joint venture to be subsequently entered into by and between ALI and API, for the
leasing of the Building floors or portions thereof separately owned by them will be considered as a corporation
taxable as such, separate and distinct from ALI and API;
3. Whether or not the rentals to be paid by the tenants of the Building to the joint venture during the term of
the JVA are to be treated as income of the joint venture;
4. Whether or not the distributions by the joint venture of the net income from its operations to ALI and API
will be considered as dividend distributions taxable to ALI and API."

In reply thereto, I have the honor to inform you that to constitute a "joint venture" certain factors are
essential:
1. each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill,
knowledge, material or money;
2. profits must be shared among the parties;
3. there must be a joint proprietary interest and right of mutual control over the subject matter of the
enterprise;
4. usually, there is single business transaction rather than a general or continuous transaction" (Words and
Phrases, Vol. 23, p. 230)

Likewise, a joint venture was created when two corporations while registered and operating separately were
placed under one sole management which operated the business affairs of said companies as though
constituted a single entity thereby obtaining substantial economy and profits in the operation (Collector vs.
Batangas Transportation et al. 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82 dated June 3, 1982;
24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990 and 254-91 dated November 26, 1991).
The Memorandum of Agreement entered into by and between ALI and API in 1990 providing for the
construction of the aforementioned office tower has not by itself created a taxable joint venture. However, the
joint venture to be subsequently entered into by and between ALI and API, for the leasing of the Building floors
or portions thereof separately owned by them will create, a joint venture subject to tax under Section 24(a) of
the Tax Code, as amended, separate and distinct from ALI and API.
Moreover, the rentals to be received by the joint venture from the tenants in the Building are income to the
joint venture. Furthermore, the distribution by the joint venture of its net income to ALI and API are in the
nature of dividends which are not subject to tax under Section 24(e)(4) of the Tax Code, as amended.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation the
same could not be substantiated then this ruling shall be considered null and avoid.

Very truly yours,

JOSE U. ONG
Commissioner of Internal Revenue
 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE

June 01, 2012

REVENUE REGULATIONS NO. 10-2012

SUBJECT: Joint Venture or Consortium Formed For The Purpose Of Undertaking

Construction Projects and Mandatory Enrollment of Local Contractors in the
Electronic Filing and Payment System (EFPS)

All Internal Revenue Officers, Employees and Others Concerned

Section 1. COVERAGE. Pursuant to the provisions of Sec 244 and 245 of the
National Internal Revenue Code of 1997, as amended, these Regulations are hereby
promulgated to properly implement exclusion to the definition of what is considered as a
corporation pursuant to Sec 22 (B) of the NIRC of 1997, in particular, those concerning joint
venture undertakings involving construction projects.

Section 2. BACKGROUND. Pursuant to Section 22(B) of the NIRC of 1997, as

amended, the term ‘corporation’ shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or
insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.

The tax exemption of joint ventures formed for the purpose of construction projects
was pursuant to Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local
contractors in achieving competitiveness with foreign contractors by pooling their resources
in undertaking big construction projects.

Section 3. JOINT VENTURES NOT TAXABLE AS CORPORATIONS. A joint venture or

consortium formed for the purpose of undertaking construction projects not considered as
corporation under Sec 22 of the NIRC of 1997 as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local contracts; that
is, licensed as general contractor by the Philippine Contractors Accreditation
Board (PCAB) of the Department of Trade and Industry (DTI);
(3) these local contractors are engaged in construction business; and
(4) the Joint Venture itself must likewise be duly licensed as such by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and
Industry (DTI)
 Joint ventures involving foreign contractors may also be treated as a non-taxable
corporation only if the member foreign contractor is covered by a special license as
contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI); and the construction project is certified by the appropriate
Tendering Agency (government office) that the project is a foreign financed/
internationally-funded project and that international bidding is allowed under the
Bilateral Agreement entered into by and between the Philippine Government and the
foreign / international financing institution pursuant to the implementing rules and
regulations of Republic Act No. 4566 otherwise known as Contractor’s License Law.

Absent any one the aforesaid requirements, the joint venture or consortium formed
for the purpose of undertaking construction projects shall be considered as taxable
corporations.

In addition, the tax-exempt joint venture or consortium as herein defined shall not
include those who are mere suppliers of goods, services or capital to a construction project.

The member to a Joint Venture not taxable as corporation shall each be responsible
in reporting and paying appropriate income taxes on their respective share to the joint
ventures profit.

Section 4. MANDATORY ENROLLMENT TO THE BIR’S EFPS. All licensed local

contactors are hereby required to enroll themselves to the Bureau of Internal Revenue’s
Electronic Filing and Payment System (EFPS). The enrollment should be done at the
Revenue District Office (RDO) where the local contractors are registered as taxpayers.

Section 5. REPEALING CLAUSE. - All existing rules and regulations and other
issuances or parts thereof which are inconsistent with the provisions of these Regulations
are hereby modified, amended or revoked accordingly.

Section 6. EFFECTIVITY. - These Regulations shall take effect fifteen (15) days after
publication.

(Original Signed)
CESAR V. PURISIMA
Secretary of Finance
Recommending Approval:

(Original Signed)
KIM S. JACINTO -HENARES
Commissioner of Internal Revenue
2. Classification of Corporations and Taxes

A. In general (Sec 27-28) as amended by RA 9337, effective July 1, 20015, implemented by RR 16-2005 (November 1,
2005), increase to 35% Corporate Income Tax; reduced to 30% beginning Jan 1, 2009

REVENUE REGULATION 16-2005

SUBJECT: Consolidated Value-Added Tax Regulations of 2005

TO: All Internal Revenue Officers and Others Concerned

Pursuant to the provisions of Secs. 244 and 245 of the National Internal Revenue Code of 1997, as last amended by
Republic Act No. 9337 (Tax Code), in relation to Sec. 23 of the said Republic Act, these Regulations are hereby
promulgated to implement Title IV of the Tax Code, as well as other provisions pertaining to Value-Added Tax (VAT).
These Regulations supersedes Revenue Regulations No. 14-2005 dated June 22, 2005.

COVERAGE, NATURE, BASIS, AND RATE OF VALUE-ADDED TAX (VAT)

SECTION 4.105-1. Persons Liable. – Any person who, in the course of his trade or business, sells, barters, exchanges or
leases goods or properties, or renders services, and any person who imports goods, shall be liable to VAT imposed in
Secs. 106 to 108 of the Tax Code.

However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether
or not made in the course of his trade or business, shall be liable to VAT imposed in Sec. 107 of the Tax Code.

“Person” refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association.

“Taxable person” refers to any person liable for the payment of VAT, whether registered or registrable in accordance
with Sec. 236 of the Tax Code.

“VAT-registered person” refers to any person who is registered as a VAT taxpayer under Sec. 236 of the Tax Code. His
status as a VAT-registered person shall continue until the cancellation of such registration.

“Taxable sale” refers to the sale, barter, exchange and/or lease of goods or properties, including transactions “deemed
sale” and the performance of service for a consideration, whether in cash or in kind, all of which are subject to tax
under Secs. 106 and 108 of the Tax Code.

SEC. 4.105-2. Nature and Characteristics of VAT. – VAT is a tax on consumption levied on the sale, barter, exchange or
lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. The seller
is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of
sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. However, in the case of
importation, the importer is the one liable for the VAT.

SEC. 4.105-3. Meaning of “In the Course of Trade or Business”. – The term “in the course of trade or business” means
the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or
government entity.

Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or
business, even if the performance of services is not regular.

SEC. 4.106-1. VAT on Sale of Goods or Properties. – VAT is imposed and collected on every sale, barter or exchange, or
transactions “deemed sale” of taxable goods or properties at the rate of 10% of the gross selling price or gross value in
money of the goods or properties sold, bartered, or exchanged, or deemed sold in the Philippines.

SEC. 4.106-2. Meaning of the Term “Goods or Properties”. – The term “goods or properties” refers to all tangible and
intangible objects which are capable of pecuniary estimation and shall include, among others:

(1) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;

(2) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;

(3) The right or the privilege to use any industrial commercial or scientific equipment;

(4) The right or the privilege to use motion picture films, films, tapes and discs; and

(5) Radio, television, satellite transmission and cable television time.

SEC. 4.106-3. “Sale of Real Properties”. – Sale of real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business of the seller shall be subject to VAT.

In the case of sale of real properties on the installment plan, the real estate dealer shall be subject to VAT on the
installment payments, including interest and penalties, actually and/or constructively received by the seller.

Sale of residential lot exceeding P1,500,000.00, residential house and lot or other residential dwellings exceeding
P2,500,000.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of
conditional sale or otherwise) is executed on or after July 1, 2005, shall be subject to 10% VAT.

Installment sale of residential house and lot or other residential dwellings exceeding P1,000,000.00, where the
instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or
otherwise) was executed prior to July 1, 2005, shall be subject to 10% VAT.

“Sale of real property on installment plan” means sale of real property by a real estate dealer, the initial payments of
which in the year of sale do not exceed twenty-five percent (25%) of the gross selling price.

However, in the case of sale of real properties on the deferred-payment basis, not on the installment plan, the
transaction shall be treated as cash sale which makes the entire selling price taxable in month of sale.

“Sale of real property by a real estate dealer on a deferred payment basis, not on the installment plan” means sale of
real property, the initial payments of which in the year of sale exceed twenty-five percent (25%) of the gross selling
price.

“Initial payments” means payment or payments which the seller receives before or upon execution of the instrument
of sale and payments which he expects or is scheduled to receive in cash or property (other than evidence of
indebtedness of the purchaser) during the year when the sale or disposition of the real property was made. It covers
any down payment made and includes all payments actually or constructively received during the year of sale, the
aggregate of which determines the limit set by law.

Initial payments do not include the amount of mortgage on the real property sold except when such mortgage
exceeds the cost or other basis of the property to the seller, in which case, the excess shall be considered part of the
initial payments.

Also excluded from initial payments are notes or other evidence of indebtedness issued by the purchaser to the seller
at the time of the sale.

Pre-selling of real estate properties by real estate dealers shall be subject to VAT in accordance with rules prescribed
above.

“Real estate dealer” includes any person engaged in the business of buying, developing, selling, exchanging real
properties as principal and holding himself out as a full or part-time dealer in real estate.

Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the
trustor and/or beneficiary. However, if the property transferred is one for sale, lease or use in the ordinary course of
trade or business and the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale
transaction pursuant to Sec. 4.106-7(a)(1) of these Regulations. The transfer is a completed gift if the transferor
divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable
designation of beneficiary.

SEC. 4.106-4. Meaning of the Term “Gross Selling Price”. – The term “gross selling price” means the total amount of
money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding VAT. The excise tax, if any, on such goods or properties shall
form part of the gross selling price.

In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration
stated in the sales document or the fair market value whichever is higher. The term “fair market value” shall mean
whichever is the higher of:

1) the fair market value as determined by the Commissioner (zonal value), or

2) the fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax
declaration). However, in the absence of zonal value, gross selling price refers to the market value shown in the latest
real property tax declaration or the consideration, whichever is higher. If the gross selling price is based on the zonal
value or market value of the property, the zonal or market value shall be deemed inclusive of VAT. If the VAT is not
billed separately, the selling price stated in the sales document shall be deemed to be inclusive of VAT.

SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. – A zero-rated sale of goods or properties (by a VAT-registered
person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on
purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in
accordance with these Regulations.

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export sales. – “Export Sales” shall mean:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so
exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s
goods, paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the
BSP;

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed
seventy percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be
considered an export-oriented enterprise.

(4) Sale of gold to the BSP; and

(5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws.

“Considered export sales under Executive Order No. 226” shall mean the Philippine port F.O.B. value determined from
invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export
products exported directly by a registered export producer, or the net selling price of export products sold by a
registered export producer to another export producer, or to an export trader that subsequently exports the same;
Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales
when actually exported by the latter, as evidenced by landing certificates or similar commercial documents;

Provided, further, That without actual exportation the following shall be considered constructively exported for
purposes of these provisions: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2)
sales to export processing zones; (3) sales to registered export traders operating bonded trading warehouses
supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation
with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); (4) sales to diplomatic missions and other
agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products
whether paid for in foreign currency or not.

For purposes of zero-rating, the export sales of registered export traders shall include commission income. The
exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact
sold by the consignee; and Provided, finally, that sales of goods, properties or services made by a VAT-registered
supplier to a BOIregistered manufacturer/producer whose products are 100% exported are considered export sales. A
certification to this effect must be issued by the Board of Investment (BOI) which shall be good for one year unless
subsequently re-issued by the BOI.

(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air
transport operations; Provided, That the same is limited to goods, supplies, equipment and fuel pertaining to or
attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without
docking or stopping at any other port in the Philippines; Provided, further, that if any portion of such fuel, goods or
supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies
shall be subject to 10% VAT.

(b) “Foreign Currency Denominated Sale”. – “Foreign Currency Denominated Sale” means the sale to a non-resident of
goods, except those mentioned in Secs. 149 and 150 of the Tax Code, assembled or manufactured in the Philippines
for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP.

Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-
residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the
government paid for in convertible foreign currency and accounted for in accordance with the rules and regulations of
the BSP shall also be considered export sales.

(c) “Sales to Persons or Entities Deemed Tax-exempt under Special Law or International Agreement”. - Sales of goods
or property to persons or entities who are taxexempt under special laws, e.g. sales to enterprises duly registered and
accredited with the Subic Bay Metropolitan Authority (SBMA) pursuant to R.A. No. 7227, sales to enterprises duly
registered and accredited with the Philippine Economic Zone Authority (PEZA) or international agreements to which
the Philippines is signatory, such as, Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc.,
shall be effectively subject to VAT at zero-rate.

SEC. 4.106-6. Meaning of the Term “Effectively Zero-rated Sale of Goods and Properties”. – The term “effectively zero-
rated sale of goods and properties” shall refer to the local sale of goods and properties by a VAT-registered person to
a person or entity who was granted indirect tax exemption under special laws or international agreement. Under
these Regulations, transactions which, although not involving actual export, are considered as “constructive export”
shall be entitled to the benefit of zero-rating, such as local sales of goods and properties to persons or entities covered
under pars. (a) no. (3) - (sale to export-oriented enterprises), (a) no. (6) - (sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or international air transport operations), (b) (Foreign Currency
Denominated Sale) and (c) (Sales to Tax-Exempt Persons or Entities) of the preceding section.

Except for Export Sale under Sec. 4.106-5(a) and Foreign Currency Denominated Sale under Sec. 4.106-5(b), other
cases of zero-rated sales shall require prior application with the appropriate BIR office for effective zero-rating.
Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be
considered exempt. The foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively
implement the processing of applications for effective zero-rating.

SEC. 4.106-7. Transactions Deemed Sale. –

(a) The following transactions shall be “deemed sale” pursuant to Sec. 106 (B) of the Tax Code:

(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for
use in the course of business. Transfer of goods or properties not in the course of business can take place when VAT-
registered person withdraws goods from his business for his personal use;

(2) Distribution or transfer to:

i. Shareholders or investors share in the profits of VAT-registered person;

Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of
retained earnings on or after January 1, 1996 and distributed by the company to its shareholders shall be subject to
VAT based on the zonal value or fair market value at the time of distribution, whichever is applicable.

ii. Creditors in payment of debt or obligation.

(3) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned.
Consigned goods returned by the consignee within the 60-day period are not deemed sold;

(4) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade,
supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the
new owner or successor. The following circumstances shall, among others, give rise to transactions “deemed sale” for
purposes of this Section;

i. Change of ownership of the business. There is a change in the ownership of the business when a single
proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business.

ii. Dissolution of a partnership and creation of a new partnership which takes over the business.

(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where a transaction is
deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where the gross
selling price is unreasonably lower than the actual market value. The gross selling price is unreasonably lower than the
actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity
and quality sold in the immediate locality on or nearest the date of sale.

For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the
time of the occurrence of the transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these Regulations.
However, in the case of retirement or cessation of business, the tax base shall be the acquisition cost or the current
market price of the goods or properties, whichever is lower.
In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market
value shall be the tax base.

SEC. 4.106-8. Change or Cessation of Status as VAT-registered Person. –

(a) Subject to output tax

The VAT provided for in Sec. 106 of the Tax Code shall apply to goods or properties originally intended for sale or use
in business, and capital goods which are existing as of the occurrence of the following:

(1) Change of business activity from VAT taxable status to VAT-exempt status. An example is a VAT-registered person
engaged in a taxable activity like wholesaler or retailer who decides to discontinue such activity and engages instead in
life insurance business or in any other business not subject to VAT;

(2) Approval of a request for cancellation of registration due to reversion to exempt status.

(3) Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of
three (3) consecutive years from the time of registration by a person who voluntarily registered despite being exempt
under Sec. 109 (2) of the Tax Code.

(4) Approval of a request for cancellation of registration of one who commenced business with the expectation of
gross sales or receipts exceeding P1,500,000.00, but who failed to exceed this amount during the first twelve months
of operation.

(b) Not subject to output tax

The VAT shall not apply to goods or properties existing as of the occurrence of the following:

(1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another
stockholder or group of stockholders. The goods or properties used in business or those comprising the stock-in-trade
of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite
the change in the ownership interest in the said corporation.

Illustration: Abel Corporation is a merchandising concern and has an inventory of goods for sale amounting to Php1
million. Nel Corporation, a real estate developer, exchanged its real estate properties for the shares of stocks of Abel
Corporation resulting to the acquisition of corporate control. The inventory of goods owned by Abel Corporation
(Php1 million worth) is not subject to output tax despite the change in corporate control because the same
corporation still owns them. This is in recognition of the separate and distinct personality of the corporation from its
stockholders. However, the exchange of real estate properties held for sale or for lease, for shares of stocks, whether
resulting to corporate control or not, is subject to VAT. This is an actual exchange of properties which makes the
transaction taxable.

(2) Change in the trade or corporate name of the business;

(3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of
merger or consolidation, shall be absorbed by the surviving or new corporation.

SEC. 4.106-9. Allowable Deductions from Gross Selling Price. – In computing the taxable base during the month or
quarter, the following shall be allowed as deductions from gross selling price:

(a) Discounts determined and granted at the time of sale, which are expressly indicated in the invoice, the amount
thereof forming part of the gross sales duly recorded in the books of accounts.

Sales discount indicated in the invoice at the time of sale, the grant of which is not dependent upon the happening of
a future event, may be excluded from the gross sales within the same month/quarter it was given.

(b) Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the
buyer for sales previously recorded as taxable sales.

SEC. 4.107-1. VAT on Importation of Goods. –

(a) In general. – VAT is imposed on goods brought into the Philippines, whether for use in business or not. The tax shall
be based on the total value used by the BOC in determining tariff and customs duties, plus customs duties, excise tax,
if any, and other charges, such as postage, commission, and similar charges, prior to the release of the goods from
customs custody.

In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported
goods, the landed cost shall be the basis for computing VAT.

Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods
imported are subject to excise tax, the excise tax shall form part of the tax base.

The same rule applies to technical importation of goods sold by a person located in a Special Economic Zone to a
customer located in a customs territory.

No VAT shall be collected on importation of goods which are specifically exempted under Sec. 109 (1) of the Tax Code.

(b) Applicability and payment. – The rates prescribed under Sec. 107 (A) of the Tax Code shall be applicable to all
importations withdrawn from customs custody.

The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody.

“Importer” refers to any person who brings goods into the Philippines, whether or not made in the course of his trade
or business. It includes non-exempt persons or entities who acquire tax-free imported goods from exempt persons,
entities or agencies.

(c) Sale, transfer or exchange of imported goods by tax-exempt persons. – In the case of goods imported into the
Philippines by VAT-exempt persons, entities or agencies which are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the latter shall be considered the importers thereof and shall be liable
for VAT due on such importation. The tax due on such importation shall constitute a lien on the goods, superior to all
charges/or liens, irrespective of the possessor of said goods.

SEC. 4.108-1. VAT on the Sale of Services and Use or Lease of Properties. – Sale or exchange of services, as well as the
use or lease of properties, as defined in Sec. 108 (A) of the Tax Code shall be subject to VAT, equivalent to 10% of the
gross receipts (excluding VAT).

SEC. 4.108-2. Meaning of “Sale or Exchange of Services”. – The term “sale or exchange of services” means the
performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in
kind or in cash, including those performed or rendered by the following:

(1) construction and service contractors;

(2) stock, real estate, commercial, customs and immigration brokers;

(3) lessors of property, whether personal or real;

(4) persons engaged in warehousing services;

(5) lessors or distributors of cinematographic films;

(6) persons engaged in milling, processing, manufacturing or repacking goods for others;

(7) proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters, and movie
houses;

(8) proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and
caterers;

(9) dealers in securities;

(10) lending investors;

(11) transportation contractors on their transport of goods or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes;

(12) common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines;

(13) sales of electricity by generation, transmission, and/or distribution companies;

(14) franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other
franchise grantees, except franchise grantees of radio and/or television broadcasting whose annual gross receipts of
the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water
utilities;

(15) non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and

(16) similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical
or mental faculties.

The phrase “sale or exchange of services” shall likewise include:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other like property or right;

(2) The lease or the use of, or the right to use any industrial, commercial or scientific equipment;

(3) The supply of scientific, technical industrial or commercial knowledge or information;

(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or any such
knowledge or information as is mentioned in subparagraph (3) hereof;

(5) The supply of services by a non-resident person or his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such
nonresident person;

(6) The supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme;

(7) The lease of motion picture films, films, tapes, and discs; and

(8) The lease or the use of, or the right to use, radio, television, satellite transmission and cable television time.
SEC. 4.108-3. Definitions and Specific Rules on Selected Services. –

a. Lessors of Property. – All forms of property for lease, whether real or personal, are liable to VAT subject to the
provisions of Sec. 4.109-1(B)(1)(v) of these Regulations.

“Real estate lessor” includes any person engaged in the business of leasing or subleasing real property.

Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing agreement
was executed if the property leased or used is located in the Philippines.

VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use
or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the
licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the
non-resident foreign corporation or owner in the manner prescribed in Sec. 4.114-2(b) hereof.

“Non-resident lessor/owner” refers to any person, natural or juridical, an alien, or a citizen who establishes to the
satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention
to reside therein, and who owns/leases properties, real or personal, whether tangible or intangible, located in the
Philippines.

In a lease contract, the advance payment by the lessee may be:

(i) a loan to the lessor from the lessee, or

(ii) an option money for the property, or

(iii) a security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, or

(iv) pre-paid rental.

If the advance payment is actually a loan to the lessor, or an option money for the property, or a security deposit for
the faithful performance of certain obligations of the lessee, such advance payment is not subject to VAT. However, a
security deposit that is applied to rental shall be subject to VAT at the time of its application.

If the advance payment constitutes a pre-paid rental, then such payment is taxable to the lessor in the month when
received, irrespective of the accounting method employed by the lessor.

(b) “Warehousing service” means rendering personal services of a warehouseman such as:

(1) engaging in the business of receiving and storing goods of others for compensation or profit;

(2) receiving goods and merchandise to be stored in his warehouse for hire; or

(3) keeping and storing goods for others, as a business and for use.

(c) A miller, who is a person engaged in milling for others (except palay into rice, corn into corn grits, and sugarcane
into raw sugar), is subject to VAT on sale of services. If the miller is paid in cash for his services, VAT shall be based on
his gross receipts for the month or quarter. If he receives a share of the milled products instead of cash, VAT shall be
based on the actual market value of his share in the milled products. Sale by the owner or the miller of his share of the
milled product (except rice, corn grits and raw sugar) shall be subject to VAT.

(d) All receipts from service, hire, or operating lease of transportation equipment not subject to the percentage tax on
domestic common carriers and keepers of garages imposed under Sec. 117 of the Tax Code shall be subject to VAT.
“Common carrier” refers to persons, corporations, firms or associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public
and shall include transportation contractors.

Common carriers by land with respect to their gross receipts from the transport of passengers including operators of
taxicabs, utility cars for rent or hire driven by the lessees (rent-a-car companies), and tourist buses used for the
transport of passengers shall be subject to the percentage tax imposed under Sec. 117 of the Tax Code, but shall not
be liable for VAT.

(e) Domestic common carriers by air and sea are subject to 10% VAT on their gross receipts from their transport of
passengers, goods or cargoes from one place in the Philippines to another place in the Philippines.

(f) Sale of electricity by generation, transmission, and distribution companies shall be subject to 10% VAT on their
gross receipts; Provided, That sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels shall be subject to 0% VAT.

“Generation companies” refers to persons or entities authorized by the Energy Regulatory Commission (ERC) to
operate facilities used in the generation of electricity. For this purpose, generation of electricity refers to the
production of electricity by a generation company or a co-generation facility pursuant to the provisions of the RA No.
9136 (EPIRA).

They shall include all Independent Power Producers (IPPs) and NPC/Power Sector Assets and Liabilities Management
Corporation (PSALM)-owned generation facilities. “Transmission companies” refers to any person or entity that owns
and conveys electricity through the high voltage backbone system and/or subtransmission assets, e.g. NPC or
TRANSCO. ‘Subtransmission assets’ shall refer to the facilities related to the power delivery service below the
transmission voltages and based on the functional assignment of asset including, but not limited to step-down
transformers used solely by load customers, associated switchyard/substation, control and protective equipment,
reactive compensation equipment to improve power factor, overhead lines, and the land where such
facilities/equipments are located. These include NPC assets linking the transmission system and the distribution
system which are neither classified as generation or transmission.

“Distribution companies” refer to persons or entities which operate a distribution system in accordance with the
provisions of the EPIRA. They shall include any distribution utility such as an electric cooperative organized pursuant to
Presidential Decree No. 269, as amended, and/or under RA No. 6938, or as otherwise provided in the EPIRA, a private
corporation, or a government-owned utility or existing local government unit which has an exclusive franchise to
operate a distribution system in accordance with the EPIRA.

For this purpose, a distribution system refers to the system of wires and associated facilities belonging to a franchised
distribution utility extending between the delivery points on the transmission or subtransmission system or generator
connection and the point of connection to the premises of the end-users. “Gross Receipts” under this Subsection (f)
shall refer to the following:

(a) Total amount charged by generation companies for the sale of electricity and related ancillary services; and/or

(b) Total amount charged by transmission companies for transmission of electricity and related ancillary services;
and/or

(c) Total amount charged by distribution companies and electric cooperatives for distribution and supply of electricity,
and related electric service. The universal charge passed on and collected by distribution companies and electric
cooperatives shall be excluded from the computation of the Gross Receipts.

(g) Dealers in securities and lending investors shall be subject to VAT on the basis of their gross receipts. However, for
Dealer in Securities, the term “gross receipts” means gross selling price less cost of the securities sold..

“Dealer in securities” means a merchant of stock or securities, whether an individual partnership or corporation, with
an established place of business, regularly engaged in the purchase of securities and their resale to customers, that is,
one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be
derived therefrom.

Lending investor” includes all persons other than banks, non-bank financial intermediaries, finance companies and
other financial intermediaries not performing quasibanking functions who make a practice of lending money for
themselves or others at interest.

(h) Services of franchise grantees of telephone and telegraph, radio and/or television broadcasting, toll road
operations and all other franchise grantees, except gas and water utilities, shall be subject to VAT in lieu of franchise
tax, pursuant to Sec. 20 of RA No.7716, as amended. However, franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00)
shall not be subject to VAT, but to the three percent (3%) franchise tax imposed under Sec. 119 of the Tax Code,
subject to the optional registration provisions under Sec. 9.236-1(c) hereof.

Likewise, franchise grantees of gas and water utilities shall be subject to two percent (2%) franchise tax on their gross
receipts derived from the business covered by the law granting the franchise pursuant to Sec. 119 of the Tax Code.

Gross receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how their
franchises may have been granted, shall be subject to the 10% VAT imposed under Sec. 108 of the Tax Code. This
includes among others, the Philippine and Amusement Gaming Corporation (PAGCOR), and its licensees or
franchisees.

Franchise grantees of telephone and telegraph shall be subject to VAT on their gross receipts derived from their
telephone, telegraph, telewriter exchange, wireless and other communication equipment services. However, amounts
received for overseas dispatch, message, or conversation originating from the Philippines are subject to the
percentage tax under Sec. 120 of the Tax Code and hence exempt from VAT.

(i) Non-life insurance companies including surety, fidelity, indemnity and bonding companies are subject to VAT. They
are not liable to the payment of the premium tax under Sec. 123 of the Tax Code.

“Non-life insurance companies” including surety, fidelity, indemnity and bonding companies, shall include all
individuals, partnerships, associations, or corporations, including professional reinsurers defined in Sec. 280 of PD 612,
otherwise known as The Insurance Code of the Philippines, mutual benefit associations and government-owned or
controlled corporations, engaging in the business of property insurance, as distinguished from insurance on human
lives, health, accident and insurance appertaining thereto or connected therewith which shall be subject to the
percentage tax under Sec. 123 of the Tax Code.

The gross receipts from non-life insurance shall mean total premiums collected, whether paid in money, notes, credits
or any substitute for money.

Non-life reinsurance premiums are subject to VAT. Insurance and reinsurance commissions, whether life or non-life,
are subject to VAT.

VAT due from the foreign reinsurance company is to be withheld by the local insurance company and to be remitted
to the BIR in accordance with Sec. 4.114-2(b)(2) hereof by filing the Monthly Remittance Return of Value-Added Tax
Withheld (BIR Form 1600).

(j) Pre-need Companies are corporations registered with the Securities and Exchange Commission and
authorized/licensed to sell or offer for sale pre-need plans, whether a single plan or multi-plan. They are engaged in
business as seller of services providing services to plan holders by managing the funds provided by them and making
payments at the time of need or maturity of the contract.

As service providers, the compensation for their services is the premiums or payments received from the plan holders.

(k) Health Maintenance Organizations (HMOs) are entities, organized in accordance with the provisions of the
Corporation Code of the Philippines and licensed by the appropriate government agency, which arranges for coverage
or designated managed care services needed by plan holders/members for fixed prepaid membership fees and for a
specified period of time.

HMO’s gross receipts shall be the total amount of money or its equivalent representing the service fee actually or
constructively received during the taxable period for the services performed or to be performed for another person,
excluding the value-added tax.

The compensation for their services representing their service fee, is presumed to be the total amount received as
enrollment fee from their members plus other charges received .

SEC. 4.108-4. Definition of Gross Receipts. -“Gross receipts” refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits applied as payments for services rendered and advance payments
actually or constructively received during the taxable period for the services performed or to be performed for
another person, excluding VAT.

“Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person
who rendered the service without restrictions by the payor. The following are examples of constructive receipts:

(1) deposit in banks which are made available to the seller of services without restrictions;

(2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment
for services rendered; and

(3) transfer of the amounts retained by the payor to the account of the contractor.

SEC. 4.108-5. Zero-Rated Sale of Services. -

(a) In general. - A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but
shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance with these Regulations.

(b) Transactions Subject to Zero Percent (0%) VAT Rate. - The following services performed in the Philippines by a VAT-
registered person shall be subject to zero percent (0%) VAT rate:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which
goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP;

(2) Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted
outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP;

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;

(4) Services rendered to persons engaged in international shipping or air transport operations, including leases of
property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to
common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines, the same being subject to 10% VAT under Sec. 108 of the Tax Code;

(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an
enterprise whose export sales exceed seventy percent (70%) of the total annual production;

(6) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross
receipts of international air carriers doing business in the Philippines and international sea carriers doing business in
the Philippines are still liable to a percentage tax of three percent (3%) based on their gross receipts as provided for in
Sec. 118 of the Tax Code but shall not to be liable to VAT; and

(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar,
wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel
cells and hydrogen fuels; Provided, however, that zero-rating shall apply strictly to the sale of power or fuel generated
through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or
operation of plants generating said power.

SEC. 4.108-6. Effectively Zero-Rated Sale of Services. The term “effectively zerorated sales of services” shall refer to
the local sale of services by a VAT-registered person to a person or entity who was granted indirect tax exemption
under special laws or international agreement. Under these Regulations, effectively zero-rated sale of services shall be
limited to local sales to persons or entities that enjoy exemptions from indirect taxes under subparagraph (b) nos. (3),
(4) and (5) of this Section. The concerned taxpayer must seek prior approval or prior confirmation from the
appropriate offices of the BIR so that a transaction is qualified for effective zero-rating. Without an approved
application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. The
foregoing rule notwithstanding, the Commissioner may prescribe such rules to effectively implement the processing of
applications for effective zero-rating.

SEC. 4.109-1. VAT-Exempt Transactions. –

(A) In general. – “VAT-exempt transactions” refer to the sale of goods or properties and/or services and the use or
lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax)
on purchases.

The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT.

(B) Exempt transactions. –

(1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT:

(a) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind
generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials
therefor.

Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese
and turkey. Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally
considered as pets.

Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps,
prawns, oysters, mussels and clams.

Meat, fruit, fish, vegetables and other agricultural and marine food products classified under this paragraph shall be
considered in their original date even if they have undergone the simple processes of preparation or preservation for
the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced
technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar
packaging methods.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered as
agricultural food products in their original state.

Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5 o and above are
presumed to be refined sugar.

Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar:

(1) product of a refining process,

(2) products of a sugar refinery, or

(3) product of a production line of a sugar mill accredited by the BIR to be producing and/or capable of producing
sugar with polarimeter reading of 99.5o and above, and for which the quedan issued therefor, and verified by the
Sugar Regulatory Administration, identifies the same to be of a polarimeter reading of 99.5o and above.

Bagasse is not included in the exemption provided for under this section.

(b) Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds
for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

“Specialty feeds” refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets.

(c) Importation of personal and household effects belonging to residents of the Philippines returning from abroad and
non-resident citizens coming to resettle in the Philippines; Provided, that such goods are exempt from customs duties
under the Tariff and Customs Code of the Philippines;

(d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal
household effects (except any vehicle, vessel, aircraft, machinery and other goods for use in the manufacture and
merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their
own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before
or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such
persons are actually coming to settle in the Philippines and that the change of residence is bonafide;

(e) Services subject to percentage tax under Title V of the Tax Code, as enumerated below:

(1) Sale or lease of goods or properties or the performance of services of non-VATregistered persons, other than the
transactions mentioned in paragraphs (A) to (U) of Sec. 109(1) of the Tax Code, the gross annual sales and/or receipts
of which does not exceed the amount of One Million Five Hundred Thousand Pesos (P1,500,000.00); Provided, That
not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index, as published by the National Statistics Office (NSO) (Sec. 116 of the Tax
Code);

(2) Services rendered by domestic common carriers by land, for the transport of passengers and keepers of garages
(Sec. 117);

(3) Services rendered by international air / shipping carriers (Sec. 118);

(4) Services rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the
preceding year do not exceed Ten Million Pesos (P10,000,000.00), and by franchise grantees of gas and water utilities
(Sec. 119);

(5) Service rendered for overseas dispatch, message or conversation originating from the Philippines (Sec. 120);

(6) Services rendered by any person, company or corporation (except purely cooperative companies or associations)
doing life insurance business of any sort in the Philippines (Sec. 123);

(7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies (Sec. 124);

(8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions,
professional basketball games, Jai-Alai and race tracks (Sec. 125); and

(9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or
through initial public offering (Sec. 127).

(f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into
raw sugar;

“Agricultural contract growers” refers to those persons producing for others poultry, livestock or other agricultural
and marine food products in their original state.

(g) Medical, dental, hospital and veterinary services, except those rendered by professionals.

Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and
medicine is subject to VAT.

(h) Educational services rendered by private educational institutions duly accredited by the Department of Education
(DepED), the Commission on Higher Education (CHED) and the Technical Education and Skills Development Authority
(TESDA) and those rendered by government educational institutions;

“Educational services” shall refer to academic, technical or vocational education provided by private educational
institutions duly accredited by the DepED, the CHED and TESDA and those rendered by government educational
institutions and it does not include seminars, in-service training, review classes and other similar services rendered by
persons who are not accredited by the DepED, the CHED and/or the TESDA;

(i) Services rendered by individuals pursuant to an employer-employee relationship;

(j) Services rendered by regional or area headquarters established in the Philippines by multinational corporations
which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the
Asia Pacific Region and do not earn or derive income from the Philippines;

(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under
special laws except those granted under PD No. 529 — Petroleum Exploration Concessionaires under the Petroleum
Act of 1949; and

(l) Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development
Authority (CDA) to their members, as well as sale of their produce, whether in its original state or processed form, to
non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to
be used directly and exclusively in the production and/or processing of their produce;

(m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing
with the Cooperative Development Authority,

(n) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good standing with
the CDA; Provided, That the share capital contribution of each member does not exceed Fifteen Thousand Pesos
(P15,000.00) and regardless of the aggregate capital and net surplus ratably distributed among the members.

Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including
spare parts thereof, to be used by them are subject to VAT.

(o) Export sales by persons who are not VAT-registered;

(p) The following sales of real properties are exempt from VAT, namely:

(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business.

(2) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the “Urban
Development and Housing Act of 1992” and other related laws, such as RA No. 7835 and RA No. 8763.

“Low-cost housing” refers to housing projects intended for homeless low-income family beneficiaries, undertaken by
the Government or private developers, which may either be a subdivision or a condominium registered and licensed
by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar
law, wherein the unit selling price is within the selling price ceiling per unit of P750,000.00 under RA No. 7279,
otherwise known as the “Urban Development and Housing Act of 1992” and other laws, such as RA No. 7835 and RA
No. 8763.

(3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as
RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00 or as may from time to time be
determined by the HUDCC and the NEDA and other related laws.

“Socialized housing” refers to housing programs and projects covering houses and lots or home lots only undertaken
by the Government or the private sector for the underprivileged and homeless citizens which shall include sites and
services development, long-term financing, liberated terms on interest payments, and such other benefits in
accordance with the provisions of RA No. 7279, otherwise known as the “Urban Development and Housing Act of
1992” and

RA No. 7835 and RA No. 8763. “Socialized housing” shall also refer to projects intended for the underprivileged and
homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home
Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or non-
government organizations.

(4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house &
lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below
where the instrument of sale/transfer/disposition was executed on or after November 1, 2005; Provided, That not
later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its
present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further,
that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each
year;

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots
as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed
P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when
sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be
presumed as a sale of one residential lot.

(q) Lease of residential units with a monthly rental per unit not exceeding Ten Thousand Pesos (P10,000.00),
regardless of the amount of aggregate rentals received by the lessor during the year; Provided, that not later than
January 31, 2009 and every three (3) years thereafter, the amount of P10,000.00 shall be adjusted to its present value
using the Consumer Price Index, as published by the NSO;

The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds Ten Thousand
Pesos (P10,000.00) but the aggregate of such rentals of the lessor during the year do not exceed One Million Five
Hundred Pesos (P1,500,000.00) shall likewise be exempt from VAT, however, the same shall be subjected to three
percent (3%) percentage tax.

In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not
exceeding P10,000.00 while others are leased out for more than P10,000.00 per unit, his tax liability will be as follows:

1. The gross receipts from rentals not exceeding P10,000.00 per month per unit shall be exempt from VAT regardless
of the aggregate annual gross receipts.

2. The gross receipts from rentals exceeding P10,000.00 per month per unit shall be subject to VAT if the aggregate
annual gross receipts from said units only (not including the gross receipts from units leased for not more than
P10,000.00) exceeds P1,500,000.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section
116 of the Tax Code.

The term ‘residential units’ shall refer to apartments and houses & lots used for residential purposes, and buildings or
parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel
rooms, hotels and hotel rooms.

The term ‘unit’ shall mean an apartment unit in the case of apartments, house in the case of residential houses; per
person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.

(r) Sale, importation, printing or publication of books and any newspaper, magazine, review, or bulletin which appears
at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of
paid advertisements;

(s) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
thereof for domestic or international transport operations;

Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall
be limited to those of one hundred fifty (150) tons and above, including engine and spare parts of said vessels;
Provided, further, that the vessels to be imported shall comply with the age limit requirement, at the time of
acquisition counted from the date of the vessel’s original commissioning, as follows: (i) for passenger and/or cargo
vessels, the age limit is fifteen (15) years old, (ii) for tankers, the age limit is ten (10) years old, and (iii) For high-speed
passenger crafts, the age limit is five (5) years old; Provided, finally, that exemption shall be subject to the provisions
of Section 4 of Republic Act No. 9295, otherwise known as “The Domestic Shipping Development Act of 2004”;

(t) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations;
Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods
and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the
Philippines;

Provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in
this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT;

(u) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank
financial intermediaries subject to percentage tax under Secs. 121 and 122 of the Tax Code, such as money changers
and pawnshops; and

(v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One Million Five Hundred
Thousand Pesos (P1,500,000.00);

Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount of P1,500,000.00 shall
be adjusted to its present value using the Consumer Price Index, as published by the NSO.

For purposes of the threshold of P1,500,000.00, the husband and the wife shall be considered separate taxpayers.
However, the aggregation rule for each taxpayer shall apply.

For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of
business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold.

SEC. 4.109-2 A VAT-registered person may, in relation to Sec. 9.236-1(c) of these Regulations, elect that the exemption
in Subsection (1) hereof shall not apply to his sales of goods or properties or services. Once the election is made, it
shall be irrevocable for a period of three (3) years counted from the quarter when the election was made.

SEC. 4.110-1. Credits For Input Tax. -- “Input tax” means the VAT due on or paid by a VAT-registered person on
importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the
course of his trade or business.

It shall also include the transitional input tax and the presumptive input tax determined in accordance with Sec. 111 of
the Tax Code.

It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any
input tax which cannot be directly attributed to either the taxable or exempt activity.

Any input tax on the following transactions evidenced by a VAT invoice or official receipt issued by a VAT-registered
person in accordance with Secs. 113 and 237 of the Tax Code shall be creditable against the output tax:

(a) Purchase or importation of goods

(1) For sale; or

(2) For conversion into or intended to form part of a finished product for sale, including packaging materials; or

(3) For use as supplies in the course of business; or

(4) For use as raw materials supplied in the sale of services; or

(5) For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code,

(b) Purchase of real properties for which a VAT has actually been paid;

(c) Purchase of services in which a VAT has actually been paid;

(d) Transactions “deemed sale” under Sec. 106 (B) of the Tax Code;

(e) Transitional input tax allowed under Sec. 4.111 (a) of these Regulations;

(f) Presumptive input tax allowed under Sec. 4.111 (b) of these Regulations;

(g) Transitional input tax credits allowed under the transitory and other provisions of these Regulations.

