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Investment incentives in the Philippines*
Synopsis of incentives under various Philippine laws
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Investment Incentives
in the PhilippinesSynopsis of incentives under various Philippine laws
Foreword
This brochure on Investment Incentives in the Philippines has been prepared by Joaquin
Cunanan & Co., a member firm of the worldwide PricewaterhouseCoopers organization, toprovide local and foreign investors with a handy reference on various fiscal and non-fiscalincentives being made available by the Philippine government. Our other related publicationsare Doing Business and Investing in the Philippines and How to Invest in the Philippines whichaim to provide answers to questions usually posed by prospective investors. Thesepublications are part of our commitment to assist the government and investors alike infacilitating the entry of investments into the country.
Through this guide, the firm recognizes the invaluable efforts of the Board of Investments (BOI),the Philippine Economic Zone Authority (PEZA), the Subic Bay Metropolitan Authority (SBMA), theClark Development Corporation (CDC), the Cagayan Economic Zone Authority (CEZA), theZamboanga City Special Economic Zone Authority (ZCSEZA), and other government agenciesin encouraging foreign and local investments into the Philippines.
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Omnibus Investments Code of 1987
(E.O. 226) As Amended
Executive Order No. 226, otherwise known as the OmnibusInvestments Code of 1987, took effect on August 13, 1987.The Code integrates the basic laws on investments, clarifyingand harmonizing their provisions to encourage and guidedomestic and foreign investors.
Fiscal and non-fiscal incentives are granted to qualified proponents who will invest in apreferred area of activity as listed in the Investment Priorities Plan (IPP). The IPP, which isissued on a yearly basis, identifies the priority investment areas eligible for incentives underthe Code. The IPP for the Year 2003 maintains export activities as an investment priority area.Also included in the current IPP are the Mandatory Inclusions and Support to GovernmentPrograms.
Mandatory Inclusions in the IPP consist of areas/activities which, as provided for under existinglaws, specifically require their inclusion therein. These activities are Industrial Tree Plantation,Iron and Steel Projects, Exploration, Mining, Quarrying and Processing of Minerals, Publicationor Printing of Textbooks, Refining, Storage, Marketing and Distribution of Petroleum Products,and Ecological and Solid Waste Management.
Activities that support government programs include Agricultural/Fishery Production andProcessing, Energy Sources, Logistics, Drugs and Medicines, Engineered Products,Information and Communications Technology, Infrastructure, Mass Housing Projects, includingDevelopment and Fabrication of Housing Components, Research and Development Activities(including Bio-technology), Social Service, Tourism-related Projects as endorsed by theDepartment of Tourism, Motion Picture (limited to films with historical and socio-culturalsignificance, and documentary films), New Projects and Bio-technology Projects with aminimum project cost of US$2 Million not commercially undertaken in the Philippines as of 31December 2001, and printing facilities.
The 2003 IPP also continues to adopt the regional approach of listing. Thus, included are“Industry Clusters” endorsed by the Small and Medium Enterprise Development Council. Thisis envisioned to be an effective tool in developing competitive advantage among industries,hence, making the regions the core of development. Likewise, as in the past IPPs, a separatelisting of economic activities is provided for the Autonomous Region of Muslim Mindanao orARMM to allow more focused investments therein.
Any individual, corporation, partnership or association that meets the qualification criteria inArticle 32 of E.O. No. 226 shall be entitled to registration unde the Code and enjoy both fiscaland non-fiscal incentives provided therein.
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Incentive privileges may be enjoyed only upon registration. In general, registered enterprisesare entitled to the following incentives:
Tax Exemptions
1. Income Tax Holiday (ITH)
a) BOI registered enterprises shall be exempt from the payment of income taxes reckonedfrom the approved target of commercial operations or actual date of commercialoperations, whichever comes first, but in no case earlier than the date of registration, asfollows:
– Six (6) years for new projects granted pioneer status;– Six (6) years for projects locating in Less Developed Areas (LDAs), regardless of
status and regardless of whether new or expansion;– Four (4) years for new projects granted non-pioneer status; and– Three (3) years for expansion and modernization projects. (As a general rule, ITH
shall be limited only to incremental sales in revenue/volume.)
b) New registered pioneer and non-pioneer enterprises and those located in the lessdeveloped areas (LDAs) may avail themselves of a bonus year in each of the followingcases:
– The indigenous raw materials used in the manufacture of the registered product isat least fifty percent (50%) of the total cost of raw materials for the preceding yearsprior to the extension unless the BOI prescribes a higher percentage; or
– The ratio of total imported and domestic capital equipment to the number of workersfor the project does not exceed US$10,000 to one (1) worker; or
– The net foreign exchange savings or earnings amount to at least US$500,000annually during the first three (3) years of operation.
