by Jesus M. Manalastas and Michelle S. Serrano*

One of the fundamental policies under the Philippine Constitution is the recognition "of the indispensable role of the private sector" in the economic development of the country, and the need to encourage private enterprise through the grant of incentives for needed investments.i That policy is underscored by three important pieces of legislation, namely, the Bases Conversion and Development Act (R.A. No. 7227), the Special Economic Zone Act of 1995 (R.A. No. 7916), and the Export Development Act of 1994 (R.A. No. 7844).

Bases Conversion and Development Act

This law seeks to accelerate the conversion of the Clark and Subic military reservations into alternative and more economically viable areas.ii The Subic military reservation has been converted into the Subic Special Economic Zone ("Subic Ecozone") which is now a self-sustained industrial, commercial, financial and investment center designed to attract and promote productive foreign investment.iii

The Subic Ecozone provides an attractive climate for productive foreign investment because:

  • it allows the duty-free importation of raw materials and capital equipment
  • business enterprises and individuals, both Filipinos and foreigners, residing therein are not subject to taxes, whether local or nationaliv
  • it is not subject to exchange control
  • banking and finance are liberalized with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks with minimum regulation by the Bangko Sentral ng Pilipinas ("BSP")
  • permanent residential status are granted to foreign investors, together with their spouses and dependent children below 21 years of age, who maintain continuing investments of not less than US$250,000

The favorable treatment given investors within the Subic Ecozone is, however, subject to certain limitations. With respect to the importation of goods, materials and equipment, the exemption from customs duties applies only while the same are kept within the Subic Ecozone. Any item brought outside the Subic Ecozone is subject to customs duties and taxes under the general customs and internal revenue law.v While business enterprises operating within the Subic Ecozone are not subject to local or national taxes, they must pay a total of 5% of gross income to the government.vi

In order to avail of the incentives within the Subic Ecozone, business enterprises must register as a Subic Bay Freeport Enterprise ("SBF Enterprise"). As a requirement for registration, the business enterprise must operate entirely within the Subic Ecozone and file with the Subic Bay Metropolitan Authority ("SBMA") the prescribed application together with certain requisite documents.vii

Individuals who wish to avail of the favorable tax treatment and other incentives granted to residents of the Subic Ecozone must obtain a Certificate of Residency from the SBMA. A Certificate of Residency will be granted to a Filipino national upon submission of certain requisite documents.viii

A temporary work and residency visa will be granted to a foreign national who possesses executive or highly technical skills upon application by the SBF Enterprise in which he is employed.ix On the other hand, a permanent residency visa may be granted to a foreign individual investor who maintains an investment of not less than US$250,000 within the Subic Ecozone. This visa may be obtained by filing the proper application together with evidence of the investment, which may be in the form of:

  • the establishment of an SBF Enterprise or any other direct investment within the Subic Ecozone
  • a cash grant or interest-free loan to the SBMA or to an SBF Enterprise for the purpose of making capital improvements by the recipient
  • the purchase (if qualified) of real estate in the Subic Ecozone or of an SBF Enterprise
  • a donation in kind to the SBMA or to an SBF Enterprise in the form of equipment or materials for capital improvement purposesx

Special Economic Zone Act of 1995

This law seeks to encourage investors/business enterprises to locate in other selected areas within the Philippines, in addition to the Subic Ecozone, through the grant of incentives.

The law identifies various areas in 34 provinces of the Philippines to be developed into agro-industrial, industrial, tourist or recreational, commercial, banking, investment and financial centers called Special Economic Zones or ECOZONES.xi In addition to these identified areas, other areas may be declared ECOZONES by the President of the Philippines upon the recommendation of the Philippine Economic Zone Authority ("PEZA").xii Any of the following may be declared as an ECOZONE:xiii

  • An Industrial Estate ("IE"), which is a tract of land subdivided and developed for the purpose of housing a community of industrial establishments according to a comprehensive plan and under a unified continuous management.
  • An Export Processing Zone ("EPZ"), which is a specialized Industrial Estate geared towards export production.
  • A Free Trade Zone, which is an isolated and policed area adjacent to a port of entry, such as a seaport or airport, where imported goods may be unloaded for immediate transshipment, or stored, re-packed, sorted, mixed or otherwise processed without being subject to import duties.