SEC. 4.110-2. Persons Who Can Avail of the Input Tax Credit. -- The input tax credit on importation of goods or local
purchases of goods, properties or services by a VATregistered person shall be creditable:
(a) To the importer upon payment of VAT prior to the release of goods from customs custody;

(b) To the purchaser of the domestic goods or properties upon consummation of the sale; or

(c) To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee.

SEC. 4.110-3. Claim for Input Tax on Depreciable Goods. -- Where a VATregistered person purchases or imports capital
goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of
VAT) in a calendar month exceeds One Million pesos (P1,000,000.00), regardless of the acquisition cost of each capital
good, shall be claimed as credit against output tax in the following manner:

(a) If the estimated useful life of a capital good is five (5) years or more – The input tax shall be spread evenly over a
period of sixty (60) months and the claim for input tax credit will commence in the calendar month when the capital
good is acquired. The total input taxes on purchases or importations of this type of capital goods shall be divided by 60
and the quotient will be the amount to be claimed monthly.

(b) If the estimated useful life of a capital good is less than five (5) years – The input tax shall be spread evenly on a
monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of the
capital good. The claim for input tax credit shall commence in the calendar month that the capital goods were
acquired.

Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased
or imported during any calendar month does not exceed One million pesos (P 1,000,000.00), the total input taxes will
be allowable as credit against output tax in the month of acquisition; Provided, however, that the total amount of
input taxes (input tax on depreciable capital goods plus other allowable input taxes) allowed to be claimed against the
output tax in the quarterly VAT Returns shall be subject to the limitation prescribed under Sec. 4.110-7 of these
Regulations.

The aggregate acquisition cost of a depreciable asset in any calendar month refers to the total price agreed upon for
one or more assets acquired and not on the payments actually made during the calendar month. Thus, an asset
acquired in instalment for an acquisition cost of more than P 1,000,000.00 will be subject to the amortization of input
tax despite the fact that the monthly payments/installments may not exceed P 1,000,000.00.

Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that the selling price,
including the VAT, shall be payable in five (5) equal monthly installments.

The data pertinent to the sold assets are as follows:

Selling Price (exclusive of VAT) - P 5,000,000.00

Passed-on VAT - 500,000.00
Original Cost of Asset - 3,000,000.00
Accumulated Depreciation at the time of sale - 1,000,000.00
Unutilized Input Tax (Sold Asset) - 100,000.00

Accounting Entries:

SELLER BUYER

Oct. 1, 2005 Oct. 1, 2005

P P
Cash Asset
1,100,000.00 5,000,000.00
Installment Receivable 4,400,000.00 Input Tax 500,000.00

Accumulated Depreciation 1,000,000.00 Cash 1,100,000.00

Output Tax 500,000.00 Installment Payable 4,400,000.00

Asset 3,000,000.00

Gain on sale of asset 3,000,000.00

To Record VAT Liability: ------------

Output Tax 500,000.00

Input Tax 100,000.00

VAT Payable 400,000.00

Periodic Receipt of Periodic Subsequent

Installment: Payment:

Cash 1,100,000.00 Installment Payable 1,100,000.00

Installment Receivable 1,100,000.00 Cash 1,100,000.00

* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread evenly over a period
of 60 months starting the month of purchase.

If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed
as input tax credit during the month/quarter when the sale or transfer was made but subject to the limitation
prescribed under Sec. 4.110-7 of these Regulations.

SEC. 4.110-4. Apportionment of Input Tax on Mixed Transactions. -- A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as
follows:

1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax
credit; Provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the
Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non-Government
entities; and

2. If any input tax cannot be directly attributed to either a VAT taxable or VATexempt transaction, the input tax shall
be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax credit.

Illustration: ERA Corporation has the following sales during the month:
Sale to private entities subject to 10% - P100,000.00
Sale to private entities subject to 0% - 100,000.00
Sale of exempt goods - 100,000.00
Sale to gov’t. subjected to
5% final VAT Withholding - 100,000.00
Total sales for the month - P400,000.00

The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (10%) - P 5,000.00
Input tax on zero-rated sales - 3,000.00
Input tax on sale of exempt goods - 2,000.00
Input tax on sale to government - 4,000.00
Input tax on depreciable capital good
not attributable to any specific activity - P20,000.00
(monthly amortization for 60 months)

A. The creditable input tax for the month shall be computed as follows:

Input tax on sale subject to 10% - P 5,000.00

Input tax on zero-rated sale - 3,000.00

Ratable portion of the input tax not directly attributable to any activity:
Taxable sales (0% and 10%) / Total Sales X Amount of input tax not directly attributable
P200,000.00 / 400,000.00 X P20,000.00 - P 10,000.00

Total creditable input tax for the month - P18,000.00

B. The input tax attributable to sales to government for the month shall be computed as follows:

Input tax on sale to gov’t. - P 4,000.00

Ratable portion of the input tax not directly attributable to any activity:
Taxable sales to government / Total Sales X Amount of input tax not directly attributable
P100,000.00 / 400,000.00 X P20,000.00 - P 5,000.00

Total input tax attributable to sales to government - P 9,000.00

C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows:

Input tax on VAT-exempt sales - P 2,000.00

Ratable portion of the input tax not directly attributable to any activity:
VAT-exempt sales /Total Sales X Amount of input tax not directly attributable
P100,000.00 / 400,000.00 X P20,000.00 - P 5,000.00

Total input tax attributable to VAT-exempt sales - P 7,000.00

The table below shows a summary of the foregoing transactions of ERA Corporation:

Input VAT
not Excess Input Unreco
Input VAT Total Creditable
Output directly Net VAT Input VAT verable
directly Input Input
VAT Attributable Payable VAT for for input
Attributable VAT VAT
to any carryover/ refund VAT
Activity
Sale Subject to 10%
10,000 5,000 5,000 10,000 10,000 0 0 0 0
VAT

Sale Subject to 0% VAT 0 3,000 5,000 8,000 8,000 0 0 8,000 0

Sale of Exempt Goods 0 2,000 5,000 7,000 0 0 0 0 7,000*

Sale to Government
subject to 5% Final 10,000 4,000 5,000 9,000 5,000** 5,000*** 0 0 4,000*
withholding VAT

* These amounts are not available for input tax credit but may be recognized as cost or expense.
** Standard input VAT of 5% on sales to Government as provided in SEC. 4.114-2(a)
*** Withheld by Government entity as Final Withholding VAT

The input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be
treated as part of cost or expense.

Notwithstanding the foregoing provisions, for persons engaged in both zero-rated sales under Sec. 108(B)(6) of the
Tax Code and non-zero rated sales, the aggregate input taxes shall be allocated ratably between the zero-rated sale
and non-zero-rated sale.

SEC. 4.110-5. Determination of Input Tax Creditable during a Taxable Month or Quarter. -- The amount of input taxes
creditable during a month or quarter shall be determined in the manner illustrated above by adding all creditable
input taxes arising from the transactions enumerated under the preceding subsections of Sec. 4.110 during the month
or quarter plus any amount of input tax carried-over from the preceding month or quarter, reduced by the amount of
claim for VAT refund or tax credit certificate (whether filed with the BIR, the Department of Finance, the Board of
Investments or the BOC) and other adjustments, such as purchases returns or allowances, input tax attributable to
exempt sales and input tax attributable to sales subject to final VAT withholding.

SEC. 4.110-6. Determination of the Output Tax and VAT Payable and Computation of VAT Payable or Excess Tax
Credits. -- In a sale of goods or properties, the output tax is computed by multiplying the gross selling price as defined
in these Regulations by the regular rate of VAT. For sellers of services, the output tax is computed by multiplying the
gross receipts as defined in these Regulations by the regular rate of VAT.

In all cases where the basis for computing the output tax is either the gross selling price or the gross receipts, but the
amount of VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be comprised of the
gross selling price/gross receipts plus the correct amount of VAT. Hence, the output tax shall be computed by
multiplying the total invoice amount by a fraction using the rate of VAT as numerator and one hundred percent
(100%) plus rate of VAT as the denominator.

Accordingly, the input tax that can be claimed by the buyer shall be the corrected amount of VAT computed in
accordance with the formula herein prescribed.

There shall be allowed as a deduction from the output tax the amount of input tax deductible as determined under
Sec. 4.110-1 to 4.110-5 of these Regulations to arrive at VAT payable on the monthly VAT declaration and the
quarterly VAT returns, subject to the limitations set forth in Section 4.110-7.

SEC. 4.110-7. VAT Payable (Excess Output)t or Excess Input Tax.

(a) If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-
registered person.
Illustration:
For a given taxable quarter ABC Corp. has output VAT of 100 and input VAT of 80. Since output tax exceeds the input
tax for such taxable quarter, all of the input tax may be utilized to offset against the output tax. Thus, the net VAT
payable is 100 minus 80 = 20.

(b) If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the input tax
inclusive of input tax carried over from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output tax; Provided, That, the excess input tax shall be carried over to the succeeding
quarter or quarters; Provided, however, that any input tax attributable to zero-rated sales by a VATregistered person
may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal
revenue taxes, subject to the limitations as may be provided for by law, as well as, other implementing rules.

Illustration:
For a given taxable quarter XYZ Corp. has output VAT of 100 and input VAT of 110. Since input tax exceeds the output
tax for such taxable quarter, the 70% limitation is imposed to compute the amount of input tax which may be utilized.
The total allowable input tax which may be utilized is 70 (70% of the output tax). Thus, the net VAT payable is 100 less
70 = 30.

The unutilized input tax amounting to 40 is carried over to the succeeding month.

SEC. 4.110-8. Substantiation of Input Tax Credits. --

(a) Input taxes for the importation of goods or the domestic purchase of goods, properties or services is made in the
course of trade or business, whether such input taxes shall be credited against zero-rated sale, non-zero-rated sales,
or subjected to the 5% Final Withholding VAT, must be substantiated and supported by the following documents, and
must be reported in the information returns required to be submitted to the Bureau:

(1) For the importation of goods - import entry or other equivalent document showing actual payment of VAT on the
imported goods.

(2) For the domestic purchase of goods and properties – invoice showing the information required under Secs. 113
and 237 of the Tax Code.

(3) For the purchase of real property – public instrument i.e., deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc., together with VAT invoice issued by the seller.

(4) For the purchase of services – official receipt showing the information required under Secs. 113 and 237 of the Tax
Code.

A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit
only if it shows the information required under Secs. 113 and 237 of the Tax Code.

(b) Transitional input tax shall be supported by an inventory of goods as shown in a detailed list to be submitted to the
BIR.

(c) Input tax on “deemed sale” transactions shall be substantiated with the invoice required under Sec. 4.113-2 of
these Regulations.

(d) Input tax from payments made to non-residents (such as for services, rentals and royalties) shall be supported by a
copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in
behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor.

(e) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT.
SEC. 4.111-1. Transitional/Presumptive Input Tax Credits.--

(a) Transitional Input Tax Credits on Beginning Inventories Taxpayers who became VAT-registered persons upon
exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily register even if their
turnover does not exceed P1,500,000.00 (except franchise grantees of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity
of their VAT registration, on the following:

(1) goods purchased for resale in their present condition;

(2) materials purchased for further processing, but which have not yet undergone processing;

(3) goods which have been manufactured by the taxpayer;

(4) goods in process for sale; or

(5) goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person.

The transitional input tax shall be two percent (2%) of the value of the beginning inventory on hand or actual VAT paid
on such, goods, materials and supplies, whichever is higher, which amount shall be creditable against the output tax of
VAT-registered person.

The value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% transitional
input tax, excluding goods that are exempt from VAT under Sec. 109 of the Tax Code.

The threshold amount of P1,500,000.00 shall be adjusted, not later than January 31, 2009 and every three years
thereafter, to its present value using the Consumer Price Index as published by the NSO.

(b) Presumptive Input Tax Credits

Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar,
cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural
products which are used as inputs to their production.

As used in this paragraph, the term processing shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to
prepare it for special use to which it could not have been put in its original form or condition.

SEC. 4.112-1. Claims for Refund/Tax Credit Certificate of Input Tax. --

(a) Zero-rated and Effectively Zero-rated Sales of Goods, Properties or Services A VAT-registered person whose sales of
goods, properties or services are zero-rated or effectively zero-rated may apply for the issuance of a tax credit
certificate/refund of input tax attributable to such sales. The input tax that may be subject of the claim shall exclude
the portion of input tax that has been applied against the output tax. The application should be filed within two (2)
years after the close of the taxable quarter when such sales were made.

In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1) and (2) of the
Tax Code, the payments for the sales must have been made in acceptable foreign currency duly accounted for in
accordance with the BSP rules and regulations.

Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and in taxable (including sales subject
to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due
or paid cannot be directly and entirely attributed to any one of the transactions, only the proportionate share of input
taxes allocated to zero-rated or effectively zero-rated sales can be claimed for refund or issuance of a tax credit
certificate.

In the case of a person engaged in the transport of passenger and cargo by air or sea vessels from the Philippines to a
foreign country, the input taxes shall be allocated ratably between his zero-rated sales and non-zero-rated sales (sales
subject to regular rate, subject to final VAT withholding and VAT-exempt sales).

(b) Cancellation of VAT registration

A VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or
due to changes in or cessation of status under Sec. 106 (C) of the Tax Code may, within two (2) years from the date of
cancellation, apply for the issuance of a tax credit certificate for any unused input tax which he may use in payment of
his other internal revenue taxes; Provided, however, that he shall be entitled to a refund if he has no internal revenue
tax liabilities against which the tax credit certificate may be utilized.

(c) Where to file the claim for refund/tax credit certificate

Claims for refunds/tax credit certificate shall be filed with the appropriate BIR office (Large Taxpayers Service (LTS) or
Revenue District Office (RDO)) having jurisdiction over the principal place of business of the taxpayer; Provided,
however, that direct exporters may also file their claim for tax credit certificate with the One Stop Shop Center of the
Department of Finance; Provided, finally, that the filing of the claim with one office shall preclude the filing of the
same claim with another office.

(d) Period within which refund or tax credit certificate/refund of input taxes shall be made In proper cases, the
Commissioner of Internal Revenue shall grant a tax credit certificate/refund for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the application filed in
accordance with subparagraph (a) above.

In case of full or partial denial of the claim for tax credit certificate/refund as decided by the Commissioner of Internal
Revenue, the taxpayer may appeal to the Court of Tax Appeals (CTA) within thirty (30) days from the receipt of said
denial, otherwise the decision shall become final. However, if no action on the claim for tax credit certificate/refund
has been taken by the Commissioner of Internal Revenue after the one hundred twenty (120) day period from the
date of submission of the application with complete documents, the taxpayer may appeal to the CTA within 30 days
from the lapse of the 120-day period.

(e) Manner of giving refund

Refund shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his duly authorized
representative without the necessity of being countersigned by the Chairman, Commission on Audit (COA), the
provision of the Revised Administrative Code to the contrary notwithstanding; Provided, that refunds under this
paragraph shall be subject to post audit by the COA.

SEC. 4.113-1. Invoicing Requirements. --

(A) A VAT-registered person shall issue: --

(1) A VAT invoice for every sale, barter or exchange of goods or properties; and

(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.

Only VAT-registered persons are required to print their TIN followed by the word “VAT” in their invoice or official
receipts. Said documents shall be considered as a “VAT Invoice”
or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not
give rise to any input tax.
VAT invoice /official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the
duplicate to be retained by the seller as part of his accounting records.

(B) Information contained in VAT invoice or VAT official receipt. – The following information shall be indicated in VAT
invoice or VAT official receipt:

(1) A statement that the seller is a VAT-registered person, followed by his TIN;

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount
includes the VAT; Provided, That:

(a) The amount of tax shall be shown as a separate item in the invoice or receipt;

(b) If the sale is exempt from VAT, the term “VAT-exempt sale” shall be written or printed prominently on the invoice
or receipt;

(c) If the sale is subject to zero percent (0%) VAT, the term “zero-rated sale” shall be written or printed prominently on
the invoice or receipt;

(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-
rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable,
exempt and zero-rated components, and the calculation of the VAT on each portion of the sale shall be shown on the
invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-
rated components of the sale.

(3) In the case of sales in the amount of one thousand pesos (P1,000.00) or more where the sale or transfer is made to
a VAT-registered person, the name, business style, if any, address and TIN of the purchaser, customer or client, shall
be indicated in addition to the information required in (1) and (2) of this Section.

SEC. 4.113-2. Invoicing and Recording Deemed Sale Transactions.-- In the case of Sec. 4.106-7(a) (1) of these
Regulations, a memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use is
required. In the case of Sec. 4.106-7(a) (2) and (3) of these Regulations, an invoice shall be prepared at the time of the
occurrence of the transaction, which should include, all the information prescribed in Sec. 4.113-1. The data appearing
in the invoice shall be duly recorded in the subsidiary sales journal. The total amount of “deemed sale” shall be
included in the return to be filed for the month or quarter.

In the case of Sec. 4.106-7(a) (4) an inventory shall be prepared and submitted to the RDO who has jurisdiction over
the taxpayer’s principal place of business not later than 30 days after retirement or cessation from business.

An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales
journal. The invoice need not enumerate the specific items appearing in the inventory, but it must show the total
amount. It is sufficient to just make a reference to the inventory regarding the description of the goods. However, the
sales invoice number should be indicated in the inventory filed and a copy thereof shall form part of this invoice. If the
business is to be continued by the new owners or successors, the entire amount of output tax on the amount deemed
sold shall be allowed as input taxes. If the business is to be liquidated and the goods in the inventory are sold or
disposed of to VAT-registered buyers, an invoice or instrument of sale or transfer shall to prepared citing the invoice
number wherein the tax was imposed on the deemed sale. At the same time the tax paid corresponding to the goods
sold should be separately indicated in the instrument of sale.

Example: “A”, at the time of retirement, had 1,000 pieces of merchandise which was deemed sold at a value of
P20,000.00 with an output tax of P2,000.00. After retirement, “A” sold to “B”, 500 pieces for P12,000.00. In the
contract of sale or invoice, “A” should state the sales invoice number wherein the output tax on “deemed sale” was
imposed and the corresponding tax paid on the 500 pieces is P1,000.00, which is included in the P12,000.00, or he
should indicate it separately as follows:

Gross selling price - P 11,000.00

VAT previously paid on “deemed sale” - 1,000.00
Total - P 12,000.00

In this case, “B” shall be entitled only to P1,000 as input tax and not 1/11 of P12,000.00

SEC. 4.113-3. Accounting Requirements. -- Notwithstanding the provisions of Sec. 233, all persons subject to VAT
under Sec. 106 and 108 of the Tax Code shall, in addition to the regular accounting records required, maintain a
subsidiary sales journal and subsidiary purchase journal on which every sale or purchase on any given day is recorded.
The subsidiary journal shall contain such information as may be required by the Commissioner of Internal Revenue.

A subsidiary record in ledger form shall be maintained for the acquisition, purchase or importation of depreciable
assets or capital goods which shall contain, among others, information on the total input tax thereon as well as the
monthly input tax claimed in VAT declaration or return.

SEC. 4. 113-4. Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt. --

(A) Issuance of a VAT Invoice or VAT Receipt by a non-VAT person. – If a person who is not VAT-registered issues an
invoice or receipt showing his TIN, followed by the word “VAT”, the erroneous issuance shall result to the following:

(1) The non-VAT person shall be liable to:

(i) the percentage taxes applicable to his transactions;

(ii) VAT due on the transactions under Sec. 106 or 108 of the Tax Code, without the benefit of any input tax credit; and

(iii) a 50% surcharge under Sec. 248 (B) of the Tax Code;

(2) VAT shall be recognized as an input tax credit to the purchaser under Sec. 110 of the Tax Code, provided the
requisite information required under Subsection 4.113 (B) of these Regulations is shown on the invoice or receipt.

(B) Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a VAT-registered Person – If a VAT-
registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the words “VAT-exempt sale”, the transaction shall become taxable and the
issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase.

SEC. 4.113-5. Transitional Period. – Notwithstanding Sec. 4.113-1 (B) hereof, taxpayers may continue to issue VAT
invoices and VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with BIR
administrative practices that existed as of December 31, 2004 but subject to the Transitory and Other Provisions of
these Regulations

SEC. 4.114-1. Filing of Return and Payment of VAT. --

(A) Filing of Return. – Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross
sales or receipts within twenty five (25) days following the close of taxable quarter using the latest version of
Quarterly VAT Return.

The term “taxable quarter” shall mean the quarter that is synchronized to the income tax quarter of the taxpayer (i.e.,
the calendar quarter or fiscal quarter).

Amounts reflected in the monthly VAT declarations for the first two (2) months of the quarter shall still be included in
the quarterly VAT return which reflects the cumulative figures for the taxable quarter. Payments in the monthly VAT
declarations shall, however, be credited in the quarterly VAT return to arrive at the net VAT payable or excess input
tax/over-payment as of the end of a quarter.

Example. — Suppose the accounting period adopted by the taxpayer is fiscal year ending October 2003, the taxpayer
has to file monthly VAT declarations for the months of November 2002, December 2002, and for the months of
February, March, May, June, August, and September for Year 2003, on or before the 20th day of the month following
the close of the taxable month. His quarterly VAT returns corresponding to the quarters ending January, April, July,
and October 2003 shall, on the other hand, be filed and taxes due thereon be paid, after crediting payments reflected
in the Monthly VAT declarations, on or before February 25, May 25, August 25, and November 25, 2003, respectively.

The monthly VAT Declarations (BIR Form 2550M) of taxpayers whether large or nonlarge shall be filed and the taxes
paid not later than the 20th day following the end of each month.

For purposes of filing returns under the Electronic Filing and Payment System (EFPS) the taxpayers classified under the
following business industries shall be required to file Monthly VAT Declarations on or before the dates prescribed as
follows:

Business Industry Period for filing of Monthly VAT Declarations

Group A - 25 days following the end of the month

Insurance and Pension Funding
Activities Auxiliary to Financial Intermediation
Construction
Water Transport
Hotels and Restaurants
Land Transport

Group B - 24 days following the end of the month

Manufacture & Repair of Furniture
Manufacture of Basic Metals
Manufacture of Chemicals and Chemical Products
Manufacture of Coke, Refined Petroleum & Fuel Products
Manufacture of Electrical Machinery & Apparatus N.E.C.
Manufacture of Fabricated Metal Products
Manufacture of Food, Products & Beverages
Manufacture of Machinery & Equipment NEC
Manufacture of Medical, Precision, Optical Instruments
Manufacture of Motor Vehicles, Trailers & Semi-Trailers
Manufacture of Office, Accounting & Computing Machinery
Manufacture of Other Non-Metallic Mineral Products
Manufacture of Other Transport Equipment
Manufacture of Other Wearing Apparel
Manufacture of Paper and Paper Products
Manufacture of Radio, TV & Communication Equipment/Apparatus
Manufacture of Rubber & Plastic Products
Manufacture of Textiles
Manufacture of Tobacco Products
Manufacture of Wood & Wood Products
Manufacturing N.E.C.
Metallic Ore Mining
Non-Metallic Mining & Quarrying

Group C - 23 days following the end of the month

Retail Sale
Wholesale Trade and Commission Trade
Sale, Maintenance, Repair of Motor Vehicle,
Sale of Automotive Fuel
Collection, Purification And Distribution of Water
Computer and Related Activities
Real Estate Activities

Group D - 22 days following the end of the month

Air Transport
Electricity, Gas, Steam & Hot Water Supply
Postal & Telecommunications
Publishing, Printing & Reproduction of Recorded Media
Recreational, Cultural & Sporting Activities
Recycling
Renting of Goods & Equipment
Supporting & Auxiliary Transport Activities

Group E - 21 days following the end of the month

Activities of Membership Organizations Inc.
Health and Social Work
Public Admin & Defense Compulsory Social Security
Research and Development
Agricultural, Hunting, and Forestry
Farming of Animals
Fishing
Other Service Activities
Miscellaneous Business Activities
Unclassified

It is reiterated and clarified, however, that the return for withholding of VAT shall be filed on or before the tenth
(10th) day of the following month, which is likewise the due date for the payment of this type of withholding tax.

To erase any doubt and to ensure receipt by the BIR before midnight of the due dates prescribed above for the filing
of a return, the electronic return shall be filed on or before 10:00 p.m. of the above prescribed due dates.

For the electronic payment of tax for the returns required to be filed earlier under the staggered filing system, the
taxpayer upon e-filing shall, still using the facilities of EFPS, likewise give instruction to the Authorized Agent Bank
(AAB) to debit its account for the amount of tax on or before the due date for payment thereof as prescribed under
the prevailing/applicable laws/regulations.

For purposes of these Regulations, the industry of the taxpayer is its primary line of business or the primary purpose
of its existence as stated in the Articles of Incorporation, for corporate taxpayers.

(B) Payment of VAT

I. Advance Payment – The following are subject to the advance payment of VAT:

1. Sale of Refined Sugar.—

a. Requirement to Pay Advance VAT on Sale of Refined Sugar. – An advance VAT on the sale of refined sugar shall be
paid by the owner/seller to the BIR through an AAB or to the Revenue Collection Officer (RCO) or deputized City or
Municipal Treasurer in places where there are no AABs before any refined sugar can be withdrawn from any sugar
refinery/mill.

b. Prohibition of Withdrawal/Transfer of Ownership. – The proprietor or operator of a sugar mill/refinery shall not
allow any withdrawal of refined sugar from its premises without the advance payment of VAT and submission of proof
of such payment, except when the refined sugar is owned and withdrawn by the cooperative, in which case the
evidence of ownership, Authorization Allowing the Release and Sworn Statements provided in these Regulations must
be presented.

The Regional Director, upon the recommendation of the RDO of the district having jurisdiction over the physical
location of the sugar mill/refinery, may direct an internal revenue officer to be present during the withdrawal of
refined sugar from the premises of the sugar mill/refinery in order to confirm and/or verify that the requirements of
this Section are complied with.

c. Basis for Determining the Amount of Advance VAT Payment. –

i. Base Price. - The amount of advance VAT payment shall be determined by applying VAT rate of 10% on the
applicable base price of P850.00 per 50 kg. bag for refined sugar produced by a sugar refinery, and P 760.00 per 50 kg.
bag for refined sugar produced by a sugar mill.

ii. Subsequent Base Price Adjustments. – The base price upon which the advance payment of VAT will be computed
under the preceding paragraph shall be adjusted when deemed necessary by the Commissioner of Internal Revenue,
upon consultation with the Chairman of the Sugar Regulatory Administration.

d. Proof of Advance Payment. – The RDO concerned or the duly constituted unit in its place such as the Regional Task
Force on Sugar, as the Regional Director may decide, shall issue a Certificate of Advance Payment of VAT. This
certificate shall serve as the authority of the sugar mill/refinery to release the refined sugar described therein, and
together with the payment form (BIR Form No. 0605 or its equivalent) and the BIR-prescribed deposit slip duly
validated by the AAB, or the Revenue Official Receipt (ROR) issued by the RCO or the duly authorized City or Municipal
Treasurer, as the case may be, shall serve as proof of the payment for the advance VAT which can be credited against
VAT liability/payable in VAT return/s to be filed.

e. Proof of exemption from the advance payment. – If a duly-registered agricultural cooperative claims ownership of
refined sugar stocked in the sugar mill/refinery, the latter shall not release the said refined sugar unless an
Authorization Allowing the Release of Refined Sugar is first secured from the RDO or any duly constituted unit in its
place such as the Regional Task Force on Sugar created by the Regional Director as the latter may decide, of the BIR
office having jurisdiction over the physical location of the sugar mill/refinery. In securing such authorization, the
cooperative shall, in addition to that of satisfying VAT-exemption requirements under RR No. 20-2001, submit to the
RDO or Regional Task Force concerned a Sworn Statement to the effect that-

(1) The sugar has not been bid, sold or otherwise transferred in ownership, at anytime prior to the removal from the
refinery, to a trader or another entity; and

(2) The refined sugar is the property of the cooperative at the time of removal and it will not charge advance VAT or
any other tax to the future buyer.

If the cooperative invokes ownership over the sugar cane and the milled/refined sugar, the sugar quedans must be in
the name of the cooperative.

In the event the refined sugar is owned and/or withdrawn from the mill/refinery by a duly accredited and registered
agricultural cooperative of good standing and said cooperative presents the “Authorization Allowing the Release of
Refined Sugar”, the mill/refinery shall release the same but only after notifying the RDO or the assigned duty officer
with jurisdiction over the mill of the time and date of the release from the mill and the names and plate numbers of
the carrying trucks so that the release can be given proper supervision and that advance VAT is collected from the
transferee/buyer/customer should evidence show that the refined sugar has already been sold by the cooperative.

f. Information Returns to be Filed by the Proprietor or Operator of a Sugar Refinery and Cooperatives.
Every proprietor or operator of a sugar refinery or mill with production line accredited by the BIR to be capable of
producing sugar with a polarimeter reading of 99.5o or above, or mill producing sugar with polarimeter reading of
99.5o or above shall render an Information Return to the RDO having jurisdiction over the physical location of the said
sugar refinery/mill which issues the Certificate of Advance Payment of VAT or Authorization Allowing the Release of
Refined Sugar not later than the 10th day following the end of the month. The aforesaid Information Return shall
reflect the following information:

i. Name, TIN and RDO number of the Owner of the Refined Sugar;

ii. Number of bags of refined sugar released;

iii. Amount of Advance VAT Paid.

Likewise, every cooperative shall submit to RDO where it is registered a List of Buyers of Sugar together with a copy of
the Certificate of Advance Payment of VAT, made by each of the respective buyer appearing in the list, not later than
the 10th day following the end of the month with the following information:

i. Name, address, TIN and RDO No. of the Buyer;

ii. Number of bags of refined sugar sold/LKG;

iii. Amount of sales.

iv. Amount of Advance VAT paid by the buyer.

2. Sale of Flour. --

a. Requirement to Pay in Advance VAT on Sale of Flour and Time of Payment of Advance VAT. –

i. VAT on the sale of flour milled from imported wheat shall be paid prior to the release from the Bureau of Custom’s
custody of the wheat, which is imported and declared for flour milling.

ii. Purchases by flour millers of imported wheat from traders shall also be subjected to advance VAT and shall be paid
by the flour miller prior to delivery.

b. Prohibition of Withdrawal of Shipment Before Payment of Advance VAT.- Withdrawal, either partial or full of
imported wheat to be used in the milling of flour from custom’s custody shall not be allowed prior to payment of the
Advance VAT and submission of documentary proof of payment such as the Authority to Release Imported Goods
(ATRIG) issued by the BIR and the BIR Payment Form No. 0605 together with the deposit slip issued by the AAB or the
ROR issued by the RCO in the absence of an AAB.

Importation of wheat by any trader shall still be exempt from the payment of VAT.

However, in order to monitor all importation of wheat regardless of its intended use, the importer, whether miller or
trader, shall be required to secure ATRIG from the BIR.

The BOC will require the submission of the ATRIG by the importer before releasing the imported wheat from its
custody. For this purpose, importation of wheat shall be treated as an exception to the list of imported articles
exempted from the issuance of ATRIG as contained in the BIR-BOC Joint Memorandum Circular No. 1-2002 dated
September 16, 2002.

c. Securing the ATRIG and the Payment Form of the Advance VAT. – To afford expediency and to minimize delay in the
processing of ATRIG, the flour miller shall compute the Advance VAT payable and fill up the Payment Form Order (BIR
Form No. 0605). The flour miller shall pay the amount indicated in the Payment Order to the AAB of the LTS/Large
Taxpayers District Office (LTDO)/RDO where the flour miller is registered. In the absence of an AAB in the RDO where
the flour miller is registered, the payment shall be made to the RCO of said district.

Upon payment, the flour miller will then present a copy of the duly validated payment form to the RDO having
jurisdiction over the port of entry. Upon receipt of the properly validated and stamped Payment Order, the RDO
having jurisdiction over the port of entry shall issue the ATRIG covering the importation of wheat by the flour miller in
accordance with Revenue Memorandum Order No. 35-2002, which prescribes the guidelines for the issuance of ATRIG
for Excise and VAT purposes.

For purchases of wheat from traders, the flour miller shall be required to present proof of payment of advance VAT to
the trader prior to delivery or withdrawal of wheat from the latter’s premises.

d. Basis for Determining the Amount of Advance VAT Payment. –

i. Determination of advance VAT. – The amount of advance VAT payment shall be determined by applying VAT rate of
10% on the tax base.

ii. Tax Base – Considering that in the course of the milling process, not all wheat is turned into flour, the tax base shall
be as follows:

For wheat imported by the flour millers – 75% of the sum of: (a) the invoice value multiplied by the currency exchange
rate on the date of payment; (b) estimated customs duties and other charges prior to the release of the imported
wheat from customs custody, except for the advance VAT; and (c) Five percent (5%) on the sum of (a) and (b).

iii. Subsequent tax base adjustments – The tax base shall be adjusted whenever deemed necessary by the
Commissioner of Internal Revenue, after proper prior consultations with the flour milling industry associations and
upon approval by the Secretary of Finance.

e. Credit for Advance VAT Payments – The amount of advance VAT payments made by the flour miller shall be allowed
as tax credit against VAT liability/payable of the flour miller.

The Payment Order, together with the deposit slip issued by the AAB or the ROR issued by the RCO, shall serve as
proof for the credit of such advance payment.

f. Reporting Requirements – All importers of wheat regardless of use, whether miller or trader, shall submit quarterly
summary list of sales, purchases and importations.

(C) Short Period Return

Any person who retires from business with due notice to the BIR office where the taxpayer (head office) is registered
or whose VAT registration has been cancelled shall file a final quarterly return and pay the tax due thereon within
twenty five (25) days from the end of the month when the business ceases to operate or when VAT registration has
been officially cancelled; Provided, however, that subsequent monthly declarations/quarterly returns are still required
to be filed if the results of the winding up of the affairs/business of the taxpayer reveal taxable transactions. All
persons first registered under Secs. 9.236-1 of these Regulations shall be liable to VAT on the effective date of
registration stated in their Certificates of Registration; i.e., the first day of the month following their registration. If the
effective date of registration falls on the first or second month of the taxable quarter, initial monthly VAT declaration
shall be filed within twenty (20) days after the end of the month, and the initial quarterly return shall be filed on or
before the 25th day after the end of the taxable quarter. On the other hand, if the effective date of registration falls
on the third month of the taxable quarter the quarterly returns shall be filed on or before the 25th day of the month
following the end of the taxable quarter, and no monthly VAT declaration need be filed for the initial quarter.

(D) Where to File and Pay

The monthly VAT declaration and quarterly return shall be filed with, and VAT due thereon paid to, an AAB under the
jurisdiction of the Revenue District/BIR Office where the taxpayer (head office of the business establishment) is
required to be registered.

In cases where there are no duly accredited agent banks within the municipality or city, the monthly VAT declaration
and quarterly VAT return, shall be filed with and any amount due shall be paid to the RDO, Collection Agent or duly
authorized Treasurer of the Municipality/City where such taxpayer (head office of the business establishment) is
required to be registered.

The quarterly VAT return and the monthly VAT declaration, where no payment is involved, shall be filed with the
RDO/LTDO/Large Taxpayers Assistance Division (LTAD), Collection Agent, duly authorized Municipal/City Treasurer of
Municipality/City where the taxpayer (head office of the business establishment) is registered or required to be
registered.”

Taxpayers filing via EFPS shall comply with the provisions of the EFPS Regulations.

Only one consolidated quarterly VAT return or monthly VAT declaration covering the results of operation of the head
office as well as the branches for all lines of business subject to VAT shall be filed by the taxpayer, for every return
period, with the BIR office where said taxpayer is required to be registered.

SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. –

(a) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of
services taxed at 10% VAT pursuant to Secs. 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the
rate of five percent (5%) of the gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining five
percent (5%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its
political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the actual input VAT directly
attributable or ratably apportioned to such sales. Should actual input VAT exceed five percent (5%) of gross payments,
the excess may form part of the sellers’ expense or cost. On the other hand, if actual input VAT is less than 5% of gross
payment, the difference must be closed to expense or cost.

(b) The government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, as well as
private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold ten percent
(10%) VAT with respect to the following payments:

(1) Lease or use of properties or property rights owned by non-residents;

(2) Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents;
and

(3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall
use BIR Form No. 1600 - Remittance Return of VAT and Other Percentage Taxes Withheld.

VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to
the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-
registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary
substantiation for the claimed input tax or input VAT.

Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident
recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased
services, which may be treated either as an "asset" or "expense", whichever is applicable, of the resident withholding
agent.

VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding
was made.

SEC.4.114-3. Submission of Quarterly Summary List of Sales and Purchases. —

a. Persons Required to Submit Summary Lists of Sales/Purchases. —

(1) Persons Required to Submit Summary Lists of Sales. — All persons liable for VAT such as manufacturers,
wholesalers, service-providers, among others, with quarterly total sales/receipts (net of VAT) exceeding Two Million
Five Hundred Thousand Pesos (P2,500,000.00).

(2) Persons Required to Submit Summary Lists of Purchases. — All persons liable for VAT such as manufacturers,
service-providers, among others, with quarterly total purchases (net of VAT) exceeding One Million Pesos (P
1,000,000.00).

b. When and Where to File the Summary Lists of Sales/Purchases. — The quarterly summary list of sales or purchases,
whichever is applicable, shall be submitted in diskette form to the RDO or LTDO or LTAD having jurisdiction over the
taxpayer, on or before the twenty-fifth (25th) day of the month following the close of the taxable quarter (VAT
quarter)-calendar quarter or fiscal quarter. However, taxpayers under the jurisdiction of the LTS, and those enrolled
under the EFPS, shall, through electronic filing facility submit their Summary List of Sales/Purchases to the
RDO/LTDO/LTAD, on or before the thirtieth (30th) day of the month following the close of the taxable quarter.

c. Information that Must be Contained in the Quarterly Summary List of Sales to be Submitted. — The quarterly
summary list must contain the monthly total sales generated from regular buyers/customers, regardless of the
amount of sale per buyer/customer, as well as from casual buyers/customers with individual sales amounting to
P100,000.00 or more. For this purpose, the term "regular buyers/customers" shall refer to buyers/customers who are
engaged in business or exercise of profession and those with whom the taxpayer has transacted at least six (6)
transactions regardless of amount per transaction either in the previous year or current year. The term "casual
buyers/customers", on the other hand, shall refer to buyers/customers who are engaged in business or exercise of
profession but did not qualify as regular buyers/customers as defined in the preceding statement.

The foregoing paragraph, notwithstanding, information pertaining to sales made to buyers not engaged in business or
practice of profession (e.g., foreign embassies) may still be required from the seller.

The Quarterly Summary List of Sales to Regular Buyers/Customers and Casual Buyers/Customers and Output Tax shall
reflect the following:

(1) BIR-registered name of the buyer who is engaged in business/exercise of profession;

(2) TIN of the buyer (Only for sales that are subject to VAT);

(3) Exempt Sales;

(4) Zero-rated Sales;

(5) Sales Subject to VAT (exclusive of VAT);

(6) Sales Subject to Final VAT Withheld; and

(7) Output Tax (VAT on sales subject to 10%).

(The total amount of sales shall be system-generated)

d. Information that must be Contained in the Quarterly Summary List of Purchases. — The following information must
be indicated in the following quarterly summary schedules of purchases:

(1) The Quarterly Summary List of Local Purchases and Input Tax. –

a. BIR-registered name of the seller/supplier/service-provider;

b. Address of seller/supplier/service-provider;

c. TIN of the seller;

d. Exempt Purchases;

e. Zero-rated Purchases;

f. (i) Purchases Subject to VAT (exclusive of VAT) — on services;

(ii) Purchases Subject to VAT (exclusive of VAT) — on capital goods; and

(iii) Purchases Subject to VAT (exclusive of VAT) — on goods other than capital goods

(iv) Purchases Subject to Final VAT Withheld

g. Creditable Input Tax; } - (to be computed not on a per supplier basis but on a per month basis)

h. Non-Creditable Input Tax.} - (to be computed not on a per supplier basis but on a per month basis)

(The total amount of purchases shall be system-generated)

(2) The Quarterly Summary List of Importations. –

(a) The import entry declaration number;

(b) Assessment/Release Date;

(c) The date of importation;

(d) The name of the seller;

(e) Country of Origin;

(f) Dutiable Value;

(g) All Charges Before Release From Customs' Custody;

(h) Landed cost:

(i) Exempt;

(ii) Taxable (Subject to VAT);

(i) VAT paid;

(j) Official Receipt (OR) Number of the OR evidencing payment of the tax; and

(k) Date of VAT payment

For the claimed input tax arising from services rendered in the Philippines by nonresidents, no summary list is required
to be submitted.

e. Rules in the Presentation of the Required Information in the Summary Schedules. —

(1) The summary schedules of sales to regular buyers/customers shall not only refer to sales subject to VAT but shall
likewise include sales subject to final VAT withheld, exempt and zero-rated sales.

(2) The summary schedule of purchases likewise shall not only refer to purchases subject to VAT but also to exempt
and zero-rated purchases.

(3) The names of sellers/suppliers/service-providers and the buyers/customers shall be alphabetically arranged and
presented in the schedules.

(4) All the summary lists or schedules mentioned above for submission to the BIR shall mention as heading or caption
of the report/list/schedule the BIR-registered name, trade name, address and TIN of the taxpayer-filer and the
covered period of the report/list/schedule.

(5) Failure to mention the TIN of the buyer in the "Schedule of Sales" may be a ground for the audit of the records of
the buyer or of both the buyer and the seller.

(6) The quarterly summary lists shall reflect the consolidated monthly transactions per seller/supplier or buyer for
each of the three (3) months of VAT taxable quarter of the taxpayer as reflected in the quarterly VAT return except the
summary list of importation which shall show the individual transactions for the month for each month of the taxable
quarter/VAT quarter. Thus, the period covered by the aforementioned summary list required to be submitted to the
BIR shall be the covered period of the corresponding quarterly VAT return.

(7) The Quarterly Summary List of Sales and Purchases shall be submitted in magnetic form using 3.5-inch floppy
diskettes following the format provided in Subsection (g) hereof.

To provide for a clear-cut rule on the mandatory submission of the said summary lists in diskette form, the following
shall be observed:

(a) Submission of said summary lists in diskette form shall be required for the taxable quarter where the total sales
(taxable-net of VAT, zero-rated, exempt) exceed Two Million Five Hundred Thousand (P2,500,000.00) or total
purchases (taxable-net of VAT, zero-rated, exempt) exceed One Million Pesos (P1,000,000.00). Thus, if the total
quarterly sales amounted to P3,000,000.00 and the total quarterly purchases amounted to P900,000.00, the quarterly
summary list to be submitted shall only be for sales and not for purchases. On the other hand, if the total quarterly
sales amounted to P2,000,000.00 and the total quarterly purchases amounted to P1,500,000 then the quarterly
summary list to be submitted shall only be for purchases and not for sales.

