Special Economic Zones in Philippines

The Philippine Economic Zone Authority (PEZA)

Special Economic Zone Act of 1995
Special Economic Zones/Ecozones
Export Development Aact (EDA) of 1994
Special Economic Zones
SBF Enterprises
Clark Special Economic Zone (CSEZ)
Other Special Economic Zones

I. Special Economic Zone Act of 1995

Republic Act (RA) No. 7916 or the Special Economic Zone Act of 1995 (the "Act") was signed into law on 24 Feb 1995. The law was created to encourage economic growth through the development of special economic zones called Ecozones.

The PEZA was also created out of the EPZA.

The PEZA is a government corporation under a director general. The PEZA's mission is to contribute to the national effort of accelerating employment generation, particularly in the countryside.

II. Special Economic Zones/Ecozones

A. Ecozones

These are areas designated by the government for development into balanced agricultural, industrial, commercial, and tourist/recreational regions.

Each Ecozone is to be developed as an independent community with minimum government interference. It shall administer its own economic, financial, industrial and tourism development without help from the national government. It shall also provide adequate facilities to establish linkages with surrounding communities and other entities within the country.

Source: Project Evaluation and Review Dept.
Corporate Planning and Management Office
PEZA (as of Aug 31, 1996)

Selected Investment Locations

Ecozones are divided into the following types

B. Ecozone Enterprises

Brief descriptions of each type of Ecozone Enterprise

C. Incentives to Ecozone Enterprises

Incentives granted by PEZA shall apply only to registered Ecozone companies and only during the period of their registration with PEZA. Export enterprises registered under the Export Processing Zone Authority shall continue to enjoy their current incentives. However, PEZA enterprises whose Income Tax Holiday has already expired will be subject to the special 5% tax rate as provided in the Act.

D. Export & Free Trade Enterprises

Export & Free trade Enterprises registered with PEZA can avail of the following fiscal and non-fiscal incentives :
- Tax- and duty-free importation of capital equipment, raw materials, spare parts, supplies, breeding stocks and genetic materials;
- Income tax holiday of 4 to a maximum of 8 years for non-pioneer and pioneer projects respectively;
- A special tax rate of 5% of gross income in lieu of all national and local taxes after the income tax holiday;
- Tax credit for import substitution;
- Exemption from wharf dues, export tax and import fees;
- Tax credit on domestic capital equipment, breeding stocks, and genetic materials;
- Additional deduction for incremental labour expenses and training expenses;
- Unrestricted use of consigned equipment;
- Permanent resident status for foreign investors and immediate family;
- Employment of foreign nationals;
- Remittance of earnings without prior approval from the Bangko Sentral ng Filipinas.

E. Ecozone Developers and Operators; Facilities, Utilities and Tourism Enterprises; and Domestic Market Enterprises can avail of the following incentives

- A special tax rate of 5% of gross income in lieu of national and local taxes;
- Additional deduction for training expenses;
- Permanent resident status for foreign investors and immediate family;
- Incentives under RA No. 6957 as amended by RA No. 7718, otherwise known as the Revised Build-Operate-Transfer Law; and
- Other incentives available under Executive Order No. 226, as may be determined by the PEZA Board.

F. Special 5% Tax Rate on Gross Income

In lieu of national and local taxes, all Ecozone enterprises, except service enterprises, shall pay only 5% final tax on gross income.

Gross income shall mean gross revenues of any business activity less sales discounts, sales returns and allowances, and allowable deductions. Administrative expenses and incidental losses are not deductible from gross revenues.

The following are additional allowable deductions specific to Ecozone Export, Free Trade, and Domestic Market Enterprises :
- Production supervision salaries
- Raw materials used in manufacturing

The following, on the other hand, are additional deductions applicable to Ecozone Facilities, Utilities and Tourism Enterprises :
- Service supervision salaries
- Direct materials, supplies

G. Investment and Operating Costs

Registration and filing fees with the PEZA amount to $300 while registration with the SEC costs 1/10 of 1% of the authorised capital. The minimal daily wage rate for non-agricultural workers is approximately $5.30/day. Rental rates for industrial land range from $0.27-$0.45 per sq m per month. Construction costs for a self-designed factory building is about $200 per sq m.

III. EXPORT DEVELOPMENT ACT (EDA) OF 1994

The Act was promulgated to provide a macro-economic policy framework to support the development of the export market and the activities undertaken by exporters. Exporters are generally defined as those earning at least 50% of their normal operating revenue from the sale of products or services abroad.
To qualify for EDA incentives, exporters must earn at least 50% of their normal operating revenue from the sale of products or services abroad. Additionally, exporters are required to secure EDA accreditation.

Once registered under the EDA, exporters are entitled to incentives (EDA incentives are in addition to the existing incentives granted by the different government agencies) :
- Exemption from Presidential Decree No. 1853, or Advanced Payment of Customs Duties;
- Duty-free importation of machinery and equipment and accompanying spare parts until Dec 31, 1997;
- Tax credit until Dec 31, 1997 for imported inputs and raw materials used primarily for the production and packaging of export goods and which are not readily available locally;
- Tax credit for increase in current year's export revenues, computed as follows:

IV. Special Economic Zones

The Bases Conversion & Development Act of 1992 has designated the following areas as Special Economic Zones :

- Subic Naval Base
- Clark Air Base
- Camp John Hay (Baguio City)
- The Wallace Air Station (San Fernando, La Union)
- The O'Donnell Transmitter Station
- The San Miguel Naval Communications Station
- The Mt. Sta. Rita Station (Hermosa, Bataan)

A. Subic Special Economic & Free Port Zone

The zone has been established by the Philippine Government with the aim of developing the area into a self-sustaining industrial, commercial, financial and investment centre in the Philippines.