Each ECOZONE is self-sustaining and subject to minimal government intervention. It administers its own economic, financial, industrial and tourism development and has the authority to establish economic relations both with other domestic entities and with foreign entities and enterprises.xiv

The law provides that establishments operating within the ECOZONES shall enjoy the fiscal incentives provided under Presidential Decree No. 66 and the Omnibus Investment Code,xv including the following:

  • Merchandise, raw materials, machinery, spare parts and wares of every description, except those prohibited by law, to be processed or manufactured or used in such activity, may be brought within the ECOZONE free from customs duties and local and national taxes.xvi
  • Merchandise purchased by an establishment within the ECOZONE from areas outside the ECOZONE shall be considered as exported, and the vendor thereof shall be considered an exporter and thus entitled to benefits provided under Philippine laws for exporters.xvii
  • No taxes, whether local or national, shall be imposed on business establishments operating within the ECOZONE.xviii
  • Foreign citizens and companies owned by foreign citizens (including companies jointly owned by foreign citizens and Filipinos in any ownership proportion) may set up business establishments in the ECOZONES.xix
  • Earnings of the foreign investments in the ECOZONE may be remitted outward without prior approval from the BSP.xx

These incentives are subject to certain limitations. Any merchandise imported tax-free into the ECOZONE, if subsequently brought outside of the ECOZONE, shall be subject to duties and taxes.xxi Registered enterprises, although exempt from taxes, are required to remit five percent (5%) of their gross income to the national government. Finally, the law restricts certain industries (as periodically determined by PEZA) from selling their products locally.xxii

In order to avail of the incentives provided under the Act, an applicant must register as an Export or Free Trade Enterprise within the ECOZONE. The application for registration must be submitted together with certain pre-registration documents, including a project feasibility study or basic data/information on the applicant’s technical, financial, marketing and management capability to undertake the proposed project or business.xxiii

Within twenty days from receipt of the notice of approval of the application, the applicant must submit to the PEZA a formal acceptance of the terms and conditions of registration and pay the registration fee. The Certificate of Registration will be issued upon the execution of the Registration Agreement between the applicant and the PEZA.xxiv

Export Development Act of 1994

In order to encourage more investors to enter into the export business, this law provides the following incentives for exporters:xxv

  • Exemption from the deposit of customs duties otherwise required at the time of opening of letters of credit covering imports
  • Tax credit for imported inputs and raw materials which are not readily available locally and which are used for the production and packaging of export products
  • Tax credit ranging from 2.5% to 10% depending on the amount of the year-to-year increase in export revenue
  • For exporters of non-traditional products who use or substitute locally produced raw materials, capital equipment and/or spare parts, the grant of tax credits equivalent to 25% of the duties that would have been paid had these inputs been imported
  • Special long-term peso and dollar credit facilities for plant and equipment expansion purposes

In order to qualify for these incentives, an entity must be licensed to do business in the Philippines, engaged directly or indirectly in the production, manufacture or trade of products or services, and earn at least 50% of its normal operating revenues from the sale of its products or services abroad for foreign currency. In the case of entities engaged in providing services, they shall be considered exporters within the purview of the law only if the services provided are information technology services, construction services and other services defined by the DTI and the Department of Finance.xxvi Under the Foreign Investments Act of 1991xxvii, foreign nationals, including entities which are 100% owned by foreign nationals, can engage in the export of products and services, provided only that such products and services are not among those the manufacture and/or sale of which are reserved for Filipinos.xxviii

Footnotes

* Jesus M. Manalastas and Michelle S. Serrano are lawyers at the Ponce Enrile Reyes & Manalastas Law Offices, located at the 3rd Floor, Vernida IV Building, Leviste St., Salcedo Village, 1227 Makati City. They may be reached by e-mail at pecabar@pecabar.com or at telephone nos. (632) 815-9571 to 80 and fax nos. (632) 818-7355 and (632) 7391.

i Sec. 12, Art. XII, 1987 Constitution

ii Sec. 2, R.A. No. 7227

iii Sec. 12, Ibid.

iv Sec. 1.1, E.O. No. 97-A

v Sec. 12, R.A. No. 7227

vi Sec. 12, Ibid.

vii Sec. 28 and 29, Rules and Regulations Implementing the Provisions Relative to the Subic Special Economic Zone and the Subic Bay Metropolitan Authority under Republic Act No. 7227, Otherwise Known as the "Bases Conversion and Development Act of 1992"

viii Sec. 31, Ibid.

ix Sec. 66, Ibid.

x Sec. 71, Ibid.

xi Sec. 5, R.A. No. 7916

xii Sec. 6, Ibid.

xiii Sec. 4, Ibid.

xiv Sec. 7, Ibid.

xv Sec. 23, Ibid.

xvi Sec. 17, P.D. No. 66

xvii Ibid.

xviii Sec. 78, E.O. No. 226

xix Sec. 76, Ibid.

xx Sec. 28, R.A. 7916

xxi Sec. 17, P.D. No. 66

xxii Sec. 26, R.A. No. 7916

xxiii Sec. 3, Part II, Rules and Regulations to Implement Republic Act No. 7916, Otherwise Known as "The Special Economic Zone Act of 1995"

xxiv Sec. 6, Ibid.

xxv Sec. 16, R.A. No. 7844

xxvi Sec. 4, Ibid.

xxvii R.A. No. 7042

xxviii Sec. 2, R.A. No. 7042; Sec. 1, Rule VI, Implementing Rules and Regulations of R.A. 7042

The information contained in this article is intended only to provide a general guide to the subject matter. Advise from specialists is still recommended for your specific requirements and particular circumstances.