(b) Once any of the taxable quarters total sales and/or purchases exceed the threshold amounts as provided above,
VAT taxpayer, in addition to the requirement that the summary list for such quarter be submitted in accordance with
the herein prescribed electronic format, shall be further required to submit the summary lists for the next three (3)
succeeding quarters, still in accordance with the herein prescribed electronic format, regardless of whether or not
such succeeding taxable quarter sales and/or purchases exceed the herein set threshold amounts of P2,500,000.00 for
sales and P1,000,000.00 for purchases.

f. The threshold amounts as herein set for sales and purchases may be increased/modified by the Commissioner of
Internal Revenue if it is necessary for the improvement in tax administration.

g. Required Procedure and Format in the Submission of Quarterly List of Sales/Purchases. — The Quarterly Summary
List of Sales and Purchases as required above shall be submitted directly to the RDO or LTDO or LTAD having
jurisdiction over the taxpayer on the same date when the Quarterly VAT return is due for filing with and the tax
thereon due for payment to the appropriate AAB or BIR Office, whichever is applicable. The list shall contain all the
information required in the preceding paragraphs and shall conform to the electronic format to be prescribed in a
Revenue Memorandum Circular (RMC), using any of the
following:

(1) Excel format;

(2) Taxpayer's own extract program; or

(3) The Data Entry Module developed by the BIR that will be available upon request or by downloading from the BIR's
web site at http://www.bir.gov.ph, with the corresponding job aid.

For those who would choose either option 1 or option 2, such taxpayers shall use a validation module developed by
the BIR, which can either be downloaded from the BIR website or made available in diskette form upon request.

Only diskettes readable upon submission shall be considered as duly filed/submitted Quarterly Summary List of Sales
and Output Tax/Purchases and Input Tax/importations.

Failure to submit the aforementioned quarterly summary lists in the manner prescribed above shall be punishable
under the pertinent provisions of the Tax Code and regulations and shall trigger an audit of taxpayer's VAT liabilities.

(h) Issuance of Certificate of VAT Withheld at Source

The certificate or statement to be issued is the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), a copy
of which should be issued to the payee.

(i) Penalty Clause

(1) In addition to the penalties imposed for other violations of the withholding tax regulation, payors reported by the
payees for not having issued the Certificate of Tax Withheld at Source, which report has been validated to be correct,
shall be subject to mandatory audit on their withholding tax liabilities and to other appropriate sanctions under the
Tax Code and applicable regulations.

(2) Penalties in case of failure to submit quarterly summary list of sales and purchases. - In accordance with the
provisions of the Tax Code of 1997, a person who fails to file, keep or supply a statement, list, or information required
herein on the date prescribed therefor shall pay, upon notice and demand by the Commissioner of Internal Revenue,
an administrative penalty of One Thousand Pesos (P1,000.00) for each such failure, unless it is shown that such failure
is due to reasonable cause and not to willful neglect. For this purpose, the failure to supply the required information
for each buyer or seller of goods and services shall constitute a single act or omission punishable hereof. However, the
aggregate amount to be imposed for all such failures during a taxable year shall not exceed Twenty-five Thousand
Pesos (P25,000.00).

(3) In addition to the imposition of the administrative penalty, willful failure by such person to keep any record and to
supply the correct and accurate information at the time or times as required herein, shall be subject to the criminal
penalty under the relevant provisions of the Tax Code (e.g., Sec. 255, Sec. 256, etc.,), upon conviction of the offender.

(4) The imposition of any of the penalties under the Tax Code and the compromise of the criminal penalty on such
violations, notwithstanding, shall not in any manner relieve the violating taxpayer from the obligation to submit the
required documents.

(5) Finally, the administrative penalty shall be imposed at all times, upon due notice and demand by the Commissioner
of Internal Revenue. A subpoena duces tecum for the submission of the required documents shall be issued on the
second offense. A third offense shall set the motion for a criminal prosecution of the offender.

SEC. 4.115-1. Administrative and Penal Provisions. --

(a) Suspension of business operations. – In addition to other administrative and penal sanctions provided for in the
Tax Code and implementing regulations, the Commissioner of Internal Revenue or his duly authorized representative
may order suspension or closure of a business establishment for a period of not less than five (5) days for any of the
following violations:

(1) Failure to issue receipts and invoices.

(2) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code.

(3) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable
quarter.

(4) Failure of any person to register as required under the provisions of Sec. 236 of the Tax Code.

(b) Surcharge, interest and other penalties. – The interest on unpaid amount of tax, civil penalties and criminal
penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code.

SEC. 4.116-1. Tax on Persons Exempt from VAT. -- Any person, whose sales or receipts are exempt under Sec. 109 (1)
(V) of the Tax Code from the payment of VAT and who is not a VAT-registered person shall pay a tax equivalent to
three percent (3%) of his gross monthly sales or receipts; Provided, that cooperatives shall be exempt from the three
(3%) gross receipts tax herein imposed.

SEC. 9.236-1. Registration of VAT Taxpayers. --

(a) In general. — Any person who, in the course of trade or business, sells, barters, exchanges goods or properties, or
engages in the sale of services subject to VAT imposed in Secs. 106 and 108 of the Tax Code shall register with the
appropriate RDO using the appropriate BIR forms and pay an annual registration fee in the amount of Five Hundred
Pesos (P500) using BIR Form No. 0605 for every separate or distinct establishment or place of business (save a
warehouse without sale transactions) before the start of such business and every year thereafter on or before the 31st
day of January.

“Separate or distinct establishment” shall mean any branch or facility where sale transactions occur.

“Branch” means a fixed establishment in a locality which conducts sales operation of the business as an extension of
the principal office.
“Principal place of business” refers to the place where the head or main office is located as appearing in the
corporation’s Articles of Incorporation. In the case of an individual, the principal place of business shall be the place
where the head or main office is located and where the books of accounts are kept.

“Warehouse” means the place or premises where the inventory of goods for sale are kept and from which such goods
are withdrawn for delivery to customers, dealers, or persons acting in behalf of the business.

Any person who maintains a head or main office and branches in different places shall register with the RDO which
has jurisdiction over the place wherein the main or head office or branch is located. However, the registration fee shall
be paid to any accredited bank in the Revenue District where the head office or branch is registered provided that in
areas where there are no accredited banks, the same shall be paid to the RDO, collection agent, or duly authorized
treasurer of the municipality where each place of business or branch is situated.

Each VAT-registered person shall be assigned only one TIN. The branch shall use the 9-digit TIN of the Head Office plus
a 3-digit Branch Code.

“VAT-registered person” refers to any person registered in accordance with this section.

“VAT-registrable person” refers to any person who is required to register under the provisions of this section but failed
to register.

(b) Mandatory:

Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or engages in the
sale or exchange of services shall be liable to register if:

i. His gross sales or receipts for the past twelve (12) months, other than those that are exempt under Sec. 109 (1)(A) to
(U) of the Tax Code, have exceeded One million five hundred thousand pesos (P1,500,000.00); or

ii. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than
those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, will exceed One million five hundred thousand
pesos (P1,500,000.00).

Every person who becomes liable to be registered under paragraph (1) of this subsection shall register with the RDO
which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee
prescribed in subsection 9.236-1(a) hereof. If he fails to register, he shall be liable to pay the output tax under Secs.
106 and/or 108 of the Tax Code as if he were a VAT-registered person, but without the benefit of input tax credits for
the period in which he was not properly registered.

Moreover, franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding
calendar year exceeded P10,000,000.00, shall register within thirty (30) days from the end of the calendar year.

(c) Optional VAT Registration. —

(1) Any person who is VAT-exempt under Sec. 4.109-1 (B) (1) (V) not required to register for VAT may, in relation to
Sec. 4.109-2, elect to be VAT-registered by registering with the RDO that has jurisdiction over the head office of that
person, and pay the annual registration fee of P500.00 for every separate and distinct establishment.

(2) Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions)
may opt that the VAT apply to his transactions which would have been exempt under Section 109(1) of the Tax Code,
as amended. [Sec. 109(2)]

(3) Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do
not exceed ten million pesos (P10,000,000.00) derived from the business covered by the law granting the franchise
may opt for VAT registration.

This option, once exercised, shall be irrevocable. (Sec. 119, Tax Code) Any person who elects to register under this
subsections (1) and (2) above shall not be allowed to cancel his registration for the next three (3) years.

The above-stated taxpayers may apply for VAT registration not later than ten (10) days before the beginning of the
calendar quarter and shall pay the registration fee prescribed under sub-paragraph (a) of this Section, unless they
have already paid at the beginning of the year. In any case, the Commissioner of Internal Revenue may, for
administrative reason deny any application for registration. Once registered as a VAT person, the taxpayer shall be
liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration.

SEC. 9.236-2. Registration of Non-VAT or Exempt Taxpayer. – Every person, other than those required to be registered
as VAT persons, engaged in any business, shall, on or before the commencement of his business, or whenever he
transfers to another revenue district, register with the RDO concerned within 10 days from the commencement of
business or transfer in the manner prescribed under this Section and shall pay the applicable registration fee of Five
Hundred Pesos (P500.00) for every separate or distinct establishment or place of business, if he has not paid the
registration fee in the beginning of the taxable year. The fee shall be paid to any AAB, where each place of business or
branch is situated. In areas where there is no AAB, such person shall pay the fee prescribed herein with the RDO, RCO,
or authorized municipal treasurer. The registration shall contain his name or style, place of residence, business, the
place where such business is carried on, and such information as may be required by the Commissioner of Internal
Revenue in the form prescribed therefor.

The following are required to register as non-VAT persons and pay the applicable registration fee:

1) VAT-exempt persons under Sec. 109 of the Tax Code who did not opt to register as VAT taxpayers;

2) Individuals engaged in business where the gross sales or receipts do not exceed One Hundred Thousand Pesos
P100,000.00 during any 12-month period. They are required to register but will not be made to pay the registration
fee of FIVE HUNDRED PESOS (P500.00).

3) Non-stock, non-profit organizations and associations engaged in trade or business whose gross sales or receipts do
not exceed P1,500,000.00 for any 12-month period or in an amount as adjusted thereafter every three (3) years
depending on the annual Consumer Price Index as published by the NSO;

4) Cooperatives other than electric cooperatives. However, they are not required to pay the registration fee imposed
in these Regulations.

SEC. 9.236-3. Application for Registration. -- The application shall be filed with the RDO where the principal place of
business, branch, storage place or premises is located, as the case may be, before commencement of business or
production or qualification as a withholding agent. In the case of storage places, the application shall be filed within
thirty (30) days from the date the aforesaid premises have been used for storage.

In any case, the Commissioner of Internal Revenue may, for administrative and meritorious reasons, deny or revoke
any application for registration.

SEC. 9.236-4. Certificate of Registration. -- The certificate shall be issued to the applicant by the BIR office concerned
upon compliance with the requirements for registration.

SEC. 9-236-5. Posting of Registration Certificate. -- Every registered taxpayer shall post or exhibit his Registration
Certificate and duly validated Registration Fee Return at a conspicuous place in his principal place of business and at
each branch in such a way that is learly and easily visible to the public.

SEC. 9.236-6. Cancellation of VAT Registration. -- A VAT-Registered person may cancel his registration for VAT if:

a. He makes written application and can demonstrate to the Commissioner of Internal Revenue’s satisfaction that his
gross sales or receipts for the following twelve (12) months, other than those that are exempt under Sec. 109 (1) (A) to
(U) of the Tax Code, will not exceed One Million Five Hundred Thousand pesos (P1,500,000.00); or

b. He has ceased to carry on his trade or business, and does not expect to recommence any trade or business within
the next twelve (12) months.

Some other instances where a VAT-registered person may apply for cancellation of registration are:

1. A change of ownership, in the case of a single proprietorship;

2. Dissolution of a partnership or corporation;

3. Merger or consolidation with respect to the dissolved corporation(s);

4. A person who has registered prior to planned business commencement, but failed to actually start his business;

Some instances where taxpayer will update his registration by submitting a duly accomplished Registration Update
Form (BIR Form No. 1905):
1. A person’s business has become exempt in accordance with Sec. 4.109-1(B) (1) of these Regulations,

2. A change in the nature of the business itself from sale of taxable goods and/or services to exempt sales and/or
services;

3. A person whose transactions are exempt from VAT who voluntarily registered under VAT system, who after the
lapse of three years after his registration, applies for cancellation of his registration as such; and

4. A VAT-registered person whose gross sales or receipts for three consecutive years did not exceed P1,500,000.00
beginning November 1, 2005, which amount shall be adjusted to its present value every three years using the
Consumer Price Index, as published by the NSO. Upon updating his registration, the taxpayer shall become liable to
the percentage tax imposed in Sec. 116 of the Tax Code. A short period return for the remaining period that he was
VAT-registered shall be filed within twenty five (25) days from the date of cancellation of his registration.

For purposes of the percentage tax, the taxpayer shall file a monthly return. An initial return shall be filed for the
month following the month of cancellation / update of his registration.

All applications for cancellation of registration due to closure/cessation or termination of business shall be subjected
to immediate investigation by the BIR office concerned to determine the taxpayer’s tax liabilities.

Any minor change in the original registration (such as change of address within the same RDO, typographical errors,
and etc.) which may not necessitate cancellation of the registration shall be effected by accomplishing the Registration
Update Form (BIR Form No. 1905).

Any person, who opted to be registered as a VAT taxpayer, may apply for cancellation of such registration. However,
the optional registration as a VAT taxpayer of a franchise grantee of radio and/or television broadcasting whose gross
receipts for the preceding year did not exceed P10,000,000.00 shall not be revocable.

TRANSITORY AND OTHER PROVISIONS

(a) Transitional Input Tax Credit –

(i) For goods, materials or supplies not for sale but purchased for use in business in their present condition, which are
not intended for further processing and are on hand as of the last day immediately preceding the effectivity of RA No.
9337, a transitional input tax equivalent to 2% of the value of the beginning inventory on hand or actual VAT paid on
such goods, materials or supplies, whichever is higher, shall be allowed.

(ii) For goods purchased with the object of resale in their present condition, the same transitional input tax equivalent
to 2% of the value of such goods unsold or actual VAT paid thereon whichever is higher, as of the day immediately
preceding the effectivity of RA No. 9337 shall be allowed which amount may also be credited against the output tax of
a VAT-registered person.

For this purpose, an inventory as of the day immediately preceding the effectivity of RA No. 9337of such goods or
supplies showing the quantity, description and amount should be filed with the RDO or concerned BIR office not later
than thirty (30) days from the effectivity of RA No. 9337.

In recognizing transitional input tax as of the day immediately preceding the effectivity of RA No. 9337, a journal entry
should be made in the books debiting the input tax account and crediting the inventory account.

The term “goods” herein mentioned does not include capital goods.

(b) Unused invoice or receipts. – Taxpayers who changed status from NON-VAT to VAT or from VAT to NON-VAT as a
result of the implementation of RA No. 9337 should submit within thirty (30) days from effectivity of the law an
inventory of unused invoices or receipts as of the day immediately preceding the effectivity of RA No. 9337 indicating
the number of booklets and the corresponding serial numbers. Unused non-VAT invoices/receipts shall be allowed for
use in transactions subject to VAT provided the phrase “VAT –registered as of [effectivity date of RA No. 9337]” is
stamped on all copies thereof. Likewise, unused VAT invoices/receipts shall be allowed in VAT-exempt transactions
provided the phrase “Non-VAT-registered as of _________________” is stamped on all copies thereof. These unused
invoices or receipts with the proper stamp shall be allowed for use in transactions subject to VAT/Non-VAT up to
December 31, 2005.

(c) Billed but uncollected sale of services. – Amounts due on sale of services becoming liable to VAT under RA No. 9337
rendered before the effectivity of RA No. 9337, payments of which are receivable on or after the effectivity of RA No.
9337, shall be considered as accrued as of the day immediately preceding the effectivity of RA No. 9337 for the
purpose of VAT exemption and payment of any applicable percentage tax, if any, or VAT exemption as the case may
be, subject to the following conditions:

(i) Information return to be filed on or before sixty (60) days from the effectivity of RA No. 9337 showing the name(s)
of the contractor(s), client(s), customer(s) and the amount(s) of the contract price outstanding as of the day
immediately preceding the effectivity of RA No. 9337, and containing a declaration of the obligation to pay the
applicable percentage tax due if any;

(ii) The seller billed the unpaid amount before the effectivity of RA No. 9337, and a copy of such billing is attached to
the information return required in (i) hereof;

(iii)The seller has recorded in his books of accounts as of the day immediately preceding the effectivity of RA No. 9337
the amount receivable; and

(iv) The seller files on or before the 20th day after each month, the regular percentage tax return for the payment of
the percentage tax on payments received after the effectivity of RA No. 9337.

In the case of sale of electricity, if a billing period covers power consumption for the period before and after the
effectivity of RA No. 9337, 10% VAT shall be applied only to electricity consumption for the period on or after the
effectivity of RA No. 9337. The electricity consumption before the effectivity of RA No. 9337 shall not be subject to
10% VAT but to the applicable franchise/percentage tax.

Failure to comply with the above-stated conditions shall automatically subject the gross receipts to the VAT.

(d) Importation. -- Goods previously VAT-exempt but became subject to VAT under RA No. 9337 imported into the
Philippines prior to the effectivity of RA No. 9337 shall remain VAT-exempt. On the other hand, goods previously VAT
taxable but became VATexempt under RA No. 9337 imported into the Philippines prior to the effectivity of RA No.
9337 shall, upon withdrawal from customs custody, be subject to VAT.

(e) Clarificatory Rules to be Issued through Revenue Memorandum Circulars (RMCs)- The Commissioner of Internal
Revenue shall issue Revenue Memorandum Circulars to clarify the rules of implementation affecting certain
peculiarities of each industry groupings such as but not limited to the power sector, oil and petroleum, and
telecommunications.

REPEALING CLAUSE
All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are contrary
to and inconsistent with any provisions of R.A. No. 9337 are deemed repealed, amended or modified. All other
issuances and rules and regulations or parts thereof which are contrary to and inconsistent with any provisions of
these Regulations are deemed repealed, amended or modified.

No VAT exemptions may be granted by the BIR except those explicitly stated in Sec. 109(1) of the Tax Code, as
amended by RA No. 9337. All previous exemptions granted through laws, acts, decrees, executive orders, issuances
and rules and regulations or parts thereof promulgated or issued prior to the effectivity of RA No. 9337 are deemed
repealed, amended or modified accordingly.
SEPARABILITY CLAUSE
If any of the provisions of these regulations is subsequently declared unconstitutional, the validity of the remaining
provisions hereof shall remain in full force and effect

EFFECTIVITY
These Regulations shall take effect on November 1, 2005.

(Original Signed)
MARGARITO B. TEVES
Secretary
Department of Finance
Recommending Approval:
(Original Signed)
JOSE MARIO C. BUÑAG
OIC-Commissioner of Internal Revenue

i. Domestic
ii. Resident
iii. Non-Resident

b. Special Corporations

i. Private Educational Intitutions and Non-Profit Hospitals

a. Constitution

Article XIV. Section 4 (3). All revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to
such exemptions, subject to the limitations provided by law, including restrictions on dividends and
provisions for reinvestment.

b. Finance Department Order 137-87 –See Part 4

c. Department Order 149-95, November 24, 1995: Non-profit/ Non Stock Educational Institutions regarding exemption
of interest from deposits and deposit substitute – See Part 5
 December 15, 1987

DOF DEPARTMENT ORDER NO. 137-87

SUBJECT : Rules and Regulations Implementing Section 4(3), Article XIV

of the New Constitution —

Pursuant to Section 79(b) of the Revised Administrative Code, the following

rules and regulations are hereby promulgated for the effective implementation of the
provisions of the New Constitution, to wit:

"Section 4(3), Article XIV — All revenues and assets of non-stock,

non-profit educational institution used actually, directly and exclusively for
educational purposes, shall be exempt from taxes and duties . . ."

SECTION 1. Scope —

This set of guidelines shall govern the availment of exemption from the
payment of internal revenue taxes and customs duties provided for under the National
Internal Revenue Code, and the Tariff and Customs Code, both as amended.

1.1 Educational institution — means a non-stock, non-profit

corporation/association duly registered under Philippine law, and
operated exclusively for educational purposes, maintained and
administered by private individuals or groups, and offering formal
education, issued a permit, to operate by the Department of
Education, Culture and Sports (DECS) in accordance with existing
laws and regulations.

1.2. Educational Activity Includes —

1.2.1. Instructing or training of individuals either through formal

education. Formal education refers to the institutionalized,
chronologically graded and hierarchically structured
educational system at all levels of education.

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 1.3. Utilization by Educational Institution — means

1.3.1. Any amount in cash or in kind (including administrative

expenses) paid or utilized to accomplish one or more
purposes for which it was created or organized, including
grant of scholarship to deserving students and professorial
chairs for the enhancement of professional course.

1.3.2. Any amount paid to acquire an asset used (or held for use)
directly in carrying out one or more purposes for which the
educational institution was created or organized, including
the upgrading of existing facilities to support the conduct of
the above activities.

1.3.3. Any amount in cash or in kind invested in an activity related

to the educational purposes for which it was created or
organized.

1.3.4. Any amount set aside for a specific project subject/ prior to
approval of the Commissioner of Internal Revenue in
writing. Application thereof must contain the following:

(i) the nature and purpose of the specific project and the
amount programmed therefor;

(ii) a detailed description of the project, including

estimated costs, sources of any future funds expected
to be used for completion of the project, and the
location or locations (general or specific) of any
physical facilities to be acquired or constructed as
part of the project; and

(iii) a statement by an authorized official of the

corporation or association that the amount to be set
aside will actually be disbursed for the specific
project within two (2) years from the date of approval
by the Commissioner of Internal Revenue, unless the
nature of the project is such that the two (2) year
period is impracticable.

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 1.3.5. Any amount set aside shall be evidenced by book entries
and documents showing evidence of deposits or
investments, including investment of the funds so set aside,
or other documents that the Commissioner may require.

1.4. Non-Profit — means no part of the income inures directly or

indirectly to any individual or member.

1.5. Operated exclusively — means primarily engaged in activities

which accomplish the educational purposes. To meet the
operational test, an organization must be engaged in activities
furthering "public purposes" rather than private interests. It must
not be operated for the benefit of designated individuals or the
persons who created it.

1.6. Actually, Directly and Exclusively Used. — shall refer to the

purpose for which the property is principally utilized for
educational purposes.

1.7. Revenues — refer to income derived in pursuance of its purpose as

an educational institution.

1.8. Assets — Any owned physical object (tangible) or right

(intangible) having a money value; an item or source of wealth,
expressed in terms of its cost, depreciated cost, or less frequently,
some other value; hence, any cost benefiting a future period.

SECTION 2. Coverage of Exemption Under Section 4(3), Article XIV of

the New Constitution —

The exemption herein contemplated refers to internal revenue taxes and

customs duties, in appropriate cases, imposed by the national government on all
revenues and assets of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes.

2.1. Non-stock, non-profit educational institutions are exempt from tax

on all revenues derived in pursuance of its purpose as an
educational institution and used actually, directly, and exclusively
for educational purposes. They shall, however, be subject to
internal revenue taxes on income from trade, business or other
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 activity the conduct of which is not related to the exercise of
performance by such educational institution of its educational
purpose or function.

2.2. Revenues derived from and assets used in the operations of

cafeterias/canteens, dormitories, bookstores are exempt from
taxation provided they are owned and operated by the educational
institution as ancillary activities and the same are located within
the school premises.

2.3. Revenues derived from and assets used in the operations of

hospitals are exempt from taxation provided they are owned and
operated by the educational institution as an indispensable
requirement in the operation and maintenance of its medical
school/college/institute.

SECTION 3. Non-Exemption from the Withholding Taxes. — Non stock

educational institutions are constituted as withholding agents of the government to
insure that the withholding tax liability of their employees, and other taxpayers to
whom income payments are made, are complied with.

SECTION 4. Filing of Return — Educational institutions shall file

information return annually on or before the 15th day of the 4th month following the
end of the taxable year. cdasia

SECTION 5. Examination of Books of Accounts, etc. — The books of

accounts and other pertinent records of educational institutions shall be subject to
examination by the Bureau of Internal Revenue, for the purpose of ascertaining
whether such organizations or institutions have been complying with the conditions
under which they have been granted tax exemption and their tax liability, if any,
pursuant to Section 275 of the Tax Code, as amended.

SECTION 6. Availment of Duty and Tax-Free Entry of Imported Articles.

—

In order to avail of the duty and tax-free entry of imported articles under
Section 4(3), Article XIV of the New Constitution, the following guidelines are
hereby prescribed in addition to the usual import requirements:

6.1. The importer shall, prior to the importation, apply with the

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 Department of Education, Culture and Sports for duty and tax
exemption executed under oath by a duly authorized representative
of the institution and supported by the following documents:

6.1.1. A copy of the Charter or other evidence of the character of

the institution for which the articles are imported and the
original of any order given by the importer.

6.1.3. Should the importation be made through a dealer or

indentor, an affidavit of both the dealer or indentor and the
ultimate consignee whose identity is indicated in the
shipping documents. Such affidavit shall state the party who
placed the order, the number of items and their respective
values and such other matters as are related to the
transaction. cdt

6.2. The Department of Education, Culture and Sports shall verify and
certify that the educational institution is non-stock and non-profit
and that the imported articles are to be used actually, directly and
exclusively for educational purposes and shall indorse the
application for duty and tax exemption to the Department of
Finance with appropriate recommendation.

6.3. The Department of Finance, based on the recommendation of the

Department of Education, Culture and Sports, may allow the tax
and/or duty-free entry of articles referred to under Section 4(3),
Article XIV of the New Constitution upon compliance with the
requirements herein indicated;

6.4. This does not, however, preclude the Department of Finance from
requiring the submission of additional documents/undertakings
should the need arise;

6.5. Articles entered tax and/or duty-free by educational institutions

may not be sold, transferred or otherwise disposed of in any
manner whatsoever to any person without the prior approval of the
Department of Finance. Any transferee of said article shall be
deemed the importer thereof, and the same shall be assessed at its
entered value without depreciation. aisadC

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 SECTION 7. Applicability of Existing Rules of Exemption of Charitable
Institutions, etc. —

The existing rules and regulations on the exemptions from internal revenue tax
and customs duties of religious and charitable institutions shall remain applicable to
said institutions/organizations.

SECTION 8. Penalty. —

The penalty provided for under existing laws shall be imposed for any violation
of the provisions. cdtai

SECTION 9. Appeal to the Department. —

All matters arising out of or in connection with the implementation of this

Order may be brought on appeal to the Department for review.

SECTION 10. Repealing Clause. —

All orders, circulars, rules and regulations inconsistent herewith are hereby
revoked or modified accordingly.

SECTION 11. Effectivity. —

This Order shall take effect upon approval.

SECTION 12. Approved. —

December 16, 1987, Manila, Philippines.

(SGD.) VICENTE R. JAYME

Secretary

MEMORANDUM for —
Secretary Jayme
Thru-Undersecretary Fernando
Re : Proposed Rules and Regulations Implementing Section 4(3) of
Article XIV of the New Constitution —

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 Proposed rules and regulations have been revised to reasonably reflect the suggestions
of the education sector, represented by Secretary Fabella, Atty. Padilla, and Sister Luz.

Special Features —

1. The rules shall govern claims for exemption from internal revenue tax and
customs duties. A separate set of guidelines is being prepared to cover real property tax and
other local taxes imposed under the Local Tax Code. This is our arrangement with Director
Carlos of our Bureau of Local Government Finance in order to simplify matters.

2. Reflective of the views of the education sector are the provisions on the
following, namely:

a. Provisions on school cafeterias, canteens, bookstores, dormitories and

hospitals.

b. Limitation of the definition of educational institution to mean only

schools offering formal education. cdtai

We feel that the proposed regulations contain reasonable requirements for the
effective implementation of Section 4(3) of Article XIV of the New Constitution.

We recommend approval:

COMMITTEE:

(SGD.) Collector TITUS VILLANUEVA (SGD.) Ms. ALICIA L. TOMACRUZ

Bureau of Customs Bureau of Internal Revenue
Member Member

Atty. SISON JARAPA (SGD.) Atty. ANTONIO P. BELICENA

National Tax Research Center Department Service Chief
Member Revenue Service
Member

(SGD.) MARCELO N. FERNANDO

Undersecretary
Chairman

Copyright 2016 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2016 7
Copyright 2016 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2016 8
November 24, 1995

DOF ORDER NO. 149-95

SUBJECT : Amending Department Order No. 137-87 as Amended by Department Order No. 92-88
Implementing Section 4(3), Article XIV of the New Constitution

SECTION 1. Section 2(2.1) of Department Order No. 137-87 as amended Order No. 92-88 is hereby
amended to read as follows:

"2.1 NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS ARE EXEMPT FROM TAXES ON ALL THEIR
REVENUES AND ASSETS USED ACTUALLY, DIRECTLY, AND EXCLUSIVELY FOR EDUCATIONAL PURPOSES. They
shall, however, be subject to internal revenue taxes on income from trade, business or other activity the
conduct of which is not related to the exercise or performance by such educational institution of its educational
purpose or function."

"2.1.1 To ensure that the exempt interest income from Philippine currency deposits and yield from deposit
substitute instruments are used actually, directly, and exclusively for educational purposes, the said
educational institutions shall, on annual basis submit to the Revenue District Officer, together with the annual
information return and duly audited financial statement, the following: cd

a) Certification from their depository banks as to the amount of interest income earned from passive
investments not subject to the 20% final withholding tax imposed by Section 24(e) of the Tax Code, as
amended;

b) Certification of actual utilization of the said income; and

c) Board Resolution by the school administration on proposed projects. (i.e. construction and/or
improvement of school building and facilities; acquisition of equipments, books and the like) to be funded out of
money deposited in banks or placed in money markets.

The RDO shall conduct an audit of the annual information return filed to determined compliance with the
conditions set forth in the Certificate of exemption and the tax liabilities, if any.

SECTION 2. Repealing Clause. — All orders, circulars, rules and regulations inconsistent herewith are
hereby revoked or modified accordingly.

SECTION 3. Effectivity. — This Order shall take effect immediately.

(SGD.) ROBERTO F. DE OCAMPO

Secretary
 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
Quezon City

May 30, 2002

REVENUE REGULATIONS NO. 15-2002

SUBJECT: Revenue Regulations Governing the Imposition of Income Tax on the Gross
Philippine Billings, Other Income of International Air Carriers and
Common Carrier’s Tax Pursuant to Sections 28 (A)(3)(a), 28(A)(1), and
118 of the National Internal Revenue Code of 1997 as well as the Manner of
Claiming Deductions on Travel Expenses and Freight Charges Incurred
Pursuant to Section 34 of the Same Code.

TO : All Internal Revenue Officers and Others Concerned.

SECTION 1. SCOPE. Pursuant to the provisions of Section 244 of the National Internal
Revenue Code of 1997 (hereinafter referred to as the “Code”), the following Regulations are
hereby promulgated to implement the provisions of Sections 28(A)(3)(a), 28(A)(1), and 118 of
the Code, relative to the imposition of income tax on the Gross Philippine Billings and Other
income of international air carriers doing business in the Philippines as well as the imposition
of common carrier’s tax. These Regulations further prescribe the manner of claiming the
deductions for travel expenses and freight charges incurred pursuant to Section 34 of the
same Code.

SEC. 2. DEFINITION OF TERMS. - For purposes of these Regulations, the following

terms shall be construed as follows:

(a) International air carrier – shall refer to a foreign airline corporation doing
business in the Philippines having been granted landing rights in any Philippine port to perform
international air transportation services/activities or flight operations anywhere in the world.

(b) Off-line carrier – shall refer to an international air carrier having no flight
operations to and from the Philippines.

(c) On-line carrier – shall refer to an international air carrier having or maintaining
flight operations to and from the Philippines.

(d) Off-line flights – shall refer to flight operations carried out or maintained by an
international air carrier between ports or points outside the territorial jurisdiction of the
Philippines, without touching a port or point situated in the Philippines, except when in distress
or due to force majeure.

1
 (e) On-line flights – shall refer to flight operations carried out or maintained by an
international air carrier between ports or points in the territorial jurisdiction of the Philippines
and any port or point outside the Philippines.

(f) Chartered flight – shall refer to flight operation which includes operations
between ports or points situated in the Philippines and ports and points outside the Philippines,
which includes block charter, placed under the custody and control of a charterer by a
contract/charter for rent or hire relating to a particular airplane.

(g) "Originating from the Philippines" - shall include the following:

(1) Where passengers, their excess baggage, cargo and/or mail originally commence
their flight from any Philippine port to any other port or point outside the Philippines;

(2) Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commencing their flights from any foreign port and whose stay in the Philippines is for more
than forty-eight (48) hours prior to embarkation save in cases where the flight of the airplane
belonging to the same airline company failed to depart within forty-eight (48) hours by reason of
force majeure;

(3) Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commencing their flights from any Philippine port to any foreign port; and

(4) Where a passenger, his excess baggage, cargo and/or mail originally commencing
his flight from a foreign port alights or is discharged in any Philippine port and thereafter boards
or is loaded on another aircraft, owned by the same airline company, the flight from the
Philippines to any foreign port shall not be considered originating from the Philippines, unless
the time intervening between arrival and departure of said passenger, his excess baggage,
cargo and/or mail from the Philippines exceeds forty-eight (48) hours, except, however, when
the failure to depart within forty-eight (48) hours is due to reasons beyond his control, such as,
when the only next available flight leaves beyond forty-eight (48) hours or by force majeure.
Provided, however, that if the second aircraft belongs to a different airline company, the flight
from the Philippines to any foreign port shall be considered originating from the Philippines
regardless of the intervening period between the arrival and departure from the Philippines by
said passenger, his excess baggage, cargo and/or mail.

(h) "Continuous and Uninterrupted Flight" – shall refer to a flight in the carrier of
the same airline company from the moment a passenger, excess baggage, cargo, and/or mail is
lifted from the Philippines up to the point of final destination of the passenger, excess baggage,
cargo and/or mail. The flight is not considered continuous and uninterrupted if transshipment of
passenger, excess baggage, cargo and/or mail takes place at any port outside the Philippines on
another aircraft belonging to a different airline company.

(i) "Place of Final Destination" – shall refer to the place of final disembarkation
designated or agreed upon by the parties in a contract of air transportation where the passengers,

2
their excess baggage, cargo and/or mail are to be transported and unloaded by the contracting
airline company.

(j) "Transient Passengers" – shall refer to a passenger who originated from outside
of the Philippines towards a final destination also outside of the Philippines but stops in the
Philippines for a period of less than forty eight (48) hours, or even more than forty-eight (48)
hours, if the delay is due to force majeure or reasons beyond his control, wherein in both cases
the passenger boarded an airplane of the same airline company bound to the place of final
destination.

“Non-revenue passengers" – shall refer to the non-revenue passengers as defined under

Resolution No. 788 of the International Air Transport Association regarding Free and Reduced
Fare or Rate Transportation and any other Free/Reduced Rate Mileage Programs Administered
by individual International Air Carriers.

“Adult passenger ” - shall refer to a passenger who has attained his twelfth birthday.

“Children” – shall refer to passengers who have attained their second but not their
twelfth birthday.

“Infant” - shall refer to a passenger who has not attained his second birthday.

(k) “Baggage” - shall refer to such articles, effects and other personal property of a
passenger as are necessary or appropriate for wear, use, comfort or convenience in connection
with his trip.

“Excess baggage” – shall refer to that part of the baggage which is in excess of
that baggage which may be carried free of charge.

(l) “Refund” – shall refer to the repayment to the purchaser of all or a portion of the
fare, rate or charge for unused carriage or service.

SEC. 3. FOREIGN AIRLINE COMPANIES WITHOUT FLIGHTS STARTING

FROM OR PASSING THROUGH ANY POINT IN THE PHILIPPINES. - An off-line
airline having a branch office or a sales agent in the Philippines which sells passage documents
for compensation or commission to cover off-line flights of its principal or head office, or for
other airlines covering flights originating from Philippine ports or off-line flights, is not
considered engaged in business as an international air carrier in the Philippines and is, therefore,
not subject to Gross Philippine Billings Tax provided for in Section 28 (A)(3)(a) of the Code nor
to the three percent (3%) common carrier’s tax under Section 118(A) of the same Code.
This provision is without prejudice to classifying such taxpayer under a different category
pursuant to a separate provision of the same Code.

SEC. 4. TAX IMPOSED ON INTERNATIONAL AIR CARRIER WITH

FLIGHTS ORIGINATING FROM PHILIPPINE PORTS. - An international air carrier

3
having flights originating from any port or point in the Philippines, as clarified in Sec. 2(g) and
(h) hereof, irrespective of the place where passage documents are sold or issued, is subject to the
Gross Philippine Billings Tax of 2½% imposed under Section 28(A)(3)(a) of the Code unless
subject to a different tax rate under the applicable tax treaty to which the Philippines is a
signatory.

SEC. 5. DETERMINATION OF GROSS PHILIPPINE BILLINGS. -

(a) In computing for “Gross Philippine Billings”, there shall be included the total
amount of gross revenue derived from passage of persons, excess baggage, cargo and/or 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 passage documents.

The gross revenue for passengers whose tickets are sold in the Philippines shall be the
actual amount derived for transportation services, for a first class, business class or economy
class passage, as the case may be, on its continuous and uninterrupted flight from any port or
point in the Philippines to its final destination in any port or point of a foreign country, as
reflected in the remittance area of the tax coupon forming an integral part of the plane
ticket. For this purpose, the Gross Philippine Billings shall be determined by computing the
monthly average net fare of all the tax coupons of plane tickets issued for the month per
point of final destination, per class of passage (i.e., first class, business class, or economy
class) and per classification of passenger (i.e., adult, child or infant), and multiplied by
the corresponding total number of passengers flown for the month as declared in the flight
manifest.

For tickets sold outside the Philippines, the gross revenue for passengers for first
class, business class or economy class passage, as the case may be, on a continuous and
uninterrupted flight from any port or point in the Philippines to final destination in any
port or point of a foreign country shall be determined using the locally available net fares
applicable to such flight taking into consideration the seasonal fare rate established at the
time of the flight, the class of passage (whether first class, business class, economy class
or non-revenue), the classification of passenger (whether adult, child or infant), the date of
embarkation, and the place of final destination. Correspondingly, the Gross Philippine
Billing for tickets sold outside the Philippines shall be determined in the manner as provided
in the preceding paragraph.

Passage documents revalidated, exchanged and/or endorsed to another on-line

international airline shall be included in the taxable base of the carrying airline and shall be
subject to Gross Philippine Billings tax if the passenger is lifted/boarded on an aircraft from
any port or point in the Philippines towards a foreign destination.

The gross revenue on excess baggage which originated from any port or point in the
Philippines and destined to any part of a foreign country shall be computed based on the actual
revenue derived as appearing on the official receipt or any similar document for the said
transaction.

4
 The gross revenue for freight or cargo and mail shall be determined based on the revenue
realized from the carriage thereof. The amount realized for freight or cargo shall be based on
the amount appearing on the airway bill after deducting therefrom the amount of discounts
granted which shall be validated using the monthly cargo sales reports generated by the IATA
Cargo Accounts Settlement System (IATA CASS) for airway bills issued through their
cargo agents or the monthly reports prepared by the airline themselves or by their general
sales agents for direct issues made. The amount realized for mails shall, on the other hand, be
determined based on the amount as reflected in the cargo manifest of the carrier.

Provided, however, that in the case of the passenger's passage documents or flights from
any port or point in the Philippines and back, that portion of revenue pertaining to the return trip
to the Philippines shall not be included as part of “Gross Philippine Billings”.

In cases where a flight is interrupted by force majeure resulting in the transshipment of

the passengers, their excess baggage, freight, cargo and/or mail to another airplane operated by
another airline company and transshipment takes place in another country, the Gross Philippine
Billings shall be determined based on that portion of flight from the Philippines up to the
point of said transshipment.

(b) Non-revenue passengers shall not be given value for purposes of computing the
taxable base subject to tax. Refunded tickets shall likewise not be included in the computation of
Gross Philippine Billings.

(c) In the case of a flight that originates from the Philippines but transshipment of
passenger, excess baggage, cargo and/or mail takes place elsewhere in another aircraft belonging
to a different airline company, the Gross Philippine Billings shall be that portion of the revenue
corresponding to the leg flown from any point in the Philippines to the point of transshipment.

(d) In computing the taxable amount, the foreign exchange conversion rate to be used
shall be the average monthly Airline Rate as provided in the Bank Settlement Plan (BSP)
Monthly sales report or the Bankers Association of the Philippines (BAP) rate, whichever is
higher. The average monthly BAP rate shall be computed by adding all the different BAP rates
during the month and dividing the same by the number of days during the month.

SEC. 6. ATTACHMENTS TO THE RETURN. – In the filing of the quarterly

and annual GPB returns and the payment of tax due thereon, there shall be attached to the
quarterly/annual returns, a Statement of Gross Philippine Billings duly certified by an
independent Certified Public Accountant, showing among others, the Taxable Passenger
Revenue for each flight number, the cumulative quarterly/annual summary as well as the
monthly summary totals of gross revenue derived from the uplifts of passengers, excess
baggage, cargo and mails from the Philippines subject to tax under Section 28(A)(3)(a) of
the Code, the applicable average conversion rate mentioned in Sec. 5(d) hereof to arrive at
the Taxable Gross Philippine Billings, and the GPB rate used in arriving at the tax due for
the quarter/year.