In no case shall a registered firm avail of ITH for a period exceeding eight (8) years.
2. Exemption from taxes and duties on imported spare parts
A registered enterprise with a bonded manufacturing warehouse shall be exempt fromcustoms duties and national internal revenue taxes on its importation of required supplies/spare parts for consigned equipment or those imported with incentives.
3. Exemption from wharfage dues and export tax, duty, impost and fees
All enterprises registered under the IPP will be given a ten (10) year period from the date ofregistration to avail of the exemption from wharfage dues and any export tax, impost andfees on its non-traditional export products.
4. Tax exemption on breeding stocks and genetic materials
Agricultural production and processing projects will be exempt from the payment of all taxesand duties on their importation of breeding stocks and genetic materials within ten (10)years from the date of registration or commercial operation.
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Tax Credits
1. Tax credit on the purchase of domestic breeding stocks and genetic materials
A tax credit equivalent to one hundred percent (100%) of the value of national internalrevenue taxes and customs duties that would have been waived (had these been imported)on the purchase of local breeding stocks and genetic materials within ten (10) years fromthe date of registration or commercial operation.
2. Tax credit on raw materials and supplies
Tax credit equivalent to the national internal revenue taxes and duties paid on rawmaterials, supplies and semi-manufactured products used in the manufacture of exportproducts and forming part thereof shall be granted to a registered enterprise.
Additional Deductions from Taxable Income
1. Additional deduction for labor expense
For the first five (5) years from date of registration, a registered enterprise shall be allowedan additional deduction from taxable income equivalent to fifty percent (50%) of the wagesof additional skilled and unskilled workers in the direct labor force. This incentive shall begranted only if the enterprise meets a prescribed capital to labor ratio and shall not beavailed of simultaneously with ITH.
This additional deduction shall be doubled if the activity is located in a LDA.
2. Additional deduction for necessary and major infrastructure works
A registered enterprise locating in LDAs or in areas deficient in infrastructure, public utilitiesand other facilities may deduct from taxable income an amount equivalent to the expensesincurred in the development of necessary and major infrastructure works.
This privilege, however, is not granted to mining and forestry-related projects as they wouldnaturally be located in certain areas to be near their source of raw materials.
Non-fiscal Incentives
1. Employment of foreign nationals
A registered enterprise may be allowed to employ foreign nationals in supervisory, technical
or advisory positions for five (5) years from date of registration. The position of president,
general manager and treasurer of foreign-owned registered enterprises or their equivalent
shall, however, not be subject to the foregoing limitations.
2. Simplification of customs procedures for the importation of equipment, spare parts, rawmaterials and supplies and exports of processed products.
3. Importation of consigned equipment for a period of 10 years from date of registration,subject to posting of a re-export bond.
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4. The privilege to operate a bonded manufacturing/trading warehouse subject to Customsrules and regulations.
The BOI uses the incentive package of E.O. 226 to influence industry and encourageenterprises to locate outside the National Capital Region (NCR). Registered projectslocating in Less Developed Areas (LDAs), may enjoy six (6) years income tax holidayregardless of status (pioneer or non-pioneer) or type of project (new or expansion) as wellas additional deductions from taxable income equivalent to expenses incurred in thedevelopment of necessary and major infrastructure facilities.
