Local Purshasing
- Local purchases under the Free-Zone System
- What can free-zone companies purchase locally?
- Is there an official list of goods or services to be purchased?
- What must free-zone companies do to purchase in the local market?
- What must local suppliers do?
- Final Recommendations
1. Local purchases under the Free-Zone System
Incentives provided under the Free-Zone System include purchasing goods and services in the local market (i.e., from domestic suppliers) exempted from sales and excise taxes. This is known as Local Purchase as specified under Article 20, subsection e) of Law 7210 (Free-Zone Act.)
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2. What can free-zone companies purchase locally?
Free-zone companies can purchase both goods and services in the local market. Goods include raw materials and production-related materials, as well as merchandise intended for administrative, operation, and production purposes. Also, they can purchase goods required to prepare foods, furniture, training equipment, health-care services and rehabilitation, as long as they are exclusively used by production, operation, management, and transportation employees. Free-zone companies can also purchase services from utilities such as phone and electric power as required to develop operational capacity or to train their own staff or related services such as transportation, lodging, and meals and, by way of exception other services as indicated by the Ministry of Finance.
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3. Is there an official list of goods or services to be purchased?
No official list exists as individual companies will require different goods and services in line with its particular business. Free-zone companies, however, must make sure that tax-exempt materials, merchandise, and services (either utilities or private services) purchased agree with their activities and are used in their production processes or to develop operational capacity.
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4. What must free-zone companies do to purchase in the local market?
Article 13, subsection f) of the Bylaws to Law 7210 state that in order to start a local purchase process, free-zone companies must have been appointed by the Customs Bureau to serve as Assistants to the Public Customs Function. If not, they must at least have applied to the Registry Department of the General Customs Bureau for such. Once this requirement is met and the company has stated what it needs to purchase, a purchase order or equivalent document must be issued. Local suppliers will draft the sales invoice stating the amount to be paid for taxes plus the line read “Exempted from sales and excise taxes as per Law 7210 as amended and its Bylaws.” With that invoice, free-zone companies can enter the goods purchased into the Free Zone. Free-zone companies needs no additional document such as Free-Zone Customs Declarations when purchasing in the local market.
However, they must draft and send two monthly reports (for goods and services) of local purchases made under this mode. These reports must be submitted within the first ten business days of each month. Free-zone companies must keep local purchase documents and information for the entire period until they prescribe (Article 51 of the Tax Standards and Procedures Code.)
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5. What must local suppliers do?
As local supplier sales to free-zone companies are seen as exports, local suppliers must report said sales in box 20 of Form D-104 (Sales Tax Return) for export sales, as these are not included within the tax base. In addition, local suppliers must add to their special sales records the purchase order number or that of an equivalent document issued by the free-zone company and they must keep sales invoices stamped as received by said company.
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6. Final Recommendations
Free-Zone companies willing to purchase merchandise in the local market will do well to heed a few additional recommendations such as:
- Evaluating whether the good they wish to purchase will be bought exempted of sales and / or excise taxes. They must consider the cost / benefit of doing so since, if these goods are exempted, they must be included in the Local Purchase report and they will come under customs control.
- Ask suppliers to separately invoice goods and services, as these must be reported independently. For instance, repairs must entail separate invoices for labor and spare parts.
Please keep in mind the suppliers’ invoice must read “Exempted from sales and excise taxes as per Law 7210 as amended and its Bylaws.”
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