5
 SEC. 7. SCHEDULES, RECORDS AND DOCUMENTS REQUIRED TO BE
KEPT. - In addition to the quarterly schedule prescribed in Sec. 6 hereof, other adequate
schedules, records and documents, such as but not limited to the following, shall be kept
and maintained at all times in the local principal office or place of business of the
international airline and shall be made available to the assigned internal revenue officers for
verification of the gross revenues reported for GPB tax purposes:

1. Passenger Flight Manifest showing date; Flight Number; the names of the
passengers grouped per each point of final destination as classified in accordance with the
classes of passage (whether first class, business class or economy class) and further sub-
grouped in accordance with the classification of passenger ( whether adult, child, infant or
non-revenue);

2. Monthly Summary of Taxable and Non-Revenue Passengers Passenger Per

Day ; per Flight Number showing the daily number of passengers per flight route on each
day and per each point of final destination grouped in accordance with class of passage
(whether first class, business class or economy class) and classification of passenger
(whether adult, child, infant, or non-revenue);

3. A complete file of cargo/mail manifests in chronological order. Based on the

cargo and/or mail manifests, monthly schedules of mail revenue and cargo sales reports must
be prepared containing the following information:

A. Cargo/mail manifest should include information on:

(a) Flight number;
(b) Date and time of departure;
(c) Destination of the aircraft ;
(d) Number of airway bills per flight;

B. Semi-monthly Cargo Sales Reports should include information on:

(a) Airway bill number;
(b) Weight of cargo and the actual amount of revenue derived;
(c) Total amount of Cargo revenue for the sales period covering half month sales;

C. Monthly Mail Revenue should include information on:

(a) Weight of Mail and Freight rate per unit of measurement; and
(b) Total amount of Mail Revenue for the month

4. A complete record of the income/revenue from excess baggage of passengers

derived in Philippine Pesos or applicable foreign currency;
5. BSP Airline Billing Analysis Report containing the following information:

6
 (a) Name of travel agent;
(b) Ticket number;
(c) Gross fare of the ticket;
(d) Fare Adjustments and Other Deductions;
(e) Net fare derived by airline;
(f) Philippine Travel Taxes and Miscellaneous Taxes and fees; and
(g) Net amount payable to the airline company (including taxes and miscellaneous
fees);

6. Semi-Monthly Sales Report for Direct Sales or Issues made by the airline
company and/or its General Sales Agent in the Philippines containing the following
information :

(a) Ticket number;

(b) Date of issuance of ticket;
(c) Gross fare of ticket;
(d) Fare adjustments and other deductions;
(e) Net fare derived by airline;
(f) Philippine Travel Taxes and miscellaneous taxes and fees; and
(g) Net amount received (including taxes and miscellaneous fees).

7. A complete file of the tax coupons of airline tickets sold and ticketed in
the Philippines indicating the net fare paid by the travel agent/passenger;

8. A file of charter agreements/contracts in the case of chartered flights;

9. A complete file of airline tickets issued based on incoming prepaid ticket advices
which plain tickets were sold outside the Philippines; and

10. Copies of passenger manifests duly submitted to the Bureau of Immigration and
Deportation.

SEC. 8. TAXABILITY OF INCOME OTHER THAN INCOME FROM

INTERNATIONAL AIR TRANSPORT SERVICES MENTIONED IN SEC. 5 HEREOF. –
All items of income other than income from international air transport services mentioned in Sec.
5 hereof shall be subject to tax under the pertinent provisions of the Code.

SEC.9. PROOF OF DEDUCTIBILITY FOR TRAVEL EXPENSES CLAIMED

BY PASSENGERS AS WELL AS FREIGHT CHARGES INCURRED ON
TRANSPORT OF CARGOES BY AIRLINE CARRIERS. – For purposes of validating
the deductions claimed on travel expenses incurred by passengers as well as freight charges
incurred in the transport of cargoes by international air carriers, the passenger coupon of the
plane ticket/airway bill which reflects the CAB rate shall not be used as the basis for the claim
of the expense. The amount of expense to be claimed shall be the actual cost incurred for the

7
purchase of the plane ticket/airway bill which is the net amount of the ticket fare/airway bill
after deducting the corresponding fare/freight adjustments. In the case of plane tickets, if
said tickets are purchased from travel agents, travel expenses as claimed by the passengers
shall be validated on the basis of the sales invoice/official receipt issued by the travel agent
representing the actual cost of the ticket and the reasonable margin added by the travel agent as
payment for services.

SEC.10. COMMON CARRIER’S TAX LIABILITY OF INTERNATIONAL

AIRLINE COMPANIES. – For purposes of determining Common Carrier’s Tax liability of
international airline companies pursuant to Section 118 of the Code, gross receipts shall
be the same as the tax base for computing Gross Philippine Billings Tax as prescribed by
these Regulations.

SEC. 11. REPEALING CLAUSE. - The provisions of these Regulations expressly

amend Revenue Regulations No. 6-66 as well as all other existing rules and regulations
which are inconsistent herewith.

SEC. 12. EFFECTIVITY CLAUSE. - These Regulations shall take effect fifteen (15)
days after publication in the Official Gazette or any newspaper of general circulation, whichever
comes first.

(Original Signed)
JOSE ISIDRO N. CAMACHO
Secretary of Finance

Recommended by:

(Original Signed)
EDMUNDO P. GUEVARRA
Deputy Commissioner of Internal Revenue
Officer-in-Charge

8
f. See RA 10378, July 23, 2012 (Reciprocal Exemption for GBP Tax) as implemented by RR 15-2013 (September 20, 2013)

REPUBLIC ACT No. 10378

AN ACT RECOGNIZING THE PRINCIPLE OF RECIPROCITY AS BASIS FOR THE GRANT OF INCOME TAX EXEMPTIONS TO
INTERNATIONAL CARRIERS AND RATIONALIZING OTHER TAXES IMPOSED THEREON BY AMENDING SECTIONS
28(A)(3)(a), 109, 118 AND 236 OF THE NATIONAL INTERNAL REVENUE CODE (NIRC), AS AMENDED, AND FOR OTHER
PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

Section 1. Section 28(A)(3)(a) of Republic Act No. 8424, otherwise known as the National Internal Revenue Code of
1997, as amended, is hereby further amended to read as follows:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

"(A) Tax on Resident Foreign Corporations. —

"(1) xxx

"(2) xxx

"(3). International – Carrier. — An international carrier doing business in the Philippines shall pay a tax of two and one-
half percent (21/2 %) on its ‘Gross Philippine Billings’ as defined hereunder:

"(a) International Air Carrier. — ‘Gross Philippine Billings’ 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 part 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.

"(b) International Shipping. — ‘Gross . Philippine Billings’ 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.

"Provided, That international carriers doing business in the Philippines may avail of a preferential rate or exemption
from the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage on
the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of
reciprocity such that an international carrier, whose home country grants income tax exemption to Philippine carriers,
shall likewise be exempt from the tax imposed under this provision.

"x x x."

Section 2. Section 109 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read
as follows:

"SEC. 109. Exempt Transactions. - The following shall be exempt from the value-added tax:

"(A) xxx;
"xxx

"(S) Transport of passengers by international carriers;

"(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
thereof for domestic or international transport operations;

"(U) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations;

"(V) Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank
financial intermediaries; and

"(W) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred
thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by. the
National Statistics-Office (NSO);

"x x x."

Section 3. Section 118 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read
as follows:

"SEC. 118. Percentage Tax on International Carriers. —

"(A) International air carriers doing; business in the Philippines on their gross receipts derived from transport of cargo
from the Philippines to another country shall pay a tax of three percent (3%) of their quarterly gross receipts.

"(B) International shipping carriers doing business in the Philippines on their gross receipts derived from transport of
cargo from the Philippines to another country shall pay a tax equivalent to three percent (3%) of their quarterly gross
receipts."

Section 4. Section 236 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read
as follows:

"SEC. 236. Registration Requirements. —1âwphi1

"(A) Requirements. — x x x

"xxx

"(G) Persons Required to Register for Value-Added Tax. —

"(1) Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in
the sale or exchange of services, shall be liable to register for value-added tax if:

"(a) His gross sales or receipts for the past twelve (12) months, other than those that are exempt under Section 109(A)
to (V), have exceeded One million five hundred thousand pesos (P1,500,000); or

"(b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than
those that are exempt under Section 109(A) to (V), will exceed One million five hundred thousand pesos (P1,500,000).

"x x x."
Section 5. Implementing Rules and Regulations. — The Secretary of Finance shall, upon the recommendation of the
Commissioner of Internal Revenue, promulgate not later than thirty (30) days upon the effectivity of this Act the
necessary rules and regulations for its effective implementation. The Department of Finance (DOF), in coordination with
the Department of Foreign Affairs (DFA), shall oversee the exchange of notes between the Philippines and concerned
countries for purposes of facilitating the availment of reciprocal exemptions intended under this Act.

Section 6. Separability Clause. — If any provision of this Act is subsequently declared invalid or unconstitutional, other
provisions hereof which are not affected thereby shall remain in full force and effect.

Section 7. Repealing Clause. — All laws, acts, presidential decrees, executive orders, issuances, presidential
proclamations, rules and regulations or parts thereof which are contrary to and inconsistent with any provision of this
Act are hereby repealed, amended or modified accordingly.

Section 8. Effectivily. — This Act shall take effect fifteen (15) days after its complete publication either in the Official
Gazette or in at least two (2) newspapers of general circulation.

RR 15-2003 – See Part 9

 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
Quezon City

April 15, 2003

REVENUE REGULATIONS NO. 15-2003

SUBJECT: Granting Taxpayers with Accounting Period Ended December 31, 2002
An Extension of Time up to April 21, 2003 within which to File their
Income Tax Returns

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. SCOPE. – Pursuant to the provisions of Section 244, in relation to

Sections 53 and 56, all of the Tax Code of 1997 (Code), these Regulations are hereby
promulgated in order to extend the time to file the income tax returns of compensation
income earners, including non-business/non-profession related income, and taxpayers,
whether individuals, estates and trusts, corporations and partnerships, engaged in trade or
business or in the exercise of profession or otherwise, with accounting period ended
December 31, 2002.

SEC. 2. – POWER TO EXTEND THE TIME TO FILE INCOME TAX

RETURNS. - By virtue of the power of the Commissioner to enforce the provisions of
the Code under the supervision and control of the Secretary of Finance, he may, in
meritorious cases, grant a reasonable extension of time for filing returns of income (or
final and adjustment returns) subject to the provisions of Section 56 of the same Code. In
view thereof, the filing of income tax returns of subject taxpayers is hereby extended to
April 21, 2003 and they may file their income tax returns and pay the applicable amount
of tax due thereon on or before the said period of extension. This is to compensate for
lost time and opportunity of the taxpayers to file their income tax returns due to perceived
systems failure of the Electronic Filing and Payment System (EFPS) of the Bureau of
Internal Revenue and for the reduced bank work force due to the fact that April 15, 2003
falls within the Holy week of the year when so many bank employees go on leave.

SEC. 3. EFFEECTIVITY. – These regulations shall take effect immediately.

(Original Signed)
NIEVES L. OSORIO
Officer-in-Charge
and Undersecretary
Recommending Approval:

(Original Signed)
GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue
December 14, 1976

REVENUE REGULATIONS NO. 10-76

SUBJECT : Regulations Governing Taxation of Offshore Banks and Foreign Currency Deposit Units of Depository Banks
Established under P.D. 1034 and 1035, respectively

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to Section 338 of the National Internal Revenue Code, as amended, the following regulations
are hereby promulgated to govern the manner of taxation of offshore banks and the expanded Foreign Currency Deposit Units of
depository banks established under Presidential Decrees No. 1034 and 1035, respectively. These regulations shall be known as
Revenue Regulations No. 10-76.

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.

SECTION 6. Statement to be attached to the return. —

There shall be attached to the final consolidated return or adjustment return of the taxpayer for such taxable year a sworn
statement, a specimen form of which is hereto attached, by a responsible officer setting forth in summarized form the pertinent
information required by these regulations with respect to the computation of the net offshore income, gross onshore income and
taxes paid or withheld.

SECTION 7. Records to be kept. —

Every offshore banking unit, as well as expanded Foreign Currency Deposit Unit, which is duly authorized by the Central Bank of
the Philippines to transact offshore banking business in the Philippines shall maintain books of account which shall be kept in the
place of its principal place of business for inspection.

In addition, all the supporting data which were used in compiling the summary statement required to be attached to the income
tax returns to be filed as prescribed under Section 6 hereof must likewise be made readily available at its principal place of
business.

SECTION 8. Income of non-resident. —

Any income of non-residents from transactions with either an offshore banking unit or with an expanded Foreign Currency
Deposit Unit shall be exempt from any and all taxes.

SECTION 9. Income of foreign personnel. —

There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual
employed by offshore banking units in the Philippines as salaries, wages, annuities, compensations, remunerations and
emoluments from such offshore banking units a tax equal to fifteen (15%) percent of such gross income. The aforesaid tax shall
be deducted and withheld at source in the same manner and condition as that provided under Supplement "A" — Withholding on
Wages of Commonwealth Act No. 466, as amended.

SECTION 10. Privileges of the offshore banking units. —

The offshore banking units shall be exempt from all forms of local licenses, fees, dues, imposts or any other local taxes or
burdens.

The license fee paid by offshore banking units shall be allowed as a deduction in accordance with Section 4 of these regulations.

SECTION 11. Registration. —

Offshore a Banking Units and expanded Foreign Currency Deposit Units shall, upon receipt of advice from the Central Bank,
register with the Bureau of Internal Revenue its business name for the purpose of —

a. registering its trade name;

b. registering as an employer pursuant to the provision of R. A. 466;

c. registering its name for the purpose of securing its taxpayer account number (TAN).

SECTION 12. Repealing Clause. —

All regulations, rulings or orders or portion thereof, which are inconsistent with the provisions of these regulations are hereby
revoked.

SECTION 13. Effectivity. —

These regulations shall apply to income received beginning with taxable year starting after January 1, 1977.
CESAR VIRATA
Secretary of Finance
Recommended by:
EFREN I. PLANA
Acting Commissioner of Internal Revenue
TAN 1456-040-3
ANNEX A
______________________
(NAME OF BANK)
SCHEDULE OF COMPUTATION OF ONSHORE AND OFFSHORE INCOME AND THE CORRESPONDING INCOME TAX FOR THE YEAR
ENDED _____
TOTAL OFFSHORE __ ONSHORE ___
INCOME: Total Interest All Others
(Percentage of
interest income) ==% ==% ==% ==% ==%
Interest P__ P__ P__ P__ P__
Discount ___ ___ ___ ___ ___
Gov't. Securities
Interest ___ ___ ___ ___ ___
Foreign Exchange
Dealings ___ ___ ___ ___ ___
Others ___ ___ ___ ___ ___
________ ___ ___ ___ ___ ___
________ ___ ___ ___ ___ ___
Total P__ P__ P__ P__ P__
Less: Interest Expense ___ ___ ___ ___ ___
(Percentage of gross
income == == == == ==
Gross Income P___ P___ P___ P___ P___
Less:
(1) Gen. & Adm.
Expenses P__ P__ P__ P__ P__
(2) Head office
Expenses P__ P__ P__ P__ P__
Total Expenses P__ P__ P__ P__ P__
Net Profit Before Taxes P__ P__ P__ P__ P__
Provision for taxes
(see computation
below) __ __ __ __ __
NET PROFIT TO SURPLUS P== P== P== P== P==
COMPUTATION OF TAX
Tax Base Tax RateAmount of Tax
1) Offshore income P_____ 5% P_________
2) Onshore income —
(a) gross interest income ______ 10% __________
(b) All others ______ 25%-35% __________
Total Tax due (see above) P========
REVENUE REGULATIONS NO. 14-77
SUBJECT : Amending Revenue Regulations No. 10-76
TO : All Internal Revenue Officers and others Concerned
Pursuant to Section 338 of the National Internal Revenue Code as amended, the following
regulations are hereby promulgated to amend certain sections of Revenue Regulations No.
10-76.
SECTION 1. Section 2(h) is hereby amended to read as follows:
"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." cdt
SECTION 2. Section 3(b) is hereby amended to read as follows:
"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."
SECTION 3. Section 5(b) is hereby amended to read as follows:
"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.
SECTION 4. Effectivity. — This regulation shall apply to income received beginning
with taxable year starting after January 1, 1977.
CESAR VIRATA
Secretary of Finance
Recommended by:
CONRADO P. DIAZ
Acting Commissioner of Internal Revenue
TAN: D2567-D1025-A-2

C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.
 a. RR 10-98

REVENUE REGULATION 10-98

Issued September 2, 1998 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.

Definitions

(A) Foreign Currency Deposit System — shall refer to the conduct of banking transactions whereby any person whether
natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with
the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines,
and For Other Purposes."

(B) Foreign Currency Deposit Unit (FCDU) — shall refer to that unit of a local bank or of a local branch of a foreign bank
authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to
the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under
the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing
business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended).

(C) Offshore Banking System — shall refer to the conduct of banking transactions in foreign currencies involving the receipt
of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree No.
1034 as implemented by CB (now BSP) Circular No. 1389, as amended.

(D) Offshore Banking Unit (OBU) — shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is
duly authorized by the Bangko Sentral Ng Pilipinas (BSP) to transact offshore banking business in the Philippines in
accordance with the provisions of Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as
amended.

(E) Deposits — shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign
Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner
thereof, with or without interest.

Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit. —

(A) Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System

(1) 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 shall be subject to a final withholding tax of seven and one-half percent
(7.5%). The depository bank shall withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of
the Code.

(2) If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or a Filipino
seaman, and his spouse or dependent who is a resident in the Philippines, fifty percent (50%) of the interest income from
such bank deposit shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of
seven and one-half percent (7.5%).

D) Illustration. Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US dollar account with ABC
Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from January 1 to March 31, 1998)
amounted to US$1,000.00. This gross interest earning shall be considered as constructively received by Mr. De la Cruz
during the first quarter of 1998 and shall be subject to a seven and one-half percent (7.5%) final withholding tax. The 7.5%
final withholding tax which is due thereon is US$75.00.

Sec. 2.27 and Sec. 2.28 — Corporate Income Tax on Interest Income from a Depository Bank under the Foreign Currency
Deposit System. (A) Interest income which is actually or constructively received by a domestic corporation or a resident
foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of seven and
one-half percent (7.5%) based on the gross amount of such interest income. The depository bank shall withhold and remit
the tax pursuant to the provisions of Sections 57 and 58 (withholding tax at source) of the Code.
 REPUBLIC ACT NO. 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.

Section 1. Sec. 27, paragraph (D) (3) of the National Internal Revenue Code, as
amended, is hereby further amended to read as follows:

"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. 2. Sec. 28, paragraph (A)(4) and (A)(7)(b) of the same Code are hereby
amended to read as follows:

"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%).

"In the case of corporations adopting the fiscal-year accounting period the
taxable income shall be computed without regard to the specific date when sales,
purchases and other transactions occur. Their income and expenses for the
fiscal year shall be deemed to have been earned and spent equally for each
month of the period.

"The reduced corporate income tax rates shall be applied on the amount
computed by multiplying the number of months covered by the new rates within
the fiscal year by the taxable income of the corporation for the period, divided by
twelve.

"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).

"(2) 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.

"(3) 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:

"(a) International Air Carrier. - 'Gross Philippine Billings' 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.
"(b) International Shipping. - 'Gross Philippine Billings' 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.

"(4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with
nonresidents, other offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with offshore banking units shall be exempt
from all taxes except net income from such transactions as may be specified by
the Secretary of Finance, upon recommendations of the Monetary Board which
shall be subject to the regular income tax payable by banks: Provided, however,
That any interest income derived from foreign currency loans granted to
residents other than offshore banking units or local commercial banks, including
local branches of foreign banks that may be authorized by the BSP to transact
business with offshore banking units, shall be subject only to a final tax at the
rate of ten percent (10%).

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

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

"(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its
head office shall be subject to a tax of fifteen percent (15%) which shall be based
on the total profits applied or carmarked for remittance without any deduction for
the tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sec. 57 and 58 of this Code: Provided, That
interests, dividends, rents, royalties, including remuneration for technical
services, salaries, wages, premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income and capital gains
received by a foreign corporation during each taxable year from all sources within
the Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.

"(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.
"(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

"(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposits
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under
he expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (71/2%) of such interest income.

"(b) 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 units and other
depository banks under the expanded 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 tax payable by banks: Provided, however. That
interest income from foreign currency loans granted by such depositors 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.

"(c) Capital Gains from Sales of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation except shares
sold or disposed of through the stock exchange:

Not over P100,000 - 5%

Or any amount in excess of P100,000 - 10%

"(d) Intercorporate Dividends. - Dividends received by a resident foreign

corporation from a domestic corporation liable to tax under this Code shall not be
subject to tax under this Title.
"(B) Tax on Nonresident Foreign Corporation. -

"(1) In General. - Except as otherwise provided in this Code, a foreign

corporation not engaged in trade or business in the Philippines shall pay a tax
equal to thirty-five percent (35%) of the gross income received during each
taxable year from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities,
emoluments or other fixed or determinable annual periodic or casual gains,
profits and income, and capital gains, except capital gains subject to tax under
subparagraphs 5 (c) and (d); 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%).

"(2) Nonresident Cinematographic Film Owner Lessor or Distributor. - A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five
percent (25%) of its gross income from all sources within the Philippines.

"(3) Nonresident Owner or Lessor of Vessels Charactered by Philippine

Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of
four and one-half percent (41/2%) of gross rentals, lease or charter fees from
leases or charters to Filipino citizens or corporations, as approved by the
Maritime Industry Authority.

"(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.

- Rentals, charter and other fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a tax of seven and one-half
percent (71/2%) of gross rentals or fees.

"(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

"(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty
percent (20%) is hereby imposed on the amount of interest on foreign loans
contracted on or after August 1, 1996;

"(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen

percent (15%) is hereby imposed on the amount of cash and/or property
dividends received from a domestic corporation which shall be collected and paid
as provided in Sec. 57(A) Of this Code, subject to the condition that the country
in which the nonresident foreign corporation is domiciled, shall allow a credit
against the tax due from the nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to twenty percent (20%) for 1997,
nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and
seventeen percent (17%) thereafter, which represents the difference between the
regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%)
in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%)
thereafter on corporations and the fifteen percent (15%) tax on dividends as
provided in this subparagraph;

"(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation, except shares
sold, or disposed sold, or disposed of through the stock exchange;

Not over P 100,000 - 5%

On any amount in excess of P10,000 - 10%"

Sec. 3. Separability Clause. - If any part or provision of this Act shall be held
unconstitutional or invalid, other provisions hereof which are not affected thereby
shall continue to be in full force and effect.

Sec. 4. Repealing Clause. - All laws, decrees, orders, rules and regulations and
other issuances or parts thereof inconsistent with this Act are hereby repealed or
modified accordingly.

Sec. 5. Effectivity. - This Act shall take effect fifteen (15) days after its publication
in the Official Gazette or in two (2) newspapers of general circulation.

Approved: April 28, 2004

vii. Petroleum Service Contractor and Sub Contractor
PRESIDENTIAL DECREE No. 1334
CREATING BARANGAY BF INTERNATIONAL VILLAGE IN THE MUNICIPALITY OF LAS PIÑAS, METRO MANILA
WHEREAS, the fundamental aim of the State is to hasten up the pace of socio-economic development throughout the
country;
WHEREAS, the effective implementation of the declared programs of the government on development hinges primarily
on the administrative efficiency of each and every local government units;
WHEREAS, it has been the clamor of the residents of the proposed barangay with the conformity of the elective
officials of the locality to create the new barangay so as to achieve a closer supervision of the execution of the
developmental programs of the locality;
WHEREAS, the creation of the proposed barangay will redound and contribute greatly to the upliftment of the socio-
economic well-being of the residents therein;
NOW, THEREFORE, I, FERDINAND E. MARCOS President of the Philippines, by virtue of the powers in me vested by the
Constitution, do hereby order and decree, as part of the law of the land, the following:
Section 1. BF International Village in Barangay Talon, in the Municipality of Las Piñas, Metro Manila, is hereby detached
and separated therefrom to form and constitute into a distinct and independent barangay which is created to be
known as Barangay BF International without affecting in any manner the legal existence of the mother barangay.
Section 2. Except as hereinafter provided, all provisions of law, now or hereafter applicable to regular barangays, shall
be applicable to Barangay BF International.
Section 3. The present elective barangay officials of Barangay Talon shall continue to perform their duties as such
officials in the newly created Barangay BF International until the barangay officials of said barangay shall have been
appointed by the President. Such officials so appointed shall hold office until their successors shall have been elected in
the regular elections for barangay officials following the issuance of this Decree and shall have qualified, unless sooner
removed at the pleasure of the President. Such appointive officers and employees as maybe necessary to organize or
to complete the government personnel of Barangay BF International shall be appointed as provided for under existing
laws.
Section 4. Upon the effectivity of this Decree, the proportionate share of Barangay BF International in the obligations,
funds, assets and other property of Barangay Talon shall be transferred by the President to the newly created barangay
upon the recommendation of the Commission on Audit.
Section 5. All laws or parts of laws as well as all executive orders or regulations, inconsistent herewith are hereby
repealed or modified accordingly.
Section 6. This Decree shall take effect immediately.

PRESIDENTIAL DECREE NO. 87

Amending Presidential Decree No. 8 Issued on October 2, 1972
and Promulgation of an Amended Act to Promote the
Discovery and Production of Indigenous Petroleum
and Appropriate Funds Therefor.

WHEREAS, Presidential Decree No. 8 dated October 2, 1972 was issued to promote the discovery and development of
the country's indigenous petroleum resources and adopting therefore as part of the law of the land the provisions of
Senate Bill No. 631 (An Act to Promote the Discovery, Production of Indigenous Petroleum and Appropriate Funds
Therefor);

WHEREAS, it was found necessary for the national interest to amend Senate Bill No. 531 among other things more
meaningful incentives to prospective service contractors.

WHEREAS, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by
the Constitution as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to Proclamation No.
1081, dated September 21, 1972, and General Order No. 1 dated September 22, 1972 as amended, do hereby amend
Presidential Decree No. 8 as follows:

AN ACT
TO PROMOTE THE DISCOVERY AND PRODUCTION OF
INDIGENOUS PETROLEUM, AND APPROPRIATING
FUNDS THEREFOR

SEC. 1. Short title. This Act shall be known and maybe cited as "THE OIL EXPLORATION AND DEVELOPMENT ACT OF
1972".
SEC. 2. Declaration of policy. It is hereby declared to be the policy of the State to hasten the discovery and production
of indigenous petroleum through the utilization of government and/or private resources, local and foreign under the
arrangements embodied in this Act which are calculated to yield the maximum benefit to the Filipino people and the
revenues to the Philippine GOVERNMENT for use in furtherance of national economic development, and to assure just
returns to participating private enterprises, particularly those that will provide the necessary services, financing and
technology and fully assume all exploration risks.
SEC. 3. Definition of terms. As used in this Act, the following terms shall have the following respective meanings:
1. "Petroleum" shall include any mineral oil, hydrocarbon gas, bitumen, asphalt, mineral gas and all other similar
or naturally associated substances with the exception of coal, peat, bituminous shale and/or other stratified
mineral fuel deposits.

2. "Crude Oil" or "Crude" means oil in its natural state before the same has been refined or otherwise treated. It
does not include oil produced through destructive distillation of coal, bituminous shale or other stratified
deposits, either in its natural state or after the extraction of water, and sand or other foreign substances
therefrom.

3. "Natural Gas" means gas obtained from boreholes and wells and consisting primarily of hydrocarbons.

4. "Petroleum Operations" means searching for and obtaining petroleum within the Philippines through drilling
and pressure or suction or the like, and other operations incidental thereto. It includes the transportation,
storage, handling and sale (whether for export or for domestic consumption) of petroleum so obtained but
does not include any: (1) transportation of petroleum outside the Philippines; (2) processing or refining at a
refinery; or (3) any transaction in the products so refined.

5. "Petroleum in commercial quantity" means petroleum in such quantities which will permit its being
economically developed as determined by the contractor after taking into consideration the location of the
reserves, the depths and number of wells required to be drilled and the transport and terminal facilities
needed to exploit the reserves which have been discovered.

6. "Posted Price" refers to the FOB price established by the contractor in consultation with the Department of
Energy for each grade, gravity and quality of crude oil offered for sale to buyers generally for export at the
particular point of export, which price shall be based upon geographical location, and fair market export values
for crude oil of comparable grade, gravity and quality.

7. "Market Price" shall mean the price, which would be realized, for petroleum, produced under a contract as
hereinafter defined if sold in a transaction between independent persons dealing at arm's length in a free
market.

8. "Barrel" means 42 U.S. gallons or 9702 cubic inches at a temperature of 60ºFahrenheit.

Any reference in this Act to the value of any crude oil at the posted price or market shall be construed as a reference to
the amount obtained by multiplying the number of barrels of that crude oil by the posted price or market price per
barrel applicable to that crude oil.

9. "Crude Oil Exported" shall include not only crude oil exported as such but also indigenous crude oil refined in
the Philippines.

10. "Government" means the Government of the Republic of the Philippines.

 11. "Contractor" means the contractor in a service contract whether acting alone or in a consortium with others.

12. "Contract" refers to a service contract.

13. "Filipino Participation Incentive" means the allowance, which may be given the contractor with Filipino
participation as provided in Section 28 hereof.

14. "Philippine Corporation" means a corporation organized under Philippine Laws, at least sixty percent of the
capital of which is owned and held by citizens of the Philippines.

15. "Affiliate" means (1) a company in which a contractor holds directly or indirectly at least fifty percent of its
outstanding shares entitled to vote; (2) a company which holds directly or indirectly at least fifty percent of the
contractor's outstanding shares entitled to vote; or (c) a company in which at least fifty percent of its share
outstanding and entitled to vote are owned by a company which owns directly at least fifty percent of the
shares outstanding and entitled to vote of the contractor.

16. "Gross Income" means the gross proceeds from the sale of crude, natural gas or casinghead petroleum spirit
produced under the contract and sold during the taxable year at posted or market price, as the case maybe,
and other income which are incidental to and arising from any one or more of the petroleum operations of the
contractor.

17. "Taxable Net Income" means the gross income less the deduction allowed in this act.

18. "Taxable Year" means the calendar or fiscal year of the contractor

19. "Casinghead Petroleum Spirit" means any liquid hydrocarbon obtained from natural gas by separation or by
any chemical or physical process.

20. "Petroleum Board (now the DEPARTMENT) " refers to the Petroleum Board (now the Department of Energy)
created in Section Seventeen of this Act.

21. "Operating Expenses" means the total expenditures for petroleum operations made by then CONTRACTOR
both within and without the Philippines as provided in a service contract.
SEC. 4. Government may undertake petroleum and production. Subject to the existing private rights, the GOVERNMENT
may directly explore for and produce indigenous petroleum. It may also indirectly undertake the same under service
contracts as hereafter provided. These contracts may cover free areas, national reserve areas and/or petroleum
reservations, as provided for in the Petroleum Act of 1949, whether onshore or offshore. In every case, however, the
contractor must be technically competent and financially capable as determined by the Board to undertake the
operations required in the contract.
SEC. 5. Execution of contract authorized in this Act. Every contract here in authorized shall, subject to the approval of
the President, be executed by the Petroleum Board created in this Act, after due public notice, pre-qualification and
public bidding or concluded through negotiations. If cash bids are requested or if no bid is submitted or the bids
submitted are rejected by the Petroleum Board for being disadvantageous to the GOVERNMENT, the contract may be
concluded through negotiations.
In opening contract areas and in selecting the best offer for petroleum operations, any of the following alternative
procedures may be resorted to by the Petroleum Board, subject to prior approval of the President: (a) The Petroleum
Board may select an area or areas and offer it for bid, specifying the minimum requirements and conditions; or (b) The
Petroleum Board may open for bidding a large area wherein bidders may select integral are not larger than the
maximum provided in this Act. Only the best offer shall be accepted and the selection thereon shall be made by a
weighted system of evaluating the different aspects of each bid; or (c) An area may be selected by an interested party
who shall negotiate with the Petroleum Board for a contract under the terms and conditions provided in this Act.
SEC. 6. Nature of service contract. In a service contract, service and technology are furnished by the service contractor
for which it shall be entitled to the stipulated service fee while financing is provided by the GOVERNMENT to which all
petroleum produced shall belong.
SEC. 7. Special stipulation in service contract. Where the GOVERNMENT is unable to finance petroleum exploration
operations in order to induce the contractor to exert the maximum efforts to discover and produce petroleum as soon
as possible, the service contract shall stipulate that the contractor shall furnish services, technology and financing, the
proceeds of sale of the petroleum produced under the contract shall be the source of funds for payments of the service
fee and the operation expenses due the contractor.
SEC. 8. Obligations of contractor in service contract. The arrangement pursuant to the preceding section shall be such
that the contractor, which may be a consortium, shall undertake, manage and execute petroleum operations. The
contract may authorize the contractor to take and dispose of and market either domestically or for export all
petroleum produced under the contract subject to supplying the domestic requirements of the Republic of the
Philippines on a pro-rate basis. The GOVERNMENT shall oversee the management of the operations contemplated in
the contract and in this connection shall require the contractor to
1. Provide all necessary services and technology;

2. Provide the requisite financing;

3. Perform the exploration work obligations and program prescribed in the agreement between the
GOVERNMENT and the CONTRACTOR, which may be more but shall not be less than the obligations prescribed
in this Act;

4. Once petroleum in commercial quantity is discovered, operate the field on behalf of the GOVERNMENT in
accordance with accepted good oil field practices using modern and scientific methods to enable maximum
economic production of petroleum; avoiding hazards to life, health and property; avoiding pollution of air, land
and waters; and pursuant to an efficient and economic program of operation.

5. Assume all exploration risks such that if no petroleum in commercial quantity is discovered and produced, it
will not be entitled to reimbursement;

6. Furnish the Petroleum Board promptly with geological and other information, data and reports which it may
require;

7. Maintain detailed technical records and accounts of its operations;

8. Conform to regulations regarding, among others, safety, demarcation of agreement acreage and work areas,
non-interference with the rights of other petroleum, mineral and natural resources operations;

9. Maintain all meters and measuring equipment in good order and allow access to these as well as to the
exploration and production sites and operations to inspectors authorized by the Petroleum Board;

10. Allow examiners of the Bureau of Internal Revenue and other representatives authorized by the Petroleum
Board full access to their accounts, books and records for tax and other fiscal purposes; and

11. Be subject to Philippine income tax;

On the other hand, the Petroleum Board shall:

1. On behalf of the GOVERNMENT, reimburse the CONTRACTOR for all operating expenses not exceeding seventy
percent of the gross proceeds from production in any year. Provided, That in any year the operating expenses
exceeds seventy percent of gross proceeds from production then the unrecovered expenses shall be recovered
from the operations of succeeding years.

2. Pay the contractor a service fee the net amount of which shall not exceed forty percent of the balance of the
gross income after deducting the Filipino participation incentive, if any, and all operating expenses recovered
 pursuant to Section 8 (1) above.

3. Reimbursement of operating expenses and payment of the service fee shall be in such form and manner as
provided for in the contract.

SEC. 9. Minimum terms and conditions. In addition to those elsewhere provided in this Act, every contract executed in
pursuance hereof, shall contain the following minimum terms and conditions:
a. Every contractor shall be obliged to spend in direct prosecution of exploration work, delineation and development
following the discovery of oil in commercial quantity not less than the amounts provided for in the contract between
the GOVERNMENT and the contractor and these amounts shall not be less than the total obtained by multiplying the
number of hectares covered by the contract by the following amounts per hectare:
PERIOD ONSHORE OFFSHORE
Year 1 P 3.00 P 3.00
Year 2 P 3.00 P 3.00
Year 3 P 3.00 P 3.00
Year 4 P 3.00 P 3.00
Year 5 P 3.00 P 3.00
Year 6 P 9.00 P 18.00
Year 7 P 9.00 P 18.00
Year 8 P 9.00 P 18.00
Year 9 P 9.00 P 18.00
Year 10 P 9.00 P 18.00
Provided, That if during any contract year the CONTRACTOR shall spend more than the amount of money required to
be spent, the excess may be credited against the money required to be spent by the CONTRACTOR during succeeding
years: Provided, further, That in case the same contractor holds two or more areas under different contracts of service,
the total amount of work obligations for exploration required for in the initial term of all contracts may be spent within
any one or more of them as if they are covered by a single contract of service; Provided, further, That should the
CONTRACTOR fails to comply with the work obligations provided for in the contract, it shall pay to the GOVERNMENT
the amount it should have spent but did not in direct prosecution of its work obligations; Provided, further, That
the CONTRACTOR shall drill a minimum footage of test well before the end of periods of time as may be specified in the
contract with the Petroleum Board in order to be entitled to the extension of the exploration period for 3 years as
provided for in paragraph (e) herein.
a. On behalf of the GOVERNMENT, reimburse the CONTRACTOR for all operating expenses not exceeding seventy
percent of the gross proceeds from production in any year. Provided, That in any year the operating expenses exceeds
seventy percent of gross proceeds from production then the unrecovered expenses shall be recovered from the
operations of succeeding years.
b. Every contract shall provide for the compulsory relinquishment of at least twenty-five percent of the initial area at
the end of five years from its effective date and in the event of an extension of the contract from seven to ten years,
and additional relinquishment of at least twenty-five percent of the initial area at the end of seven years from its
effective date. But the portion already delineated as production area pursuant to the succeeding paragraph shall not
be taken into account in ascertaining the extent of relinquishment required. Any are renounced or abandoned under
Sec. 9 (b) above shall be credited against the portion of the area subject to the contract, which is required to be
surrendered hereunder.
c. The CONTRACTOR shall, from the discovery of petroleum in commercial quantity, delineated the production area
within the period agreed upon in the contract.
d. The exploration period under every contract shall be seven years, extendible for three years if the contractor has not
been in default in its exploration work obligations and other obligations after which the contract shall lapse unless
petroleum has been discovered by the end of the tenth year and the contractor request a further extension of one year
to determine whether it is in commercial quantity in which event, another extension of one year for exploration may
be granted. If Petroleum in commercial quantity has been discovered, the contractor may retain after the exploration
period and during the effectively of the contract twelve and one-half percent of the initial area in addition to the
delineated production area: Provided, further, That the contractor shall pay annual rentals on such retained area which
shall not be less than ten pesos per hectare or fraction thereof for onshore areas and not less than twenty pesos as
determined by the Petroleum Board per hectare or fraction thereof for offshore areas: Provided, further, That such
rentals can be offset against exploration expenditures actually spent on such area.
e. Where petroleum of commercial quantity is discovered during the exploration period in any area covered by the
contract, the contract with respect to said area shall remain in force for production purposes during the balance of the
ten-year exploration period and for an additional period of twenty-five years, thereafter renewable for a period not
exceeding fifteen years under such terms and conditions as may be agreed upon by the parties at the time of renewal.
f. All materials, equipment, plants and other installations erected or placed on the expiration and/or production area of
a movable nature by the contractor shall remain properties of the contractor unless not removed therefrom within one
year after the termination of the contract.
g. The contractor shall be subject to the provisions of laws of general application relating to labor, health, safety, and
ecology insofar as they are not in conflict with the provisions otherwise contained in this Act.
h. Every contract executed in pursuance of this Act shall contain provisions regarding the discovery, production, sale,
and disposal of natural gas and casinghead petroleum spirit that shall be in line with the rules herein prescribed for
crude oil except that:

1. The market price shall be the basis for tax and all other purposes;

2. After meeting the requirements in secondary recovery operations priority shall be given to supplying
prospective demand in the Philippines.

SEC. 10. Contract Areas. Subject to Section eighteen hereof, a contractor or its affiliate may enter into one or more
contracts with the GOVERNMENT. Contracts for offshore areas may cover any portion beneath the Philippine territorial
waters or its continental shelf, or portion of continental slope, terrace or areas which are or may be subject to
Philippine jurisdiction: Provided, That for offshore areas beyond water depths of 200 meters, the Petroleum Board may
provide for more liberal terms that provided for herein with respect to contract area, exploration period and
relinquishment.
SEC.11. Transfer and Assignment. The rights and obligations under a contract executed under this Act shall not be
assigned or transferred without the prior approval of the Petroleum Board: Provided, That with respect to the transfer
or assignment of contractual right and obligations under this Act to an affiliate of the transferor, the approval thereof
by the Petroleum Board shall be automatic, if the transferee is as qualified as the transferor to enter into such contract
with the GOVERNMENT; Provided, further, That the affiliate relationship between the original transferor or a company
which holds at least fifty percent of the contractor's outstanding shares entitled to vote and each transferee shall be
maintained during the existence of the contract.
SEC. 12. Privileges of contractor. The provisions of any law to the contrary notwithstanding, a contract executed under
this Act may provide that the contractor shall have the following privileges:
1. Exemption from all taxes except income tax;

2. Exemption from payment of tariff duties and compensating tax on the importation of machinery and
equipment, and spare parts and all materials required for petroleum operations subject to the conditions that
said machinery, equipment, spare parts and materials of comparable price and quality are not manufactured
domestically; are directly and actually needed and will be used exclusively by the contractor in its operations or
in operations for it by a subcontractor; are covered by shipping documents in the name of the contractor to
whom the shipment will be delivered directly by the customs authorities; and the prior approval of the
Petroleum Board was obtained by the contractor before the importation of such machinery, equipment, spare
parts and materials which approval shall not be unreasonably withheld; Provided, however, That the contractor
or its subcontractor may not sell, transfer, or dispose of these machinery, equipment, spare parts or materials
without the prior approval of the Petroleum Board and payment of taxes due to the GOVERNMENT: Provided,
further, That should the contractor or its subcontractor sell, transfer, or dispose of these machinery,
equipment, spare parts or materials without the prior consent of the Petroleum Board, it shall pay twice the
amount of the tax exemption granted: Provided, finally, That the Petroleum Board shall allow and approve the
sale, transfer, or disposition of the said items without tax if made (1) to another contractor; (2) for reasons of
technical obsolescence; or (3) for purposes of replacement to improve and/or expand the operations of the
 contract;

3. Exemption upon approval by the Petroleum Board from laws, regulations, and / or ordinances restricting the
(1) construction, installation, and operation of power plant for the exclusive use of the contractor if no local
enterprise can supply within a reasonable period and at reasonable cost the power needed by the contractor in
its petroleum operations, (2) exportation of machinery and equipment which were imported solely for its
petroleum operation when no longer needed thereof;

4. Exemption from publication requirements under Republic Act Numbered Five Thousand Four Hundred Fifty-
five; and the provisions of Republic Act Numbered Sixty-one Hundred and Seventy three with respect to the
exploration, exploration or sale or disposition of crude oil discovered and produced in the Philippines;

5. Exportation of petroleum subject to the prior filing pro-rata of domestic needs as elsewhere provided in this
Act;

6. Entry, upon the sole approval of the Petroleum Board which shall not be unreasonably withheld, of alien
technical and specialized personnel (including the immediate members of their families), who may exercise
their professions solely for the operations of the contractor as prescribed in its contract with the
GOVERNMENT under this Act Provided, That if the employment of connection or any such alien with contractor
ceases, the applicable laws and regulations on immigration shall apply to him and his immediate family:
Provided, further, That Filipinos shall be given preference to positions for which they have adequate training
and Provided, finally, That the contractor shall adopt and implement a training program for Filipinos along
technical or specialized lines, which program shall be reported to the Petroleum Board;

7. Rights and obligations in any contract concluded pursuant to this Act shall be deemed as essential
considerations for the Conclusions thereof and shall not be unilaterally changed or impaired; and

8. The privileges and benefits granted to a contractor under the provisions of this Act together with any
applicable obligations shall likewise be made available to concessionaires under the Petroleum Act of 1949 and
their authorized contractors and/or service operators, whether local or foreign, if they so elect.

