More commonly known as ‘Free Zones’, PEZA zones and Free Ports (e.g. Clark and Subic) have been under increasing scrutiny from tax and customs authorities due to heightened efforts to raise revenues and due to the perception that free zones are becoming avenues for technical smuggling.
Even without this added attention, existing rules and regulations on goods removed from Free Zones have been greatly lacking, to say the least. For many years, legitimate companies have regularly faced problems when supplying or purchasing articles from Free Zone locators.
We have summarized below the common issues involved when removing goods from PEZA zones and Free Ports.
Under present laws, Free Zones are generally defined as ‘separate’ customs territories and as such, customs and tariff laws are generally not applicable for articles entered into said zones. Goods entered into the zones are technically not importation and said goods are considered only as importations when removed from the free zone into the customs territory. When goods are withdrawn from the Free Zone, the zone locator is technically the exporter/supplier while the recipient located outside the zone is deemed as the importer/buyer.
Unfortunately, existing laws and procedures vary as to the requirements for importers and exporters in such situations. For Clark and Subic, the implementing rules of RA 9400 provide that for tax purposes, the zone locator should be the exporter-of-record while the recipient in the customs territory should be the importer-of-record. In contrast, the existing practice and procedures in PEZA zones require the zone locator to be the importer-of-record.
From a customs perspective, the rules are not very clear as to who should be the importer or exporter of record. What is important though is that, for customs purposes, the importer-of-record will be principally liable for compliance with customs rules and regulations, and for the payment of any deficiency in duties and taxes on goods removed from the zone.
Another concern when removing goods from the zone is the application of the correct classification and duty rate. This concern obviously will not apply when the goods removed from the zone are unprocessed or in their original state when first imported, in which case, the classification and duty rate will not change.
The problem arises when the goods withdrawn are processed and manufactured goods utilizing raw materials originally admitted into the zone. In such a case, customs may use any of the following classification and duty rates; (1) classification and duty rate of the individual raw materials utilized in the production of the finished good; or (2) classification and duty rate of the finished good. This problem is heightened by the fact that customs would normally apply the classification and duty rate of the finished article, which is normally higher than the duty rate of raw materials.
Dutiable Base – Raw Material or Finished Good
A related issue to the classification treatment of finished goods would be the basis of duties to be collected by customs. Should customs collect duties on the value of the finished article or should it collect only based on the originally-imported components, excluding those considered as ‘local content’?
In reality, customs has several options to collect the duties as follows:
- total value of the finished article using duty rate for finished article
- total value of originally-imported raw materials using duty rate for finished article
- value of originally-imported raw material using duty rate for raw material
While customs would most likely want to collect more revenues, zone locators or those entities located outside the zone would rather pay the lower duties. Unfortunately, existing laws and rules are not very much explicit on this matter.
BIR Treatment for VAT
For VAT purposes, present BIR rules require the payment of VAT based on the amount paid by the buyer located outside of the zone. The difficulty here is that for goods removed from the zone, customs has its own formula for computing and collecting the VAT. In contrast, BIR has its own rules on the correct amount to be collected.
To illustrate, if a Subic locator entered a second-hand 6W truck van worth USD5,000 into the zone, he will most likely pay duties and VAT based on such amount when he removes the truck unit from the zone for delivery to a buyer outside the zone. Let us say that the Subic locator subsequently sold the truck unit to the local buyer for the amount of USD10,000. In such a case, BIR rules require that the Subic locator pay VAT based on USD10,000 and not on the original amount of USD5,000.
The author is an international trade consultant, and a licensed customs broker. He is a lecturer on logistics, indirect tax and customs, and a lecturer of Ateneo and BayanTrade on International Supply Chain Management. Please contact firstname.lastname@example.org for your comments.