Philippines – For Taxable Years Prior To The Corporate Recovery And Tax Incentives For Enterprises Act.

6 September 2021

 

Yes.  Section 4(g) of Revenue Regulations No. 2-2001 provides that  “[e]nterprises 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. No. 7227 (BCDA), 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” are exempt from improperly accumulated earnings tax (IAET).  

 

In Commissioner of Internal Revenue v. Yumex Philippines Corporation (G.R. No. 222476, May 5, 2021), the Supreme Court rejected the Commissioner of Internal Revenue’s (CIR’s) argument that only income from PEZA-registered activities which are subject to the preferential tax rate of 5% is exempt from IAET.  It quoted with approval the CTA En Banc’s interpretation that “the phrase “which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local” applies only to corporations belonging to the third group – other companies duly registered under special economic zones declared by law. On the other hand, PEZA-registered enterprises and those registered pursuant to the BCDA, are exempted from the imposition of the improperly accumulated earnings tax without further qualification.  Section 4(g) [of Revenue Regulations No. 2-2001] made no distinction whether a corporation duly registered with the PEZA or registered pursuant to the BCDA enjoys an income tax holiday (ITH) or the special tax regime at a rate of 5% on its registered activities.  In other words, the fact of registration with the PEZA under RA No. 7916 or pursuant to the BCDA under RA No. 7227 alone excludes a corporation or enterprise from the coverage of corporations upon which improperly accumulated earnings tax may be imposed.” 

 

SyCipLaw Tip: A company registered with the PEZA and is under ITH is exempt from IAET. If the CIR issues an IAET assessment against it on the basis that only PEZA-registered companies under the 5% tax regime are exempt from IAET, the company may protest the assessment and cite Commissioner of Internal Revenue v. Yumex Philippines Corporation (G.R. No. 222476, May 5, 2021).

 

Note that the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) repealed the IAET. Thus, the IAET shall no longer be imposed for all taxable years ending after the effectivity of CREATE on April 11, 2021.