SEC. 13. Repatriation of capital and retention of profits abroad. The contractor shall be entitled to (1) repatriate over a
reasonable period the capital investment actually brought into the country in foreign exchange or other assets and
registered with the Central Bank; (2) retain abroad all foreign exchange representing proceeds arising from exports
accruing to the contractor over and above (a) the foreign exchange to be converted into pesos in an amount sufficient
to cover, or equivalent to, the local costs for administration and operations of the exported crude and (b) revenues due
the GOVERNMENT on such crude: Provided, however, That the GOVERNMENT and the contractor shall stipulate in the
contract the currency in which the GOVERNMENT revenues arising under (b) above are to be paid; (3) convert
into foreign exchange and remit abroad at prevailing rates no less favorable to contractor than those available to any
other purchaser of foreign currencies, any excess balances of their peso earnings from petroleum production and sale
over and above the current working balances they require, and (4) convert foreign exchange into Philippine Currency
for all purposes in connection with its petroleum operations at prevailing rates no less favorable to contractor than
those available to any other purchaser of such currency.
SEC. 14. Full disclosure of interest in contractor. Interest held in the contractor by domestic mining and petroleum
companies and/or the latter' stockholders may be allowed to any extent after full disclosure thereof to, and approved
by the Petroleum Board.
SEC. 15. Arbitration. The Petroleum Board may stipulate in a contract executed under this Act that disputes in the
implementation thereof between the GOVERNMENT and the CONTRACTOR may be settled in accordance with
generally accepted international arbitration practice.
SEC. 16. Performance guarantee. In order to guarantee compliance with the obligations of the contractor in contracts
executed under this Act, the contractor shall post a bond or other guarantee of sufficient amount in favor of the
GOVERNMENT and with surety or sureties satisfactory to the Petroleum Board, conditioned upon the faithful
performance by the contractor of any or all the obligations under and pursuant to said contracts.
IMPLEMENTING AGENCY
SEC. 17. There is hereby created a Petroleum Board composed of the President of the Philippine National Oil Company
as Chairman, and the Secretary of National Defense, the Executive Secretary of Natural Resources, the Secretary of
Finance, the Secretary of Justice, the Secretary of Industry, the Governor of the Central Bank and the Director of Mines
as members. The Board shall designate and appoint its Executive Director (as amended by P.D. No. 469 dated May 23,
1974).
SEC. 18. Functions of the Petroleum Board. In accordance with the provisions and objectives of this Act, the Petroleum
Board shall:
1. Define and give public notice when applicable of the areas available for service contract;

2. Enter into contracts herein authorized with such terms and conditions as may be appropriate under the
circumstances including the grant of special allowance: Provided, however, That no depletion allowance shall
be granted: Provided, further, That except as provided in Sections twenty-six and twenty-seven hereof, no
contract in favor of one contractor and its affiliates shall cover less than fifty thousand nor more than seven
hundred and fifty thousand hectares for onshore areas, or less than eighty thousand nor more than one million
five hundred thousand hectares for offshore areas: Provided, finally, That in no case shall the annual net
revenue or share of the GOVERNMENT, including all taxes paid by or on behalf of the contractor, be less than
sixty percent of the difference between the gross income and the sum of operating expenses and Filipino
participation incentive;

3. Provide for the manner and form of the income tax payment, the reimbursement of operating expenses, the
payment of service fee, and payment of Filipino participation incentive allowance, if any, in the service
contract;

4. Make specific proposals to Congress for the grant of subsidy to contractors and petroleum companies at least
sixty percent of the capital of which is owned by Philippine citizens, to be derived from the revenue or share
that will accrue to the GOVERNMENT in pursuance of this Act:

5. Undertake intensive studies and researches in oil field practices, procedures, and policies.

6. Promulgate such rules and regulations as may be necessary and assess charges for service rendered to
implement the intent and provisions of this Act;

7. Appoint, discipline and remove, and determine the compensation of, its technical staff and other personnel:
Provided, That positions which are highly technical or primarily confidential shall not be subject to the Civil
Service Laws and Rules, and of the Wage and Position Classification Office:

8. Within four months after the close of every fiscal year, submit to the President and Legislature as annual report
on its activities, with appropriate recommendation; and

9. Generally, exercise all powers necessary or incidental to attain the objective of this Act.

TAX PROVISIONS
SEC. 19. Imposition of Tax. The contractor shall be liable each taxable year for Philippine income tax on income derived
from its petroleum operations under its contract of service, computed as provided in Section 20 through 25.
SEC. 20. Determination of gross income. The gross income shall consist of:
1. In respect of crude oil exported, the gross proceeds from the sale of crude oil at the posted price;

2. In respect of crude oil sold for consumption in the Philippines, the gross income shall consist of the gross
proceeds from the sale thereof at market price per barrel;

3. In respect of natural gas and/or casing head petroleum exported or sold for consumption in the Philippines the
 gross income shall consist of the total quantity sold at the prevailing market price thereof; and

4. Such other income which are incidental to and/or arising from any petroleum operations.

SEC. 21. Deduction from gross income. In computing the taxable net income, there shall be allowed as deductions: (1)
Filipino participation incentive; and (2) Operating expenses reimbursed pursuant to Section 8 (1) which includes
amortization and depreciation as provided in Section 22.
SEC. 22. Amortization and depreciation. Intangible exploration costs may be deductible in full; all tangible exploration
costs such as capital expenditures and other recoverable capital assets are to be depreciated for a period of ten years.
SEC. 23. Deduction not allowed. In ascertaining the taxable net income, no deduction from gross income shall be
allowed in respect of any interest or other consideration paid or suffered in respect of the financing of its petroleum
operations.
SEC. 24. Return and payment of tax.. Every party to a service contract shall render to the Petroleum Board a return for
each taxable year in duplicate in such form and manner as provided by law setting forth its gross income and the
deductions herein allowed. The return shall be filed by the Petroleum Board with the Commissioner of Internal
Revenue or his deputies or other persons authorized by him to receive such return within the period specified in the
National Internal Revenue Code and the Rules and Regulations promulgated there under. Every party to a service
contract shall be subject to tax separately on its share of taxable income arising from such contract.
SEC. 25. Applicability of the provisions of the National Internal Revenue Code. All provisions of the National Internal
Revenue Code and rules and regulations promulgated in relation therewith which are not inconsistent with the
provisions of this Act shall be applicable to the CONTRACTOR.

SPECIAL PROVISIONS
SEC. 26. Option of exploration concessionaires. A holder of a valid and subsisting petroleum, exploration concession
under the Petroleum Act of 1949 may, at this option enter into a contract of service under the rules of the Petroleum
Act of 1949, subject to constitutional restrictions, with any local or foreign oil company under such terms and
conditions as may be agreed upon by the concessionaire and the service contractor. As an alternative the
concessionaire may convert his concession into a service contract as provided in this Act through negotiations, with all
the rights and privileges herein authorized: Provided, That the contract which may concluded after said negotiation
shall contain at least the minimum terms and conditions provided in this Act and shall take into account terms and
conditions more favorable to the GOVERNMENT contained in contracts involving exploration pursuant to this Act;
Provided, further, That the exploration period shall commence to run from the effective date of the original
concessions, except when the concession has been effective for a period of seven years or more, in which case
the CONTRACTOR shall be required to commence exploration drilling operations within a period of not exceeding
eighteen months from the date of effectivity of the service contract. If the CONTRACTOR is not default in the drilling
operations as here under required, an extension of the exploration period may begranted as provided in Section nine,
paragraph (e) of this Act.
SEC. 27. Alternative option of exploration concessionaire. The concessionaire referred to in the preceding section may
form a consortium with another company or companies and jointly enter into a service contract with the
GOVERNMENT under this Act, with the right to assign to the consortium, subject to the approval of the Petroleum
Board, the area covered by his concession which shall thereupon be governed by the provisions of this Act: Provided,
That the voluntary relinquishment of the concession and its assignment, as well as all technical data on the area
resulting from the studies conducted by the concessionaire and subsisting improvement introduced by him thereon,
shall be evaluated and given a fair value which may constitute his contribution, wholly or in part to the consortium:
Provided, however, That the exploration period under the new contract shall commence to run from the date of
effectivity of the contract if it covers areas in addition to the assigned areas; otherwise the provisions of the
preceding section shall apply: Provided, further, That duly published applications for exploration concessions as bids
thereof already awarded by the Secretary of Agriculture and National Resources under the provisions of the Petroleum
Act of 1949 shall be recognized and the corresponding deeds of concessions issued accordingly: Provided, finally, That
exploration concessions on which the holders thereof failed to perform for three consecutive years the exploration
work required under the provisions of the Petroleum Act of 1949, as amended by Republic Act Numbered Five
Thousand Eighty-Six shall be considered automatically cancelled
SEC. 28. Filipino Participation Incentive. The contractor under a service contract in which Philippine citizens or
corporations have a minimum participating interest of fifteen per cent in the contract area may, subject to reasonable
conditions imposed by the Petroleum Board, be granted a government subsidy, commensurate with the scope of
Filipino participation incentive not exceeding seven and one-half percent, which shall be computed by deducting the
said allowance from the posted or market price, whichever is higher, of crude oil exports produced in the contract area,
and form the market price of crude oil produced in the contract area, sold or disposed of for consumption in the
Philippines.
SEC. 29. Publicity. Negotiations with the GOVERNMENT for the concluded here under shall be given publicity consistent
with the best interest of the GOVERNMENT.
SEC. 30. Provisions of Petroleum Act Applicable. The provisions of the Petroleum Act of 1949, as amended, shall not be
applicable to the service contract provided in this Act, except the following articles.
1. Article 16, referring to public easements on lands covered by concessions;

2. Article 17, providing that petroleum operations are subject to existing mining rights, permits ,leases and
concessions in respect of substances other than petroleum, and to existing petroleum rights;

3. Article 18, referring to the right of the GOVERNMENT to established reservations or grant mining rights on
petroleum concessions;

4. Article 20, granting exploration and exploitation concessionaires the right to enter private lands covered by
their concessions;

5. Article 21, referring to easements and the exercise of the right of eminent domain over private lands for the
purpose of carrying out any work essential to petroleum operations;

6. Article 22, providing of easement over public land for the purpose of carrying out any work essential to
petroleum operations; and

7. Article 23, which grants concessionaires the right to utilize for any of the work to which the concession relates,
timber, water, and clay from any public lands within their concessions,

SEC. 31. Preference to Local Labor. The contractor shall give priority in employment to qualified personnel in the
municipality or municipalities or province where the exploration or production operations are located.
SEC. 32. Foreign Assistance. Nothing in this Act or of any other law shall preclude the GOVERNMENT of the Republic of
the Philippines, through the Petroleum Board or any other proper office or agency, from the negotiating or entering
into any agreement with any foreign country or government for assistance in terms of equipment, technical know-how
and financing for the exploration and production of indigenous crude oil and its by-products.
SEC. 33. Funds. To carry out the purpose of this Act, there is hereby appropriated; out of any funds in the National
Treasury not otherwise appropriated the sum of five hundred thousand pesos for the fiscal year nineteen hundred
ninety four. Hereafter the necessary appropriations shall be included in subsequent General Appropriations Act.
SEC. 34. Repealing Clause. All laws, executive orders and regulations inconsistent with the provisions of this Act are
hereby repealed, provided that no existing rights shall be prejudiced thereby.
SEC. 35. Effective Date. This Act shall take effect upon its approval.

viii. Enterprises Registered under Bases Convention and Development Act of 1992 and Philippine Economic Zone Act of
1995
REPUBLIC ACT NO. 7227 - AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER
PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THE PURPOSE,
PROVIDING FUNDS THEREFORE AND FOR OTHER PURPOSES
Section 1. Short Title. — This Act shall be known as the "Bases Conversion and Development Act of 1992."

Sec. 2. Declaration of Policies. — It is hereby declared the policy of the Government to accelerate the sound and
balanced conversion into alternative productive uses of the Clark and Subic military reservations and their extensions
(John Hay Station, Wallace Air Station, O'Donnell Transmitter Station, San Miguel Naval Communications Station and
Capas Relay Station), to raise funds by the sale of portions of Metro Manila military camps, and to apply said funds as
provided herein for the development and conversion to productive civilian use of the lands covered under the 1947
Military Bases Agreement between the Philippines and the United States of America, as amended.

It is likewise the declared policy of the Government to enhance the benefits to be derived from said properties in order
to promote the economic and social development of Central Luzon in particular and the country in general.

Sec. 3. Creation of the Bases Conversion and Development Authority. — There is hereby created a body corporate to
be known as the Bases Conversion and Development Authority, hereinafter referred to as the Conversion Authority,
which shall have the attribute of perpetual succession and shall be vested with the powers of a corporation.

It shall be organized within thirty (30) days after approval of this Act. It shall have a term of fifty (50) years from its
organization: provided, that Congress, by a joint resolution, may dissolve the Conversion Authority whenever in its
judgment the primary purpose for its creation has been accomplished. It shall establish its principal office in
Metropolitan Manila unless otherwise provided by the Conversion Authority and may put up such branches as may be
necessary.

Sec. 4. Purposes of the Conversion Authority. — The Conversion Authority shall have the following purposes:

(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, O'Donnell
Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those
portions of Metro Manila military camps which may be transferred to it by the President;

(b) To adopt, prepare and implement a comprehensive and detailed development plan embodying a list of projects
including but not limited to those provided in the Legislative-Executive Bases Council (LEBC) framework plan for the
sound and balanced conversion of the Clark and Subic military reservations and their extensions consistent with
ecological and environmental standards, into other productive uses to promote the economic and social development
of Central Luzon in particular and the country in general;

(c) To encourage the active participation of the private sector in transforming the Clark and Subic military
reservations and their extensions into other productive uses;

(d) To serve as the holding company of subsidiary companies created pursuant to Section 16 of this Act and to invest
in Special Economic Zones declared under Sections 12 and 15 of this Act;

(e) To manage and operate through private sector companies developmental projects outside the jurisdiction of
subsidiary companies and Special Economic Zones declared by presidential proclamations and established under this
Act;

(f) To establish a mechanism in coordination with the appropriate local government units to effect meaningful
consultation regarding the plans, programs and projects within the regions where such plans, programs and/or project
development are part of the conversion of the Clark and Subic military reservations and their extensions and the
surrounding communities as envisioned in this Act; and

(g) To plan, program and undertake the readjustment, relocation, or resettlement of population within the Clark and
Subic military reservations and their extensions as may be deemed necessary and beneficial by the Conversion
Authority, in coordination with the appropriate government agencies and local government units.

Sec. 5. Powers of the Conversion Authority. — To carry out its objectives under this Act, the Conversion Authority is
hereby vested with the following powers:

(a) To succeed in its corporate name, to sue and be sued in such corporate name and to adopt, alter and use a
corporate seal which shall be judicially noticed;
(b) To adopt, amend and repeal its bylaws;

(c) To enter into, make, perform and carry out contracts of every class, kind and description which are necessary or
incidental to the realization of its purposes with any person, firm or corporation, private or public, and with foreign
government entities;

(d) To contract loans, indebtedness, credit and issue commercial papers and bonds, in any local or convertible foreign
currency from any international financial institutions, foreign government entities, and local or foreign private
commercial banks or similar institutions under terms and conditions prescribed by law, rules and regulations;

(e) To execute any deed of guarantee, mortgage, pledge, trust or assignment of any property for the purpose of
financing the programs and projects deemed vital for the early attainment of its goals and objectives, subject to the
provisions of Article VII, Sec. 20, and Article XII, Sec. 2, paragraphs (4) and (5) of the Constitution;

(f) To construct, own, lease, operate and maintain public utilities as well as infrastructure facilities;

(g) To reclaim or undertake reclamation projects as it may deem necessary in areas adjacent or contiguous to the
Conversion Authority's lands described in Sec. 7 of this Act either by itself or in collaboration with the Public Estates
Authority (PEA) established under Presidential Decree No. 1084 as amended;

(h) To acquire, own, hold, administer, and lease real and personal properties, including agricultural lands, property
rights and interests and encumber, lease, mortgage, sell, alienate or otherwise dispose of the same at fair market value
it may deem appropriate;

(i) To receive donations, grants, bequests and assistance of all kinds from local and foreign governments and private
sectors and utilize the same;

(j) To invest its funds and other assets other than those of the Special Economic Zones under Section 12 and 15 of this
Act in such areas it may deem wise;

(k) To exercise the right of eminent domain;

(l) To exercise oversight functions over the Special Economic Zones declared under this Act and by subsequent
presidential proclamations within the framework of the declared policies of this Act;

(m) To promulgate all necessary rules and regulations; and

(n) To perform such other powers as may be necessary and proper to carry out the purposes of this Act.

Sec. 6. Capitalization. — The Conversion Authority shall have an authorized capital of One hundred billion pesos
(P100,000,000,000) which may be fully subscribed by the Republic of the Philippines and shall either be paid up from
the proceeds of the sales of its land assets as provided for in Sec. 8 of this Act or by transferring to the Conversion
Authority properties valued in such amount.

An initial operating capital in the amount of Seventy million pesos (P70,000,000) is hereby authorized to be
appropriated out of any funds in the National Treasury not otherwise appropriated which shall be covered by preferred
shares of the Conversion Authority retireable within two (2) years.

Sec. 7. Transfer of Properties. — Pursuant to paragraph (a), Sec. 4 hereof, the President shall transfer forthwith to the
Conversion Authority:

(a) Station Area in has.

 (more or less)

John Hay Air Station 570

Wallace Air Station 167

O'Donnell Transmitter Station 1,755

San Miguel Naval Communications Station 1,100

Mt. Sta. Rita Station (Hermosa, Bataan)

(b) Such other properties including, but not limited to, portions of Metro Manila military camps, pursuant to Sec. 8 of
this Act: provided, however, that the areas which shall remain as military reservations shall be delineated and
proclaimed as such by the President.

Sec. 8. Funding Scheme. — The capital of the Conversion Authority shall come from the sales proceeds and/or
transfers of certain Metro Manila military camps, including all lands covered by Proclamation No. 423, series of 1957,
commonly known as Fort Bonifacio and Villamor (Nicholas) Air Base, namely:

Camp Area in has.

(more or less)

Phase I (for immediate disposal)

1. Camp Claudio 2.0

2. Camp Bago Bantay 5.0
3. Part of Villamor Air Base 135.10
4. Part of Fort Bonifacio 498.40
————
Total 640.50
=======

Phase II

1. Camp Ver 1.9

2. Camp Melchor 1.0
3. Camp Atienza 4.9
4. Part of Villamor Air Base 37.9
5. Part of Fort Bonifacio 224.90
6. Fort Abad .60
————
Total 271.20
=======

Provided, that the following areas shall be exempt from sale:

(a) Approximately 148.80 hectares in Fort Bonifacio for the National Capital Region (NCR) Security Brigade, Philippine
Army (PA) officers' housing area, and Philippine National Police (PNP) jails and support services (Presently Camp
Bagong Diwa);

(b) Approximately 99.91 hectares in Villamor Air Base for the Presidential Airlift Wing, one squadron of helicopters for
the NCR and respective security units;
(c) The following areas segregated by Proclamation Nos.:

(1) 461, series of 1965; (AFP Officers Village)

(2) 462, series of 1965; (AFP Enlisted Men's Village)

(3) 192, series of 1967; (Veterans Center)

(4) 208, series of 1967; (National Shrines)

(5) 469, series of 1969; (Philippine College of Commerce)

(6) 653, series of 1970; (National Manpower and Youth Council)

(7) 684, series of 1970; (University Center)

(8) 1041, series of 1972; (Open Lease Concession)

(9) 1160, series of 1973; (Manila Technical Institute)

(10) 1217, series of 1973; (Maharlika Village)

(11) 682, series of 1970; (Civil Aviation Purposes)

(12) 1048, series of 1975; (Civil Aviation Purposes)

(13) 1453, series of 1975; (National Police Commission)

(14) 1633, series of 1977; (Housing and Urban Development)

(15) 2219, series of 1982; (Ministry of Human Settlements, BLISS)

(16) 172, series of 1987; (Upper, Lower and Western Bicutan and Signal Housing)

(17) 389, series of 1989; (National Mapping and Resource Information Authority)

(18) 518, series of 1990; (CEMBO, SO CEMBO, W REMBO, E REMBO, COMEMBO, PEMBO, PITOGO)

(19) 467, series of 1968; (Greater Manila Terminal Food Market Site)

(20) 347, series of 1968; (Greater Manila Food Market Site)

(21) 376, series of 1968; (National Development Board and Science Community)

(d) A proposed 30.15 hectares as relocation site for families to be affected by circumferential road 5 and radial road 4
construction: provided, further, that the boundaries and technical description of these exempt areas shall be
determined by an actual ground survey.

The President is hereby authorized to sell the above lands, in whole or in part, which are hereby declared alienable and
disposable pursuant to the provisions of existing laws and regulations governing sales of government properties:
provided, that no sale or disposition of such lands will be undertaken until a development plan embodying projects for
conversion shall be approved by the President in accordance with paragraph (b), Sec. 4, of this Act. However, six (6)
months after approval of this Act, the President shall authorize the Conversion Authority to dispose of certain areas in
Fort Bonifacio and Villamor as the latter so determines. The Conversion Authority shall provide the President a report
on any such disposition or plan for disposition within one (1) month from such disposition or preparation of such plan.
The proceeds from any sale, after deducting all expenses related to the sale, of portions of Metro Manila military
camps as authorized under this Act, shall be used for the following purposes with their corresponding percent shares of
proceeds:

(1) Thirty-two and five-tenths percent (35.5%) — To finance the transfer of the AFP military camps and the
construction of new camps, the self-reliance and modernization program of the AFP, the concessional and long-term
housing loan assistance and livelihood assistance to AFP officers and enlisted men and their families, and the
rehabilitation and expansion of the AFP's medical facilities;

(2) Fifty percent (50%) — To finance the conversion and the commercial uses of the Clark and Subic military
reservations and their extentions;

(3) Five Percent (5%) — To finance the concessional and long-term housing loan assistance for the homeless of Metro
Manila, Olongapo City, Angeles City and other affected municipalities contiguous to the base areas as mandated
herein; and

(4) The balance shall accrue and be remitted to the National Treasury to be appropriated thereafter by Congress for
the sole purpose of financing programs and projects vital for the economic upliftment of the Filipino people.

Provided, that, in the case of Fort Bonifacio, two and five tenths percent (2.5%) of the proceeds thereof in equal shares
shall each go to the Municipalities of Makati, Taguig and Pateros: provided, further, that in no case shall farmers
affected be denied due compensation.

With respect to the military reservations and their extensions, the President upon recommendation of the Conversion
Authority or the Subic Authority when it concerns the Subic Special Economic Zone shall likewise be authorized to sell
or dispose those portions of lands which the Conversion Authority or the Subic Authority may find essential for the
development of their projects.

Sec. 9. Board of Directors: Composition. — The powers and functions of the Conversion Authority shall be exercised
by a Board of Directors to be composed of nine (9) members, as follows:

(a) A full-time chairman who shall also be the president of the Conversion Authority; and

(b) Eight (8) other members from the private sector, two (2) of whom coming from the labor sector.

The chairman and members shall be appointed by the President with the consent of the Commission on Appointments.
Of the initial members of the Board, three (3) including the chairman, a representative from the private sector and a
representative from the labor sector shall be appointed for a term of six (6) years, three (3) for a term of four (4) years
and the other three (3) for a term of two (2) years. In case of vacancy in the Board, the appointee shall serve the
unexpired term of the predecessor.

No person shall be appointed or designated unless he is a natural-born Filipino citizen, of good moral character, of
unquestionable integrity, and of recognized competence in relevant fields including, but not limited to, economics,
management, international relations, law or engineering, preferably naval or aeronautical.

The chairman and president of the Conversion Authority shall have a fixed term of six (6) years.

All procedural matters in the conduct of board meetings shall be prescribed in its internal rules.

Members of the Board shall receive a per diem of not more than Five thousand pesos (P5,000) for every board
meeting: provided, however, that the per diem collected per month does not exceed the equivalent of four (4)
meetings: provided further, that the amount of per diem for every board meeting may be increased by the President
but such amount shall not be increased within two (2) years after its last increase.

SECTION 10. Functions of the Board. — The Board of Directors shall be the policy-making body of the Conversion
Authority and shall perform the following functions:

(a) Determine the organizational structure of the Conversion Authority, define the duties and responsibilities of all
officials and employees and adopt a compensation and benefit scheme at least equivalent to that of the Central Bank
of the Philippines;

(b) Appoint all officials down to the third level and authorize the president of the Conversion Authority to appoint all
others: provided, that all appointments shall be on the basis of merit and fitness and all personnel action shall be in
pursuance of Civil Service Laws, rules and regulations, except those coterminous employees of the members of the
Board;

(c) Prepare the annual and supplemental budgets of the Conversion Authority;

(d) Submit an annual report of the operation of the Conversion Authority to the President of the Philippines,
President of the Senate and Speaker of the House of Representatives;

(e) Carry out the purposes of the Conversion Authority with the following terms and references:

(1) As much as possible, major conversion projects shall be undertaken under the complete project turnkey or build-
operate-transfer (BOT) scheme, as provided under Republic Act Numbered Sixty-nine hundred and fifty-seven (RA
6957); and

(2) Starting the fourth year of the Conversion Authority's full operation, a privatization or divestment program of its
projects and subsidiaries shall begin under general guidelines prescribed by the President of the Philippines.

SECTION 11. Duties and Responsibilities of the President of the Conversion Authority. — The president of the
Conversion Authority shall have the following duties and responsibilities:

(a) To act as Chief Executive Officer of the Conversion Authority;

(b) To execute, administer and implement the policies and measures approved by the Board;

(c) To direct and supervise the operations and administration of the Conversion Authority;

(d) To represent the Conversion Authority in all dealings with offices, agencies and instrumentalities of the
Government and with all persons and entities, public or private, domestic or foreign;

(e) To direct and supervise the preparation of the agenda for the meeting of the Board, and to submit for the
consideration of the Board such policies and measures as he believes necessary to carry out the purposes and
objectives of this Act; and

(f) To exercise such other powers and functions provided in the bylaws and as may be vested in him by the Board.

SECTION 12. Subic Special Economic Zone. — Subject to the concurrence by resolution of the sangguniang
panlungsod of the City of Olongapo and the sangguniang bayan of the Municipalities of Subic, Morong and Hermosa,
there is hereby created a Special Economic and Free-port Zone consisting of the City of Olongapo and the Municipality
of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous extensions as embraced,
covered, and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America
as amended, and within the territorial jurisdiction of the Municipalities of Morong and Hermosa, Province of Bataan,
hereinafter referred to as the Subic Special Economic Zone whose metes and bounds shall be delineated in a
proclamation to be issued by the President of the Philippines. Within thirty (30) days after the approval of this Act,
each local government unit shall submit its resolution of concurrence to join the Subic Special Economic Zone to the
office of the President. Thereafter, the President of the Philippines shall issue a proclamation defining the metes and
bounds of the Zone as provided herein.

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions
of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in and around the zone and to
attract and promote productive foreign investments;

(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 Customs and Tariff Code and other relevant
tax laws of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national,
shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the
National Government, one percent (1%) each to the local government units affected by the declaration of the zone in
proportion to their population area, and other factors. In addition, there is hereby established a development fund of
one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone
to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and
other municipalities contiguous to be base areas.

In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special
Economic Zone, the same shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and future shall
be allowed and maintained in the Subic Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and other
financial institutions within the Subic Special Economic Zone;

(f) Banking and finance shall be liberalized with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than Two
hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21) years of age,
shall be granted permanent resident status within the Subic Special Economic Zone. They shall have freedom of ingress
and egress to and from the Subic Special Economic Zone without any need of special authorization from the Bureau of
Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this Act may also issue
working visas renewal every two (2) years to foreign executives and other aliens possessing highly-technical skills which
no Filipino within the Subic Special Economic Zone possesses, as certified by the Department of Labor and
Employment. The names of aliens granted permanent residence status and working visas by the Subic Bay
Metropolitan Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof;
(h) The defense of the zone and the security of its perimeters shall be the responsibility of the National Government
in coordination with the Subic Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own internal security and firefighting forces; and

(i) Except as herein provided, the local government units comprising the Subic Special Economic Zone shall retain
their basic autonomy and identity. The cities shall be governed by their respective charters and the municipalities shall
operate and function in accordance with Republic Act No. 7160, otherwise known as the Local Government
Code of 1991.

SECTION 13. The Subic Bay Metropolitan Authority. —

(a) Creation of the Subic Bay Metropolitan Authority. — A body corporate to be known as the Subic Bay Metropolitan
Authority, is hereby created as an operating and implementing arm of the Conversion Authority.

(b) Powers and Functions of the Subic Bay Metropolitan Authority. — The Subic Bay Metropolitan Authority,
otherwise known as the Subic Authority, shall have the following powers and functions:

(1) To operate, administer, manage and develop the ship repair and ship building facility, container port, oil storage
and refueling facility and Subic Air Base within the Subic Special Economic and Free-Port Zone as a free market in
accordance with the policies set forth in Section 12 of this Act;

(2) To accept any local or foreign investment, business or enterprise, subject only to such rules and regulations to be
promulgated by the Subic Authority in conformity with the policies of the Conversion Authority without prejudice to
the nationalization requirements provided for in the Constitution;

(3) To undertake and regulate the establishment, operation and maintenance of utilities, other services and
infrastructure in the Subic Special Economic Zone including shipping and related business, stevedoring and port
terminal services or concessions, incidental thereto and airport operations in coordination with the Civil Aeronautics
Board, and to fix just and reasonable rates, fares, charges and other prices therefore;

(4) To construct, acquire, own, lease, operate and maintain on its own or through contract, franchise, license permits
bulk purchase from the private sector and build-operate-transfer scheme or joint-venture the required utilities and
infrastructure in coordination with local government units and appropriate government agencies concerned and in
conformity with existing applicable laws therefore;

(5) To adopt, alter and use a corporate seal, to contract, lease, sell, dispose, acquire and own properties; to sue and
be sued in order to carry out its duties and functions as provided for in this Act and to exercise the power of eminent
domain for public use and public purpose;

(6) Within the limitation provided by law, to raise and/or borrow the necessary funds from local and international
financial institutions and to issue bonds, promissory notes and other securities for that purpose and to secure the same
by guarantee, pledge, mortgage, deed of trust, or assignment of its properties held by the Subic Authority for the
purpose of financing its projects and programs within the framework and limitations of this Act;

(7) To operate directly or indirectly or license tourism-related activities subject to priorities and standards set by the
Subic Authority including games and amusements, except horse racing, dog racing and casino gambling which shall
continue to be licensed by the Philippine Amusement and Gaming Corporation (PAGCOR) upon recommendation of the
Conversion Authority; to maintain and preserve the forested areas as a national park;

(8) To authorize the establishment of appropriate educational and medical institutions;

(9) To protect, maintain and develop the virgin forests within the baselands which will be proclaimed as a national
park and subject to a permanent total log ban, and for this purpose, the rules and regulations of the Department of
Environment and Natural Resources and other government agencies directly involved in the above functions shall be
implemented by the Subic Authority;

(10) To adopt and implement measures and standards for environmental pollution control of all areas within its
territory, including, but not limited to all bodies of water and to enforce the same. For which purpose the Subic
Authority shall create an Ecology Center; and

(c) Board of Directors. — The powers of the Subic Authority shall be vested in and exercised by a Board of Directors,
hereinafter referred to as the Board, which shall be composed of fifteen (15) members, to wit:

(1) Representatives of the local government units that concur to join the Subic Special Economic Zone;

(2) Two (2) representatives from the National Government;

(3) Five (5) representatives from the private sector coming from the present naval stations, public works center, ship
repair facility, naval supply depot and naval air station; and

(4) The remaining balance to complete the Board shall be composed of representatives from the business and
investment sectors.

The chairman and the members of the Board shall be appointed by the President to serve for a term of six (6) years,
unless sooner removed for cause except for the representatives of the local government units who shall serve for a
term of three (3) years. In case of removal for cause, the replacement shall serve only the unexpired portion of the
term.

No person shall be appointed as a member of the Board unless he is a Filipino citizen, of good moral character, and of
recognized competence in relevant fields including, but not limited to economics, management, international relations,
law or engineering. Preference in the appointment of the members of the Board shall be given to residents within the
Subic Special Economic Zone.

Members of the Board shall receive a per diem of not more than Five thousand pesos (P5,000.00) for every board
meeting: provided, however, that the per diem collected per month does not exceed the equivalent of four (4)
meetings: provided, further, that the amount of per diem for every board meeting may be increased by the President:
provided finally, that the amount of per diem shall not be increased within two (2) years after its last increase.

(d) Chairman/Administrator. — The President shall appoint a professional manager as administrator of the Subic
Authority with a compensation to be determined by the Board subject to the approval of the Secretary of Budget, who
shall be the ex officio chairman of the Board and who shall serve as the chief executive officer of the Subic Authority:
provided, however, that for the first year of its operations from the effectivity of this Act, the mayor of the City of
Olongapo shall be appointed as the chairman and chief executive officer of the Subic Authority.

(e) Capitalization. — The Subic Authority shall have an authorized capital stock of Twenty billion pesos
(P20,000,000,000) divided into twenty thousand (P20,000) no-par shares fully subscribed and paid up by the Republic
of the Philippines with:

(1) All lands embraced, covered and defined in Section 12 hereof, as well as permanent improvements and fixtures
upon proper inventory not otherwise alienated, conveyed, or transferred to another government agency;

(2) All other assets which the President may transfer to the Subic Authority as part of the equity contribution of the
Government; and

(3) Cash contribution by the Government in the amount of Three hundred million pesos (P300,000,000) a year for the
next three (3) years, which is hereby appropriated out of any fund in the National Treasury not otherwise
appropriated.

SECTION 14. Relationship with the Conversion Authority and the Local Government Units. —

(a) The provisions of existing laws, rules and regulations to the contrary notwithstanding, the Subic Authority shall
exercise administrative powers, rule-making and disbursement of funds over the Subic Special Economic Zone in
conformity with the oversight function of the Conversion Authority.

(b) In case of conflict between the Subic Authority and the local government units concerned on matters affecting the
Subic Special Economic Zone other than defense and security, the decision of the Subic Authority shall prevail.

SECTION 15. Clark and Other Special Economic Zones. — Subject to the concurrence by resolution of the local
government units directly affected, the President is hereby authorized to create by executive proclamation a Special
Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as
embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States
of America, as amended, located within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and
Porac, Province of Pampanga, and the Municipality of Capas, Province of Tarlac, in accordance with the policies as
herein provided insofar as applicable to the Clark military reservations.

The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with
such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66 as
amended.

The policies to govern and regulate the Clark Special Economic Zone shall be determined upon consultation with the
inhabitants of the local government units directly affected which shall be conducted within six (6) months upon
approval of this Act.

Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall
create other Special Economic Zones, in the base areas of Wallace Air Station in San Fernando, La Union (excluding
areas designated for communications, advance warning and radar requirements of the Philippine Air Force to be
determined by the Conversion Authority) and Camp John Hay in the City of Baguio.

Upon recommendation of the Conversion Authority, the President is likewise authorized to create Special Economic
Zones covering the Municipalities of Morong, Hermosa, Dinalupihan, Castillejos, and San Marcelino.

SECTION 16. Subsidiaries. — The Conversion Authority shall have the power to form, establish, organize and maintain
a subsidiary corporation or corporations. Such subsidiary or subsidiaries shall be formed in accordance with the
Philippine Corporation Law and existing rules and regulations promulgated by the Securities and Exchange Commission,
unless otherwise provided in this Act. In all cases, the Conversion Authority shall own initially at least fifty-one per
centum (51%) of the capital stock of a subsidiary. The Conversion Authority shall also initially have the majority of the
Board of Directors of the subsidiaries, of which at least one (1) director shall be the chairman of the Conversion
Authority and a second director shall be the president of the Conversion Authority or his designated representative.

Such subsidiaries shall be exempt from the coverage of the Civil Service Laws, rules and regulations.

SECTION 17. Supervision. — The Conversion Authority shall be under the direct control and supervision of the Office
of the President for purposes of policy direction and coordination.

SECTION 18. Legal Counsel. — Without prejudice to the hiring of an outside counsel, the Government Corporate
Counsel shall be the ex officio legal counsel of the Conversion Authority, the governing boards of the Special Economic
Zones and the subsidiaries wherein the Conversion Authority owns the majority of the shares of stocks, and for this
purpose he may designate a full time representative whose compensation shall be approved by the Board.
SECTION 19. Auditor. — The Commission on Audit shall appoint a representative who shall be the full time auditor of
the Conversion Authority, its subsidiaries and the Special Economic Zones and such personnel as may be necessary to
assist said representative in the performance of his duties. He is mandated to impose pre-audit within thirty (30) days
after submission of all proposed substantial sales, transfers, and alienations of property. He shall likewise render a full
report thereof to Congress every sixty (60) days. The salaries of the auditor and his staff shall be approved by the
Board.

Sec. 20. Interim Capacity. — Except for the chairman of the Subic Authority, the chairman and other members of the
Board of the Conversion Authority and the Subic Authority shall act in an interim capacity and shall serve until the 31st
of July 1992 or until such time that their successors shall have been duly appointed.

Sec. 21. Injunction and Restraining Order. — The implementation of the projects for the conversion into alternative
productive uses of the military reservations are urgent and necessary and shall not be restrained or enjoined except by
an order issued by the Supreme Court of the Philippines.

Sec. 22. Separability Clause. — If any provision of this Act shall be held unconstitutional or invalid, the other
provisions not otherwise affected shall remain in full force and effect.

Sec. 23. Repealing Clause. — All laws, executive issuances or parts thereof which are inconsistent herewith are hereby
repealed or amended accordingly.

Sec. 24. Effectivity Clause. — This Act shall take effect upon its publication in at least one (1) newspaper of general
circulation.

[REPUBLIC ACT NO. 7916]

(as amended by Republic Act No. 8748)
AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS FOR THE CREATION, OPERATON,
ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN THE PHILIPPINES, CREATING FOR THIS
PURPOSE, THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA), AND FOR OTHER PURPOSES.
CHAPTER I

PURPOSES AND OBJECTIVES: ESTABLISHMENT

AND NATURE OF SPECIAL ECONOMIC ZONES;
COORDINATION WITH OTHER SIMILAR SCHEMES

SEC. 1. Title. – This act shall be known and cited as "The Special Economic Zone Act of 1995."

SEC. 2. Declaration of Policy. – It is the declared policy of the government to translate into practical realities the
following State policies and mandates in the 1987 Constitution, namely:

(a) "The State recognizes the indispensible role of the private sector, encourages private enterprise, and provides
incentives to needed investments." (Sec. 20, Art II)

(b) "The State shall promote the preferential use of Filipino labor, domestic materials and locally produced goods and
adopt measures that help make them competitive." (Sec. 12, Art XII)

In pursuance of these policies, the government shall actively encourage, promote, induce and accelerate a sound and
balanced industrial, economic and social development of the country in order to provide jobs to the people specially
those in the rural areas, increase their productivity and their individual and family income, and thereby improve the
level and quality of their living condition through the establishment, among others, of special economic zones in suitable
and strategic locations in the country and through measures that shall effectively attract legitimate and productive
foreign investments.
SEC. 3. Purposes, Intents and Objectives. – It is the purpose, intent and objective of this Act:

(a) To establish the legal framework and mechanisms for the integration, coordination, planning and monitoring of
special economic zones, industrial estates / parks, export processing zones and other economic zones;

(b) To transform selected areas in the country into highly developed agro industrial, industrial, commercial, tourist,
banking, investment, and financial centers, where highly trained workers and efficient services will be available to
commercial enterprises;

(c) To promote the flow of investors, both foreign and local, into special economic zones which would generate
employment opportunities and establish backward and forward linkages among industries in and around the economic
zones;

(d) To stimulate the repatriation of Filipino capital by providing attractive climate and incentives for business activity;

(e) To promote financial and industrial cooperation between the Philippines and industrialized countries through
technology-intensive industries that will modernize the country’s industrial sector and improve productivity levels by
utilizing new technological and managerial know-how; and

(f) To vest the special economic zones on certain areas thereof with the status of a separate customs territory within the
framework of the Constitution and the national sovereignty and territorial integrity of the Philippines.

SEC. 4. Definition of Terms. – For purposes of this Act, the following definitions shall apply to the following terms:

(a) "Special Economic Zones (SEZ)" – hereinafter referred to as the ECOZONES, are selected areas with highly developed
or which have the potential to be developed into agro-industrial, Industrial tourist/recreational, commercial, banking,
investment and financial centers. An ECOZONE may contain any or all of the following: Industrial Estates (IEs), Export
Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers.

(b) "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.

(c) "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.

(d)"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.

