The government will soon require cigarette manufacturers planning to set up shop in the country’s special economic zones (SEZs) to register with the Bureau of Internal Revenue (BIR) before they can be allowed to operate, in line with the Duterte administration’s sustained drive against tax evasion and the illicit tobacco trade.

Finance Secretary Carlos Dominguez III said the alleged illicit activities in SEZs of certain locators registered with the Philippine Economic Zone Authority (PEZA) is “alarming” because on top of enjoying tax breaks granted by the investment promotion agency (IPA), these errant firms have been depriving the government of unpaid income taxes, excise taxes, value-added tax (VAT) and customs duties whenever their illicit products are sold in the local market.

In a letter to Department of Trade and Industry (DTI) Secretary Ramon Lopez regarding this concern, Dominguez said the BIR is now drafting these revised rules covering the operations of cigarette makers inside SEZs.

Dominguez traced the alleged illicit activities of certain PEZA-registered locators in SEZs to “lackadaisical” monitoring and weak enforcement of laws.

Existing PEZA registration requirements do not mandate compliance and submission of secondary licenses or authorization from agencies like the BIR for locator-applicants engaged in the manufacture of regulated products such as cigarettes, medicines, oil and alcohol.

As a result of this loophole, two enterprises which are both PEZA-registered locators, were able to allegedly manufacture unregistered cigarettes inside an SEZ and supply these illicitly to the domestic market.

The BIR Strike Team seized these unregistered cigarettes and several cigarette-making machines from the companies’ warehouses and filed a complaint against the firms for violating the Tax Code and incurring deficiency excise taxes.

“The fact that the alleged illicit activities occurred inside the PEZA Ecozone is alarming. Not only did PEZA provide tax breaks to the alleged perpetrators, the government has lost billions of pesos in income taxes, excise taxes, VAT and customs duties when these illicit goods entered the local market,” said Dominguez in his letter to Lopez.

Lopez, as Trade Secretary, supervises over the DTI-attached PEZA.

“It appears that these manufacturers took advantage of the lackadaisical monitoring inside the Zone to perpetrate their schemes under the cover of the laws, rules and policies enacted to favor them,” Dominguez said.

The BIR raid on the warehouses of the PEZA-registered locators was the subject of a recent hearing conducted by the House ways and means committee chaired by Albay Representative Joey Salceda.

Dominguez said he agrees with Salceda’s proposal during the hearing that PEZA should also “reinvigorate its police force to patrol the zones against illicit activities” so that the BIR, Bureau of Customs (BOC) and other regulatory agencies can easily avail of its services to enforce laws and rules against violators inside the economic zones.

“Moreover, keeping a close watch on those engaged in manufacturing regulated goods from the moment the raw materials enter the Zones up to the removal from warehouses is consistent with best practices employed to monitor excisable products and goods,” Dominguez added in his letter.

He informed Lopez that the BIR is also reviewing Revenue Regulations (RR) No. 9-2015 after Salceda called on the revenue agency to “uniformly affix stamps on all cigarette packs whether for export or local consumption.”

Under RR 9-2015, cigarettes manufactured for exports are required to strictly comply with all existing BIR rules and regulations relating to the registration of brands, manufacture, import, utilization and withdrawal of raw materials; work in process and finished products; labels and posting of export bonds, among others.

“Meanwhile, the interagency meeting (among DOF, BIR, BOC and PEZA) resolved to require secondary licenses, i.e., BIR registration to manufacture cigarettes secured from the Excise Tax Division, prior to issuance of the locator’s Certificate of Registration (COR) by the PEZA,” Dominguez said.

“We expect the completion of the revised rules by the BIR soon after the PEZA and other stakeholders have provided comments thereon,” he added in his letter.

Dominguez told Lopez that the “collaboration among DTI, DOF and the agencies mentioned, is therefore, necessary in order to address the illicit trade both in and out of the Zones.”

“We strongly believe that the strong commitment towards this endeavor will further improve investor confidence in our country,” Dominguez said.

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