REVENUE REGULATIONS NO. 7-2016 issued on November 18, 2016 prescribes the rules and regulations to implement the tax incentives available to tourism enterprises duly registered with the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) under Republic Act No. 9593 otherwise known as the “Tourism Act of 2009”. The following incentives may, in the discretion of the TIEZA Board, be granted to TIEZA-registered Tourism Enterprises within Tourism Enterprise Zones (TEZs): a. Income Tax Holiday for New Registered Tourism Enterprises and Existing Registered Tourism Enterprises in TEZs New Registered Tourism Enterprises (RTE) in Greenfield and Brownfield TEZs may be granted an Income Tax Holiday (ITH) for six (6) years from the start of business operations on income from its TIEZA-registered activity/ies. The ITH granted to a new RTE may be extended: Provided, that prior to the expiration of the first six (6) years, the RTE shall undertake a Substantial Expansion: Provided, that the ITH extension shall consider the cost of such expansion or upgrade in relation to the original investment: Provided further, that the extension shall in no case exceed a total additional period of six (6) years: Provided, finally, that for the purpose of availment of this incentive, the RTE shall apply in writing to TIEZA for the extension of ITH not later than three (3) months prior to the expiration of the initial ITH and shall submit proof of compliance with the criteria for a Substantial Expansion. An existing RTE in a Brownfield TEZ shall be entitled to avail of a non-extendible ITH if it undertakes a Substantial Expansion. The extent of the grant of such ITH shall consider the cost of such expansion or upgrade in relation to the original investment, but shall in no case exceed six (6) years to be counted from the time of completion of the expansion or upgrade: Provided, that capital expenditures to be considered in granting an ITH shall mean money spent to acquire or upgrade physical assets, such as buildings, machinery and equipment, intended to extend the life of an asset or increase the capacity or efficiency of an RTE: Provided further, that in case of expansion involving the improvement of existing structures or constructing new ones, such expansion shall consider the substantial amount infused, the substantial number of rooms added or constructed, and, where applicable, their change in classification from three-star to five-star establishments. b. Gross Income Tax A new RTE may, in lieu of all national internal revenue taxes except real estate taxes and such fees as may be imposed by TIEZA, pay a tax of five percent (5%) on its gross income earned from its registered activity/ies, subject to compliance with the conditions prescribed by TIEZA and these rules. For purposes of computing the 5% tax imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned: i. Direct salaries, wages or labor expense; ii. Service supervision salaries; iii.Direct materials or supplies used in registered activities; iv.Depreciation of machinery and equipment used in registered activities, and of that portion of the building owned or constructed that is used exclusively in undertaking the registered activities; v. Rent and utility charges for buildings and capital equipment used in undertaking registered activities; and vi. Financing charges associated with fixed assets used in registered activities, the amounts of which were not previously capitalized. c. Net Loss Carry Over (NOLCO) The net operating loss of an RTE for any taxable year immediately preceding the current taxable year shall be carried over as a deduction from gross income for the next six (6) consecutive taxable years immediately following the year of such loss: Provided, that such loss has not been previously offset as a deduction from gross income, and it shall cover net operating losses incurred after the start of business operations and registration with TIEZA: Provided further, that RTEs enjoying an ITH or the preferential 5% gross Income Tax rate shall not be allowed a NOLCO deduction: Provided, further, that in case of an RTE which is engaged in both TIEZA-registered and unregistered business activities, the net operating loss or losses sustained or incurred by the RTE from its registered activities shall not be allowed as NOLCO deduction from its gross income derived from the unregistered business activities. d. Exemption from Taxes on Importation of Capital Investment and Equipment Importation of capital investment and equipment, as provided under applicable TIEZA guidelines by an RTE, shall be exempt from taxes, subject to the following conditions: i. The capital investment and equipment are directly and actually needed and shall be used exclusively in the registered activity; and ii. Subject to reasonable allowances, the rated capacity of the capital equipment to be imported shall be within the registered capacity of the RTE. The approval of the TIEZA shall be obtained prior to such importation. Any sale, transfer, assignment, donation or other form of disposition of originally imported capital investment and equipment/machinery, brought into the TEZ duty- and taxfree, shall require prior approval of the TIEZA Board: Provided, that any sale, transfer, assignment, donation or other form of disposition, within five (5) years from date of acquisition, shall be granted only if the sale or other form of disposition is made under the following circumstances: i. To an RTE or tourism enterprise entitled to duty- and tax-free importation of machinery or to any other enterprise enjoying similar incentives under existing laws; ii. For reasons of proven technical obsolescence; iii.For purposes of replacement to improve and/or expand the operations