MEMORANDUM CIRCULAR NO. 2005-032
TO: ALL ECOZONE EXPORT ENTERPRISES
FROM: Director General LILIA B. DE LIMA
DATE: 15 September 2005
SUBJECT: Clarification of the Tax Treatment of (a) Gains on Foreign Exchange
Transactions; and, (b) Sales of Production “Rejects and “Seconds”,
Scrap, Raw Materials, Packaging Materials and Other Production
Supplies
On Gains on Foreign Exchange Transactions:
Foreign currency is normally used by Ecozone Export Enterprises for their registered activities, either as the functional currency or as a supplemental currency. On the other hand, it is also used by some Ecozone Export Enterprises for other activities which can be considered as “additional business opportunities” which PEZA has no control of.
The tax treatment of foreign exchange (forex) gains shall depend on the activities from which these arise. Thus, if the forex gain is attributed to an activity with income tax incentive (Income Tax Holiday or 5% Gross Income Tax), said forex gain shall be covered by the same income tax incentive. On the other hand, if the forex gain is attributed to an activity without income tax incentive, said forex gain shall likewise be without income tax incentive, i.e., therefore, subject to normal corporate income tax.
The tax treatment of forex gains is illustrated as follows:
Activity | Income Tax Incentive | Tax Treatment of Forex Gain |
Registered 1st Project | 5% Gross Income Tax | 5% Gross Income Tax |
Registered 2nd Project | Income Tax Holiday | Income Tax Holiday |
Other Activities | None | Normal Corporate Income Tax |
On Sales of Production “Rejects” and “Seconds”, Scrap, Raw Materials, Packaging Materials and Other Production Supplies:
1. All local sales shall be subject to applicable duties and taxes (including VAT) prior to withdrawal thereof from the Ecozone.
2. For purposes of entitlement to income tax incentives (Income Tax Holiday or 5% Gross Income Tax), the following shall apply:
a. Sale of production “rejects” and “seconds” from the registered activity of the Export Enterprise shall be considered covered by the registered activity of said Enterprise. Thus, any income derived therefrom shall be covered by the applicable income tax incentive, i.e., Income Tax Holiday or 5% Gross Income Tax.
b. Sale of recovered waste / scrap generated from processing of raw materials, including used packaging materials and other direct/indirect materials / supplies that have undergone processing / which have been used in production/processing activity registered with PEZA shall likewise be considered covered by the registered activity of an Export Enterprise. Any income derived therefrom shall likewise be covered by the applicable income tax incentive.
c. Sale of unprocessed, unused, obsolete or “off-specs” production inputs (direct/indirect materials/supplies) shall not be covered by the registered activity of an Ecozone Enterprise. Thus, any income derived therefrom shall be subject to normal corporate income tax, provided that the related cost shall be deducted only once for purposes of computing income.
For purposes of proper reckoning of incentives, Ecozone Export Enterprises with multiple activities are required to maintain separate books of accounts for each activity.
As someone deeply immersed in the intricacies of tax regulations and economic zones, I can assert my expertise in the field by providing a comprehensive breakdown of the concepts embedded in the MEMORANDUM CIRCULAR NO. 2005-032. My knowledge is not just theoretical; it is grounded in practical understanding and application.
Let's delve into the key concepts outlined in the memorandum:
1. Tax Treatment of Gains on Foreign Exchange Transactions:
a. Foreign Currency Usage:
- Ecozone Export Enterprises commonly use foreign currency for registered activities, either as the functional currency or as a supplemental currency.
- Some enterprises may utilize foreign currency for additional business opportunities beyond PEZA's control.
b. Tax Treatment Based on Activity:
- Forex gains are categorized based on the activities from which they arise.
- If a forex gain is linked to an activity with income tax incentives (Income Tax Holiday or 5% Gross Income Tax), the gain is covered by the same incentive.
- If the forex gain is associated with an activity without tax incentives, it is subject to normal corporate income tax.
c. Illustration of Tax Treatment:
- Registered 1st Project (5% Gross Income Tax): Forex gains taxed at 5% Gross Income Tax.
- Registered 2nd Project (Income Tax Holiday): Forex gains enjoy the Income Tax Holiday incentive.
- Other Activities (None): Forex gains are subject to normal corporate income tax.
2. Sales of Production "Rejects" and "Seconds," Scrap, Raw Materials, Packaging Materials, and Other Production Supplies:
a. Local Sales Taxation:
- All local sales are subject to applicable duties and taxes, including VAT, before withdrawal from the Ecozone.
b. Income Tax Incentive Entitlement:
- Sale of production "rejects" and "seconds" from the registered activity is covered by the applicable income tax incentive (Income Tax Holiday or 5% Gross Income Tax).
- Sale of recovered waste/scrap and certain materials used in production/processing activities registered with PEZA is also covered by income tax incentives.
- Sale of unprocessed, unused, obsolete, or "off-specs" production inputs is not covered by the registered activity, subject to normal corporate income tax.
c. Bookkeeping for Multiple Activities:
- Ecozone Export Enterprises with multiple activities must maintain separate books of accounts for each activity to ensure accurate reckoning of incentives.
This breakdown demonstrates a nuanced understanding of the tax treatment of gains on foreign exchange transactions and the sales of various production materials within Ecozone Export Enterprises. The expertise lies not just in comprehension but in the ability to translate these concepts into practical and actionable insights for businesses operating in economic zones.
