September 12, 2002
Ponente: Judge Acosta (CTA)
Topic: Territoriality or Situs of Taxation
SUMMARY:
Donald Smith, an American working at Subic Special Economic Zone (SSEZ), was seeking for a refund of the income taxes he had paid for the year 1998 amounting to P1.5M. His legal basis was Sec. 12(c) of the Bases Conversion and Development Act of 1992 (RA 7227), which states that "no taxes, local and national, shall be imposed within the Subic Special Economic Zone." The CTA denied his claim for refund, ruling that said provision pertained to businesses and not individuals.
FACTS:
Donald Smith, an American working as controller at Coastal Subic Bay Terminal at the SSEZ in Zambales, paid P1,533,660.70 in compensation income taxes for the year 1998.
In 2000, he filed a refund claim for the said amount before the BIR, arguing that the payment on his income tax was erroneous. Smith was claiming that as an employee at the SSEZ, he was exempt from paying income as per Sec. 12(c) of the Bases Conversion and Development Act of 1992 (RA 7227), which states that:
(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors.
In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter.
There was no immediate action from the BIR, so Smith elevated his case before the Court of Tax Appeals (CTA) by way of Petition for Review.
RULING:
Petition denied.
Whether aliens (like Smith) working within the Subic SSEZ are subject to Philippine income taxes on income earned from such employment. – YES.
SMITH: he entire territory known as Subic Special Economic Zone is a tax-free territory and as such, all income derived within the zone, including that of an alien individual, is exempt from income tax and other taxes.
CTA: The phrase “no taxes, local and national, shall be imposed within the SSEZ” must be read together with the following sentence “In lieu of paying taxes, 3% of the gross income earned by all businesses and enterprises within the SSEZ shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. x x x”
The term "in lieu of paying taxes" as used in the law does not constitute an absolute exemption from taxation. While spared from national and local taxes, businesses and enterprises within the SSEZ are subjected to the said tax base on gross income. No matter what legal jargon is used, the said taxes are in fact taxes imposed on businesses or enterprises operating within the SSEZ.
Thus, it is incorrect to say that SSEZ is actually a tax-free territory.
Individual aliens employed within the SSEZ are not exempt from the awesome power of Philippine taxation. The secured area of SSEZ, which is virtually delineated in metes and bounds by proclamation No. 532, issued by the then President Fidel Ramos on February 1, 1995, is in reality part of the territorial jurisdiction of the Philippines.
All subjects over which the Philippines can exercise dominion are necessarily objects of taxation. As such, all subjects of taxation within its jurisdiction, including aliens, are required to pay tax in exchange of the protection that the State gives..
Whether Smith is entitled to a refund or tax credit for income taxes paid on compensation earned from working within the SSEZ. – NO.
Since RA 7227, in granting tax incentives, only made mention of businesses and enterprises within the SSEZ, it follows then that the said law operates only on the said group. As no mention was made to individual taxpayers being tax-exempt, it follows that they still fall within the ambit of the general law (NIRC) pursuant to the maxim excepto firmat regulam in casibus non exceptis, a thing not being excepted must be regarded as coming within the purview of the general rule.
There is not much of a substantial difference between individual citizen and an individual resident alien working in the Philippines as far as income taxation is concerned. The distinction lies only on the source of income to be taxed: While a resident citizen is taxed on all income from within and without the Philippines, the resident alien is taxed only on income from within the Philippines.
Whether Section 12(c) of RA 7227 applies to Smith. – NO.
Resident aliens within the SSEZ are still subject to the NIRC as far as their income from within the Philippines is concerned. Accordingly, no refund of the said tax can be granted to Smith as the said tax due him in the amount of P1,533,660.70 was correctly remitted to the BIR.
A close reading of Section 12 (c) would reveal that the exemption from taxes, local or national, is actually intended to benefit only those registered businesses and establishments operating within the territory and not to individual taxpayers working within its parameters.
The grant of said incentive is premised on the fact that the influx of new investments in our economy could very well meet the country's avowed policy of accelerating economic growth and development.
If the law intended to exempt individuals employed within the SSEZ from taxes, it could have expressly stated it in clear and unequivocal language.