of the RTE intending to sell, transfer, assign, donate or otherwise dispose of such machinery or spare parts; or iv.In cases of withdrawal or cessation from operations of the RTE. If the RTE sells, transfers, or disposes of the machinery and equipment without prior approval of the TIEZA, the RTE and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of tax exemptions granted. e. Exemption from Taxes on the Importation of Transportation Equipment and Spare Parts Importation of transportation equipment and their accompanying spare parts by a new or expanding RTE shall be exempt from national taxes only if the said equipment and spare parts are: i. not manufactured domestically in sufficient quantity, of comparable quality, and at reasonable prices; ii. reasonably needed to perform the TIEZA-registered activities of the RTE; and iii.to be used exclusively by the RTE. The approval of the TIEZA shall be obtained prior to such importation. Any sale, transfer, assignment, donation or other form of disposition of originally imported transportation equipment or accompanying spare parts, brought into the TEZ dutyand tax-free, shall require prior approval of the TIEZA Board: Provided, that any sale, transfer, assignment, donation or other form of disposition, within five (5) years from date of acquisition, shall be granted only if the sale or other form of disposition is made under the following circumstances: i. To an RTE or tourism enterprise entitled to duty- and tax-free importation of transportation equipment and accompanying spare parts or to any other enterprise enjoying similar incentives under existing laws; ii. For reasons of proven technical obsolescence; iii.For purposes of replacement to improve and/or expand the operations of the RTE intending to sell, transfer, assign, donate or otherwise dispose of such transportation equipment and accompanying spare parts; and iv.In cases of withdrawal or cessation from operations of the RTE. If the RTE sells, transfers, or disposes of the transportation equipment or accompanying spare parts without prior approval of the TIEZA, the RTE and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of tax exemptions granted. f. Goods and Services Incentives RTEs engaged in the sale of services shall be entitled to the following: i. Exemption from VAT and Excise Taxes on the importation of goods necessary to carry out its TIEZA-registered activity/ies and are actually consumed in the course of services related to its registered activity actually rendered by the RTE within the TEZ: Provided, however, that no goods shall be imported for the purpose of operating a wholesale or retail establishment in competition with the Duty Free Philippines Corporation; and ii. A tax credit equivalent to national internal revenue taxes paid on all locally-sourced goods and services used by the RTE for services pursuant to its registered activity which are actually rendered within the TEZ: Provided, that input VAT paid by an RTE shall only be allowed as a credit against its output VAT liability, in accordance with existing rules and regulations. g. Social Responsibility Incentive RTEs shall be entitled to a tax deduction of up to 50% of the cost of: i. Environmental protection activities in the surrounding areas of the enterprise or the TEZ as certified by the Department of Environment and Natural Resources: Provided, that environmental protection activities conducted for the purpose of securing an Environmental Compliance Certificate under the Philippine Environmental Impact Assessment system, as required by Philippine environmental laws, or for purposes of securing other requirements under applicable laws and regulations, shall not be covered by this incentive; ii. Cultural heritage preservation activities in the surrounding areas of the enterprise or the TEZ conducted pursuant to RA No. 10066, as certified by the appropriate cultural agency and the Local Culture and Arts Council in the local government unit where the tourism enterprise is located; iii.Sustainable livelihood programs for local communities in the surrounding areas of the enterprise or the TEZ which may be chosen from the list of activities identified by the National Anti-Poverty Commission (NAPC); and iv.Other similar activities as may be determined by the TIEZA Board. Provided, that the approval of the TIEZA Board shall be obtained prior to undertaking such activities/programs: Provided further, that the activities conducted under this section do not comprise and are not ancillary to the registered activity of the RTE. The costs of these activities/programs shall include only those directly incurred to undertake the same. For purposes of availing of the said tax deduction, an RTE shall submit to the BIR proof of the costs incurred (official receipts, sales invoices) and the direct relation of such costs to the environmental protection/cultural heritage preservation activity or sustainable livelihood program which directly benefited the local communities. All expenses, especially for hotel accommodations, transportation, entertainment, and communication, shall be strictly scrutinized in the course of evaluating such tax deductions in the course of a tax audit investigation. RTEs shall, under RA No. 10708, report such tax deductions as “Other Income Tax Incentives”. The following incentives may, in the discretion of the TIEZA Board, be granted to TIEZA-registered Tourism Enterprises outside Tourism Enterprise Zones (TEZs): a. Income Tax Holiday Existing accommodation establishments outside TEZs shall be entitled to avail of a nonextendible ITH of up to six (6) years for a Substantial Expansion. The extent of the grant of such ITH shall consider the cost of the expansion or upgrade in