The Philippine Economic Zone Authority – Incentives and Assistance

Op-ed by Bob Shead

The Philippine Economic Zone Authority (PEZA) is a Philippine Government agency, attached to the Philippine Department of Trade and Industry, and is the 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 Philippines, known as PEZA Special Economic Zones.

PEZA oversees and administers Philippine tax exemptions, and other beneficial incentives to foreign investors, developers and operators of, ready to occupy, environmentally friendly, secure and competitively priced Special Economic Zones (see below for a list of Philippine Economic Zones).  PEZA also assists investors who locate in service facilities inside selected areas in the country (areas named as PEZA Special Economic Zones); these are usually Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) companies.  Other activities also eligible for PEZA registration and incentives include establishment and operations within the Special Economic Zones for tourism, medical tourism, logistics and warehousing services, economic zone development and operation and facilities providers.

PEZA’s client-oriented priorities have given the agency a good reputation, and has enabled it to earn the trust and confidence of investors in its Special Economic Zones as well as the local business sectors, and foreign Chambers of Commerce in the Philippines.  All Industrial and Special Economic Zones are manned by PEZA officers with administrative staff to resolve any issues of importance to its stakeholders’ needs and concerns.  Information Technology companies do receive priority service and will have a direct link to the PEZA Head Office in Metro Manila.

PEZA was created in 1995 by the Special Economic Zone Act that promoted the development of Special and Industrial Economic Zones throughout the country, to actively encourage competitive incentives to attract foreign investors into the Philippines.  PEZA is also certified under ISO 9001:2008. The PEZA Board is chaired by the Secretary of the Department of Trade and Industry, with the Vice Chair as the Director General (Chief Executive Officer) of PEZA.  This office is now held, since President Duterte’s appointment in September 2016, by Ms Charito Booc Plaza.  Members of the Board are Undersecretaries, representing nine (9) key Philippine Government Departments, ensuring a reliable coordination between PEZA, and the respective Government Departments, on all issues that can affect the operations of foreign investors inside the individual Special Economic Zones.

PEZA locations in the Philippines

Currently, PEZA has over 300 fully operating Economic Zones, spread all over the Philippines.  Aside from Central Business Districts (CBDs) in Metro Manila, including Bonifacio Global City, Makati City, Ortigas City and Quezon City, there are also Economic Zones in most other major city centers, such as Batangas, Cebu, Baguio, Davao, Subic, Clark, Dumaguete, with new Economic Zones planned for other areas.  Currently, PEZA accredited buildings and office spaces are mostly in Makati City, with over 35 operating Economic Zones, including Glorietta 1 and 2 BPOs, PBCom Tower, and the Zuellig Building.  In Bonifacio Global City (BGC), there are 17 operating Economic Zones, including Bonifacio Technology Center, Sun Life Centre, Piccadilly Star, World Plaza and Eco Tower.   In Quezon City, there are 18 operating Economic Zones, including the ELJ Communications Center in Diliman Avenue. There are 73 Manufacturing/Industrial Economic Zones in the Philippines;  243 Information Technology Parks and Centers;  21 Agro-Industrial Economic Zones;  19 Tourism Economic Zones;  2 Medical Tourism Parks and Centers. As of May 2016 there are 3,189 businesses operating within PEZA zones, with a total of 6480 separate offices, across the Philippines.

PEZA financial and non-financial incentives

PEZA offers both fiscal and non-fiscal incentives as well as ready to occupy business locations, in excellent Economic Zones as well as IT parks and buildings.  Fiscal incentives include  income tax holidays for a certain number of years, which translates to 100 percent exemption from corporate income tax;  tax and duty-free importation of raw materials, capital equipment, machineries and spare parts;  exemption from wharfage dues and export tax, import or related fees;  VAT zero-rating of local purchases subject to compliance with BIR (Bureau of Inland Revenue) and PEZA requirements;  exemption from payment of any and all local government, fees, licenses or taxes;  exemption from expanded withholding tax.  Non-fiscal incentives, on the other hand include simplified import-export procedures, extended visa facilitation assistance to foreign nationals and spouses and dependents, and special visa multiple entry privileges.

