WHAT IS MEANT BY A CROSS BORDER DOCTRINE AND HOW DOES IT APPLY TO

CUSTOMS TERRITORY?

Under the Cross Border Doctrine, the ecozone is recognized, by legal fiction, as a
foreign territory. Thus, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside the territorial border of the taxing authority. In turn, actual export of
goods and services from the Philippines to a foreign country must be free of the VAT. As for
the Destination Principle, it provides that the onus of taxation is the country where the
goods, property or services are destined, used or consumed. Those destined for use or
consumption within the Philippines shall be imposed with the 12-percent VAT. Thus, the
availment of VAT zero-percent rating on sales of services by VAT-registered persons in the
customs territory to PEZA-registered entities is limited to those performed within the
ecozone. (BDB Laws Tax Law For Business)

Customs Territory shall mean the national territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES except those areas specifically declared by other
laws and/or presidential proclamations to have the status of special economic zones and/or
free ports. (Sec. 1 (g), PEZA Rules and Regulations)

Application of Cross Border Doctrine to Customs Territory would be difficult to

understand without a thorough comprehension on its correlated matters and concepts.
Cognizance about Philippine Economic Zone Authority and Special Economic Zone is
essential.

PEZA - attached to the Department of Trade and Industry - is the Philippine

government agency tasked to promote investments, extend assistance, register, grant
incentives to and facilitate the business operations of investors in export-oriented
manufacturing and service facilities inside selected areas throughout the country proclaimed
by the President of the Philippines as PEZA Special Economic Zones. (www.peza.gov.ph)

Special Economic Zones (SEZ) hereinafter referred to as the ECOZONES, are

selected areas with highly developed or which have the potential to be developed into agro-
industrial, Industrial tourist/recreational, commercial, banking, investment and financial
centers. An ECOZONE may contain any or all of the following: Industrial Estates (IEs),
Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers.
(Sec. 4 (a), R.A. No. 7916)

From the above information, it is apparent that PEZA-registered ECOZONE

enterprises are 100% VAT free yet are subject to 5% special tax on gross income. On the
other hand, importers and enterprises within Customs Territory, even so PEZA-registered,
cannot be subjected to 0% VAT rating due to the rule implemented under the Cross Border
Doctrine that 12% of VAT rating should be imposed.