In March 13, 1992, Congress enacted RA 7227, "the Bases Conversion and Development Act", which had as its declared policy "the sound and balanced conversion into alternative productive uses of the Clark and Subic military reservations and their extensions". Section 12(a) of RA 7227 declared the Subic Special Economic Zone as a separate customs territory which ensured that movement of raw materials, capital and equipment into, within and out of the zone would not be subject to duties and taxes. In place of existing national taxes, Section 12(b) imposed on business enterprises located inside the Subic Special Economic Zone the equivalent of a five-percent tax on gross income earned. Section 15 of RA 7227 then went on to authorize the President, with the concurrence of the affected local government units, to create the Economic Zones of Clark, John Hay, and Morong. Unfortunately, Section 15 was silent on the tax treatment of business enterprises that chose to locate in these zones.
Subsequently, President Ramos issued two executive orders: the first, Executive Order No. 80, in 1993, created the Clark Special Economic Zone. Section 5 of EO 80, stated that the Clark Economic Zone shall have "all applicable incentives in the Subic Special Economic and Freeport Zone under RA 7227…". The second executive order, Proclamation No. 420, created the John Hay Special Economic Zone in 1994. In granting all "applicable" incentives to these entities the executive proclamations invoked Section 12 of RA 7227 as their authority. This meant that businesses located inside the Clark and John Hay Special Economic Zones would enjoy the special tax rate of five percent of gross income earned. On this basis, both zones attracted locators to do business within their respective confines.
However, in 2005 the Supreme Court, in Coconut Oil Refiners Association Inc. vs. Torres (G.R. No. 132527, July 29, 2005) and in John Hay Peoples Alternative Coalition vs. Lim (G.R. No. 119775, March 29, 2005) declared these tax incentives in the executive proclamations as void. The Court said that while Section 12 of RA 7227 expressly granted incentives to the Subic Special Economic Zone, it made no such grant for economic zones that had yet to be created, Clark and John Hay among them. A basic principle is that a grant of a tax exemption should be clearly expressed by the law purporting to grant the exemption, without which the tax exemption must fail.
The Court’s decision, while sound, had awkward consequences. Shortly after the decisions the BIR was poised to issue sizable assessments for back taxes, penalties and interest on John Hay and Clark businesses that had enjoyed the special tax. The assessments were the difference between the special tax rate of five percent and the regular corporate tax on net income (then 32 percent), as well as most, if not all, other taxes under the Tax Code (remember that the special tax was in lieu of all other taxes and customs duties, including local taxes). Worse, the assessments were to cover a period of more than a decade during which EO 80 and Proclamation 420 were in effect. In a predicament worthy of a Twilight Zone episode Clark and John Hay businesses, having located there relying on the government guarantees of favorable tax treatment, faced the unpleasant prospect of being assessed hundreds of millions of pesos; the BIR – ever conscious of its growing collection targets – looked at them as legitimate sources to cover any collection shortfall; and the Department of Finance, well, it had to concede that – at least in this case – foreign investors’ complaints about the rules changing midstream were true. While the DOF certainly could not prevent the BIR from performing their statutory duty to collect taxes, it realized that such amounts were of mythical proportions; i.e., non-existent: businesses could simply pull stakes, and go elsewhere in the region without paying one centavo’s worth of tax.
With the reputation of the Philippines as an investment destination at stake, Congress and the Executive worked on remedial legislation. The result is RA 9399, which forgives all taxes and duties, including penalties, interest, and civil, administrative, and criminal liabilities, of all business establishments who have, as a result of the Supreme Court rulings, accrued liabilities to the national government and local governments. Included in this amnesty are those establishments located in Poro Point Economic and Freeport Zone and Morong Special Economic Zone which, like Clark and John Hay, were created by executive fiat. The amnesty tax is a flat fee of P25,000. This must be paid within six months from RA 9399’s effective date, which was yesterday, April 23. (Since the law gives the relevant executive agencies a maximum of two months to produce rules and regulations, this may effectively cut down the compliance period to four months.) It must be stressed that the amnesty is not for all taxes; rather, it is only for the difference between, first, all national and local taxes and, second, the five percent on gross income earned during the period covered by the amnesty. Together with RA 9399 Congress also passed RA 9400, which extended the special tax rate of five percent on gross income earned on businesses located in all these special zones, putting an end to the question of whether special incentives exist in these zones.
(Emmanuel P. Bonoan is chief operating officer and vice chairman for Tax & Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG International, a Swiss Cooperative. Mr. Bonoan is a former Undersecretary of the Department of Finance. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email manila@kpmg.com.ph or ebonoan@-kpmg.com)