Only business establishments at John Hay Special Economic Zone (JHSEZ) that are registered with the Philippine Economic Zone Authority (PEZA) can enjoy duty and tax free privileges, according to the Supreme Court.
In a 45-page decision written by Associate Justice Marvic Leonen, the SC’s Second Division also declared businesses the John Hay Special Economic Zone not registered with PEZA must pay their national and local taxes, duties, and fees.
The ruling sustained a decision issued by the Regional Trial Courtof Baguio City which junked the petition for declaratory relief, with a prayer for a writ of preliminary injunction filed by the Bases Conversion Development Authority (BCDA) and JHSEZ last March 12, 2010 against the Baguio City government.
In its May 13, 2010 ruling, the Baguio City RTC held that business permitsand the payment of fees to the local government unit are of a different character than that of taxes and duties, as revenue generation was not their sole purpose.
The trial court concluded that the JHSEZ was exempted from paying local and national taxes, but not from the requirement of business permits.
The lower court also held that neither the BCDA nor John Hay Management Corporation (JHMC) possessed any police power, thus, they were not exempted from the local government unit’s power to require business permits and exact regulatory fees for their businesses.
The BCDA and JHMC filed a motion for reconsideration, but the trialcourt denied their plea on June 24, 2010.
The BCDA and the JHMC thus elevated the issue to the High Tribunal.
The petitioners argued that the trial court’s ruling should bereversed as regulation of establishments inside the JHSEZ is exercised by the PEZA, not the local government unit.
They also argued that the issuance of permits under Baguio City Tax Ordinance No. 2000-001 was “primarily revenue raising” since before it can be issued, establishments must pay the applicable fees based on their gross receipts for the fiscal year.
Besides, the petitioners pointed out that establishments in the JHSEZ have preferential tax treatment under the law, “neither subject to internal revenue laws and regulations nor to any local tax.”
They noted that Republic Act No. 7916 (Special Economic Zone Act) exempts all establishments operating within special economic zones from paying taxes and Republic Act No. 9399, which declared a one-time amnesty on certain tax and duty liabilities, inclusive of fees, fines, penalties, and interest.
The petitioners also cited Republic Act No. 9400 that granted tax exemption to the JHSEZ.
Petitioners maintained that in lieu of paying taxes, they practice an income-sharing arrangement with the Baguio government.
Through this arrangement, the local government unit was allegedly able to acquire the Baguio Convention Center and some of its projects.
They argued that respondent cannot avail of its share in the arrangement and impose business taxes at the same time.
The SC ruled however, that the mayor’s permit “is not a tax that establishments within the JHSEZ are exempt from paying.”
“No statute authorizes petitioners to issue permits or regulate businesses inside the John Hay Special Economic Zone. Neither can they invoke the powers granted only to the Philippine Economic Zone Authority. Without an express grant by law, respondent’s police power prevails,” the SC said.
“Thus, locators within the John Hay Special Economic Zone not duly registered with the Philippine Economic Zone Authority are liable to pay business permit fees to respondent,” it added.
The case stemmed from the issuance of Administrative Order No. 102 Series of 2009, creating the John Hay Special Economic Zone Task Force to implement City Tax Ordinance No. 2000-001.
The ordinance required establishments inside Baguio City to secure business permits or licenses from the city government, including those within the John Hay Special Economic Zone.