Fiscal incentives to PEZA-Registered Economic Zone Enterprises include:

1. Economic Zone Export Manufacturing Enterprises

• Income Tax Holiday (ITH) – 100 percent exemption from corporate income tax
• Four years ITH for Non-pioneer Project
• Six years ITH for Pioneer Project
• ITH Extension years may be granted if the Project complies with the following criteria, (one criteria is equivalent to one ITH extension year) provided that the total ITH entitlement period shall not exceed eight years
• Upon expiry of the Income Tax Holiday, five percent Special Tax on Gross Income, and exemption from all national and local taxes (“Gross Income” refers to gross sales or gross revenues derived from the registered activity, net of sales discounts, sales returns and allowances and minus cost of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period)
• Tax and duty free importation of raw materials, capital equipment, machineries and spare parts.
• Exemption from wharfage dues and export tax or fees
• VAT zero-rating of local purchases subject to compliance with BIR and PEZA requirements
• Exemption from payment of any, and all local government fees, licenses or taxes. However, while under Income Tax Holiday, no exemption from Real Estate Tax, but machineries installed and operated in the Economic Zone for manufacturing, processing or for industrial purposes shall be exempt from real estate taxes for the first three years of operation of such machineries.  Production equipment not attached to real estate shall be exempt from real property taxes.

2. Information Technology Enterprises

• Income Tax Holiday (ITH) – 100 percent exemption from corporate income tax
• 4 years ITH for Non-pioneer project
• 6 years ITH for Pioneer project
• ITH Extension year may be granted if Project complies with the following criteria (one criteria is equivalent to one ITH extension year) provided that the total ITH entitlement period does not exceed eight years.  The average net foreign exchange earnings of the project for the first three years of operations is at least US$500,000 and, the capital equipment to labor ratio of the project does not exceed US$10,000 to 1 for the year immediately preceding the ITH extension year being applied for.

Non-fiscal incentives to PEZA-Registered Economic Zone Enterprises

• Simplified Import – Export Procedures (Electronic Import Permit System and Automated Export Documentation System).
• Non-resident Foreign Nationals may be employed by PEZA registered Economic Zone Enterprises in supervisory, technical or advisory positions
• Special Non-Immigrant Visas with Multiple Entry Privileges for the following non-resident Foreign Nationals in a PEZA-registered Economic Zone Enterprise: Investors, company officers, and employees in supervisory, technical or advisory position, with their spouses, and unmarried children under 21 years of age.   PEZA also extends Visa Facilitation Assistance to foreign nationals, their spouses and dependents (under 21)

Basic documents required to register with PEZA

• Parent company and product brochures
• Description of the new project (include description and uses of the service)
• Detailed organizational chart
• Project timetable
• Potential market, marketing costs, marketing program
• Service process and flowchart
• List of equipment, country of equipment origin, rated capacity, and corresponding costs
• Materials, their sources and prices, supply contracts if any, ratio of imported to local materials, if applicable
• Area requirement, office lay-out
• Equipment lay-out
• Electricity and water requirements
• Types and volume of wastes and waste disposal system
• Bio-data of principal officers
• Certificate of registration with the Securities and Exchange Commission
• Articles of Incorporation
• Financial Data and Document Requirements:
• Number of employees, position and salary rates, training to be provided and length of training, classification of employees as to a) skilled, semi-skilled, and unskilled, b) direct, indirect, and administrative
• Number of foreign experts to be hired, positions, salary rates, length of stay
• Projected volume of sales, selling price, and unit of measure
• Breakdown of other dollar costs (interest on loans, salaries of foreign personnel)
• Number of workdays per year, number of shifts per day
• Sources of financing (please indicate whether loans to be obtained are foreign currency denominated or not)
• Latest audited financial statements, if any
• Parent company’s latest volume and value of sales, net income, total assets, and number of total employees, if applicable.

Conclusion

It will be obvious to the reader that if an investment is being considered in the Philippines then an exploration and serious consideration of the Philippine Economic Zone Authority (PEZA) should be considered.  Over the years since its inception in 1995, PEZA has developed a very good reputation, as an efficient and user friendly organisation that both encourages and assists foreign investors to set up shop in the Philippines with very good tax breaks etc.  The new areas in Central and Southern Philippines must also be considered when looking at the Philippines as a whole.

• Previous Article ASEAN Market Watch: Singapore Innovation Fund, Philippines Credit Rating, and Myanmar Tourism
• Next Article ASEAN Regulatory Brief: Malaysia Cabotage Policy, Philippines Tax Reform, and Laos Land Concessions