FREQUENTLY ASKED QUESTIONS

Q: What is a Tax Credit?

There is no exact legal definition of tax credits however it can be defined by its ordinary usage and/or parlance based on existing laws to wit:

1. Tax credit is an alternative remedy to a refund of overpaid taxes which may be applied to offset tax liabilities.

2. Tax credits shall mean credits against taxes and/or duties equal to those actually paid on raw materials used in manufacturing the export products.

3. A reward or incentive granted to certain tax payers for satisfying certain requirements prescribed by an incentive law.

In Black’s Legal Dictionary, Tax Credit is defined as an amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability.

Q: What is a Tax Credit Certificate?

A Tax Credit Certificate is the instrument evidencing the amount of tax credit for which the tax payer is allowed or entitled to in accordance with applicable laws and can be used to settle the holder’s obligations due to the national government

Q: What laws grants Tax Credits?

Executive Order No. 226 or the Omnibus Investments Code

Section 106 of the Tariff and Customs Code of the Philippines (Duty drawback for exporters)

National Internal Revenue Code of the Philippines

Republic Act 7844 or the Export Development Act of 1994 (rewards to exporters)

Executive Order No. 765 (exemption to suppliers of foreign-funded government projects)

Republic Act No. 8550 or the Philippine Fisheries Code of 1998 (tax exemption on fuel oil)

Letter of Instruction 1355 or the Order Regalo Program

Republic Act No. 7918

Presidential Decree No. 1789

Other applicable laws

Q: What are the agencies tasked to administer the tax credits?

Bureau of Internal Revenue - National Internal Revenue Code

Bureau of Customs - Tariff and Customs Code of the Philippines

One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center-Laws enumerated under A.O. 266 which are basically tax credits granted to exporters and other sectors as mandated by law and those previously administered by the Board of investments.

Q: What does the term "to administer" refer to?

The term "to administer" refers to the act of receiving, processing, issuing and accepting tax credits. "To administer" means to manage or conduct, direct or superintend affairs in relation to tax credits.

Q: What is the reason for the grant of Tax Credits?

Tax Credits are granted in lieu of the inability of the government to give cash refund to its tax payers. Tax Credit Certificates are given in lieu of cash which in turn can be used by the holder thereof to settle his or her obligation with the government.

Q: What are the benefits of tax credits vis-à-vis Cash Refund?

	Tax Credit	Cash Refund
Advantage	No Cash out for the Government	No problems on irregularities as in tax credits
Disadvantage	Susceptible to Irregularities in the utilization thereof	Immediate Cash Out

Q: What is an incentive?

Incentives are those that induce action or motivate effort. Something that causes and encourages a given response.

Q: What is a tax incentive?

A government taxing policy intended to encourage a particular activity (Black’s Legal Dictionary, 6^{th Edition). An example of which is the tax credits given to domestic capital equipment so as to encourage the development of the local industry.}

Q: Are all Tax Credits considered as incentives?

This concept that all Tax Credits are incentives is a complete fallacy. Tax Credits which are but a refund of previously paid taxes and/or duties as well as refund of excess payments previously made cannot be considered as incentives. Only those tax credits which are classified as rewards or an outright grant by the government in the form of a subsidy can be considered as incentives.

Q: Who are entitled to tax credits?

A taxpayer who made excess payment

Exporters

Fishing Vessels as provided under the Fisheries Code

Other sectors allowed by law

Q: What is the reason for the grant of tax exemption on export sales?

The grant of tax exemption on export sales is in accordance with the universal practice of governments not to impose internal taxes to such sales for a better leverage and competitiveness in the global market and thereby encourage local and foreign investments in projects that are export-oriented for boosting economic growth. Thus, any additional cost or price that would affect the final unit price of the product is exempted so as to give these Filipino products better leverage on the global market.

In fact, no country taxes its export sales and the Philippines should be no different. Some countries even grant subsidies to better encourage their domestic manufacturers to increase their production.

Q: What are the different Mechanisms available to implement the policy of the government to exempt exporters from the payment of taxes and duties?

Tax Credit System

Bonded Warehouse

PEZA Registration

Q. What are the advantages and disadvantages of the above mentioned mechanisms?

Tax Exempt Systems for Exporters
CRITERIA	TAX CREDIT SYSTEM	BONDED MANUFACTURING WAREHOUSE	EXPORT PROCESSING ZONES
ADVANTAGES TO THE GOVERNMENT	^{1. Collection of revenue first before refund}	^{1. Effective promotion of exports.}	^{1. Effective promotion of exports}
	^{2. Government exercises a measure of control, as the burden of proof to establish entitlement to the tax credit shifts to the taxpayer}
DISADVANTAGES TO THE GOVERNMENT	^{1. Need to safeguard against abuse and fraud}	^{1. No collection}	^{1. No collection}
	^{2. Susceptible to irregularities on the grant and use of TCCs, such as recycling, tampering, etc.}	^{2. Difficult to control smuggling}	^{2. Difficult to control smuggling}
		^{3. Unduly promotes the use of imported materials}	^{3. Unduly promotes the use of imported materials}
		^{4. Government is unable to collect on the surety bonds}	^{4. Diversion of the export products to the local market}
ADVANTAGES TO THE EXPORTER	^{1. No need to spend for maintaining a BMW}	^{1. No need to shell out cash for taxes and duties}	^{1. No need to shell out cash for taxes and duties}
	^{2. Can locate to chosen strategic site}	^{2. Can locate to chosen site}	^{2. Minimal working capital requirements}
		^{3. Less waiting time/delay}
		^{4. Restrictions on the use of TCCs}
		^{5. Cash flow -- the exporter is exempted from duty payments}
DISADVANTAGES TO THE EXPORTER	^{1. Has to organize a claim and wait for approval}	^{1. High Cost of Supervision fee/bond}	^{1. Limited within the zone}
	^{2. Has to undergo a long process before allowed to use TCCs}	^{2. Subject to liquidation}	^{2. Unavailability of skilled labor within PEZA zone}
	^{3. Difficulty in the use and transfer of TCCs}	^{3. Subject to audit by Warehousing Assessment Monetary Unit and other offices under the BOC}
	^{4. Negative impressions on the tax credit system brought about by unfair and unsubstantiated accusations}