Complementary to the provision of the law granting maximum incentives to registeredenterprises in LDAs, the BOI limits incentives to firms that locate in congested urbancenters, Initially, the locational restriction applies to the NCR wherein projects are notentitled to ITH. Exempt from locational restriction policy are:
– projects locating in certain government industrial estates within the NCR;– service-type projects with no manufacturing facilities, such as, but not limited to,
software development, data encoding, design and pattern-making for export orientedindustries, gemstone cutting and polishing, dentures/prosthetics, and cold storagefacilities for agricultural products;
– environmental, public utility and infrastructure projects except industrial communities,mass housing development projects and industrial estates projects;
– expansion projects for export (subject to certain conditions);– modernization projects;– export-oriented enterprises whose activities are in support of a jewelry enterprise such
as electroplating, gemstone appraisal and certification, assaying and refining;– new export-oriented projects to be undertaken by small enterprises with total assets not
exceeding the amount established by the SMED Council for small enterprises, providedthat these projects comply with environmental standards;
– new projects of existing export-oriented enterprises (subject to certain conditions); and– those projects that use production processes/equipment that meet environmental
standards.
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Bases Conversion and Development
Act of 1992 (R.A. 7227)
Republic Act 7227, otherwise known as the BasesConversion and Development Act of 1992, was enacted intolaw on March 13,1992. The objective of the Act is toaccelerate the sound and balanced conversion anddevelopment of the former United States military bases intospecial economic zones in order to promote the economicand social development of Central Luzon in particular, and thecountry in general.
R.A. 7227 created two administrative bodies for the purpose of adopting, preparing andimplementing a comprehensive development program for the conversion of the Clark andSubic military reservations and their environs into special economic zones as envisioned in theAct. The two administrative bodies created under the Act are the Bases Conversion andDevelopment Authority (BCDA) and the Subic Bay Metropolitan Authority (SBMA). The BCDA ismandated to oversee and implement the conversion and development of Clark, John Hay AirStation, Wallace Air Station, O’Donnell Transmitter Station, Mt. Sta. Rita Station and thoseportions of Metro Manila Military Camps which may be transferred to it through PresidentialProclamations. On the other hand, the SBMA is mandated to oversee the implementation of thedevelopment programs of the Subic Bay Naval Station, its environs and surroundingcommunities.
In 1993, Executive Order No. 80 was issued establishing the Clark Development Corporation(CDC), as the implementing arm of the BCDA for the Clark Special Economic Zone. Theincentives granted under either BCDA or SBMA or CDC are basically the same. These are thefollowing:
Fiscal Incentives
1. A final tax of 5% on gross income earned shall be paid in lieu of all local and national taxes.
(Gross income refers to gross sales derived from any business activity less cost of sales,
cost of production or direct cost of services.)
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2. Tax and duty free importation of capital equipment, raw materials, supplies, spare parts andall other articles including finished goods.
Non-fiscal Incentives
1. Permanent residency status for investors, their spouses, dependent children under 21years of age, provided they have continuing investments of not less than US$250,000.
2. Employment of foreign nationals.
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The Special Economic Zone Act of
1995 (R.A. 7916)
The Special Economic Zone Act was enacted on February24, 1995 to encourage and promote the establishment anddevelopment of economic zones or “ecozones” in identifiedand selected areas in the country as a means to achievesound and balanced industrial, economic and socialdevelopment.
It also created the Philippine Economic Zone Authority(PEZA) as the agency mandated to enforce the provisionsand objectives of the law.
1. Under current PEZA policies, the following types of enterprises may be eligible to incentives:
– Export-oriented and free trade enterprises– Ecozone developer/ operator– Utilities and facilities providers1
– Tourism enterprises– Logistics service enterprises providing warehousing and trading2
– Information Technology (IT) Parks developer/ operator– IT Service exporters and export producers of IT related products
2. Upon registration with PEZA, the incentives available are a combination of those granted byBOI and BCDA, as follows:
– All incentives under E.O. 226 which include income tax holidays (ITH)– Tax and duty free importation of capital equipment, spare parts, raw materials and
supplies which are needed in the registered activity.– After the lapse of the ITH period, the enterprise shall pay a preferential final tax of 5% of
gross income in lieu of all national and local taxes. Alternatively, the enterprise maywaive the privilege to avail of the 5% gross income tax incentive subject to certainconditions.
1Incentives limited to 5% preferential tax rate; thus, not entitled to ITH incentives.2Incentives limited to tax and duty-free importations.