SEC. 5. Establishment of ECOZONES. – To ensure the viability and geographical dispersal of ECOZONES through a system
of prioritization, the following areas are initially identified as ECOZONES, subject to the criteria specified in Section 6:

(a) So much as may be necessary of that portion of Morong, Hermosa, Dinalupihan, Orani, Samal, and Abucay in the
Province of Bataan;

(b) So much as may be necessary of that portion of the municipalities of Ibaan, Rosario, Taysan, San Jose, San Juan, and
cities of Lipa and Batangas;
(c) So much as may be necessary of that portion of the City of Cagayan de Oro in the Province of Misamis Oriental;

(d) So much as may be necessary of that portion of the City of Iligan in the Province of Lanao del Norte;

(e) So much as may be necessary of that portion of the Province of Saranggani;

(f) So much as may be necessary of that portion of the City of Laoag in the Province of Ilocos Norte;

(g) So much as may be necessary of that portion of Davao City and Samal Island in the Province of Davao del Norte;

(h) So much as may be necessary of that portion of Oroquieta City in the Province of Misamis Occidental;

(i) So much as may be necessary of that portion of Tubalan Cove, Malita in the Province of Davao del Sur;

(j) So much as may be necessary of that portion of Baler, Dinalungan and Casiguran including its territorial waters and
islets and its immediate environs in the Province of Aurora;

(k) So much as may be necessary of that portion of cities of Naga and Iriga in the Province of Camarines Sur, Legaspi and
Tabaco in the Province of Albay, and Sorsogon in the Province of Sorsogon;

(l) So much as may be necessary of that portion of Bataan Island in the Province of Batanes;

(m) So much as may be necessary of that portion of Lapu-lapu in the Island of Mactan, and the municipalities of
Balamban and Pinamungahan and the cities of Cebu and Toledo and the Province of Cebu, including its territorial waters
and islets and its immediate environs;

(n) So much as may be necessary of that portion of Tacloban City;

(o) So much as may be necessary of that portion of the Municipality of Barugo in the Province of Leyte;

(p) So much as may be necessary of that portion of the Municipality of Buenavista in the Province of Guimaras;

(q) So much as may be necessary of that portion of the municipalities of San Jose de Buenavista, Hamtic, Sibalon, and
Culasi in the Province of Antique;
(r) So much as may be necessary of that portion of the municipalities of Catarman, Bobon and San Jose in the Province
of Northern Samar, the Island of Samar;

(s) So much as may be necessary of that portion of the Municipality of Ternate and its immediate environs in the
Province of Cavite;

(t) So much as may be necessary of that portion of Polloc, Parang in the Province of Maguindanao;

(u) So much as may be necessary of that portion of the Municipality of Boac in the Province of Marinduque;

(v) So much of may be necessary of that portion of the Municipality of Pitogo in the Province of Zamboanga del Sur;

(w) So much as may be necessary of that portion of Dipolog City-Manukan Corridor in the Province of Zamboanga del
Norte;

(x) So much as may be necessary of that portion of Mambajao, Camiguin Province;

(y) So much as may be necessary of that portion of Infanta, Real, Polillo, Alabat, Atimonan, Mauban, Tiaong, Pagbilao,
Mulanay, Tagkawayan, and Dingalan Bay in the Province of Quezon;
(z) So much as may be necessary of that portion of Butuan City and the Province of Agusan del Norte, including its
territorial waters and islets and its immediate environs;

(aa) So much as may be necessary of that portion of Roxas City including its territorial waters and islets and its
immediate environs in the Province of Capiz;

(bb) So much as may be necessary of that portion of San Jacinto, San Fabian, Mangaldan, Lingayen, Sual, Dagupan,
Alaminos, Manaoag, Binmaley in the Province of Pangasinan;

(cc) So much as may be necessary of that portion of the autonomous region;

(dd) So much as may be necessary of that portion of Masinloc, Candelaria and Sta. Cruz in the Province of Zambales;

(ee)So much as may be necessary of that portion of the Palawan Island;

(ff) So much as may be necessary of that portion of General Santos City in South Cotabato and its immediate environs;
(gg) So much as may be necessary of that portion of Dumaguete City and Negros Oriental, including its territorial waters
and islets and its immediate environs;

(hh)So much as may be necessary of that portion of the Province of Ilocos Sur;

(ii) So much as may be necessary of that portion of the Province of La Union;

(jj) So much as may be necessary of that portion of the Province of Laguna, including its territorial waters and its
immediate environs;

(kk) So much as may be necessary of that portion of the Province of Rizal;

(ll) All existing export processing zones and government-owned industrial estates; and

(mm) Any private industrial estate which shall voluntarily apply for conversion into an ECOZONE.

These areas shall be developed through any of the following schemes:

i. Private initiative;

ii. Local government initiative with the assistance of the national government; and

iii. National government initiative.

The metes and bounds of each ECOZONE are to be delineated and more particularly described in a proclamation to be
issued by the President of the Philippines, upon the recommendation of the Philippine Economic Zone Authority (PEZA),
which shall be established under this Act, in coordination with the municipal and / or city council, National Land Use
Coordinating Committee and / or the Regional Land Use Committee.

SEC. 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 of 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.

Other 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.

SEC. 7. ECOZONE to be a Decentralized Agro-Industrial, Industrial, Commercial / Trading, Tourist, Investment and
Financial Community. - Within the framework of the Constitution, the interest of national sovereignty and territorial
integrity of the Republic, ECOZONE shall be developed, as much as possible, into a decentralized, self-reliant and self-
sustaining industrial,commercial/trading, agro-industrial, tourist, banking, financial and investment center with
minimum government intervention. Each ECOZONE shall be provided with transportation, telecommunications, and
other facilities needed to generate linkage with industries and employment opportunities for its own inhabitants and
those of nearby towns and cities.

The ECOZONE shall administer itself on economic, financial, industrial, tourism development and such other matters
within the exclusive competence of the national government.

The ECOZONE may establish mutually beneficial economic relations with other entities within the country, or, subject to
the administrative guidance of the Department of Foreign Affairs and/or the Department of Trade and Industry, with
foreign entities or enterprises.

Foreign citizens and companies owned by non-Filipinos in whatever proportion may set up enterprises in the ECOZONE,
either by themselves or in joint venture with Filipinos in any sector of industry, international trade and commerce within
the ECOZONE. Their assets, profits and other legitimate interests shall be protected: Provided, That the ECOZONE
through the PEZA may require a minimum investment for any ECOZONE enterprises in freely convertible currencies:
Provided, further, That the new investment shall fall under the priorities, thrusts and limits provided for in the Act.

SEC. 8. ECOZONE to be Operated and Managed as Separate Customs Territory. – The ECOZONE shall be managed and
operated by the PEZA as separate customs territory.

The PEZA is hereby vested with the authority to issue certificate of origin for products manufactured or processed in
each ECOZONE in accordance with the prevailing rules or origin, and the pertinent regulations of the Department of
Trade and Industry and/or the Department of Finance.
SEC. 9. Defense and Security. – The defense of the ECOZONE and the security of its perimeter fence shall be the
responsibility of the national government in coordination with the PEZA. Military forces sent by the national
government for the purpose of defense shall not interfere in the internal affairs of any of the ECOZONE and expenditure
for these military forces shall be borne by the national government. The PEZA may provide and establish the ECOZONES’
internal security and firefighting forces.

SEC. 10. Immigration. – Any investor within the ECOZONE whose initial investment shall not be less than One Hundred
Fifty Thousand Dollars ($150,000.00), his/her spouse and dependent children under twenty-one (21) years of age shall
be granted permanent resident status within the ECOZONE. They shall have freedom of ingress and egress to and from
the ECOZONE without any need of special authorization from the Bureau of Immigration.

The PEZA shall issue working visas renewable every two (2) years to foreign executives and other aliens, processing
highly-technical skills which no Filipino within the ECOZONE possesses, as certified by the Department of Labor and
Employment. The names of aliens granted permanent resident status and working visas by the PEZA shall be reported to
the Bureau of Immigration within thirty (30) days after issuance thereof.

CHAPTER II

GOVERNING STRUCTURES
SEC. 11. The Philippine Economic Zone Authority (PEZA) Board. – There is hereby created a body corporate to be known
as the Philippine Economic Zone Authority (PEZA) attached to the Department of Trade and Industry. The Board shall
have a director general with the rank of department undersecretary who shall be appointed by the President. The
director general shall be at least forty (40) years of age, of proven probity and integrity, and a degree holder in any of
the following fields: economics, business, public administration, law, management or their equivalent, and with at least
ten (10) years relevant working experience preferably in the field of management or public administration.

"The director general shall be assisted by three (3) deputy directors general each for policy and planning, administration
and operation, who shall be appointed by the PEZA Board, upon the recommendation of the director general. The
deputy directors general shall be at least thirty-five (35) years old, with proven probity and integrity, and a degree
holder in any of the following fields: economics, business, public administration, law, management or their equivalent."

"The Board shall be composed of thirteen (13) members as follows: the Secretary of the Department of Trade and
Industry as Chairman, the Director General of the Philippine Economic Zone Authority as Vice-Chairman, the
undersecretaries of the Department of Finance, the Department of Labor and Employment, the Department of Interior
and Local Government, the Department of Environment and Natural Resources, the Department of Agriculture, the
Department of Public Works and Highways, the Department of Science and Technology, the Department of Energy, the
Deputy Director General of the National Economic and Development Authority, one (1) representative from the
investors / business sector in the ECOZONE. In case of the unavailability of the Secretary of the Department of Trade and
Industry to attend a particular board meeting, the Director General of PEZA shall act as Chairman."

The existing Export Processing Zone Authority (EPZA) created under Presidential Decree No. 66 shall evolve into the
PEZA in accordance with the guidelines and regulations set forth in an executive order issued for this purpose.

Members of the Board shall receive a per diem of not less than the amount equivalent to the representation and
transportation allowances of the members of the Board and / or as may be determined by the Department of Budget
and Management: Provided, however, That per diems collected per month does not exceed the equivalent of four (4)
meetings.

SEC. 12. Functions and Powers of PEZA Board. – The Philippine Economic Zone Authority (PEZA) Board shall have the
following functions and powers:

(a) Set the general policies on the establishment and operations of the ECOZONES, industrial estates, export processing
zones, free trade zones, and the like;

(b) Review proposals for the establishment of ECOZONES based on the set criteria under Section 6 and endorse to the
President the establishment of the ECOZONES, industrial estates, export processing zones, free trade zones and the like.
Thereafter, it shall facilitate and assist in the organization of said entities;

(c) Regulate and undertake the establishment, operation and maintenance of utilities, other services and infrastructure
in the ECOZONE, such as heat, light and power, water supply, telecommunication, transport, toll roads and bridges, port
services, etc., and to fix just, reasonable and competitive rates, charges and fees therefore;

(d) Approve the annual budget of the PEZA and the ECOZONE development plans;

(e) Issue rules and regulations to implement the provisions of this Act in so far as its power and functions are concerned;

(f) Exercise its powers and functions as provided for in this Act; and

(g) Render annual reports to the President and the Congress.

SEC. 13. General Powers and Functions of the Authority. – The PEZA shall have the following powers and functions:

(a) To operate, administer, manage and develop the ECOZONE according to the principles and provisions set forth in this
Act;

(b) To register, regulate and supervise the enterprises in the ECOZONE in an efficient and decentralized manner;

(c) To coordinate with local government units and exercise general supervision over the development, plans, activities
and operations of the ECOZONES, industrial estates, export processing zones, free trade zones, and the like;

(d) In coordination with local government units concerned and appropriate agencies, to construct, acquire, own, lease,
operate and maintain on its own or through contract, franchise, license, bulk purchase from the private sector and
build-operate-transfer scheme or joint venture, adequate facilities and infrastructure, such as light and power systems,
water supply and distribution systems, telecommunication and transportation, buildings, structures, warehouses, roads,
bridges, ports and other facilities for the operation and development of the ECOZONE;

(e) To create, operate and/or contract to operate such agencies and functional units or offices of the authority as it may
deem necessary;

(f) To adopt, alter and use a corporate seal; make contracts, lease, own or otherwise dispose of personal or real
property; sue and be sued; and otherwise carry out its duties and functions as provided for in this Act;

(g) To coordinate the formulation and preparation of the development plans of the different entities mentioned above;

(h) To coordinate with the National Economic Development Authority (NEDA), the Department of Trade and Industry
(DTI), the Department of Science and Technology (DOST), and the local government units and appropriate government
agencies for policy and program formulation and implementation; and

(i) To monitor and evaluate the development and requirements of entities in subsection (a) and recommend to the local
government units or other appropriate authorities the location, incentives, basic services, utilities and infrastructure
required or to be made available for said entities.

SEC. 14. Powers and Functions of the Director General. – The director general shall be the overall coordinator of the
policies, plans and programs of the ECOZONES. As such, he shall provide overall supervision over and general direction
to the development and operations of these ECOZONES. He shall determine the structure and the staffing pattern and
personnel complement of the PEZA and establish regional offices, when necessary, subject to the approval of the PEZA
Board.

In addition, he shall have the following specific powers and responsibilities:

(a) To safeguard all the lands, buildings, records, monies, credits and other properties and rights of the ECOZONES;

(b) To ensure that all revenues of the ECOZONE are collected and applied in accordance with its budget;

(c) To ensure that the investors/firms and employees of the ECOZONES are properly discharging their respective duties;

(d) To give such information and recommend such measures to the Board, as he shall deem advantageous to the
ECOZONE;

(e) To submit to the Board, the ongoing and proposed projects, work and financial program, annual budget of receipts,
and expenditures of the ECOZONE;

(f) To represent the ECOZONE in all its business matters and sign on its behalf after approval of the Board, all its bonds,
borrowings, contracts, agreements and obligations made in accordance with this Act;

(g) To acquire jurisdiction, as he may deem proper, over the protests, complaints, and claims of the residents and
enterprises in the ECOZONE concerning administrative matters;

(h) To recommend to the Board the grant, approval, refusal, amendment or termination of the ECOZONE franchises,
licenses, permits, contracts, and agreements in accordance with the policies set by the Board;

(i) To require owners of houses, buildings or other structures constructed without the necessary permit whether
constructed on public or private lands, to remove or demolish such houses, buildings, structures within sixty (60) days
after notice and upon failure of such owner to remove or demolish such house, building our structure within said period,
the director general or his authorized representative may summarily cause its removal or demolition at the expense of
the owner, any existing law, decree, executive order and other issuances or part thereof to the contrary
notwithstanding;

(j) To take such emergency measures as may be necessary to avoid fires, floods and mitigate the effects of storms and
other natural or public calamities;

(k) To prepare and make out plans for the physical and economic development of the ECOZONE, including zoning and
land subdivision, and issue such rules and regulations which shall be submitted to the Board for its approval; and

(l) To perform such other duties and exercises such powers as may be prescribed by the Board, and to implement the
policies, rules and regulations set by the PEZA.

SEC. 15. Administration of Each ECOZONE. – Except for privately-owned, managed or operated ECOZONES, each
ECOZONE shall be organized, administered, managed and operated by the ECOZONE executive committee composed of
the following:

(a) The administrator who shall be appointed by the PEZA Board upon recommendation of the director general; and

(b) One (1) deputy administrator to be appointed by the Board upon recommendation of the director general.

An ECOZONE advisory body shall be created with the following members:

1. The president of the association of investors in the ECOZONE;

2. The governor of the province where the ECOZONE is located;

3. The mayor/s of the municipality/ies or city/ies where the ECOZONE is located;

4. The president of an accredited labor union in the ECOZONE;

5. The representative of the business sector in the periphery of the ECOZONE; and

6. The representative of the PEZA.

The ECOZONE advisory body shall have the following functions:

i. Advise the ECOZONE management on matters pertaining to policy initiatives; and

ii.Assist the ECOZONE management in setting problems arising between labor and any enterprise in the ECOZONE.

Privately-owned ECOZONES shall retain autonomy and independence but shall be monitored by the PEZA for the
implementation of incentives and operations for adherence to the law.

SEC. 16. Personnel. – The PEZA Board of Directors shall provide for an organization and staff of officers and employees
of the PEZA, and upon recommendation of the director general with the approval of the Secretary of the Department of
Trade and Industry, appoint and fix the remunerations and other emoluments: Provided, That the Board shall have
exclusive and final authority to promote, transfer, assign and reassign officers of the PEZA, any provision of existing law
to the contrary notwithstanding: Provided, further, That the director general may carry out removal of such officers and
employees.

All positions in the PEZA shall be governed by a compensation, position classification system and qualification standards
approved by the director general with the concurrence of the Board of Directors based on a comprehensive job analysis
and audit of actual duties and responsibilities. The compensation plan shall be comparable with the prevailing
compensation plans in the Subic Bay Metropolitan Authority (SBMA), Clark Development Corporation (BCDA) and the
private sector and shall be subject to the periodic review by the Board no more than once every two (2) years without
prejudice to yearly merit reviews or increases based on productivity and profitability. The PEZA shall therefore be
exempt from existing laws, rules and regulations on compensation, position classification and qualification standards. It
shall however endeavor to make its systems conform as closely as possible with the principles under Republic Act No.
6758.

The PEZA officers and employees including all Members of the Board shall not engage directly or indirectly in partisan
activities or take part in any election, except to vote.

No officer or employee of the PEZA subject to Civil Service laws and regulations shall be removed or suspended except
for cause, as provided by law.

SEC. 17. Investigation and Inquiries. – Upon a written formal complaint made under oath, which on its face provides
reasonable basis to believe that some anomaly or irregularity might have been committed, the PEZA or the
administrator of the ECOZONE concerned, shall have the power to inquire into the conduct of firms or employees of the
ECOZONE and to conduct investigations, and for that purpose may subpoena witnesses, administer oaths, and compel
the production of books, papers, and other evidences: Provided, That to arrive at the truth, the investigator(s) may grant
immunity from prosecution to any person whose testimony or whose possessions of documents or other evidence is
necessary or convenient to determine the truth in any investigation conducted by him or under the authority of the
PEZA or the administrator of the ECOZONE concerned.

SEC. 18. Prohibition Against Holding Any Other Office. – The director general, deputy director general, administrators,
officials and staff or assistants of the PEZA shall not hold any other office or employment within or outside the PEZA
during their tenure. They shall not, during their tenure, directly or indirectly, practice any profession, participate in any
business, or be financially interested in any contract with, or in any franchise, or special privilege granted by the PEZA or
national government, or any subdivision, agency, or instrumentality thereof, including any government-owned-
controlled corporation, or its subsidiary.

SEC. 19. Disbursement of Funds. – No money shall be paid out of the funds of any ECOZONE except in pursuance of the
budget as formulated and approved by the PEZA.

SEC. 20. Full Disclosure of Financial and Business Interests. – Every member of the Board of the PEZA, the director
general, the deputy directors general, and their staff shall, upon assumption of office, make full disclosure of their
financial and business Interests.

CHAPTER III

OPERATIONS WITHIN THE ECOZONE

SEC. 21. Development Strategy of the ECOZONE. - The strategy and priority of development of each ECOZONE
established pursuant to this Act shall be formulated by the PEZA, in coordination with the Department of Trade and
Industry and the National Economic and Development Authority; Provided, That such development strategy is
consistent with the priorities of the national government as outlined in the medium-term Philippine development plan.

It shall be the policy of the government and the PEZA to encourage and provide Incentives and facilitate private sector
participation in the construction and operation of public utilities and infrastructure in the ECOZONE, using any of the
schemes allowed in Republic Act No. 6957 (the build-operate-transfer law).

SEC. 22. Survey of Resources. The PEZA shall, in coordination with appropriate authorities and neighboring cities and
municipalities, immediately conduct a survey of the physical, natural assets and potentialities of the ECOZONE areas
under its jurisdiction.

SEC. 23. Fiscal Incentives. – Business establishments operating within the ECOZONES shall be entitled to the fiscal
incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or
those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987.

Furthermore, tax credits for exporters using local materials as Inputs shall enjoy the same benefits provided for in the
Export Development Act of 1994.

SEC. 24. Exemption from National and Local Taxes.- Except for real property taxes on land owned by developers, no
taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof,
five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted
as follows:

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the business establishments to the treasurer’s office of the
municipality or city where the enterprise is located.

SEC. 25. Applicable National and Local Taxes. – All persons and services establishments in the ECOZONE shall be subject
to national and local taxes under the National Internal Revenue Code and the Local Government Code.
SEC. 26. Domestic Sales. – Goods manufactured by an ECOZONE enterprise shall be made available for Immediate retail
sales in the domestic market, subject to payment of corresponding taxes on the raw materials and other regulations
that may be adopted by the Board of the PEZA.

However, in order to protect the domestic industry, there shall be a negative list of Industries that will be drawn up by
the PEZA. Enterprises engaged in the industries included in the negative list shall not be allowed to sell their products
locally. Said negative list shall be regularly updated by the PEZA.

The PEZA, in coordination with the Department of Trade and Industry and the Bureau of Customs, shall jointly issue the
necessary implementing rules and guidelines for the effective Implementation of this section.

SEC. 27. Applicability of Banking Laws and Regulations. – Existing banking laws and Bangko Sentral ng Pilipinas (BSP)
rules and regulations shall apply to banks and financial institutions to be established in the ECOZONE and to other
ECOZONE-registered enterprises. Among other pertinent regulations, these include those governing foreign exchange
and other current account transactions (trade and non-trade) local and foreign borrowings, foreign currency deposit
units, offshore banking units and other financial institutions under the supervision of the BSP.

SEC. 28. After Tax Profits. – Without prior Bangkok Sentral approval, after tax profits and other earnings of foreign
investments in enterprises in the ECOZONE may be remitted outward in the equivalent foreign exchange through any of
the banks licensed by the Bangko Sentral ng Pilipinas in the ECOZONE: Provided, however, That such foreign
investments in said enterprises have been previously registered with the Bangko Sentral.

SEC. 29. Eminent Domain. – The areas comprising an ECOZONE may be expanded or reduced when necessary. For this
purpose, the government shall have the power to acquire, either by purchase, negotiation or condemnation
proceedings, any private lands within or adjacent to the ECOZONE for:

a. Consolidation of lands for zone development purposes;

b. Acquisition of right of way to the ECOZONE; and

c. The protection of watershed areas and natural assets valuable to the prosperity of the ECOZONE.

If in the establishment of a publicly-owned ECOZONE, any person or group of persons who has been occupying a parcel
of land within the Zone has to be evicted, the PEZA shall provide the person or group of persons concerned with proper
disturbance compensation: Provided, however, That in the case of displaced agrarian reform beneficiaries, they shall be
entitled to the benefits under the Comprehensive Agrarian Reform Law, including but not limited to Section 36 of
Republic Act No. 3844, in addition to a homelot in the relocation site and preferential employment in the project being
undertaken.

SEC. 30. Leases of Lands and Buildings. – Lands and buildings in each ECOZONE may be leased to foreign investors for a
period not exceeding fifty (50) years renewable once for a period of not more than twenty-five (25) years, as provided
for under Republic Act No. 7652, otherwise known as the Investors’ Lease Act. The leasehold right acquired under long-
term contracts may be sold, transferred or assigned, subject to the conditions set forth under Republic Act No. 7652.

SEC. 31. Land Conversion. – Agricultural lands may be converted for residential, commercial, industrial and other non-
agricultural purposes, subjects to the conditions set forth under Republic Act No. 6657 and other existing laws.

SEC. 32. Shipping and Shipping Register. – Private shipping and related business including private container terminals
may operate freely in the ECOZONE, subject only to such minimum reasonable regulations of local application which the
PEZA may prescribe.

The PEZA shall, in coordination with the Department of Transportation and Communications, maintain a shipping
register for each ECOZONE as a business register of convenience for ocean-going vessels and issue related certification.
Ships of all sizes, descriptions and nationalities shall enjoy access to the ports of the ECOZONE, subject only to such
reasonable requirement as may be prescribed by the PEZA In coordination with the appropriate agencies of the national
government.

SEC. 33. Protection of Environment. - The PEZA, in coordination with the appropriate agencies, shall take concrete and
appropriate steps and enact the proper measure for the protection of the local environment.

SEC. 34. Termination of Business. - Investors In the ECOZONE who desire to terminate business or operations shall
comply with such requirements and procedures which the PEZA shall set, particularly those relating to the clearing of
debts. The assets of the closed enterprise can be transferred and the funds con be remitted out of the ECOZONE subject
to the rules, guidelines and procedures prescribed jointly by the Bangko Sentral ng Pilipinas, the Department of Finance
and the PEZA.

SEC. 35. Registration of Business Enterprises. - Business enterprises within a designated ECOZONE shall register with the
PEZA to avail of all incentives and benefits provided for in this Act.

SEC. 36. One Stop Shop Center. - The PEZA shall establish a one stop shop center for the purpose of facilitating the
registration of new enterprises in the ECOZONE. Thus, all appropriate government agencies that are Involved In
registering, licensing or issuing permits to investors shall assign their representatives to the ECOZONE to attend to
Investor’s requirements.

CHAPTER IV

INDUSTRIAL HARMONY IN THE ECOZONES

SEC. 37. Labor and Management Relations. - Except as otherwise provided in this Act, labor and management relations
in the ECOZONE shall be governed by the existing Labor Code of the Philippines. Employees and personnel in the
ECOZONE enterprises shall receive salaries and benefits and shall enjoy working conditions not less than those provided
under the Philippine Labor Code and other relevant laws, issuances, rules and regulations of the Philippine government
and the Department of Labor and Employment.

SEC. 38. Promotion of Industrial Peace. - In the pursuit of Industrial harmony in the ECOZONE, a tripartite body
composed of one (1) representative each from the Department of Labor and Employment, labor sector and business and
industry sectors shall be created In order to formulate a mechanism under a social pact for the enhancement and
preservation of industrial peace in the ECOZONE within thirty (30) days after the effectivity of this Act.

SEC. 39. Master Employment Contracts. - The PEZA, in coordination with the Department of Tabor and Employment,
shall prescribe a master employment contract for all ECOZONE enterprise staff members and workers, the terms of
which provide salaries and benefits not less than those provided under this Act, the Philippine Labor Code, as amended,
and other relevant issuances of the national government.

SEC. 40. Percentage of Foreign Nationals. - Employment of foreign nationals hired by ECOZONE enterprises in a
supervisory, technical or advisory capacity shall not exceed five percent (5%) of Its workforce without the express
authorization of the Secretary of Labor and Employment.

SEC. 41. Migrant Worker. - The PEZA, in coordination with the Department of Labor and Employment, shall promulgate
appropriate measures and programs leading to the expansion of the services of the ECOZONE to help the local
governments of nearby areas meet the needs of the migrant workers.
SEC. 42. Incentive Scheme. - An additional deduction equivalent to one- half (1/2) of the value of training expenses
incurred In developing skilled or unskilled labor or for managerial or other management development programs
incurred by enterprises In the ECOZONE can be deducted from the national government's share of three percent (3%) as
provided In Section 24.

The PEZA, the Department of Labor and Employment, and the Department of Finance shall jointly make a review of the
incentive scheme provided In this section every two (2) years or when circumstances so warrant.

CHAPTER V

NATIONAL GOVERNMENT AND OTHER ENTITIES

SEC. 43. Relationship with the Regional Development Council. - The PEZA shall determine the development goals for the
ECOZONE within the framework of national development plans, policies and goals, and the administrator shall, upon
approval by the PEZA Board, submit the ECOZONE plans, programs and projects to the regional development council for
inclusion in and as inputs to the overall regional development plan.

SEC. 44. Relationship with the Local Government Units. - Except as herein provided, the local government units
comprising the ECOZONE shall retain their basic autonomy and identity. The cities shall be governed by their respective
charters and the municipalities shall operate and function In accordance with Republic Act No. 7160, otherwise known
as the Local Government Code of 1991.

SEC. 45. Relationship of PEZA to Privately-Owned Industrial Estates. – Privately-owned industrial estates shall retain
their autonomy and independence and shall be monitored by the PEZA for the implementation of incentives.

SEC. 46. Transfer of Resources. - The relevant functions of the Board of Investments over industrial estates and agri-
export processing estates shall be transferred to the PEZA. The resources of government-owned Industrial estates and
similar bodies except the Bases Conversion Development Authority and those areas identified under Republic Act No.
7227, are hereby transferred to the PEZA as the holding agency. They are hereby detached from their mother agencies
and attached to the PEZA for policy, program and operational supervision.

The Boards of the affected government-owned industrial estates shall be phased out and only the management level
and an appropriate number of personnel shall be retained.

Government personnel whose services are not retained by the PEZA or any government office within the ECOZONE shall
be entitled to separation pay and such retirement and other benefits they are entitled to under the laws then in force at
the time of their separation: Provided, That in no case shall the separation pay be less than one and one-fourth (1 1/4)
month of every year of service.

CHAPTER VI

MISCELLANEOUS PROVISIONS

SEC. 47. Appropriation. - Upon the effectivity of this Act, all funds of the former Export Processing Zone Authority (EPZA)
shall be transferred to the newly-created Philippine Economic Zone Authority, Thereafter, any sum as may be necessary
to augment its capital outlay shall be Included In the General Appropriations Act to be treated as an equity of the
national government.

Additional funding shall come from the following:

(a) The annual subsidies, appropriations and/or other assets of the exports processing zone, and the industrial estates
and other economic areas that have been absorbed/transferred to the PEZA as mandate in this Act;
(b) The proceeds from the rent of lands, buildings, and other properties of the ECOZONES concerned;

(c) The proceeds from fees, charges and other revenue-generatlng Instruments which the PEZA is authorized to impose
and collect under this Act,

(d) The proceeds from bonds which the PEZA authorized to float both domestic and abroad; and

(e) The advance rentals, license fees, and other charges which the PEZA is authorized to impose under this Act and
which an investor is willing to advance payment for.

SEC. 48. Applicability of National Laws. - National laws shall prevail vis-a- vis ECOZONE rules, regulations and standards,
unless there is a clear intent in this Act or other Acts of Congress to vest the ECOZONE specific power and privileges not
otherwise allowed under existing laws.

SEC. 49. Authority of the President to Advance Initial Funding.-- Subject to existing laws, the President of the Philippines
is hereby authorized to advance out of the savings of the Office of the President such funds as may be necessary to
effect the organization of an ECOZONE which shall be reimbursed by the PEZA at reasonable term and condition.

SEC. 50. Non-Applicability on Areas Covered by Republic Act. No. 7227. - This Act shall not be applicable to economic
zones and areas already created or to be created under Republic Act No. 7227 or other special laws, and governed by
authorities constituted pursuant thereto.

SEC. 51. Ipso-Facto Clause. - All privileges, benefits, advantages or exemptions granted to special economic zones under
Republic Act. No. 7227, shall ipso-facto be accorded to special economic zones already created or to be created under
this Act. The free port status shall not be vested upon new special economic zones.

SEC. 52. Separability Clause. - The provisions of this Act are hereby declared separable, and in the event one or more of
such provisions or part thereof are declared unconstitutional, such declaration of unconstitutionality shall not affect the
validity of the other provisions thereof.

SEC. 53. Interpretation / Construction. - The powers, authorities and functions that are vested In the Philippine
Economic Zone Authority (PEZA) and the ECOZONES concerned are intended to establish decentralization of
governmental functions and authority as well as an efficient and effective working relationship between the ECOZONE,
the central government and the local government units.

SEC. 54. Repealing Clause. - All laws, acts, presidential decrees, executive orders, proclamations and / or administrative
regulations which are inconsistent with the provisions of this Act, are hereby amended, modified, superseded or
repealed accordingly.

SEC. 55. Implementing Rules and Regulations. - The Department of Trade and Industry, the National Economic and
Development Authority, the Department of Finance, the Bureau of Customs, the Department of Agrarian Reform, the
Department of Interior and local Government, the Philippine Economic Zone Authority, and the representatives from
the technical staff of the Committee on Economic Affairs of both Houses of Congress shall formulate the implementing
rules and regulations of this Act within ninety (90) days after its approval. Such rules and regulations shall take effect
fifteen (15) days after their publication in a newspaper of general circulation in the Philippines.

SEC. 56. Transitory Provisions. - Prior to the effectivity of the implementing rules and regulations of this Act, the
provisions of Presidential Decree No. 66, as amended, and its implementing rules and regulations shall remain in force.

SEC. 57. Effectivity- This Act shall take effect upon its approval.

a. Clarification of coverage of 5% Preferential Rate by RR 20-2000, as amended by RR 2-2005, amending RR

1-95 and RR 16-99 and further amended by RRs 11, 12, 13-2005
 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE

October 14, 2002

REVENUE REGULATIONS NO. 20-2002

SUBJECT : 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

TO : All Internal Revenue Officers and Others Concerned

These Regulations are issued to clarify the internal revenue tax treatment of
income earned from unregistered activities by enterprises that are registered with the
Subic Bay Metropolitan Authority, the Clark Development Authority, or the
Philippine Economic Zone Authority, as the case may be.

SECTION 1. 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.

(Page 1of 2 pages)

 SEC. 2. REPEALING CLAUSE – Section 6 (f) of Revenue Regulations No.
1-95 and the provisions of all other internal revenue issuances inconsistent herewith
are hereby repealed, modified or amended accordingly.

SEC. 3. EFFECTIVITY – Except for the second paragraph of Section 1

which is a mere reiteration of the law already enforced, these regulations shall take
effect after fifteen (15) days following publication in the Official Gazette or any
newspaper of general circulation in the Philippines.

(Original Signed)
JOSE ISIDRO N. CAMACHO
Secretary of Finance

Recommending Approval:

(Original Signed)
GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue

2
RR 2-2005
SUBJECT: Consolidated Revenue Regulations Implementing Relevant Provisions of Republic Act No. 7227 otherwise
known as “Bases Conversion and Development Act of 1992”, Republic Act 7916 as amended otherwise known as
“Special Economic Zone Act of 1995”, Republic Act No. 7903 otherwise known as “Zamboanga City Special Economic
Zone Act of 1995” and Republic Act No. 7922 otherwise known as “Cagayan Special Economic Zone Act of 1995”
Thereby Amending Revenue Regulations No. 1-95 as amended by Revenue Regulations No. 16-99.

TO: All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. - Pursuant to the provisions of Sections 244 and 245 of the National Internal Revenue Code of 1997
as amended, these regulations are hereby promulgated to implement:

1. Sections 12(b) and 12(c) of Republic Act No. 7227 governing businesses and enterprises within the Subic Special
Economic and Freeport Zone (SUBIC-ECOZONE);

2. Sections 23, 24, 26, 50 and 51 of Republic Act No. 7916 governing businesses and enterprises within the Special
Economic Zones (ECOZONE);

3. Sections 4(e) and 4(f) of Republic Act No. 7903 governing businesses and enterprises within the Zamboanga City
Special Economic Zone (ZAMBO-ECOZONE); and

4. Sections 4(b) and 4(c) of Republic Act No. 7922 governing businesses and enterprises within the Cagayan Special
Economic Zone and Free Port (CAGAYAN-ECOZONE)

SECTION 2. Definitions - For purposes of these Regulations the terms used herein shall be construed to have the
following meanings:

a. SUBIC-ECOZONE — refers to the Subic Special Economic and Freeport Zone, created under Section 12 of RA No. 7227.

b. SUBIC-ECOZONE Registered Enterprise — refers to any business entity or concern located within the SUBIC-ECOZONE
and duly registered with and/or licensed by the SBMA to operate any lawful economic activity within the SUBIC-
ECOZONE.

c. SUBIC-ECOZONE Facilities Operator — refers to a SUBICECOZONE Enterprise which operates facilities or services
within the SUBIC-ECOZONE, including the subleasing of land or other property to other SUBIC-ECOZONE Enterprise

d. SBMA — refers to the Subic Bay Metropolitan Authority, established and created pursuant to Section 13 of the
Republic Act No. 7227

e. ECOZONES or "Special Economic Zones"- shall refer to selected areas with highly developed or which have the
potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and
financial centers established in accordance with Sec 5 & 6 of Republic Act No. 7916.

f. ECOZONE Registered Enterprise – refers to any business entity or concern within the ECOZONE duly registered with
and/or licensed by the PEZA to operate any lawful economic activity within the ECOZONE. An ECOZONE Registered
Enterprise may be classified as follows:

f.1 “ECOZONE Export Enterprise” - refers to an individual, association, partnership, corporation or other form of
business organization which has been registered with the PEZA to engage in manufacturing, assembling or processing
activity falling within the purview of the Act and resulting in the exportation of 100% of its production, unless a lower
percentage of its production for exportation is prescribed by the PEZA Board subject to such terms and conditions as the
latter may determine.

f.2 “ECOZONE Domestic Market Enterprise” - refers to an individual, association, partnership, corporation or other form
of business organization which has been registered with the PEZA to engage in manufacturing, assembling or processing
activity falling within the purview of the Act resulting in the sale of its finished products in the customs territory or in the
non-restricted or authorized areas within the ECOZONE in its entirety or if exporting a portion of its production output,
it continually fails to export at least fifty percent (50%) thereof for a period of three (3) years without any justifiable
reason in case at least 60% of its working capital is owned by Philippine nationals or in case more than 40% of its
working capital is owned by foreign nationals, it continually fails to export at least seventy percent (70%) of its
production output for a period of three (3) years without any justifiable reason.

f.3 “ECOZONE Pioneer Enterprise” - shall mean an ECOZONE enterprise (1) engaged in the manufacture, processing or
production and not merely in the assembly or packaging of goods, products, commodities or raw materials that have not
been or are not being produced in the Philippines on a commercial scale or (2) which uses a design, formula, scheme,
method, process or system of production or transformation of any element, substance or raw materials into another
raw material or finished goods which is new and untried in the Philippines or (3) which produces non-conventional fuels
or manufactures equipment which utilizes non-conventional sources of energy or uses or converts to coal or other
nonconventional fuels or sources of energy in its production, manufacturing or processing operations: or (4) engaged in
the pursuit of agri-export processing zone development or (5) given such status under the Investment Priorities Plan:

Provided, That the final product in any of the foregoing instances involves or will involve substantial use and processing
of domestic raw materials, whenever available, taking into account the risk and magnitude of investment.

f.4 “ECOZONE Free Trade Enterprise” - refers to an individual, association, partnership, corporation or other form of
business organization which has been registered with the PEZA to engage in the importation of goods or merchandise
within the restricted or free trade area in the ECOZONE tax and duty-free for immediate transshipment or for storage,
repacking, sorting, mixing or manipulation and subsequent exportation unless the Board allows the sale thereof in the
customs territory subject to the payment of customs duties and internal revenue taxes and to such other terms and
conditions as it may determine.

f.5 “ECOZONE Utilities Enterprise” - shall refer to a business entity or concern within the ECOZONE duly registered with
and/or franchised/licensed by the PEZA with or without the incentives provided under Republic Act No. 6957, as
amended, (the Build-Operate-Transfer Law) and/or with or without financial exposure on the part of the PEZA, such as
contractors/operators of light and power systems, water supply and distribution systems, communications and
transportation systems within the ECOZONE and other similar or ancillary activities as may be determined by the PEZA
Board.

f.6 “ECOZONE Facilities Enterprise” - shall refer to a business entity or concern within the ECOZONE duly registered with
and/or franchised/licensed by the PEZA with or without incentives provided under Republic Act No. 6957, as amended,
(the Build-Operate-Transfer Law) and/or with or without financial exposure on the part of the PEZA such as
contractors/operators of buildings, structures, warehouses, site development and road network, ports, sewerage and
drainage system and other facilities for the development, operation and maintenance of the ECOZONE and other similar
or ancillary activities as may be determined by the PEZA Board.

f.7 “ECOZONE Developer/Operator” - refers to a business entity or concern duly registered with and/or licensed by the
PEZA to develop, operate and maintain an ECOZONE or any or all of the component IE, EPZ, Free Trade Zone or
Tourist/Recreational Center and the required infrastructure facilities and utilities such as light and power system, water
supply and distribution system, sewerage and drainage system, pollution control devices, communication facilities,
paved road network, administration building and other facilities as may be required by the PEZA.

The term shall include the PEZA and/or the Local Government Unit when by themselves or in joint venture with a
qualified private entity, shall act as the Developer/Operator of the ECOZONES. As such, they shall be entitled to the
same incentives under Rule XIV of these Rules in accordance with the pertinent provisions of Republic Act No.7916 and
the Omnibus Investments Code.

f.8 “ECOZONE Service Enterprise” - shall refer to a business entity or concern within the ECOZONE such as but not
limited to those engaged in customs brokerage, trucking/forwarding services, parcel services, janitorial services, security
services, insurance, and/or banking services, consultancy services, restaurants or such other services within the
ECOZONE as may be determined by the Board, duly registered and/or licensed by the PEZA whose income derived
within the ECOZONE shall be subject to taxes under the National Internal Revenue Code pursuant to Section 25 of the
Republic Act No. 7916 as amended by Republic Act No. 8748.

f.9 “ECOZONE Tourism Enterprise” - shall refer to an individual, association, partnership, corporation or other business
organization duly registered with the PEZA proposing to engage in the establishment and operation of tourist-oriented
accommodations, restaurants operated as an integral part of a tourism facility (e.g. hotels, resorts, recreational centers),
sports and recreational facilities within the ECOZONE.

g. Restricted Area - shall mean a specific area within the ECOZONE, which has been classified and/or fenced-in as export
processing zone, free trade zone or such other similar areas as may be declared by governing Board.

h. PEZA – shall refer to the Philippine Economic Zone Authority i. ZAMBO-ECOZONE – refers to the Zamboanga City
Special Economic Zone and Freeport created pursuant to Sec. 3 of the Republic Act No. 7903.

j. ZAMBO-ECOZONE Enterprise — refers to any business entity or concern within the ZAMBOECOZONE, duly registered
with and/or licensed by the ZAMBOECOZONE Authority to operate any lawful economic activity within the
ZAMBOECOZONE.

k. ZAMBOECOZONE Authority – refers to the Zamboanga City Special Economic Zone Authority created under Sec. 5 of
Republic Act No. 7903.

l. CAGAYAN-ECOZONE – refers to the Cagayan Special Economic Zone and Freeport created pursuant to Sec. 3 of the
Republic Act No. 7922.

m. CAGAYAN-ECOZONE Enterprise — refers to any business entity or concern within the CAGAYAN-ECOZONE, duly
registered with and/or licensed by the CEZA to operate any lawful economic activity within the CAGAYAN-ECOZONE.

n. CEZA – refers to Cagayan Economic Zone Authority created under Sec. 5 of Republic Act No. 7922.

o. Zone – refers to the SUBIC-ECOZONE, ECOZONES, ZAMBOECOZONE or CAGAYAN-ECOZONE, as the context may
require.

p. Resident — refers to any individual who is registered and authorized by the SBMA, PEZA, ZAMBOECOZONE Authority
or CEZA to establish and maintain a personal residence in the Zone where they are registered.

q. Certificate of Registration — refers to the certificate issued by the SBMA, PEZA, ZAMBO-ECOZONE Authority or CEZA
evidencing the registration of the business entity as an Enterprise in the applicable Zone where registered.

r. Certificate of Residency — refers to the certificate issued by the SBMA, PEZA, ZAMBO-ECOZONE Authority or CEZA
evidencing the registration of an individual as a Resident of the applicable Zone where registered.

s. Date of Registration – shall refer to the date appearing in the Certificate of Registration or Certificate of Residency

t. Customs — means the Philippine Bureau of Customs

u. Customs Territory — refers to the portion of the Republic of the Philippines outside of SUBIC-ECOZONE, ECOZONE,
ZAMBOECOZONE or the CAGAYAN-ECOZONE, as the case maybe.
v. Articles — refers to any goods, wares, merchandise and in general, any thing which under the Tariff and Customs
Code of the Philippines or other laws may be made or is the subject of importation or exportation.

w. Domestic Articles — refers to articles which are the growth, produce, 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.

x. 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, produce, 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.

y. Transshipment — refers to transshipment of articles discharged at ports or airports of entry located in Customs
territory destined for delivery and actually delivered to the Zone, and articles coming from the latter intended for export
and actually exported thru a Philippine Customs port/airport of entry which may be transported under bond, upon
examination, and consigned to the Collector at the port of destination/export who will allow the consignor or consignee,
as the case may be, to make entry exportation.

z. Retail Sale — refers to the sale of articles in the Zone, in small quantities to any person, natural or juridical, for
his/her/its own personal use and account and not for resale.

aa. Foreign Exchange — shall mean any currency other than the Philippine Peso acceptable for international reserve or
authorized for international transaction by the Central Bank of the Philippines.

