The Philippine Economic Zone Authority (PEZA), a government agency tasked to promote investments for our country’s export-oriented manufacturing industry, is known for offering highly attractive fiscal incentives. All PEZA-registered enterprises, known as locators, are entitled to Income Tax Holidays (ITH), 5% Gross Income Earned (GIE) tax, and tax and duty-free importation of raw materials. These incentives are responsible for having brought in foreign direct investment worth billions of pesos.
Moreover, PEZA contributes substantially to employment, with locators directly employing 1.4 million Filipinos from 1995-2017. As of 2018, the majority of Filipino-employed locator investments operated within the Electronics and Semiconductors sector (36.17%), followed by the Manufacturing sector (20.68%), and the Information Technology Services sector (11.67%).
Recently, PEZA has generated noise because it opposed the Corporate Income Tax Incentive Reform Act (Citira) and pushed for an all-or-nothing exemption for its locators. Among other things, Citira seeks to remove redundant fiscal incentives, such as the 5% GIE tax enjoyed by manufacturing and information technology-business process management (IT-BPM) companies. However, PEZA Director General Charito Plaza stressed that Citira’s goal of overhauling tax incentives will not be optimal for export-oriented companies. For instance, a shift to corporate income tax (CIT) can increase tax payments in the IT-BPM sector by up to 170%.
Vice President of the Japanese Chamber of Commerce and Industry of the Philippines Nobuo Fujii said that Japanese investors think “this TRABAHO TRAIN 2… it’s a very dangerous situation in the Philippines.” Consequently, investors have trained their sights on Vietnam instead for their next plant expansion. The American Chamber of Commerce of the Philippines Incorporated agreed with Plaza as well, urging lawmakers to maintain the incentives currently enjoyed by most foreign companies, as it helps them offset the country’s high cost of doing business.
With that, ecozone developers and locators have said that they are amenable to some compromise. For instance, the IT and Business Process Association of the Philippines President Rey Untal would rather that the GIE tax is increased from 5% to 7%, without the provision to transition to CIT. Plaza has said as well that PEZA “should be amenable to [a] 7 percent [increase in] GIE, but no sunset clause or transition to CIT.” Department of Trade and Industry Secretary Ramon Lopez likewise proposed a GIE tax hike. However, should the government mandate the implementation of CIT, Lopez will continue to argue for a transition period longer than five to eight years to minimize job losses.
However, Department of Finance (DOF) Undersecretary Karl Chua rejected PEZA’s call to exempt its locators from Citira and emphasized that out of the government’s foregone revenues worth Php 441 billion, PEZA incentives accounted for Php 346 billion. Theoretically, PEZA’s GIE tax perk—which can be availed after the ITH expires—could last forever since no expiration period exists under current laws. Moreover, Finance Undersecretary and DOF Chief Economist Gil Beltran said that the economic team doesn’t oppose PEZA nor the incentives. Rather, they “are simply trying to fix a long-broken system.”
It is this huge foregone revenue from perpetual tax incentives that prompted President Rodrigo Duterte to aim for the minimizing of government revenue losses. Unfortunately, with a compromise yet to be reached, uncertainty continues to send jitters across the business landscape. To that, Chua reassured stakeholders that he “will commit to responding to each of their position papers… [and] to put them all together and see the package work.”
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