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An amount equivalent to one half (½) of the value of training expenses incurred indeveloping skilled or unskilled labor or for management development programsincurred by the PEZA firm can be deducted from the national government’s share of the3% (out of 5%) final tax.
The above incentives and benefits are available only to enterprises located within theecozones administered by the PEZA.
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Zamboanga City Special Economic
Zone Act of 1995 (R.A. 7903)
and the Cagayan Special Economic
Zone Act of 1995 (R.A. 7922)
Aside from the ecozones under PEZA, the Subic area underSBMA and the Clark area under CDC, there are two otherspecial economic zones established under special laws.These are the Zamboanga City Special Economic Zone,created under R.A. 7903 on February 23, 1995, and theCagayan Special Economic Zone and Freeport, createdunder R.A. 7922 on February 24, 1995.
Firms registered with the Zamboanga City Special Economic Zone Authority and the CagayanEconomic Zone Authority, respectively, and located within the territorial boundaries of theseecozones, shall be entitled to fiscal and non-fiscal benefits similar to those available to PEZA-registered enterprises.
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Regional or Area Headquarters,
Regional Operating Headquarters
and Regional Warehouses (R.A.
8756)
R.A. 8756 provides for the terms, conditions, and licensingrequirements of Regional or Area Headquarters (RHQ),Regional Operating Headquarters (ROHQ), and RegionalWarehouses (RWs) of multinational companies.
By definition, a RHQ is an office whose purpose is to act as an administrative branch of amultinational company engaged in international trade which principally serves as asupervision, communications and coordination center for its subsidiaries, branches oraffiliates in the Asia-Pacific Region and other foreign markets and which does not earn orderive income in the Philippines.
On the other hand, a ROHQ refers to a foreign business entity which is allowed to deriveincome in the Philippines by performing qualifying services to its affiliates, subsidiaries orbranches in the Philippines, in the Asia-Pacific Region and in other foreign markets. Suchservices are general administration and planning; business planning and coordination;sourcing and procurement of raw materials and components; corporate finance advisoryservices; marketing control and sales promotion; training and personnel management; logisticservices; research and development services and product development; technical support andmaintenance; data processing and communication; and business development.
The incentives available to regional offices include:
– A special tax rate of 10% on taxable income for ROHQs;– For RHQs, value added tax (VAT) zero-rating on their purchase or lease of goods, property
and services;– Exemption from all kinds of local taxes, fees, or charges imposed by local government
units, except for real property tax on land improvements and equipment;– Tax and duty-free importation of equipment and materials for training and conferences;– Importation of new motor vehicles, subject to the payment of taxes and duties;
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– The option to establish a RW within a Philippine economic zone (ecozone). Tax breaksavailable to RWs include tax and duty free importation of warehouse equipment, as well asspare parts, components, semi-finished products, raw materials and other items which areto be re-exported abroad; and
– Various incentives to expatriate employees, such as:- A preferential 15% tax rate on income. Filipino employees occupying the same
positions as their alien colleagues will also be entitled to the same tax treatment.- Special multiple entry visas with a 3-year validity period for the foreign personnel, their
spouses and unmarried children under 21 years of age;- Tax and duty free importation of personal and household effects; and- Exemption from travel tax, specific immigration fees and requirements, subject to certain
conditions.
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Export Development Act
(R.A. 7844)
The purpose of the Export Development Act (EDA) is topromote and develop the Philippine export industry as ameans to achieve the country’s economic goals ofsustainable agri-industrial development and increasedemployment and enhanced incomes.
Any person, natural or juridical, licensed to do business in the Philippines and exporting atleast fifty percent (50%) of his products or services, excluding overseas contract workers, maybe accredited as an export enterprise under the EDA. An accredited export enterprise shall beentitled to the following incentives:
1. Tax credit on increments in export revenue over the previous year, granted for the year whenthe performance is achieved, computed as follows:
– 2.5% for the first 5% increase;– 5.0% for the next 5% increase;– 7.5% for the next 5% increase; and– 10.0% in excess of 15% increase.
(This incentive, however, is not available for exporters enjoying ITH or VAT exemption orwhose local value added is 10% and below.)
2. In addition to the above incentive, all existing incentives being enjoyed by the enterprise ifregistered with the BOI, PEZA, SBMA, or CDC.
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