Subic Bay is located 80 km northwest of Manila, in the province of Zambales, and a short distance north of the entrance to Manila Bay. It is strategically located near major international shipping lanes in the South China Sea. It offers a natural harbour that is protected on 3 sides by mountains and is only a three-hour drive from manila. The site has a land area of 16,200 ha and an estimated English-speaking work force of 66,000.

B. Opportunities For Investors

The SBMA offers various incentives to local and foreign investors locating within Industrial Estates in the Subic Bay Freeport (see Incentives offered to an SBF Enterprise). The investors must export at least 70% of their production.
- A proposed Multi-use Zone (148 ha) will be a convention centre to attract business from neighbouring Asian countries. There are also plans for effective conversion and/or urban renewal of Olongapo City into commercial or trade areas.
- Investment opportunities are also offered in any of the planned tourist areas within the Subic Bay Area. Areas include the Peninsula Area, Grande Island, Pegueña/Mayanga Island and Subic Bay Olongapo.
- The following areas of infrastructure development are also opportunities for investors:

- Upgrading of existing airport to handle both domestic and international flights
- Bullet and sky trains, and railways within and outside the Subic Bay Area
- Construction of suspension bridge - Subic Bay/Olongapo to the Peninsula
- Construction and maintenance of cable cars
- Various highways: East-West Expressway; highway linking airport to city; Manila to Subic Bay
- Port terminal for passengers or for commerce use
- Ferry service to and from Manila, Subic Bay and other areas in the SBF
- Power plants
- Water supply

- Construction of condominiums, villas near recreational areas, executive housing and low-cost housing near industrial areas.

V. SBF Enterprises

A. SBF Enterprises

A business enterprise may register as an SBF Enterprise, and a natural person as an SBF Resident with the SBMA.

An SBF Enterprise is any business entity or concern within the SBF, duly registered with and/or licensed by the SBMA to operate any lawful economic activity within the SBF. Registration as an SBF Enterprise is open to any business enterprise in any area of economic activity, subject only to limitations in the Philippine Constitution.

B. Incentives offered to an SBF Enterprise

- Right to freely engage in any business, trade, manufacturing, financial or service activity and to import and export freely all types of goods into and out of SBF, subject to certain laws and regulations;
- Right to employ foreign nationals subject to evidence of unavailability of comparably-skilled Filipinos within the Philippines;
- Exemption from all national and local taxes, in lieu of which a final tax of 5% of gross income must be paid.

An SBF Enterprise which operates facilities or services within the SBF (SBF Facilities Operator) is entitled to the following additional incentives :

- Right to manage the facilities on the real property it owns, has acquired or has leased within the SBF;
- Right to lease out real property it owns or has leased within the SBF, and to acquire and lease land and sell or lease out facilities to SBF Enterprises, subject to certain guidelines;
- Right to make improvements on buildings and other facilities, and develop infrastructure necessary to enhance the SBF's efficient operation, or grants contracts or concessions to other private or public parties for the construction or provision of any of the said facilities, subject to certain guidelines.

C. Top 20 Investors in Subic Bay Freeport & Special Economic Zones (as of Sep 15, 1996)

VI. Clark Special Economic Zone (CSEZ)

The Philippine government aims to develop the CSEZ as a new industrial town site and as a major civil aviation complex for international passengers and cargo. Clark Field, located in the CSEZ, has been designated as the site of a premier international airport.

The territory of the CSEZ includes the former U.S. Clark Air Base and its extensions located within Angeles City, municipalities of Mabalacat and Porac in Pampanga and the municipality of Capas in Tarlac. The CSEZ covers a total area of approximately 28,041 ha.

Certain incentives also follow for enterprises located within the CSEZ Main Zone, encompassing Clark Air Base proper. Limited incentives are available to enterprises which are located within the rest of the area of the CSEZ.

Top 20 Investors in the Clark Special Economic Zone (as of Sep 30, 1996)

VII. Other Special Economic Zones

Subject to the concurrence by the local government units directly affected, the President may create other Special Economic Zones in the Wallace Air Station and Camp John Hay.

Upon recommendation of the Bases Conversion and Development Authority, the President may likewise create Special Economic Zones in the municipalities of Morong, Hermosa, Dinalupihan, Castillejos and San Marcelino.

Southern Mindanao : Abundance of natural and agricultural resources in this area, together with its location (which makes it East Indonesia's gateway to the world), make this an area where major international agricultural companies such as Dole, Del Monte, Cargill, General Milling and Coca-Cola are beginning to invest. Southern Mindanao is emerging as a major trading corridor for the ASEAN region.

There are also ongoing special development programmes designed to revitalise communities so that the social, industrial and public infrastructure networks can all work together for the economic well-being of the community. The 5 major projects are the Calabarzon project, the Samar Island Special Development Project, the Panay-Negros Agro-Industrial Development Project, the South Cotabato-General Santos City Area Development Project and the Illigan-Cagayan de Oro Industrial Corridor.