SECTION 3. National Tax Exemption and Incentives to Zone Registered Enterprises - All ECOZONE-registered enterprises,
CAGAYAN-ECOZONE 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:

a. Exemption from national internal revenue taxes on importations of raw materials for manufacture and actually
manufactured into finished products, and capital goods and equipment needed for their business operation, within the
Zone. Removal of raw materials, capital goods, equipment and consumer items out of the Zone for sale to non-Zone
registered enterprises shall be subject to the usual taxes and duties provided for in Republic Act No. 7227 for SUBIC-
ECOZONE.

b. Exemption from the national 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, except for local sales as
discussed in sub-section f of this Section and unless provided for in other laws to the contrary.

c. Exemption from franchise, common carrier or value added taxes and other percentage taxes on public and service
utilities and enterprises within the Zone for services rendered within Zone.

d. Preferential tax treatment on income earned/derived from business operations within the Zone or from foreign
sources. However, in the case of telecommunications service, the income of the enterprise within the Zone 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 Zone 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 from enterprises in the Customs Territory of raw materials forming part of finished goods exported by the
Zone registered enterprises shall be considered effectively zero-rated or exempt for VAT purposes depending on the
fiscal incentives availed of by the Zone registered enterprise. The application of this rule on VAT will however be covered
by a separate Revenue Regulations discussing in particular the VAT implications of transaction within, into and outside
the Zone.

f. Zone registered enterprises may generate income from sources within the Customs Territory of but up to Thirty
Percent (30%) of its total income from all sources only.

All of the income of Zone registered enterprises generated from sources within the Customs Territory shall be subject to
the internal revenue laws of the Customs Territory and the regular internal revenue taxes and rate imposed for
enterprises in the Customs Territory.

Provided, however, that in the event SUBIC-ZONE registered enterprises shall generate income from sources within the
Customs Territory in excess of thirty percent (30%) of its total income from all sources, all of its income shall be subject
to the regular internal revenue tax rate imposed for enterprise in the Customs Territory.

g. Carriers who undertake to transship articles to and/or from the Zone to a Customs Bonded warehouse within the
Customs Territory shall be bonded in an amount to be determined by the SBMA, PEZA, ZAMBO-ECOZONE Authority or
CEZA and Bureau of Customs which shall not be less than fifty thousand (P50,000) pesos conditioned upon the carrier
transporting and delivering 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 Zone.

h. Articles which are manufactured in the Zone and exported therefrom to a foreign country shall, upon subsequent
importation into customs territory, be subject to the laws on importation applicable to like articles manufactured in a
foreign country.

Business enterprises operating within the Zone, but which are not registered by or accredited with SBMA, PEZA,
ZAMBO-ECOZONE Authority or CEZA shall not be entitled to the preferential tax treatment provided for in Section 12(c)
of the Republic Act No. 7227; Section 24 of Republic Act No. 7916; Section 4(f) of Republic Act No. 7903; and Section 4(c)
of Republic Act No. 7922.

SECTION 4. Tax and Fiscal Obligation - Pursuant to Section 12(c) of the Republic Act No. 7227; Section 24 of Republic Act
No. 7916; Section 4(f) of Republic Act No. 7903;
and Section 4(c) of Republic Act No. 7922:

a. Zone registered enterprises doing business within the Zone shall, in lieu of local and national taxes, be liable to the
pay 5% of gross income earned, broken down as follows:

RA 7227 Subic-Ecozone RA 7916 Ecozones RA 7903 Zambo-Ecozone RA 7922 Cagayan-Ecozone

(1) 3% to the National Government;

(2) 1% to the Local Government units affected by the declaration of the Zone; and

(3) 1% to the Special

Development Fund to be utilize for the development of municipalities outside the City of Olongapo and the Municipality
of Subic and ther municipalities contiguous to the base area

(1) 3% to the National Government;

(2) 2% which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city
where the enterprise is located

(1) 2% to the National Government;

(2) 2% to the City of Zamboanga; and

(3) 1% to the barangay special development fund, which is hereby created, for the development and improvement of
the barangays within the City of Zamboanga

(1) 2% to the national government;

(2) 1% to the Province of Cagayan;

(3) ½% to be shared by municipalities affected by the declaration of the Zone in proportion to their income from
business activities within the Zone; and

(4) 1 ½% to the CEZA

b. The equivalent amount of tax paid/payable to the National Government of the Philippines shall be considered for
purposes of any claim for credit against taxes paid to foreign government by the foreign corporation accredited by the
SBMA, PEZA, ZAMBOECOZONE Authority or CEZA to operate within the Zone.

c. Zone registered enterprises operating within the Zone shall be responsible for the safekeeping and accounting of all
articles received by them. Articles which are missing or cannot be accounted for in the Zone shall be presumed to have
been transferred to the Customs Territory without permit and therefore subject to taxes and duties.

Articles which are found in the Zone but cannot be accounted for in the records of a zone registered enterprise shall be
treated as having been received in the Zone without permit and therefore should be reported to the SBMA, PEZA,
ZAMBO-ECOZONE Authority or CEZA and the Bureau of Customs.

d. A zone registered enterprise operating within the Zone shall be constituted as withholding agent for the government
(1) if it acts as an employer and its employees receive compensation income subject to the withholding tax under Sec.
72 (a), Chapter X, Title II of the NIRC as implemented by Revenue Regulations No. 12-86 as amended, or (ii) if it makes
income payments to individuals or corporations subject to the expanded withholding tax pursuant to Sec. 50 (b) of the
NIRC, as amended, and as implemented by Revenue Regulations No. 6-85 as amended; or (iii) if it makes
payment/remittance of certain income subject to the final withholding tax under Sec. 50 (a) in relation to Sec. 51 of the
NIRC.

e. Interest from any Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes,
and from trust fund and similar arrangements received by a zone registered enterprise engaged in business within the
Zone shall be subject to the internal revenue taxes under the National Internal Revenue Code as amended.

SECTION 5. Removal or Withdrawal from the Zone to Customs Territory - 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.

SECTION 6. Service Establishments - On income derived service establishments within the Zone, the following rules shall
apply:
a) On income derived within ECOZONES: All income derived by persons and by all service establishments rendering their
services within the ECOZONES, whether registered or not with PEZA, which may qualify as ECOZONE Service Enterprise
as defined herein shall be subject to all internal revenue taxes under the National Internal Revenue Code, as amended.

However, all service establishments registered with the PEZA as ECOZONE locators which export their services or are
rendering their services abroad through the use of information technologies shall remain to enjoy the five percent (5%)
preferential tax rate under these revenue regulations, provided that such services are paid in foreign currency inwardly
remitted through the Banko Sentral ng Pilipinas.

b) On income derived within SUBIC-ECOZONE, ZAMBO-ECOZONE and CAGAYAN-ECOZONE: all income derived by
persons shall be subject to withholding taxes under existing tax laws, rules and regulations. All income derived by
service establishments within SUBIC-ECOZONE, ZAMBO-ECOZONE and CAGAYANECOZONE shall be subject to the five
percent (5%) preferential tax rate, provided that such services are paid in foreign currency inwardly remitted through
the Banko Sentral ng Pilipinas.

SECTION 7. Gross income earned – For purposes of the application of these Regulations “gross income earned” shall
refer to gross sales or gross revenue derived from registered business activity within the Zone net of sales discounts,
sales returns and allowances minus cost of sales or direct costs but before any deductions for administrative, marketing,
selling, operating expenses or incidental losses during a given taxable. For financial enterprises, gross income shall
include interest income, gains from sales, and other income.

For purposes of computing the total five percent (5%) tax rate imposed by Republic Act No. 7227, Republic Act No. 7903,
Republic Act No. 7922 and Republic Act No. 7916, the cost of sales or direct cost shall consist only of the following cost
or expense items which shall be computed in accordance with Generally Accepted Accounting Principles (GAAP):

For SUBIC-ECOZONE, ZAMBO-ECOZONE and CAGAYAN-ECOZONE -

1) Trading Enterprises:
- Cost of Sales (Cost of Sales which is equal to Inventory beginning plus purchases minus Inventory of goods ending)

2) Manufacturing enterprises:
- Direct salaries, wages or labor expenses
- Production supervision salaries
- Raw materials used in the manufacture of products
- Decrease in Goods in Process Account (Intermediate goods)
- Decrease in Finished Goods Account
- Supplies and fuels used in production
- Depreciation of machineries and equipment used in production
- Rent and utility charges associated with building, equipment and warehouses used in production
- Financing charges associated with fixed assets used in production the amount of which were not previously capitalized

3) Services enterprises:
- Direct salaries, wages or labor expense
- Service supervision salaries
- Direct materials, supplies used
- Depreciation of machineries equipment used in the rendition of registered services
- Financing charges associated with fixed assets used in the service business the amount of which were not previously
capitalized
- Rent and utility charges for buildings and capital equipment used in the rendition of registered services

For ECOZONES under RA No. 7916 -

1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises:
- Direct salaries, wages or labor expenses
- Production supervision salaries
- Raw materials used in the manufacture of products
- Decrease in Goods in Process Account (intermediate goods)
- Decrease in Finished Goods Account
- Supplies and fuels used in production
- Depreciation of machinery and equipment used in production
- Rent and utility charges associated with building, equipment and warehouses used in production
- Financing charges associated with fixed assets used in production the amount of which were not previously capitalized

2. ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises:

- Direct salaries, wages or labor expense
- Service supervision salaries
- Direct materials, supplies used
- Depreciation of machinery and equipment used in registered activities
- Financing charges associated with fixed assets used in registered activities the amount of which were not capitalized
- Rent and utility charges for buildings and capital equipment used in undertaking registered activities

SECTION 8. Repealing Clause – Revenue Regulations No. 1-95 and 16-99 are hereby repealed. Any existing regulations,
order or instructions or portions thereof that are inconsistent with these regulations are likewise repealed, amended or
modified accordingly.

SECTION 9. Effectivity Clause - These regulations shall take effect fifteen (15) days after publication in a newspaper of
general circulation in the Philippines.

(Original Signed)
JUANITA D. AMATONG
Secretary of Finance
Recommending Approval:
(Original Signed)
GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue

RR 1-95 See Part 17

January 24, 1995

REVENUE REGULATIONS NO. 01-95

SUBJECT : 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.

TO : All Internal Revenue Officers and Others Concerned.

SECTION 1. Scope. — Pursuant to the provisions of Section 245 of the National

Internal Revenue Code, in relation to Section 5(m) and 13 (b) (11) of Republic
Act No. 7227, these regulations are hereby promulgated to implement the tax
incentives provided for under paragraphs (b) and (c), Section 12 of said Act.

SECTION 2. Declaration of Policy. — Within the framework and subject to the

mandate of the Constitution and the pertinent provisions of the Local
Government Code of 1991, it is hereby declared the policy of the State of
develop the Subic Special Economic Zone into a self-sustaining, industrial,
commercial, financial and investment center to generate employment
opportunities in an around the Zone, and to attract and promote productive
foreign investments.

SECTION 3. Definition. — For purposes of these Regulations, the terms used

herein shall be construed to have the following meanings:

a. Act — refers to RA 7227 otherwise known as the Bases Conversion and

Development Act of 1992.

b. SBMA — refers to the Subic Bay Metropolitan Authority, established and

created pursuant to Section 13 of the Act.

c. 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.)

d. 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.

e. Customs — means the Philippine Bureau of Customs

f. Customs Territory — refers to the portion of the Republic of the Philippines

where the customs laws are in force and effect, which is separate from the Zone.

g. 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.

h. 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.

i. 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.

j. Resident — refers to any individual who is registered and authorized by

the SBMA to establish and maintain a personal residence in the Secured Area of
the Zone.

k. Registered Enterprise — refers to any corporation registered with the

SBMA to do business in the Secured Area of the Zone.

l. Transshipment — refers to transshipment of articles discharged at ports or

airports of entry located in Customs territory destined for delivery to the Zone,
and articles coming from the latter intended for export thru a Philippine Customs
port/airport of entry may be transported under bond, upon examination, and
consigned to the Collector at the port of destination/export who will allow the
consignor or consignee, as the case may be, to make entry exportation.

m. Retail Sale — refers to the sale of articles in the Secured Area of the Zone,
in small quantities to an individual for his or her own personal use and account
and not for resale.

n. Foreign Exchange — shall mean any currency other than the Philippine
Peso acceptable for international reserve or authorized for international
transaction by the Central Bank of the Philippines.

o. Gross income earned — refers to gross sales or gross revenues derived

from the business activity within the zone, net of sales discounts and sales
returns and allowances and minus costs of sales or direct costs but before any
deduction for administrative expenses or incidental losses during a given taxable
period. For financial enterprises, gross income shall include interest income,
gains from sales, and other income, net of allowable deductions. The following
deductions shall be allowable for the calculation of gross income earned for
specific types of enterprises:

1) Trading and manufacturing enterprises

Direct salaries, wages or labor expenses

Production supervision salaries

Raw materials used in the manufacture of Products Goods in process

(Intermediate goods)

Finished goods

Supplier and fuels used in production

Depreciation of machineries and equipment used in production, and buildings

owned and or constructed by SBMA-registered enterprise

Rent and utility charges associated with building, equipment and warehouses, or
handling of goods

Financing charges associated with fixed assets

2) Service enterprises

Direct salaries, wages or labor expense

Service supervision salaries

Direct Materials, supplies used or resold to another SBMA registered enterprise

Depreciation of machineries, equipment and buildings owned and/or constructed

Financing Charges associated with fixed assets

Rent and utility charges for buildings and capital equipment

3) Financial Institutions

Depreciation

Financing Charges associated with fixed assets

Rent and utility charges

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.

SECTION 6. Taxes and Fiscal Obligations. —

Obligations and Liabilities.

a. Pursuant to Section 12(c) of the Act, registered enterprises within the

Secured Area in the Zone shall, in lieu of local and national taxes, be liable to the
payment of the following, based on gross income earned.

(1) To the National Government 3%

(2) To the Local Government units

affected by the declaration of

the Zone 1%

(3) To the Special Development Fund

to be utilize for the development

of municipalities outside the City

of Olongapo and the Municipality

of Subic and other municipalities

contiguous to the base area 1%

b. The equivalent amount of 3% of gross income earned as defined in

Section 3 (o) of these Regulations, paid/payable to the National Government of
the Philippines, shall be considered for purposes of any claim for credit against
taxes paid to foreign government by the foreign corporation accredited by the
SBMA to operate within the Secured Area.

c. Registered enterprises operating within the Secured Area shall be

responsible for the safekeeping and accounting of all articles received by them
and shall be relieved from responsibility for the articles upon removal under
proper permit from the Secured Area, transfer to another registered enterprise or
to a Secured Area resident, destruction in the Secured Area, or abandonment to
the SBMA in the Secured Area. Articles which are missing or cannot be accounted
for in the Secured Area shall be presumed to have been transferred to the
Customs Territory without permit and therefore subject to taxes and duties.

Articles which are found in the Secured Area but cannot be accounted for in the
records of a registered enterprise shall be treated as having been received in the
Secured Area without permit and therefore should be reported to the SBMA and
the Bureau of Customs.

d. Registered enterprises operating in the Secured Area and registered

residents are responsible for compliance with the provisions of any Operations
Manual issued by the SBMA or Customs Authority, and any such Manual shall
have the same force and effect as these regulations.

e. A registered enterprise operating within the Secured Area shall be

constituted as withholding agent for the government (1) if it acts as an employer
and its employees received compensation income subject to the withholding tax
under Sec. 72 (a), Chapter X, Title II of the NIRC as implemented by Revenue
Regulations No. 12-86 as amended, or (ii) if it makes income payments to
individuals or corporations subject to the expanded withholding tax pursuant to
Sec. 50 (b) of the NIRC, as amended, and as implemented by Revenue
Regulations No. 6-85 as amended; or (iii) if it makes payment/remittance of
certain income subject to the final withholding tax under Sec. 50 (a) in relation to
Sec. 51 of the NIRC.

f. Interest from any Philippine currency bank deposits and yield or any other
monetary benefit from deposit substitutes, and from trust fund and similar
arrangements received by a registered enterprise engaged in business within the
Secured Area shall be subject to the preferential tax rate. All other interest, yield
or monetary benefit from deposit substitutes, trust funds and other similar
arrangements and royalties derived from sources within the Philippines by a
person other than a registered enterprises operating within the Secured Area in
the Zone shall be subject to the appropriate tax law rates of the Customs
Territory.

SECTION 7. Returns and Payment of Tax. — Tax total amount representing 5%

of the gross income earned by the registered enterprise from the operation of its
business activity within the Secured Area in the Zone shall be paid and remitted
to the Commissioner of Internal Revenue or his duly authorized agent on or
before the 15th day of the fourth month following the close of its taxable year.

a. Requirements. — Every registered enterprise operating within the Secured

Area subject to the 5% on gross income earned prescribed in Section 12(c) of the
Act, shall render in duplicate a true and accurate quarterly return and final or
adjustment return in accordance with the provisions of Section 68 and 69,
Chapter IX, Title II of the National Internal Revenue Code, (NIRC) as amended.
The return shall be filed by the President, Vice-President or other responsible
officer of the enterprise and shall be sworn to by such officer and by the
treasurer or assistant treasurer.

b. Place of filing. — The quarterly return and the final or adjustment return
required in the preceding paragraph (a) shall be filed with the Revenue District
Officer or the collection agent/accredited bank located within the Zone.

c. Time for filing the return/payment of tax. — The provisions of Sections 68

and 69 of the NIRC, as amended, and existing regulations regarding the time for
filing of quarterly and final or adjustment returns and payment of the tax
imposed herein, as well as the requirement of withholding and remittance of the
tax under Sections 50 (a) and (b) and 51, Chapter VI of Title II of the NIRC and
the implementing Regulations shall apply to registered enterprises operating
within Secured Area in the Zone.

SECTION 8. Disposition of Funds. —

Amount representing 5% of gross income earned by registered enterprises

operating within the Secured Area and collected by the BIR shall be remitted to
the National Treasury; the proceeds from the 3% shall form part of the general
fund; proceeds from the 1% shall be allocated to the local governments units
affected by the declaration of the Zone; and the balance of 1% for the special
development fund to be utilized for the development of municipalities outside
the City of Olongapo and the Municipality of Subic, and other municipalities
contiguous to the base areas.

SECTION 9. Bookkeeping and Reportorial Requirements. —

All registered and enterprises operating within the Secured Area in the Zone
shall keep regular and accurate records of their transactions, and maintain books
of accounts and allied documents in accordance with the bookkeeping rules and
regulations prescribed by the Bureau of Internal Revenue and/or the SBMA,
which shall be open to inspection and verification by authorized officers of the
SBMA or of the Bureau of Internal Revenue. For this purpose, the Bureau of
Internal Revenue is authorized to conduct at any time during office hours an
audit, check, or inventory count for verification and reconciliation of the records
with the inventory of articles in the Secured Area.

SECTION 10. Applicability of Existing Laws, Rules and Regulations. —

For the effective implementation of the Act, pertinent provisions of the National
Internal Revenue Code, as amended, including Title IX on the Requirements of
Keeping of Books of Accounts and Records, Title X on Statutory Penalties and
Offenses as well as their implementing rules and regulations shall apply to
registered enterprises operating within the Secured Area in the Zone.

SECTION 11. Effectivity. — These Regulations shall take effect fifteen days after
its complete publication in the Official Gazette or any newspaper of general
circulation, whichever comes first.

ROBERTO F. DE OCAMPO

Secretary of Finance

Recommended by:

LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

September 27, 1999

REVENUE REGULATIONS NO. 16-99

SUBJECT : Amending Revenue Regulations No. 1-95, as amended, and

other related rules and regulations to implement the provisions of paragraphs (b)
& (c) of Section 12 of Republic Act No. 7227, otherwise known as the "Bases
Conversion and Development Act of 1992" relative to the tax incentives granted
to enterprises registered in the Subic Special Economic and Freeport Zone

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to the provisions of Sections 244 and 245 of

Republic Act No. 8424 or the National Internal Revenue Code of 1997, as
amended, in relation to Sections 5 (m) and 13 (b) (11) of Republic Act No. 7227,
these regulations are hereby promulgated to implement the tax incentives
provisions under Section 12 (c) of R.A. No. 7227, particularly the definition of the
term gross income earned and the creditable character of the tax paid therein
against taxes paid to foreign governments.

SECTION 2. Declaration of Policy. — Within the framework and subject to the

mandate of the Constitution, it is hereby declared the policy of the State to
enhance the attractiveness and provide for the greater competitiveness of the
Philippines, its various economic zones, including the Subic Special Economic
and Freeport Zone Bay, as preferred area/s of foreign and local investments,
particularly in the Asia-Pacific region.

SECTION 3. Section 3 of Revenue Regulations No. 1-95 is hereby amended by

adding paragraph (4) under sub-section (o) thereof and by adding thereto a sub-
section (p), to read as follows: cda

"o. Gross Income Earned. — . . .

1) Trading and manufacturing enterprises . . .;

2) Service enterprises . . .;

3) Financial Institutions . . .;

4) Subic Bay Regional Enterprise. — For purposes of this paragraph, the term
"Gross income earned" refers to the gross sales or gross revenues derived from
the business activity within the zone, net of sales discounts and sales returns
and allowances and minus the costs of sales or direct costs and other costs that
are material in the operations of the business and involves a significant amount
in determining the profitability and viability of the business (but before any
deduction for administrative expenses or incidental losses during a given taxable
period). For financial enterprises, gross income shall include interest income,
gains from sales, and other income, net of allowable deductions. The following
deductions shall be allowable for the calculation of gross income earned for the
following specific types of enterprises:

(a) Trading and manufacturing enterprises

Direct salaries

Production supervision salaries

Raw materials used in the manufacture of products

Goods in process (Intermediate goods)

Finished goods

Supplier and fuels used in production

Toll manufacturing fees

Commission expenses

Distribution expenses

Depreciation of machineries and equipment used in production

and building owned and/or constructed by SBMA-registered

enterprise

Equipment lease payments

Rent and utility charges associated with. building,

equipment and warehouses, or handling of goods

Financing charges associated with fixed assets

Corporate management salaries

Administrative salaries

Marketing and sales salaries

Advertising

Research & Development

Royalty Fees

Travel expense

Communication Expenses

Outside Professional Services

Interest & financial charges on working capital

Loss on foreign exchange translation

Loss on disposal of merchandise inventory

(b) Service enterprises

Direct salaries

Service supervision salaries

Direct Materials, supplies used or resold to

another SBMA registered enterprise

Depreciation of machineries, equipment and

buildings owned and/or constructed

Equipment lease payments

Financing Charges associated with fixed assets

Rent and utility charges for buildings and capital

Equipment

Corporate management salaries

Administrative salaries

Marketing and sales salaries

Advertising

Research & Development

Royalty Fees

Travel and Entertainment expenses

Communication expenses

Outside Professional Services

Interest & financial charges on working capital

Loss on foreign exchange translation

(c) Financial Services

Depreciation

Equipment lease payments

Financing Charges associated with fixed assets

Rent and Utility

Corporate management salaries

Administrative salaries

Marketing and sales salaries

Materials & supplies used

Advertising

Royalty Fees

Travel and Entertainment expenses

Communication expenses

Outside Professional Services

Insurance

Cost of securities

Bad debts actually ascertained to be worthless and

written-off

Interest & financial charges

Loss on foreign exchange translation

(p) Registration of Subic Bay Regional Enterprises. — Any multinational

company, whose purpose, as expressed in its organizational documents or by
resolution of its Board of Directors or its equivalent, is to engage in regional
and/or international trade/services and in business activities such as, but not
limited to, manufacturing, including entering into toll and contract manufacturing
arrangements, employing commission agents and/or distributors; trading,
marketing, financial services and treasury services may establish in the Subic
Special Economic and Freeport Zone (SSEFZ) its seat of management and the
situs of its business transactions, including the recording of its income, from
some or all countries in the Asia-Pacific region and or other parts of the world,
including the Philippines, by registering as a Subic Bay Regional Enterprise with
the Subic Bay Metropolitan Authority. cdtai

The following minimum requirements shall, however, be complied with by the

said multinational company:

(a) A certification from the appropriate government agency in the

multinational company's home country that said multinational company is an
entity engaged in regional and/or international trade/service in the Asia-Pacific
Region and/or other parts of the world.
1. The Regional Enterprise is engaged in regional and/or international
trade/services and in business activities such as, but not limited to
manufacturing, including entering into toll and contract manufacturing
arrangements, employing commission agents and/or distributors; trading,
marketing, financial services and treasury services in some or all of the countries
in the Asia-Pacific region and/or other parts of the world, including the
Philippines.

2. The Regional Enterprise will establish in the SSEFZ its seat of management
and the situs of its business transactions from some or all of the countries in the
Asia-Pacific region and/or other parts of the world, including the Philippines.

(b) An undertaking that the multinational company will have an investment in

the SSEFZ in an amount not less than US $250,000.00, an inward remittance of
not less than US $250,000.00 and that it will employ at least twenty (20) direct
employees.

(c) Any violation by the Subic Bay Regional Enterprise of any of the provisions
of R A. No. 7227 or the Bases Conversion and Development Act or its
implementing rules and regulations, or other terms and conditions of its
registration, or any provision of existing laws, shall constitute sufficient cause for
the cancellation of its license or registration. cdll

SECTION 4. Section 4 (A) (f) of Revenue Regulations No. 1-95 is hereby

amended to insert thereunder sub-section (f.1), to read as follows:

f. . . . .

f. 1. Subic Bay Regional Enterprise. —

(1) The Subic Bay Regional Enterprise shall pay a tax of 5% on Gross Income
Earned from business transactions in some or all of the countries in the Asia
Pacific region and/or other parts of the world, including the Philippines.

(2) The Subic Bay Regional Enterprise shall establish in the SSFEZ its seat of
management and situs of its business transactions, including the recording of
income, in some or all of the Asia-Pacific region and/or other parts of the world.
The Regional Enterprise may engage the services of toll manufacturers,
commission agents, and/or distributors in some or all of the countries in the Asia-
Pacific region and/or other parts of the world.

(3) The Subic Bay Regional Enterprise may generate revenues from sources
within the Customs Territory up to 50% of its total revenues. The income
generated from the customs territory will be subject to the tax of 5% on gross
income earned as defined under Sec. 3 (o)(4) of these Regulations; Provided,
That, if the revenues derived from the customs territory exceed 50% of its total
revenues, the excess of the income generated by the Regional Enterprise will be
subject to the regular income tax rates in the customs territory.
SECTION 5. Section 6 (b) of Revenue Regulations No. 1-95 is hereby amended,
to read as follows:

"b. Tax Credits for Foreign Corporations. — The 5% tax on gross income
earned paid herein by foreign corporations that are registered as Subic Bay
Regional Enterprises shall be considered as payment of income tax. Said tax
shall be in lieu of income tax, for purposes of application for tax credits by said
foreign corporations in their respective home countries. In addition, no other
national or local taxes shall be imposed on the Subic Bay Regional Enterprises.

SECTION 6. Monitoring and Reporting Requirements. — All registered

enterprises embraced under these Regulations shall keep separate Books of
Accounts, for each country in the Asia Pacific Region in which its operates, which
books shall be duly registered with the concerned Revenue District Office,
showing among others all transactions within and without the Philippines and the
gross income earned therefrom for purposes of the tax herein imposed.
Schedules showing sales and gross income earned per country shall be included
as part of the enterprise's duly audited financial statement to be filed with its
annual final adjustment return. LexLib

SECTION 7. Applicability of Existing Laws. Rules and Regulations. —

For the effective implementation of the Act, pertinent provisions of the National
Internal Revenue Code, as amended, including Title X on Statutory Penalties and
Offenses as well as their implementing rules and regulations shall apply to
registered Subic Bay Regional Enterprises operating within the SSEFZ.

SECTION 8. Effectivity. — These Regulations shall take effect fifteen days after
its complete publication in the Official Gazette or any newspaper of general
circulation, whichever comes first.

(SGD.) EDGARDO B. ESPIRITU

Secretary of Finance

Recommended by:

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue

RR 11-2005
SUBJECT : Regulations Defining “Gross Income Earned” to Implement the Tax Incentive Provision in Section 24 of
Republic Act No. 7916, otherwise known as “The Special Economic Zone Act of 1995” Revoking Section 7 of Revenue
Regulations No. 2-2005, and Suspending the Effectivity of Certain Provisions of Revenue Regulations No. 2-2005.

TO : All Internal Revenue Officers and Other Concerned

SECTION 1. Scope. Pursuant to the provisions of Sections 244 and 245 of the National Internal Revenue Code of 1997, as
amended, these regulations are hereby promulgated to define gross income earned to implement the tax incentive
provision of Section 24 of Republic Act No. 7916, thus, revoking Section 7 of Revenue Regulations No. 2-2005.

SECTION 3. Gross Income Earned – For purposes of implementing the tax incentive of registered Special Economic Zone
(ECOZONE) enterprises in Section 24 of Republic Act No. 7916, the term “gross income earned” shall refer to gross sales
or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and
allowances and minus costs of sales or direct costs but before any deduction is made for administrative, marketing,
selling and/or operating expenses or incidental losses during a given taxable period.

For purposes of computing the total five percent (5%) tax rate imposed, the following direct costs are included in the
allowable deductions to arrive at gross income earned for specific types of enterprises:

1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises:
- Direct salaries, wages or labor expenses
- Production supervision salaries
- Raw materials used in the manufacture of products
- Decrease in Goods in Process Account (Intermediate goods)
- Decrease in Finished Goods Account
- Supplies and fuels used in production
- Depreciation of machinery and equipment used in production, and of that portion of the building owned or
constructed that is used exclusively in the production of goods
- Rent and utility charges associated with building, equipment and warehouses used in production
- Financing charges associated with fixed assets used in production the amount of which were not previously capitalized

2. ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises:

- Direct salaries, wages or labor expense
- Service supervision salaries
- Direct materials, supplies used
- Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the
building owned or constructed that is used exclusively in the rendition of registered service
- Rent and utility charges for buildings and capital equipment used in the rendition of registered services
- Financing charges associated with fixed assets used in the registered service business the amount of which were not
previously capitalized.”
-

SECTION 2. Suspension of Certain Provisions of Revenue Regulations No. 2-2005 - The effectivity of Sections 3, 4, and 6
of Revenue Regulations No. 2-2005 is hereby suspended in so far as it applies to enterprises registered under R.A. 7916,
pending the issuance of a new regulations pertaining on the matter related thereto.

SECTION 3. Effectivity Clause. – These Regulations shall take effect beginning March 5, 2005.

RR 12-2005
SUBJECT : Regulations Defining “Gross Income” to Implement the Tax Incentive Provision under Paragraph (c) of Section
4 of Republic Act No. 7922, otherwise known as “Cagayan Special Economic Zone Act of 1995” and Paragraph (f) of
Section 4 of Republic Act No. 7903, otherwise known as “Zamboanga City Special Economic Zone Act of 1995”, Revoking
Section 7 of Revenue Regulations No. 2-2005 and Suspending the Effectivity of Certain Provisions of Revenue
Regulations No. 2-2005.

TO : All Internal Revenue Officers and Other Concerned

SECTION 1. Scope - Pursuant to the provisions of Sections 244 and 245 of the National Internal Revenue Code of 1997,
as amended, these regulations are hereby promulgated to define gross income to implement the tax incentive provision
under Paragraph (c) of Section 4 of Republic Act No. 7922 and Paragraph (f) of Section 4 of Republic Act No. 7903, thus,
revoking Section 7 of Revenue Regulations No. 2-2005.

SECTION 2. Gross Income – For purposes of implementing the tax incentive provision under Paragraph (c) of Section 4 of
Republic Act No. 7922 otherwise known as “Cagayan Special Economic Zone Act of 1995” and Paragraph (f) of Section 4
of Republic Act No. 7903 otherwise known as “Zamboanga City Special Economic Zone Act of 1995,”

the term “gross income” shall refer to gross sales or gross revenues derived from business activity within the Zone, net
of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is
made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period.

For purposes of computing the total five percent (5%) tax rate imposed, the following deductions shall be allowed for
calculating gross income for the following specific types of enterprises:

1. Trading Enterprises:
- Cost of Sales (Cost of Sales which is equal to inventory, beginning plus purchases minus Inventory of goods, ending)

2. Manufacturing Enterprises:
- Direct salaries, wages or labor expenses
- Production supervision salaries
- Raw materials used in the manufacture of products
- Decrease in Goods in Process Account (Intermediate goods)
- Decrease in Finished Goods Account
- Supplies and fuels used in production
- Depreciation of machinery and equipment used in production, and of that portion of the building owned or
constructed by the registered enterprise that is used exclusively in the production of goods
- Rent and utility charges associated with building, equipment and warehouses used in production
- Financing charges associated with fixed assets used in production the amount of which were not previously capitalized

3. Service Enterprises:
- Direct salaries, wages or labor expense
- Service supervision salaries
- Direct materials, supplies used
- Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the
building owned or constructed that is used exclusively in the rendition of the registered service
- Rent and utility charges for buildings and capital equipment used in the rendition of registered services
- Financing charges associated with fixed assets used in the registered service business the amount of which were not
previously capitalized.

SECTION 2. Suspension of Certain Provisions of Revenue Regulations No. 2-2005 - The effectivity of Sections 3, 4, and 6
of Revenue Regulations No. 2-2005 is hereby suspended in so far as it applies to enterprises registered under R.A. 7922
and R.A. 7903, pending the issuance of a new regulations pertaining on the matter related thereto.

SECTION 3. Effectivity Clause. – These Regulations shall take effect beginning March 5, 2005.
RR 13-2005
SUBJECT : Regulations Defining “Gross Income Earned” to Implement the Tax Incentive Provision under Paragraph (c) of
Section 12 of Republic Act No. 7227, otherwise known as “The Bases Conversion Development Act of 1992” Revoking
Section 7 of Revenue Regulations No. 2-2005, and Suspending the Effectivity of Certain Provisions of Revenue
Regulations No. 2-2005.

TO : All Internal Revenue Officers and Other Concerned

SECTION 1. Scope - Pursuant to the provisions of Sections 244 and 245 of the National Internal Revenue Code of 1997,
as amended, these regulations are hereby promulgated to define gross income earned to implement the tax incentive
provision under Paragraph (c) of Section 12 of Republic Act No. 7227, thus, revoking Section 7 of Revenue Regulations
No. 2-2005.

SECTION 2. Gross Income Earned. – For purposes of implementing the tax incentive provision under paragraph (c) of
Section 12 of Republic Act No. 7227, otherwise known as “The Bases Conversion Development Act of 1992,” Section 3
(o) of Revenue Regulations No. 1-95 as amended by Revenue Regulations No. 16-99 shall read as follows:

“(o) Gross income earned - shall refer to gross sales or gross revenues derived from business activity within the Zone,
net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is
made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period.
For financial enterprises, gross income shall include interest income, gains from sales, and other income, net of costs of
funds. For purposes of computing the total five percent (5%) tax rate imposed, the following deductions shall be
allowable for the calculation of gross income earned for specific types of enterprises:

1. Trading Enterprises:
- Cost of Sales
(Cost of Sales which is equal to inventory, beginning plus purchases minus Inventory of goods, ending)

2. Manufacturing Enterprises:
- Direct salaries, wages or labor expenses
- Production supervision salaries
- Raw materials used in the manufacture of products
- Decrease in Goods in Process Account (Intermediate goods)
- Decrease in Finished Goods Account
- Supplies and fuels used in production
- Depreciation of machinery and equipment used in production, and of that portion of the building owned or
constructed by the registered enterprise that is used exclusively in the production of goods
- Rent and utility charges associated with building, equipment and warehouses used in production
- Financing charges associated with fixed assets used in production the amount of which were not previously capitalized
3. Service Enterprises:
- Direct salaries, wages or labor expense
- Service supervision salaries
- Direct materials, supplies used
- Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the
building owned or constructed that is used exclusively in the rendition of the registered service
- Rent and utility charges for buildings and capital equipment used in the rendition of registered services
- Financing charges associated with fixed assets used in the registered service business the amount of which were not
previously capitalized.

4. Financial Institutions:
- None”

SECTION 2. Suspension of Certain Provisions of Revenue Regulations No. 2-2005 - The effectivity of Sections 3, 4, and 6
of Revenue Regulations No. 2-2005 is hereby suspended in so far as it applies to enterprises registered under paragraph
(c) of Section 12 of R.A. 7227, pending the issuance of a new regulations pertaining on the matter related thereto.

Pending the issuance of said new regulations, the provisions of Revenue Regulations No. 1-95, in so far as the same is
not in conflict with these Regulations, shall apply.

SECTION 3. Effectivity Clause. – These Regulations shall take effect beginning March 5, 2005.
x. Clark Development Tax Exemption

xi. RA 9400, Restores Priveleges to Clark and John Hay; RA 9399 Grants Tax Amnesty to locators of Clark and John Hay

REPUBLIC ACT NO. 9400 March 20, 2007

AN ACT AMENDING REPUBLIC ACT NO. 7227, AS AMENDED, OTHERWISE KNOWN AS THE BASES CONVERSION AND
DEVELOPMENT ACT OF 1992, AND FOR OTHER PURPOSES
Section 1. Section 12 of Republic Act No. 7227, as amended, otherwise known as the Bases Conversion and
Development Act of 1992, is hereby amended to read as follows:
"SEC. 12. Subic Special Economic Zone. – x x x
"(a) x x x
"(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%).
"x x x."
Sec. 2. Section 15 of the Republic Act No. 7227, as amended, is hereby amended to read as follows:
"SEC. 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). – Subject to the concurrence by resolution
of the local government units directly affected, the President is hereby authorized to create by executive proclamation a
Special Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as
embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of
America, as amended, located within the territorial jurisdiction of Angeles City, municipalities of Mabalacat and Porac,
Province of Pampanga, and the municipalities of Capas and Bamban, Province of Tarlac, in accordance with the provision
as herein provided insofar as applied to the Clark military reservations. The Clark Air Base proper with an area of not
more than four thousand four hundred hectares (4,400 has.), with the exception of the twenty-twohectare commercial
area situated near the main gate and the Bayanihan Park consisting of seven and a half hectares (7.5 has.) located
outside the main gate of the Clark Special Economic Zone, is hereby declared a Freeport zone.
"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.
"The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with
such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66, as
amended: Provided, That it shall have no regulatory authority over public utilities, which authority pertains to the
regulatory agencies created by law for the purpose, such as the Energy Regulatory Commission created under Republic
Act No. 9136 and the National Telecommunications Commission created under Republic Act No. 7925.
"x x x
"Subject to the concurrence by resolution of the local government units directly affected and upon recommendation of
the Philippine Economic Zone Authority (PEZA), the President is hereby authorized to create by executive proclamation
Special Economic Zones covering the City of Balanga and the municipalities of Limay, Mariveles, Morong, Hermosa, and
Dinalupihan, Province of Bataan.
"Subject to the concurrence by resolution of the local government units directly affected and upon recommendation of
the PEZA, the President is hereby authorized to create by executive proclamation Special Economic Zones covering the
municipalities of Castillejos, San Marcelino, and San Antonio, Province of Zambales.
"Duly registered business enterprises that will operate in the Special Economic Zones to be created 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 Special Economic Zones."
cralawlibrary
Sec. 3. A new Section 15-A is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows:
"SEC. 15-A. Poro Point Freeport Zone (PPFZ). – The two hundred thirty-six and a half-hectare (236.5 has.) secured area in
the Poro Point Special Economic and Freeport Zone created under Proclamation No. 216, series of 1993, 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.
"The governing body of the PPFZ shall have no regulatory authority over public utilities, which authority pertains to the
regulatory agencies created by law for the purpose, such as the Energy Regulatory Commission created under Republic
Act No. 9136 and the National Telecommunications Commission created under Republic Act No. 7925."
Sec. 4. A new Section 15-B is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows:
"SEC. 15-B. Morong Special Economic Zone (MSEZ). – Duly registered business enterprises operating within the MSEZ
created under Proclamation No. 984, series of 1997, 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. 5. A new Section 15-C is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows:
"Sec. 15-C. John Hay Special Economic Zone (JHSEZ). – Registered business enterprises which will operate after the
effectivity of this Act, within the JHSEZ created under Proclamation No. 420, series of 1994, 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.
Sec. 8. Administration, Implementation and Monitoring of Incentives. – The governing authorities shall be responsible
for the administration and implementation of the incentives granted to their respective registered enterprises. They
shall submit to the Department of Finance (DOF) their respective annual tax expenditures based on the computed costs
in terms of revenue forgone on the tax incentives granted to their registered enterprises. For proper monitoring, the
DOF shall create a single database of all incentives provided by all these authorities. The DOF shall monitor and review
the incentives granted and submit an annual report to the President.
Sec. 9. Penal Provision. –Any registered business enterprise found guilty of smuggling by final judgment, either as
principal, accomplice or accessory shall be perpetually barred from doing business in any freeport and special economic
zone, in addition to the penalties and sanctions imposed by existing laws.
Sec. 10. Implementing Rules and Regulations. – The DOF, in coordination with the PEZA, the Bureau of Internal
Revenue (BIR) and the Bureau of Customs (BOC), and in consultation with the Bases Conversion Development Authority
(BCDA), the SBMA, the CDC, the JHMC, the PPMC, and the BTPI, shall promulgate and publish the necessary rules and
regulations for the effective implementation of this Act within two months from the date of effectivity of this Act.
Sec. 11. Separability Clause. – If any portion or provision of this Act is declared unconstitutional, the remainder of this
Act or any provision not affected thereby shall remain in force and effect.
Sec. 12. Repealing Clause. – All laws, decrees, orders, proclamations, rules and regulations or other issuances or parts
thereof inconsistent with the provisions of this Act are hereby repealed or modified accordingly.
The provision of Section 50 of Republic Act No. 7916, as amended, is hereby repealed.
The provisions of Section 13(b)(3) of Republic Act No. 7227, as amended, with respect to public utilities engaged in the
provision of electric power and telecommunications services are hereby repealed.
Sec. 13. Effectivity. – This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in any two
newspapers of general circulation, whichever comes earlier.

