Validating your PEZA ITH Incentive

SUITS THE C-SUITE By Janice G. Bernabe-Sibuyan

First published in BusinessWorld (03/24/2014 – p.S1/2)

ON JAN. 24, the BIR issued Revenue Regulations 2-2014, prescribing the use of the new Income Tax Returns (ITRs) for filing covering taxable year ended Dec. 31, 2013. Under the said regulations, companies with mixed income subject to multiple income tax rates or with income subject to special or preferential tax, such as companies registered with the Philippine Economic Zone Authority (PEZA), are now required to use the new Annual Income Tax Return (BIR Form No. 1702-MX).

One of the required attachments to BIR Form No. 1702-MX is the PEZA Certificate of Available Incentives (PEZA-ERD Form No. 03-01), which enumerates the incentives given to a PEZA-registered company, as well as the conditions imposed for the availment of the incentives. Failure to attach this PEZA Certificate to the ITR and submit the same to the BIR may expose the company to adverse tax consequences, such as the disallowance of the incentive claimed.

Naturally, before the PEZA issues the Certificate of Available Incentives, PEZA-registered companies have to comply with the terms and conditions of their PEZA registration. For example, companies that were given the income tax holiday (ITH) incentive, subject to the condition that they will only use new machinery and equipment, are required to file an application for validation of the incentive.

Another example would be in the case of IT-enabled enterprises that are required to have a minimum investment (e.g., for voice, $2,500 [now $5,000 under the 2013 Investment Priority Plan] per seat). The validation requirement, which is included in the terms and conditions of the company’s Registration Agreement with the PEZA, aims to ensure that only entities who have met these PEZA investment requirements will be entitled to the ITH incentive.

PEZA-registered entities that fail to apply for validation of their ITH incentive will be notified by PEZA to comply accordingly. The notice will require them to submit the application for validation together with the documentary requirements within seven days from receipt thereof. It is only after the PEZA-registered entity has filed the validation application with complete documents that PEZA will release the Certificate of Available Incentives.

Given the importance of both applying for the validation of the ITH incentive and securing the PEZA Certificate of Available Incentives, we discuss briefly below the relevant procedures and requirements for the ITH validation.

APPLYING FOR APPROVAL OF START OF COMMERCIAL OPERATIONS (SCO)

Among the prerequisites for the validation of the ITH incentive is PEZA’s approval of SCO for the new and/or expansion project of the company. The application for approval of SCO must be filed within seven days from the actual commencement of commercial operations. Entities that have not secured the approval within the required seven-day period may still apply by filing a notarized PEZA Form No. ERD.2.F.005 or Certification of SCO. The certification must be signed by the highest responsible officer of the company and attested to by the administrator or manager of the economic zone where the entity is located.

Once the application is approved, PEZA will issue a Notice of Approval of SCO confirming the actual SCO date, which will serve as the starting date of the PEZA-registered entity’s ITH entitlement.

APPLYING FOR VALIDATION OF ENTITLEMENT TO ITH INCENTIVE

This application must be filed within 45 days after the first year of the PEZA-registered entity’s approved SCO.

For IT-enabled enterprises, application for validation of ITH incentive will cover compliance with the minimum investment required in new machinery and equipment as well as investment cost per seat (for voice).

Upon receiving the application, the PEZA Incentives Management Division (IMD) will evaluate and prepare a report for approval of the PEZA director general. Once approved, PEZA will issue a Notice of Confirmation as proof that the PEZA-registered entity has complied with the required amount of investment in machinery and equipment and investment cost per seat.

Before the PEZA Notice of Confirmation is released, the entity must pay the penalties assessed for late filing of application for validation, equivalent to a basic fine of P500 and additional fine of P50 for every day of delay.

The same process and requirements for applying for (1) approval of SCO, and (2) validation of ITH incentive also apply to PEZA-registered entities granted pioneer status upon registration but who have yet to file an application for validation of their pioneer status. However, as a condition for entitlement to the six-year ITH incentive (as against the four-year ITH given to PEZA-registered entities on a non-pioneer status), the additional investment requirement stated in its PEZA Agreement (e.g. project cost, etc.) must be met. Applications for validation of pioneer status are subject to approval of the PEZA Board.

CONSEQUENCES OF FAILURE TO MEET PEZA’S INVESTMENT REQUIREMENT

• If an IT-enabled enterprise given pioneer status upon registration fails to meet the required minimum project cost, PEZA may reduce its ITH from six to four years, effectively downgrading its status to non-pioneer. After expiration of the ITH, the enterprise will be entitled to the 5% GIT incentive.

• If the IT-enabled enterprise fails to meet the minimum investment cost per seat and minimum amount of investment on machinery and equipment, PEZA may revoke the four-year ITH incentive, and the PEZA-registered entity will only be entitled to the 5% GIT incentive retroactive to the date of its registration with PEZA.

• If the entity does not meet the minimum investment on machinery and equipment, PEZA may also revoke the four-year ITH incentive and apply the 5% GIT incentive reckoned from the PEZA registration.

• If the company used old machines and equipment for its registered activity, its new project may be downgraded to a mere expansion project and, as such, it is entitled only to a three-year ITH. This rule will apply even if its required investment in new machinery and equipment has been met.

Tax incentives serve the purpose of attracting investments into the country. Like other privileges, they come with certain conditions and requirements that need to be fulfilled for their continued enjoyment. The PEZA requirement for validation is the PEZA’s mechanism to ensure that these conditions and requirements are being met, whereas the PEZA Certificate of Available Incentives, which is required to be attached to the ITR, is the BIR’s “comfort letter” (as it were) that the company is meeting its commitments to the PEZA. Thus, PEZA-registered companies — whether newly registered or those already registered but have yet to fulfill this PEZA filing requirement — should ensure that said applications are filed on time. Heeding the PEZA’s call for compliance should help prevent any after-the-fact controversy with the BIR on the matter of the incentive availments.

Janice G. Bernabe-Sibuyan is a tax senior director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.