relation to the original investment, but shall in no case exceed six (6) years to be counted from the time of completion of the expansion, renovation or upgrade: Provided, that capital expenditures to be considered in granting an ITH shall mean money spent to acquire or upgrade physical assets such as buildings, machinery and equipment, intended to extend the life of an asset or increase the capacity or efficiency of the accommodation enterprise: Provided further, that in case of expansion involving the improvement of existing structures or constructing new ones, such expansion shall consider the substantial amount infused, the substantial number of rooms added or constructed, and, where applicable, their change in classification from three-star to five-star establishments. b. Exemption from Taxes on Importation of Capital Investment and Equipment Importation of capital investment and equipment as provided under applicable TIEZA guidelines by an accommodation enterprise, when necessary for a Substantial Expansion, which will be subject to an application for ITH with the TIEZA, shall be exempt from taxes, subject to the following conditions: i. The capital investment and equipment are directly and actually needed and shall be used exclusively by the accommodation enterprise in its TIEZA-registered activity; and ii. Subject to reasonable allowances, the rated capacity of the capital equipment to be imported shall be within the registered capacity of the accommodation enterprise. The approval of the TIEZA shall be obtained prior to such importation, taking into consideration the necessity of the importation in connection to a Substantial Expansion which will be subject to an application for an ITH incentive with the TIEZA. Should the expansion or upgrade not meet the TIEZA requirement for a Substantial Expansion, the accommodation enterprise shall be liable to pay the import VAT and Excise Taxes as originally due, plus the applicable interest and penalties computed from the date these taxes should have been paid on the importation had no incentives been granted. Any sale, transfer, assignment, donation or other form of disposition of originally imported capital investment and equipment/machinery, bought duty- and tax-free, shall require prior approval of the TIEZA Board: Provided, that any sale, transfer, assignment, donation or other form of disposition, within five (5) years from date of acquisition, shall be granted only if the sale or other form of disposition is made under the following circumstances: i. To an RTE or tourism enterprise entitled to duty- and tax-free importation of capital investment and equipment/machinery or to any other enterprise enjoying similar incentives under existing laws; ii. For reasons of proven technical obsolescence; iii. For purposes of replacement to improve and/or expand the operations of the accommodation enterprise intending to sell, transfer, assign, donate or otherwise dispose of such machinery or spare parts; or iv. In cases of withdrawal or cessation from operations of the accommodation enterprise. If the accommodation enterprise sells, transfers, or disposes of the capital investment and equipment/machinery without prior approval of the TIEZA, the RTE and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of tax exemptions granted. c. Net Loss Carry Over (NOLCO) The net operating loss of a Tourism Enterprise for any taxable year immediately preceding the current taxable year shall be carried over as a deduction from gross income for the next six (6) consecutive taxable years immediately following the year of such loss: Provided, that such loss has not been previously offset as a deduction from gross income, and it shall cover net operating losses incurred after the start of business operations and registration with TIEZA: Provided further, that Tourism Enterprises enjoying an ITH or the preferential 5% gross income tax rate shall not be allowed a NOLCO deduction: Provided, further, that in case of a Tourism Enterprise which is engaged in both TIEZA-registered and unregistered business activities, the net operating loss or losses sustained or incurred by the Tourism Enterprise from its registered activities shall not be allowed as NOLCO deduction from its gross income derived from the unregistered business activities. Enterprises availing of incentives under RA No. 9593 are required to obtain from TIEZA, on an annual basis, a Certificate of Entitlement (CE) as proof of their entitlement to such incentives which, together with the TIEZA Certificate of Registration, shall be attached to the Income Tax Returns and/or the applicable tax return upon filing of the return. In the absence of the CE and the TIEZA Certificate of Registration, the BIR shall disallow any claim of incentive. The incentive schemes set forth in these Rules shall be in effect for a period of ten (10) years from the effectivity of RA No. 9593, which period is subject to review by the Joint Congressional Oversight Committee on Tourism. In case the TIEZA registration of an RTE or a Tourism Enterprise is downgraded, suspended, or revoked, the TIEZA shall order it to pay back taxes in an amount equivalent to the difference between the taxes that it should have paid had it not availed of incentives under RA 9593 and the actual amount of taxes paid by it under RA 9593. These back taxes shall be computed up to three (3) years directly preceding the date of promulgation of the decision or order finding that the enterprise violated the terms of its accreditation. Such back taxes may be assessed by the Bureau of Internal Revenue notwithstanding the lapse of the three – year period to assess taxes under Section 203 of the National Internal Revenue Code of 1997, as amended.