Capital Equipment Duty Exemption in the Philippines: Who Qualifies and How

Registered business enterprises in the Philippines may import capital equipment free of customs duties if the equipment is directly attributable to their registered project or activity and the importation is approved in advance by their Investment Promotion Agency. The exemption is not automatic. The enterprise must hold a certificate of authority to import, and the equipment must generally not be produced domestically in sufficient quantity, of comparable quality, and at reasonable prices. The rules come from Republic Act No. 12066, which amended the National Internal Revenue Code of 1997, and from the Customs Modernization and Tariff Act.

What is the capital equipment duty exemption?

Republic Act No. 12066 amended several sections of the National Internal Revenue Code of 1997 and introduced a duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, including goods used for administrative purposes, of the registered project or activity of a registered business enterprise. This is one of the tax incentives available to registered business enterprises under the amended Tax Code.

The same law defines capital equipment as machinery, equipment, major components thereof, tools, devices, applications, or apparatus that are directly attributable to the registered project or activity of the registered business enterprise.

The exemption covers customs duties on importation. It is separate from the value-added tax exemption on importation and VAT zero-rating on local purchases also available to registered business enterprises.

Who can avail of the duty exemption?

Only registered business enterprises — enterprises registered with an Investment Promotion Agency — may avail of the incentive. The amended Tax Code lists the Investment Promotion Agencies, which include the Board of Investments, the Philippine Economic Zone Authority, the Bases Conversion and Development Authority, the Subic Bay Metropolitan Authority, the Clark Development Corporation, and other similar authorities.

The exemption applies to the RBE's registered project or activity. Under the amended Tax Code, the Fiscal Incentives Review Board or the Investment Promotion Agency grants tax incentives only to the extent of the approved registered project or activity under the Strategic Investment Priority Plan.

Conditions for duty-free importation

The amended Tax Code sets out the conditions for the duty exemption:

• The capital equipment, raw materials, spare parts, or accessories must be directly attributable to the registered project or activity, including goods used for administrative purposes.
• These items must not be produced or manufactured domestically in sufficient quantity or of comparable quality and at reasonable prices.
• The approval of the Investment Promotion Agency must be obtained prior to importation.

The law also requires prior IPA approval for part-time use of the imported items in a non-registered project or activity, with proportionate taxes and duties paid based on utilization.

The certificate of authority to import

The amended Tax Code defines the certificate of authority to import as the document issued by the Investment Promotion Agency as proof of entitlement to exemption from value-added tax and/or duty-free importation. It contains a list of the capital equipment, raw materials, spare parts, or accessories to be imported that are directly attributable to the production of goods and services, including goods used for administrative purposes.

An Investment Promotion Agency may also authorize importation pending issuance of the certificate of registration, subject to posting a performance bond or bank guarantee equivalent to the duties and taxes waived.

What happens if the equipment is sold or transferred?

The amended Tax Code provides that no taxes and duties shall be imposed on the subsequent sale, transfer, or disposition of the capital equipment, raw materials, spare parts, or accessories within the first five (5) years from the date of importation, provided the approval of the Investment Promotion Agency is secured and the transaction falls under any of the following:

• Sale to another enterprise availing of customs duty exemption on imported capital equipment, raw materials, spare parts, or accessories;
• Exportation of the items; or
• Donation to the Government of the Philippines or its agencies, including fully-owned government corporations, TESDA, state universities and colleges, or DepEd and CHED-accredited schools.

If the sale, transfer, or disposition is made to an enterprise not availing of the duty exemption, or if there is proven technical obsolescence, taxes and duties are assessed based on the net book value of the items.

If the RBE sells, transfers, or disposes of the imported items without prior approval, the RBE and the vendee, transferee, or assignee are solidarily liable to pay twice the amount of the duty exemption that should have been paid during importation.

How does this interact with customs law?

Under the Customs Modernization and Tariff Act (Republic Act No. 10863), all goods imported into the Philippines are subject to duty upon importation, except as otherwise provided in that Act or in other laws. The duty exemption for capital equipment operates as an exception grounded in the Tax Code and the RBE's registration.

The Customs Modernization and Tariff Act also provides that importation is deemed terminated when the duties, taxes, and other charges due upon the goods have been paid or secured to be paid, unless the goods are free from duties, taxes, and other charges and a legal permit for withdrawal has been granted.

Frequently asked questions

Is the duty exemption automatic once an enterprise is registered with an IPA? No. The amended Tax Code requires that the IPA's approval be obtained prior to importation. The RBE must also show that the items are directly attributable to its registered project or activity and are not produced domestically in sufficient quantity, of comparable quality, and at reasonable prices.

Can imported capital equipment be used in a non-registered activity? Only with prior approval of the IPA for part-time utilization. The RBE must adopt a method to allocate the equipment and pay proportionate taxes and duties for the non-registered use. If used in a non-registered activity within the first five years from importation, prior IPA approval is required and the unpaid taxes and customs duties must be paid.

What happens if the equipment is sold within five years without IPA approval? The RBE and the buyer are solidarily liable to pay twice the amount of the duty exemption that should have been paid during importation.

Practical takeaways

• The duty exemption on capital equipment is available only to registered business enterprises and only for items directly attributable to the registered project or activity.
• Secure the Investment Promotion Agency's approval before importation; a certificate of authority to import serves as proof of entitlement.
• The equipment must generally not be produced domestically in sufficient quantity, of comparable quality, and at reasonable prices.
• Sales, transfers, or dispositions within five years from importation require prior IPA approval and must fall under the allowed circumstances.
• Unauthorized sale or transfer within five years makes the RBE and the buyer solidarily liable for twice the duty exemption amount.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 10863 - AN ACT MODERNIZING THE CUSTOMS AND TARIFF ADMINISTRATION

• REPUBLIC ACT NO. 12066 - AN ACT AMENDING SECTIONS 27, 28, 32, 34, 57, 106, 108, 109, 112, 135, 237-A, 269, 292, 293, 294, 295, 296, 297, 300, 301, 308, 309, 310, AND 311, AND ADDING NEW SECTIONS 135-A, 295-A, 296-A, AND 297-A OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.