5 Features of Economic Zones under PEZA in the Philippines

By: Garry S. Pagaspas, CPA

Let me share you my personal views on the features of the economic zones under Philippine Economic Zone Authority (PEZA) under Republic Act No. 7915 or otherwise known as “The Special Economic Zone Act of 1995“. This seems to be a good concept as a government’s foreign investments mechanism for multinational and other foreign investors to relocate and establish business presence in the Philippines. First, is the generation of labor for the labor capital country, Philippines. Second, is the improvement in the interaction of Philippines with the international territories for business and economic ventures. An thirdly, is the revenue generation from the operation of such ecozones within the defined economic zones in the country.

As a rule, Philippines is a customs territory so sales going outside of the Philippines is an exportation, while, purchases from abroad are importation. Under the concept of economic zone (or “ecozone“), the ecozone in the Philippines is viewed as a separate customs territory, even though located within the same country. As such, the  sales of ecozone registered entities from outside of it is an exportation to a non-ecozone within the Philippines, and purchases is an importation. To distinguish them from the normal import and export transactions, they, are termed as “technical importation“, and “technical exportation“. Hereunder are the features I conceptually developed and would wish to share:

1. Specific registrable business activities

Not just any line of business undertaking is registrable. The Philippine government chooses the business operations or undertaking it would deem best to register under Philippine Economic Zone Authority (PEZA) as an ecozone. The following are the activities eligible for PEZA registration:

• Export manufacturing – Economic Zone Export Manufacturing Enterprise
• Information Technology Service Export – Economic Zone IT Enterprise or IT Parks and Buildings
• Tourism – Tourism Economic Zone Developers or Operators and Locators
• Medical tourism – Medical Tourism Enterprise
• Agro-industrial Bio-fuel Manufacturing – Agro-industrial Economic Zone Developers or Operators and Locators
• Economic zone development and operation –
• Facilities provider
• Utilities – Economic zone utilities enterprise

If your business operation is one of the above, then, you may consider registering with the PEZA for tax and other incentives.

2. Prior registration to avail of benefits and incentives

Establishing the above business operations is not automatic and prior registration is required. A new business could file an application papers during the stage of incorporation with the Securities and Exchange Commission (SEC) or after SEC approval. A set of documentary requirements applies to a particular type of activity to be registered. This may include the SEC corporate papers, business plan, and more. PEZA locators must be located in a particular ecozone to qualify. For the purpose, an ecozone is a specific area registered by the PEZA or a building accredited as an IT building.

3. Incentives to registered activities

What is being registered is the particular business activity that the entity will engage into. If a corporation will engage in more than on business activity, registration of one business activity does not necessarily mean a registration of all activities. This would mean that a registered corporation may not be qualified tax and other incentives with respect to non-registered activities. To avoid complications, some approach is to adopt an company for every activity.

4. Specifically defined fiscal and non-fiscal incentives

The PEZA law as implemented by its implementing rules and regulations provide specific incentives to registered PEZA ecozones. These incentives are normally spelled out in the terms and conditions on the issuance of PEZA of its Certificate of Registration. Fiscal incentives would include the following:

• Income tax holiday of specific duration (4 years, 6 years, 3 years), and subject to extension under certain conditions. Under this, the PEZA registered company will not be liable to 30% income tax;
• 5% special income tax upon expiration of the income tax holiday. 5% is based on the defined gross income where only specific enumerated expenses are deductible from gross sales or gross receipts;
• Tax and duty free importation;
• Zero percent (0%) value added tax (VAT) on purchases of goods and services for use in the registered activity;
• Exemption from withholding taxes on payments of local buyers from customs territory;
• Exemption from payment of any and all local government fees, imposes, licenses, or taxes;

5. Compliance of the terms and conditions

Registration with the PEZA of economic zones is not a boundless privilege. The grant of its certificate of registration by the PEZA is subject to terms and condition laid down in the Registration Agreement that will be signed by the representatives of both the company and PEZA. Sample terms could be the amount of sales on annual basis, percentage of production export- say 70%, number of employees,  submission of reports on a periodic basis, environmental compliance, and more. Failure to abide with the terms may entitle the registered company penalties, or worst cancellation of the certificate of registration by PEZA upon a process for the purpose.

(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for almost two (2) decades now and a professor of taxation for more than five (5) years. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. For comments, you may please send mail at garry.pagaspas(@)taxacctgcenter.ph.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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