TAKE note, Department of Finance (DOF). Economies across the world make use of fiscal incentives as a key instrument to attract investments in special economic zones (SEZ), according to the World Investment Report 2019 of the United Nations Conference for Trade and Development (Unctad).
“Almost 80 percent of the SEZ laws provide for fiscal incentives, such as tax holidays for a defined period often five to 10 years or the application of a reduced tax rate,” the report read.
“Tax exemptions may apply to the payment of profit taxes, corporate taxes, wages and salaries taxes, and value-added taxes invoiced by local suppliers of goods, services and works necessary for carrying out SEZ activities. Some countries allow the deduction of a certain percentage of training expenses for local personnel from the tax bill,” it added.
The report showed 98 of the 127 SEZ laws across the world provide locators with incentives, while 94 implement special customs regimes that simplify import procedures for firms operating in economic zones.
“Similarly, most SEZ laws provide for a special customs regime, eliminating or reducing tariffs on goods, plants or machinery imported into the zone. This applies to items to be used exclusively inside the zone,” the report read.
On the other hand, about one third of SEZ laws include rules on investment facilitation, of which the Philippines was cited for institutionalizing the one-stop shop Philippine Economic Zone Authority (Peza).
“One frequently used tool is the streamlining of registration procedures, for instance, by providing a list of documents required for admission or by setting deadlines for the completion of approval procedures. Other laws require zone operators to establish a single point of contact or a one-stop shop to deliver government services to businesses within SEZs,” the report read.
SEZ laws also commonly provide for investment protection, preferential land use, trade facilitation, infrastructure provision and social amenities, the Unctad study added.
According to Unctad, the Philippines has the second-highest number of SEZs among all economies. China tops the list with 2,543 economic zones, followed by the Philippines with 528, India with 373, the United States with 262 and Russia with 130.
The report also showed SEZs account for a major share of exports, particularly manufactured products, such as in the Philippines, where 60 percent of shipments were produced by economic zone firms.
It argued that SEZs are part and parcel of any industrial policy, as they present an opportunity to develop technology and skills and improve a country’s role in the global value chain. Several economies incorporated SEZs with their development frameworks, and this resulted in industrial improvement and upgrading.
“Asean countries, such as the Philippines and Malaysia, have also been able to attract foreign direct investment to SEZs and upgrade to higher value-added and technology-intensive industries, including electronics, services and software development,” the report read.
In an earlier report, Finance Secretary Carlos Dominguez III had said that fiscal incentives are only “No. 5” on the list of factors that entice investors to make a stake in the country. Thus, he found it illogical for business groups and the ecozone officials to keep harping on the need for fiscal perks as a first priority. (“See, DOF insists: Investors will come sans tax perks,” by Ma. Stella F. Arnaldo, BusinessMirror, June 5, 2019)
Anxious in PHL
Economic zones in the Philippines are developing slower over the past months, as prospective and existing investors are holding on to their capital in anticipation of a change in the corporate tax and incentives regime. Investments registered with the Peza from January to April declined 24.54 percent to P29.49 billion, from P39.08 billion during the same period last year.
The government, headed by the DOF, is seeking to gradually bring down corporate income tax to 20 percent by 2029, from 30 percent at present.
In exchange, incentives granted to economic zone firms will be overhauled. Locators, mostly multinationals, warned they will relocate to another Southeast Asian site with more competitive incentives if the government takes away their existing incentives, particularly the 5-percent tax on gross income in lieu of all local and national taxes.
Efforts to swing the changes, packaged as the Tax Reform for Attracting Better and High Quality Opportunities (Trabaho) bill in the 17th Congress, hurdled final approval at the House of Representatives but failed to pass Senate scrutiny.
In spite of the nonpassage of the “Trabaho” bill, Peza Director General Charito B. Plaza in May said uncertainties brought about by the measure will continue to scare off investors. As long as the rationalization of incentives remains a priority of the Duterte administration, expect firms to be hesitant about expanding operations or bringing in fresh capital, she added.