REPUBLIC ACT NO. 9399 March 20, 2007

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 CREATED UNDER PROCLAMATION NO. 163, SERIES OF 1993;
PROCLAMATION NO. 216, SERIES OF 1993; PROCLAMATION NO. 120, SERIES OF 1994; AND PROCLAMATION NO, 984,
SERIES OF 1997, PURSUANT TO SECTION 15 OF REPUBLIC ACT NO. 7227, AS AMENDED, AND FOR OTHER PURPOSES
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.
SEC. 3. Implementing Rules and Regulations. - The Department of Finance, in coordination with the Bureau of Internal
Revenue and the Bureau of Customs, and in consultation with the Bases Conversion and Development Authority, the
Clark Development Corporation, the John Hay Management Corporation, the Poro Point Management Corporation, and
the Bataan Technological Park, Inc., shall promulgate and publish the necessary rules and regulations for the effective
implementation of this Act within two months from the date of effectivity of this Act.
SEC. 4. Separability Clause. - If any portion or provision of this Act is declared unconstitutional, the remainder of this Act
or any provision not affected thereby shall remain in force and effect.
SEC. 5. Repealing Clause. - All laws, decrees, orders, rules and regulations or other issuances or parts thereof
inconsistent with the provisions of this Act are hereby repealed or modified accordingly.
SEC. 6. Effectivity. - This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in any two
newspapers of general circulation, whichever comes earlier.

3. Kinds of Taxes (Domestic, Resident, Non Resident)

a. Final Income Tax

b. Income Tax at the end of the year, quarterly income tax

4. Branch Profit Remittance Tax – Revised Memo Circular 55-80; Sec 28 (A) [5]

RR 55-80 (See Part 21)

December 3, 1980

REVENUE MEMORANDUM CIRCULAR NO. 55-80

Subject : Publishing Section 24(b) (2) (b) of the National Internal Revenue Code, as amended by Presidential Decree No.
1705.

To : All Internal Revenue Officers and Others Concerned.

For the information and guidance of all concerned, Section 24(b) (2) (b) of the Tax Code, as amended by P.D. No. 1705, is quoted
as follows:

"(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." cdtai

FEATURES OF THE AMENDMENT

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. casia

For example, if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in
some shares of stock on which dividends are subsequently received, the dividends thus earned are not considered effectively
connected with its trade or business in this country.

On the other hand, if a resident foreign corporation with a branch office in the Philippines engaged in the canning business allows
its trade name or brand to be used and royalties are received by its parent company, such royalties which constitute passive
income, are effectively connected with its trade or business and should be subject to tax, if remitted abroad.

Effectivity. — The foregoing amendment took effect upon the promulgation of P.D. No. 1705 on August 1, 1980.

Enforcement. — It is desired that this Circular be given as wide a publicity as possible. cdasia

RUBEN B. ANCHETA

Acting Commissioner

C o p y r i g h t 2 0 0 2 C D T e c h n o l o g i e s A s i a, I n c.

11-04-1980 Revenue Memorandum Circular No. 54-80

Loss of One (1) Pad of Revenue Official Receipts

Sec 28 (A) [5]
Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax
shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, that interests,
dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received
by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch
profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

5. Minimum Corporate Income Tax

RR 9-98
SUBJECT : Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as
Amended" Relative to the Imposition of the Minimum Corporate Income Tax (MCIT) on Domestic Corporations and
Resident Foreign Corporations
TO : All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 27(E) and Section 28(A)(2), these Regulations are hereby promulgated to
govern the imposition of the minimum corporate income tax on domestic and resident foreign corporations.
Sec. 2.27(E) MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS —
(1) Imposition of the Tax — A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of
the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby
imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year
in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of minimum-corporate income tax is greater than the
normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998; 33% effective January 1, 1999; and at 32% effective
January 1, 2000 and thereafter.
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 shall apply on operations covered by the regular income
tax system. For example, if a BOI-registered enterprise has a "registered" and an "unregistered" activity, the MCIT shall
apply to the unregistered activity.
(2) Carry forward of excess minimum corporate income tax — Any excess of the minimum corporate income tax
(MCIT) over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual
basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.
Illustration on how to carry forward excess minimum corporate income tax —
Excess of MCIT
Normal Income Over the Normal
Year Tax MCIT Income Tax

1998 P50,000 P75,000 P25,000

1998 amount of tax payable P75,000
1999 P60,000 P100,000 P40,000
1999 amount of tax payable P100,000
2000 P100,000 P60,000

Computation of Net Amount of Tax Payable in 2000:

Amount of tax payable P100,000
Less:
1998 excess MCIT (25,000)
1999 excess MCIT (40,000) P65,000
Net amount of tax payable P35,000

The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is
imposed under Sec. 27(A) of the Code. The comparison between the normal income tax payable by the corporation and
the MCIT shall be made at the end of the taxable year. Thus, under the example, the taxpayer will pay the MCIT of
P75,000.00 since this amount is greater than the normal income tax of P50,000.00 in 1998.
In 1999, the firm will also pay the MCIT since the MCIT of P100,000.00 is greater than the normal income tax of
P60,000.00.
In the year 2000, where the normal or regular corporate income tax of P100,000.00 is greater than the MCIT of
P60,000.00, the firm will pay the normal income tax.
The corporation can credit the excess of its MCIT over the normal income tax for 1998 (i.e. P25,000) and 1999 (i.e.
P40,000), or a total amount of P65,000 from the amount of normal income tax which is payable by the firm in the year
2000. Thus, the amount of income tax payable by the firm is P35,000 after deducting P65,000 from P100,000.
The excess MCIT is creditable against the normal income tax within the next three (3) years from payment thereof. Thus,
in the illustration above where the corporation had an excess MCIT of P25,000 over its normal income tax in 1998, the
P25,000 can be claimed as a tax credit against the normal income tax up to the year 2001 and only when the normal
income tax is greater than the MCIT. The excess MCIT cannot be claimed as a credit against the MCIT itself or against
any other losses.
(3) Relief from the Minimum Corporate Income Tax under Certain Conditions — The Secretary of Finance, upon
recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of proof by the applicant-
corporation, duly verified by the Commissioner's authorized representative, that the corporation sustained substantial
losses on account of a prolonged labor dispute or because of "force majeure" or because of legitimate business
reverses.
(4) Definition of Terms —
(a) "Gross Income" defined — For purposes of the minimum corporate income tax prescribed under this Subsection,
the term "gross income" means gross sales less sales returns, discounts and allowances and cost of goods sold. "Gross
sales" shall include only sales contributory to income taxable under Sec. 27(A) of the Code. "Cost of goods sold" shall
include all business expenses directly incurred to produce the merchandise to bring them to their present location and
use.
Passive incomes which have been subject to a final tax at source shall not form part of gross income for purposes of the
minimum corporate income tax.
For a trading or merchandising concern, "cost of goods sold" means the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the
goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" means all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of sales of services, the term "gross income" means gross receipts less sales returns, allowances, discounts
and cost of services. "Cost of services" means all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and
specialists directly rendering the service, and (b) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, that "cost of services" shall not
include interest expense except in the case of banks and other financial institutions. The term "gross receipts" as used
herein means amounts actually or constructively received during the taxable year; Provided, that for taxpayers
employing the accrual basis of accounting, the term "gross receipts" shall mean amounts earned as gross income.
(b) The term "substantial losses from a prolonged labor dispute" means losses arising from a strike staged by the
employees which lasted for more than six (6) months within a taxable period and which has caused the temporary
shutdown of business operations.
(c) The term "force majeure" means a cause due to an irresistible force as by "Act of God" like lightning, earthquake,
storm, flood and the like. This term shall also include armed conflicts like war or insurgency.
(d) The term "legitimate business reverses" shall include substantial losses sustained due to fire, robbery, theft or
embezzlement, or for other economic reason as determined by the Secretary of Finance.
(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT —
For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the
domestic corporation registered with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998.
Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT three calendar years thereafter
(i.e. after the lapse of three calendar years from 1998). For example, a firm which was registered in May 1998 shall be
covered by the MCIT in 2002.
The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm which registered with the BIR
on July 1, 1998 shall be subject to an MCIT on his gross income earned for the entire fiscal year ending in the year 2002.
Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year basis. For firms using the
fiscal year basis and whose first taxable period under the minimum corporate income tax covers month/months in 1997
(i.e. prior to the imposition of MCIT under RA 8424), the MCIT which is due for 1998 shall be computed using an
apportionment formula. The ratio to be applied is the number of months in 1998 to twelve (12) months (i.e. the total
number of months in a fiscal year).
Illustration. Firm A registered with the BIR in July 1994. It becomes subject to the MCIT in 1998. Since it is using a fiscal
year as basis of its taxable period, a part of the tax base for the MCIT was earned by the corporation in 1997 prior to the
imposition of the MCIT (i.e. gross income from July to December 1997). The MCIT which is due from the firm is
computed using the gross income of the firm for 1998 (January to June) which is computed on an apportionment basis
as follows:
Gross income of the firm for the entire fiscal year
Multiply: 0.50 (i.e. ratio of 6 months in 1998 to 12 months covering FY 97-98)
Equals: Tax base of the MCIT for 1998
Multiply: 2% (i.e. MCIT tax rate)
Equals: MCIT for 1998.
(6) Manner of filing and payment — The minimum corporate income tax (MCIT) shall be paid on a taxable year basis.
It shall be covered by a tax return designed for the purpose which will be submitted together with the corporation's
annual final adjustment income tax return. Domestic corporations shall not be required to pay the minimum corporate
income tax on a quarterly basis, the provisions of Sec. 75 of the Code notwithstanding.
(7) Accounting treatment of the excess minimum corporate income tax paid — Any amount paid as excess minimum
corporate income tax shall be recorded in the corporation's books as an asset under account title "deferred charges-
minimum corporate income tax". This asset account shall be carried forward and may be credited against the normal
income tax due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which
the same has been paid. Any amount of the excess minimum corporate income tax which has not or cannot be so
credited against the normal income taxes due for the 3-year reglementary period shall lose its creditability. Such
amount shall be removed and deducted from "deferred charges-minimum corporate income tax" account by a debit
entry to "retained earnings" account and a credit entry to "deferred charges-minimum corporate income tax" account
since this tax is not allowable as deduction from gross income it being an income tax.
Illustration on the accounting treatment of the excess minimum corporate income tax paid — Assume that ABC
Corporation commenced business operations in calendar year 1991. It is already more than four (4) years in operation
as of calendar year 1998 hence, subject to the minimum corporate income tax beginning taxable year 1998. Assume,
further, that its income taxes during the years from 1998 to year 2005 are as follows:
EXCESS OF
MCIT OVER
NORMAL INCOME NORMAL
YEAR TAX MCIT INCOME TAX

1998 P25,000 P100,000 P75,000

1999 130,000 150,000 20,000
2000 200,000 190,000 -
2001 - 300,000 300,000
2002 10,000 50,000 40,000
2003 15,000 60,000 45,000
2004 8,000 40,000 32,000
2005 1,000 50,000 49,000

In this case, ABC Corporation shall not be allowed to carry forward and credit the 1998 excess MCIT against the income
tax liability for 1999 since the 1999 MCIT is greater than the normal income tax for said year. However, for year 2000,
where the normal income tax is greater than the computed MCIT, ABC Corporation shall be allowed to apply the excess
MCIT of 1998 and 1999 amounting to P95,000 (P75,000 plus P20,000) against the normal income tax liability of
P200,000.
The excess MCIT for the year 2001 (P300,000) may only be credited against normal income tax liabilities for the
succeeding three years from 2002 to 2004. However, since the normal income tax liabilities for these succeeding years
are lesser than the respective MCITs, the excess MCIT for the year 2001 of P300,000 loses its creditability by the year
2005 hence, must be removed and deducted from "Deferred charges-MCIT" account and charged to "Retained
Earnings" account.
Illustrative accounting entries to record excess MCIT —
(a) For taxable year 1998 when MCIT is greater than the normal income tax liability of the company
1998

(1) Debit: Provision for income tax P25,000

Credit: Income tax payable P25,000
To record income tax liability using the normal income tax rate

(2) Debit: Deferred Charges-MCIT P75,000

Credit: Income Tax Payable P75,000
To record excess MCIT (P100,000 - P25,000)

(3) Debit: Income Tax Payable P100,000

Credit: Cash in bank P100,000
To record payment of income tax due for 1998

(b) For taxable year 2000 when excess MCIT (1998 and 1999) is applied against normal income tax liability
2000

(1) Debit: Provision for income tax P200,000

Credit: Income Tax Payable P200,000
To record income tax liability using the normal income tax rate

(2) Debit: Income tax payable P95,000

Credit: Deferred Charges-MCIT
(P75,000 plus P20,000) P95,000
To record application of excess MCIT against normal income tax liability for taxable year 2000

(3) Debit: Income Tax Payable P105,000

Credit: Cash in Bank P105,000
To record payment of income tax due (P200,000 less P95,000)

(c) For taxable year 2005 when the expired portion of excess MCIT (P300,000) for taxable year 2001 is closed to the
retained earnings account due to its non-application.

2005

Debit: Retained Earnings P300,000

Credit: Deferred Charges-MCIT P300,000
To record the expired portion of Deferred Charges-MCIT

(8) Exceptions — The minimum corporate income tax (MCIT) shall apply only to domestic corporations subject to the
normal corporate income tax prescribed under these Regulations. Accordingly, the minimum corporate income tax shall
not be imposed upon any of the following:
(a) Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on
their taxable income; or
(b) Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent (10%) on
their taxable income; and
(c) Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit
system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency
transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the
foreign currency deposit system, including their interest income from foreign currency loans granted to residents of the
Philippines under the expanded foreign currency deposit system, subject to final income tax at ten percent (10%) of
such income.
(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the
PEZA law and the Bases Conversion Development Act, respectively).
Sec. 2.28(A)(2) MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN CORPORATION — A minimum
corporate income tax of two percent (2%) of the gross income from sources within the Philippines is hereby imposed
upon any resident foreign corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal year,
depending on the accounting period employed) immediately following the taxable year in which the corporation
commenced its business operations, whenever the amount of the minimum corporate income tax is greater than the
normal income tax due for such year.
In computing for the minimum corporate income tax due from a resident foreign corporation, the rules prescribed
under Sec. 2.27(E) of these Regulations shall apply: Provided, however, that only the gross income from sources within
the Philippines shall be considered for such purposes.
Exceptions — The minimum corporate income tax shall only apply to resident foreign corporations which are subject to
normal income tax. Accordingly, the minimum corporate income tax shall not apply to the following resident foreign
corporations:
(a) Resident foreign corporations engaged in business as "international carrier" subject to tax at two and one-half
percent (2 ½%) of their "Gross Philippine Billings";
(b) Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from
foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with Offshore Banking Units (OBUs), including interest income
from foreign currency loans granted to residents of the Philippines, subject to a final income tax at ten percent (10%) of
such income; and
(c) Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten
percent (10%) of their taxable income.
(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the
PEZA law and the Bases Conversion Development Act, respectively).
EFFECTIVITY CLAUSE. These Regulations shall 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 shall not be imposed with penalties for late payment of the
tax.

6. Improperly Accumulated Earnings Taxa.

RR 2-2001
SUBJECT : Implementing the Provision on Improperly Accumulated Earnings Tax Under Section 29 of the Tax Code of
1997
TO : All Internal Revenue Officers and Others Concerned
SECTION 1. Scope. - Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 29 of the same Code, these
Regulations are being issued to prescribe the rules governing the imposition of Improperly Accumulated Earnings Tax.
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.
The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the
accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings
and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or
undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed.
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.
For purposes of these Regulations, closely-held corporations are those corporations at least fifty percent (50%) in value
of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock
entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations
not falling under the aforesaid definition are, therefore, publicly-held corporations.
For purposes of determining whether the corporation is closely held corporation, insofar as such determination is based
on stock ownership, the following rules shall be applied:
1. Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate
or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.
2. Family and Partnership Ownership. - An individual shall be considered as owning the stock owned, directly or
indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the 'family of an
individual' includes his brothers or sisters (whether by whole or half-blood), spouse, ancestors and lineal
descendants.
3. Option to Acquire Stocks. - If any person has an option to acquire stock, such stock shall be considered as owned
by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of
option shall be considered as an option to acquire such stock.
4. Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of
paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by
such person; but stock constructively owned by the individual by reason of the application of paragraph (2)
hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make
another the constructive owner of such stock.
Provided, however, that a branch of a foreign corporation is not covered by these Regulations, the same being a
resident foreign corporation.
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.
For purposes of determining the source of earnings or profits declared or distributed from accumulated income for each
taxable year, the dividends shall be deemed to have been paid out of the most recently accumulated profits or surplus
and shall constitute a part of the annual income of the distributee for the year in which received pursuant to Section
73(C) of the Code. Provided, however, that where the dividends or portion of the said dividends declared forms part of
the accumulated earnings as of December 31, 1997, or emanates from the accumulated income of a particular year and,
therefore, is an exception to the preceeding statement, such fact must be supported by a duly executed Board
Resolution to that effect.
SEC. 6. Period for Payment of Dividend/Payment of IAET. - The dividends must be declared and paid or issued not later
than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days
thereafter.
SEC. 7. Determination of Purpose to Avoid Income Tax. - The fact that a corporation is a mere holding company or
investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Likewise, the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable
needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members. In both
instances, the corporation may, by clear preponderance of evidence in its favor, prove the contrary.
For purposes of these Regulations, the term "holding or investment company" shall refer to a corporation having
practically no activities except holding property, and collecting the income therefrom or investing the same.
The following are prima facie instances of accumulation of profits beyond the reasonable needs of a business and
indicative of purpose to avoid income tax upon shareholders:
a. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities
of unrelated business;
b. Investment in bonds and other long-term securities;
c. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs
of the business as defined in these Regulations.
In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the
imposition of the improperly accumulated earnings tax, the controlling intention of the taxpayer is that which is
manifested at the time of accumulation, not subsequently declared intentions which are merely the product of
afterthought. A speculative and indefinite purpose will not suffice. The mere recognition of a future problem or the
discussion of possible and alternative solutions is not sufficient. Definiteness of plan/s coupled with action/s taken
towards its consummation are essential.
SEC. 8 . Transitory Provision. - The IAET shall not apply on improperly accumulated income as of December 31, 1997 in
the case of corporations using the calendar year basis. In the case of corporations adopting the fiscal year accounting
period, the IAET shall not apply on improperly accumulated taxable income as of the end of the month comprising the
twelve-month period of fiscal year 1997-1998.
Taxable income improperly accumulated, as heretofore discussed, prior to the effectivity of these regulations if declared
as dividend and paid/issued within one month from the effectivity hereof will not be subjected to the 10% Improperly
Accumulated Earnings Tax.
SEC. 9. Effectivity. - These Regulations shall take effect fifteen (15) days after publication in any newspaper of general
circulation and shall cover Improperly Accumulated Taxable Income earned starting January 1, 1998.

b. Formula RMC 35-2011 (See Part 23)

 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE

March 14, 2011

REVENUE MEMORANDUM CIRCULAR NO. 35-2011

SUBJECT : Clarification of Issues Concerning the Imposition of Improperly

Accumulated Earnings Tax Pursuant to Section 29 of the Tax Code of
1997, in relation to Revenue Regulations No. 2-2001

TO : All Revenue Officers and Others Concerned

______________________________________________________________________________

I. BACKGROUND

This Revenue Memorandum Circular (RMC) is being issued to clarify certain issues
relative to the imposition of the 10% Improperly Accumulated Earnings Tax (IAET) pursuant
to Section 29 of the National Internal Revenue Code of 1997 (Code), as amended, as it
applies to the taxable income earned starting January 1, 1998 by closely-held domestic
corporations, except publicly held corporations, banks and other non-bank financial
intermediaries, insurance companies, and those enumerated under Section 4 of Revenue
Regulations (RR) No. 2-2001.

Under Section 29 of the Code, as amended, a Corporation that permits the

accumulation of earnings and profits beyond the reasonable needs of the business, instead
of dividing or distributing said profits, is subject to ten percent (10%) improperly
accumulated earnings tax on the improperly accumulated taxable income.

II. DEFINITION OF IMPROPERLY ACCUMULATED TAXABLE INCOME

Section 29(D) of the Code, as amended, defines the term Improperly Accumulated
Taxable Income as “taxable income adjusted by:

(1) Income exempt from tax;

(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;

And reduced by the sum of:

(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
 Provided, however, That for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated income as of
December 31, 1997. In the case of corporations adopting the fiscal year accounting period,
the improperly accumulated income not subject to this tax, shall be reckoned, as of the end
of the month comprising the twelve (12)-month period of fiscal year 1997-1998.”

III. COMPUTATION OF IMPROPERLY ACCUMULATED TAXABLE INCOME

By way of illustration, Improperly Accumulated Taxable Income (IATI) is computed

as follows:

Taxable Income for the year (e.g., 2010) P xxxx

Add:
(a) Income subjected to Final Tax P xxx
(b) NOLCO xxx
(c) Income exempt from tax xxx
(d) Income excluded from gross income xxx xxxx
P xxxx
Less:
Income Tax paid P xxx
Dividends declared/paid xxx xxxx
Total P xxxx
Add: Retained Earnings from prior years
Accumulated Earnings as of December 31, 2010
Less: Amount that may be Retained
(100% of Paid-Up Capital as of December 31, 2010) xxxx
IATI P xxxx

The resulting “Improperly Accumulated Taxable Income” is thereby multiplied by

10% to arrive at the Improperly Accumulated Earnings Tax (IAET).

For purposes of this RMC, and in accordance with RR No. 2-2001, the amount that
may be retained, taking into consideration the accumulated earnings within the
“reasonable needs of the business” as determined under Section 3 of the said RR, shall be
100% of the paid-up capital or the amount contributed to the corporation representing the
par value of the shares of stock, hence, any excess capital over and above the par shall be
excluded.
IV. REPEALING CLAUSE

All BIR rulings and other issuances issued inconsistent herewith are revoked
accordingly.

All concerned revenue officials are hereby enjoined to be guided accordingly and to
give this Circular as wide a publicity as possible.

(Original Signed)
KIM S. JACINTO-HENARES
Commissioner of Internal Revenue
7. Fringe Benefits Tax

RR 3-98

SUBJECT : Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No.
8424 Relative to the Special Treatment of Fringe Benefits

TO : All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code of 1997, these Regulations are
hereby promulgated to govern the collection at source of the tax on fringe benefits which have been furnished, granted
or paid by the employer beginning January 1, 1998.

SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS

(A) Imposition of Fringe Benefits Tax — A final withholding tax is hereby imposed on the grossed-up monetary value
of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined
in these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of
whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe
benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the
fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the
following rates:

Effective January 1, 1998 - 34%

Effective January 1, 1999 - 33%

Effective January 1, 2000 - 32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be
withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax
on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe
benefit by the following percentages and in accordance with the following schedule:

Effective January 1, 1998 - 66%

Effective January 1, 1999 - 67%

Effective January 1, 2000 - 68%

The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee
which includes the net amount of money or net monetary value of property which has been received plus the amount of
fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee,
pursuant to the provisions of this Section.

Coverage — These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory
employees and not to the rank and file.

The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory
position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with
powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer,
effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in
nature but requires the use of independent judgment. cdtai

Moreover, these regulations do not cover those benefits properly forming part of compensation income subject to
withholding tax on compensation in accordance with Revenue Regulations No. 2-98.

Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these Regulations.

Determination of the Amount Subject to the Fringe Benefit Tax — In general, the computation of the fringe benefits tax
would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit
which is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100
per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which
stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of
the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the
fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the
portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are
defined under these rules and regulations.

Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows:

(1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount
granted or paid for.

(2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is
transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property
as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property
Values).

(3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not
transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.

Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the
Philippines — A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of
the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-
five per cent (75%).

Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a
multinational company or by regional operating headquarters of a multinational company; (2) an alien individual
employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed
by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines;
and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied
or held by the alien employees. — A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up
monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe
benefit by eighty-five per cent (85%).

Taxation of fringe benefit received by employees in special economic zones — Fringe benefits received by employees in
special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are
also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15%
as provided above.

(B) Definition of Fringe Benefit — In general, except as otherwise provided under these regulations, for purposes of
this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer
in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in
these regulations) such as, but not limited to the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate
granted;

(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs
or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law
allows.

For this purpose, the guidelines for valuation of specific types of fringe benefits and the determination of the monetary
value of the fringe benefits are give below. The taxable value shall be the grossed-up monetary value of the fringe
benefit.

(1) Housing privilege —

(a) If the employer leases a residential property for the use of his employee and the said property is the usual place
of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as
evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the
benefit.

(b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual
place of residence, the annual value of the benefit shall be five per cent (5%) of the market value of the land and
improvement, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is
higher. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. cda

The monetary value of the housing fringe benefit is equivalent to the following:

MV = [5%(FMV or ZONAL VALUE] X 50%

WHERE:

MV = MONETARY VALUE

FMV = FAIR MARKET VALUE

(c) If the employer purchases a residential property on installment basis and allows his employee to use the same as
his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the acquisition cost, exclusive
of interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit.

(d) If the employer purchases a residential property and transfers ownership thereof in the name of the employee,
the value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is
higher. The monetary value of the fringe benefit shall be the entire value of the benefit.

(e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's
residential use, at a price less than the employer's acquisition cost, the value of the benefit shall be the difference
between the fair market value, as declared in the Real Property Tax Declaration Form, or zonal value as determined by
the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values),
whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall be the entire value of
the benefit.

(f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the
Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance
with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible
from the military camp so that they can be readily on call to meet the exigencies of their military service.

(g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be
considered as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is
located within the maximum of fifty (50) meters from the perimeter of the business premises.

(h) Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be
considered a taxable fringe benefit.

(2) Expense account —

(a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable
fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the
expenditures do not partake the nature of a personal expense attributable to the employee.

(b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except
only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not
partake the nature of a personal expense attributable to the said employee.

(c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee
and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe
benefits of the employee whether or not the same are duly receipted for in the name of the employer.

(d) Representation and transportation allowances which are fixed in amounts and are regular received by the
employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same
shall be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the Code.

(3) Motor vehicle of any kind —

(a) If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the
acquisition cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of
whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his
employer.

(b) If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is
placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee.
The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle
is used by the employee partly for his personal purpose and partly for the benefit of his employer, unless the same was
subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98.

(c) If the employer purchases the car on installment basis, the ownership of which is placed in the name of the
employee, the value of the benefit shall be the acquisition cost exclusive of interest, divided by five (5) years. The
monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is
used by the employee partly for his personal purpose and partly for the benefit of his employer.

(d) If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of
which is placed in the name of the employee, the value of the benefit shall be the amount shouldered by the employer.
The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle
is used by the employee partly for his personal purpose and partly for the benefit of his employer.

(e) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees, the
value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery
service and other non-personal used divided by five (5) years. The monetary value of the fringe benefit shall be fifty per
cent (50%) of the value of the benefit.

The monetary value of the motor vehicle fringe benefit is equivalent to the following:

MV = [(A)/5] X 50%

where:

MV = Monetary value

A = acquisition cost

(f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees, the
value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight,
delivery, service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the
value of the benefit.

(g) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business
use and not be subject to the fringe benefits tax.

(h) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe
benefit. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20
years.

(4) Household expenses — Expenses of the employee which are borne by the employer for household personnel,
such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for
homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits.

(5) Interest on loan at less than market rate

(a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such
interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per
cent (12%) shall be treated as a taxable fringe benefit.

(b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent
regulation.

(c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%)
starting January 1, 1998.

(6) Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs
or other similar organizations. — These expenditures shall be treated as taxable fringe benefits of the employee in full.

(7) Expenses for foreign travel —

(a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the
purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance,
inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or
similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit
tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.

The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent
of the cost of first class airplane ticket shall be subject to a fringe benefit tax.

(b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with
business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other
expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business
meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the
meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or
entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits
of the employee.

(c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall
be treated as taxable fringe benefits of the employee.

(8) Holiday and vacation expenses — Holiday and vacation expenses of the employee borne by his employer shall be
treated as taxable fringe benefits.

(9) Educational assistance to the employee or his dependents —

(a) The cost of the educational assistance to the employee which are borne by the employer shall, in general, be
treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as
taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or
profession, and there is a written contract between them that the employee is under obligation to remain in the employ
of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as
incurred for the convenience and furtherance of the employer's trade or business.

(b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated
as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the
scholarship program of the company.

(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law
allows — The cost of life or health insurance and other non-life insurance premiums borne by the employer for his
employee shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the
benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A.
No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar
contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer
for the group insurance of his employees.

(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on
the following fringe benefits:
(1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law;

(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization
benefit plans;

(3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;

(4) De minimis benefits as defined in these Regulations;

(5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or
profession of the employer; or

(6) If the grant of the fringe benefit is for the convenience of the employer.

The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to
mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt
from any other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is
exempted from the fringe benefits tax, the same may, however, still form part of the employee's gross compensation
income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment.

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 such as the following:

(1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;

(2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month;

(3) Rice subsidy of P350 per month granted by an employer to his employees;

(4) Uniforms given to employees by the employer;

(5) Medical benefits given to the employees by the employer;

(6) Laundry allowance of P150 per month;

(7) Employee achievement awards, e.g. for length of service or safety achievement, which must be in the form of a
tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding one-half (½)
month of the basic salary of the employee receiving the award under an established written plan which does not
discriminate in favor of highly paid employees; dctai

(8) Christmas and major anniversary celebrations for employees and their guests;

(9) Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; and

(10) Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness,
marriage, birth of a baby, etc

(D) Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe Benefit Tax Due Thereon. — As a
general rule, the amount of taxable fringe benefit and the fringe benefits tax shall constitute allowable deductions from
gross income of the employer. However, if the basis for computation of the fringe benefits tax is the depreciation value,
the zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code or the fair market value as
determined in the current real property tax declaration of a certain property, only the actual fringe benefits tax paid
shall constitute a deductible expense for the employer. The value of the fringe benefit shall not be deductible and shall
be presumed to have been tacked on or actually claimed as depreciation expense by the employer.

Provided, however, that if the aforesaid zonal value or fair market value of the said property is greater than its cost
subject to depreciation, the excess amount shall be allowed as a deduction from the employer's gross income as fringe
benefit expense.

Illustrations on fringe benefit furnished or granted by the employer to an employee (other than a rank-and-file
employee)

(1) During the year 1998, ABC Corporation paid for the monthly rental of a residential house of its branch manager
(Mr. Dela Cruz) amounting to P66,000.00.

In this case, the monthly taxable grossed-up monetary value of the said fringe benefit furnished or granted to its branch
manager (Mr. Dela Cruz) shall be P50,000.00, computed as follows:

Monthly rental for the residential house P66,000.00

Grossed-up monetary benefit granted

(P66,000.00 divided by 66% factor for

calendar year 1998 times 50% taxable portion) P50,000.00

———––––

Fringe benefit tax due thereon (34%) P17,000.00

=========

ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit furnished to Mr. Dela Cruz, under
account title "Fringe Benefit Expense" and the amount of 17,000.00 under the account title "Fringe Benefit Tax
Expense". The aforesaid amounts shall be fully allowed as deductions from the gross income of ABC Corporation and
shall be taken up in the said employer's books of accounts as follows:

Debit: Fringe Benefit Expense P66,000

Debit: Fringe Benefit Tax Expense P17,000

Credit: Cash P83,000

To record fringe benefit expense and fringe benefit tax paid on rental of the residential property furnished to Mr. Dela
Cruz for his residential use. (Note: If the fringe benefit expense of P66,000.00 has already accrued but not yet paid, use
the account title "fringe benefit payable". If the fringe benefit tax has already accrued but not yet paid, use the account
title "fringe benefit tax payable").

(2) XYZ Corporation owns a condominium unit. During the year 1998, the said corporation furnished and granted the
said property for the residential use of its Assistant Vice-President. The fair market value of the said property as
determined by the Commissioner pursuant to Section 6(E) of the Code amounts P10,000,000.00 while its fair market
value as shown in its current Real Property Tax Declaration amounts to P8,000,000.00. In this case, the higher fair
market value of P10,000,000.00 as determined by the Commissioner shall be used in computing the monetary of the
fringe benefit so furnished or granted to said employee and the fringe benefit tax due thereon shall be computed as
follows:

Monthly rental value of the property

(P10,000,000 times 5% thereof times 50%

divided by 12 months) P20,833.33

Grossed-up monetary value thereof as fringe

benefit (P20,833.33 divided by 66% factor for

calendar year 1998) P31,565.66

Fringe Benefit tax due thereon (34%) P10,732.32

=========

In general, under this illustration, the XYZ Corporation shall not further claim deduction for allowing its Assistant Vice-
President the use of its residential property since the cost for the use thereof has already been recovered as deduction
from its gross income under "Depreciation Expense". However, since the fringe benefit tax in the amount of P10,732.32,
assumed and paid by XYZ corporation has not as yet been recovered by way of deduction from gross income, the same
shall be allowed as a deduction from its gross income. XYZ Corporation shall take up the foregoing in its books of
accounts, as follows:

Debit: Fringe Benefit Tax Expense P10,732.32

Credit: Cash/Fringe Benefit Tax Payable P10,732.32

To record fringe benefit tax expense for the

residential property furnished to employees.

However, if the cost of the aforesaid condominium unit subject to depreciation allowance (example: its acquisition cost
is only P7,000,000.00) is lesser that its fair market value as determined by the Commissioner (i.e. P10,000,000.00), the
excess amount (i.e. P3,000,000.00) shall be amortized throughout the remaining estimated useful life of the residential
property used in computing the said employer's depreciation expense and allowed as a deduction from the said
employer's gross income as fringe benefit expense. Thus, if the remaining estimated useful life thereof during the year
1998 is fifteen (15) years, its monthly amortization shall be computed as follows:

Monthly amortization (P3,000,000.00 divided by

15 years divided by 12 months) P16,666.67

In this case, XYZ Corporation shall take up the foregoing in its books of accounts as follows:

Debit: Fringe benefit expense P16,666.67

Debit: Fringe benefit tax P10,732.32

Credit: Income constructively realized P16,666.67

Credit: Cash/Fringe benefit tax payable P10,732.32

To record fringe benefit and fringe benefit tax expenses and income constructively realized from the use of company-
owned residential property furnished to employees.

REPEALING CLAUSE — All existing rules and regulations or parts thereof which are inconsistent with the provisions of
these regulations are hereby revoked. LibLex

EFFECTIVITY — These regulations shall take effect on fringe benefits furnished, granted or paid beginning January 1,
1998.

TRANSITORY PROVISIONS — No penalty shall be imposed for late payment of the fringe benefit tax for the first quarter
ending March 1998: Provided, however, that the withholding tax return for the first quarter shall be filed and the tax is
paid not later than July 25, 1998.

RR 8-2000 (Sorry, can’t find full text)

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.

RR 10-2000 (Sorry, can’t find full text)

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.

Note: The list of de minimis benefits under RR 10-2008 and the previous regulations RR 5-2008, 10-2000 and RR 8-2000
are the same. Below is the present list of de minimis benefits:

RR 10-2008

Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the
monetized value of leave credits paid to government officials and employees

Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per
month

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

Uniforms and clothing allowance not exceeding P4,000.00 per annum

Actual yearly medical benefits not exceeding P10,000.00 per annum

 Laundry allowance not exceeding P300.00 per month;

Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a
tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00
received by the employee under an established written plan which does not discriminate in favor of highly paid
employees

Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum

Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness,
marriage, birth of a baby, etc..

Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.

b. As amended by RR 5-2008 (Increase rice subsidy to P1500 per month, clothing allowance to P4,000) as amended by
RR 5-2011 (monetized leaves) and RR 8-2012 (increasing clothing allowance to P5,000)
 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE

Quezon City

April 17, 2008

REVENUE REGULATIONS NO. 5-2008

SUBJECT: Further Ame ndments to Revenue Regulations Nos. 2-98 and 3-98, as Last Amended
by Revenue Regulations No. 10-2000, With Respect to “De Minimis Benefits”.
TO: All Internal Revenue Officials and Others Concerned

Pursuant to Sections 4 and 244 in relation to Section 33 of the Tax Code of 1997, these
Regulations are hereby promulgated to further amend Revenue Regulations (RR) Nos. 2-98 and 3-
98, as las t amended by RR No. 10-2000, with respect to “De Minimis “ benefits which are exempt
from income tax on compensation as well as from fringe benefit tax.

Section 1. Section 2.78.1 (A)(3)(c) and (d) of RR 2-98, as last amended by RR 10-2000, is
hereby further amended to read as follows:

“Sec. 2.78.1 Withholding of Income Tax on Compensation Income.-

(A) xxx xxx xxx

(1) xxx xxx xxx

xxx xxx xxx

(3) Facilities and privileges of relatively small value. - xxx

xxx xxx xxx

The following shall be considered as “de minimis” benefits not subject to
income tax as well as withholding tax on compensation income of both managerial
and rank and file employees:

(a) xxx xxx xxx

xxx xxx xxx

(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;

1
 (d) Uniform and Clothing allowance not exceeding P4,000.00 per
annum;

xxx xxx xxx”

Section 2 . Section 2.33(C) of RR 3-98, as last amended by RR 10-2000, is hereby further

amended to read as follows:
“Sec. 2.33. Special Treatment of Fringe Benefits.

(A) Imposition of Fringe Benefits Tax – xxx xxx

xxx xxx xxx

(B) Definition of Fringe Benefit – xxx xxx

xxx xxx xxx

(C) Fringe Benefits Not Subject to Fringe Benefit Tax – In general, the
fringe benefit tax shall not be imposed on the following fringe benefits:

xxx xxx xxx

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 such as the following:
(a) xxx xxx xxx

xxx xxx xxx

(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;

xxx xxx xxx”

Section 3. Transitory Provisions. – The benefits herein provided shall apply to income
earned starting the year 2008.

Section 4. Repealing Clause. - All existing rules and regulations or parts thereof which
are inconsistent with the provisions of these regulations are hereby revoked, repealed or modified
accordingly.

2
 Section 5 . Effectivity Clause. – These Regulations shall take effect after fifteen (15) days
following its publication in any newspaper of general circulation.

(Original Signed)
MARGARITO B. TEVES
Secretary of Finance

Recommending Approval:

(Original Signed)
LILIAN B. HEFTI
Commissioner of Internal Revenue

3
 REPUBLIC OF THE PHILIPPINES
DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
Quezon City

March 16, 2011

REVENUE REGULATIONS NO. 5-2011

SUBJECT : Further Amendments to Revenue Regulations Nos. 2-98 and 3-98,

as Last Amended by Revenue Regulations No. 5-2008, with
Respect to "De Minimis Benefits"

TO : All Internal Revenue Officials and Others Concerned.

Pursuant to Sections 4 and 244 in relation to Section 33 of the Tax Code of 1997,
these Regulations are hereby promulgated to further amend Revenue Regulations (RR)
No. 2-98, as last amended by RR No. 5-2008, with respect to "De Minimis" benefits
which are exempt from income tax on compensation as well as from fringe benefit tax.

SECTION 1. Section 2.78.1 (A) (3) (c) and (d) of RR 2-98, as last amended by RR 5-
2008, is hereby further amended to read as follows:

"Sec. 2.78.1 Withholding of Income Tax on Compensation Income. —

(A) ...

(1) ...

xxx xxx xxx

(3) Facilities and privileges of relatively small value. — . . .

xxx xxx xxx

The following shall be considered as "de minimis" benefits not subject to income
tax as well as withholding tax on compensation income of both managerial and rank and
file employees:

a) Monetized unused vacation leave credits of private employees not

exceeding ten (10) days during the year;

b) Monetized value of vacation and sick leave credits paid to

government officials and employees;
 c) Medical cash allowance to dependents of employees, not exceeding
P750 per employee per semester or P125 per month;

d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500;

e) Uniform and Clothing allowance not exceeding P4,000 per

annum;

f) Actual medical assistance, e.g. medical allowance to cover

medical and healthcare needs, annual medical/executive check-up,
maternity assistance, and routine consultations, not exceeding
P10,000.00 per annum;

g) Laundry allowance not exceeding P300 per month;

h) Employees achievement awards, e.g., for length of service or safety

achievement, which must be in the form of a tangible personal
property other than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received by the employee
under an established written plan which does not discriminate in
favor of highly paid employees;

i) Gifts given during Christmas and major anniversary celebrations

not exceeding P5,000 per employee per annum;

j) Daily meal allowance for overtime work and night/graveyard shift

not exceeding twenty-five percent (25%) of the basic minimum
wage on a per region basis;

All other benefits given by employers which are not included in the above
enumeration shall not be considered as "de minimis" benefits, and hence, shall be
subject to income tax as well as withholding tax on compensation income.

xxx xxx xxx”

SECTION 2. Section 2.33 (C) of RR 3-98, as last amended by RR 5-2008, is hereby

further amended to read as follows:

"Sec. 2.33. Special Treatment of Fringe Benefits. —

(A) Imposition of Fringe Benefits Tax — . . .

 xxx xxx xxx

(B) Definition of Fringe Benefit — . . .

xxx xxx xxx

(C) Fringe Benefits Not Subject to Fringe Benefit Tax — In general, the fringe
benefit tax shall not be imposed on the following fringe benefits:

xxx xxx xxx

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. The following are considered as “de minimis” benefits granted to each
employee:
a) Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year;

b) Monetized value of vacation and sick leave credits paid to

government officials and employees;

c) Medical cash allowance to dependents of employees, not exceeding

P750 per employee per semester or P125 per month;

d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500;

e) Uniform and Clothing allowance not exceeding P4,000 per

annum;

f) Actual medical assistance, e.g. medical allowance to cover

medical and healthcare needs, annual medical/executive check-up,
maternity assistance, and routine consultations, not exceeding
P10,000.00 per annum;

g) Laundry allowance not exceeding P300 per month;

h) Employees achievement awards, e.g., for length of service or safety

achievement, which must be in the form of a tangible personal
property other than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received by the employee
 under an established written plan which does not discriminate in
favor of highly paid employees;

i) Gifts given during Christmas and major anniversary celebrations

not exceeding P5,000 per employee per annum;

j) Daily meal allowance for overtime work and night/graveyard shift

not exceeding twenty-five percent (25%) of the basic minimum
wage on a per region basis.

All other benefits given by employers which are not included in the above
enumeration shall not be considered as "de minimis" benefits, and hence, shall be
subject to income tax as well as withholding tax on compensation income.

xxx xxx xxx"

SECTION 3. Transitory Provisions. — The benefits herein provided shall apply to
income earned starting the year 2011.

SECTION 4. Repealing Clause. — All existing rules and regulations or parts thereof
which are inconsistent with the provisions of these regulations are hereby revoked,
repealed or modified accordingly.

SECTION 5. Effectivity Clause. — These Regulations shall take effect after fifteen (15)
days following its publication in any newspaper of general circulation.

(Original Signed)
CESAR V. PURISMA
Secretary of Finance

Recommending Approval:

(Original Signed)
KIM S. JACINTO-HENARES
Commissioner of Internal Revenue