How PEZA incentives were destroyed by the TRAIN and CREATE Laws

Atty. Rami Hourani

The TRAIN and CREATE Laws were reforms aimed at our tax system. However, they carried with them some unintended consequences. Philippine Economic Zone Authority (PEZA) impacted the most, which has lost more attractiveness for investments. The issue stems from four things:

  • Sec. 294 of the National Internal Revenue Code’s [NIRC] exclusive enumeration of investment incentives that can be granted by all Investment Promotion Agencies [IPAs]
  • Sec. 309 of the NIRC prohibits the conduct of registered activities inside a PEZA Zone from being carried on outside the zone
  • The abandonment of the Cross-Border Doctrine
  • The existence of Customs Bonded Warehouses [CBWs] for those operating under the Board of Investments
Photo by Recha Oktaviani on Unsplash

The foregoing creates a situation where there is no advantage to registering a business within the areas administered by PEZA. Due to the incentives granted by the Board of Investments (BOI), PEZA registered enterprises. Firstly, PEZA and BOI offer the same incentives. Secondly, the operation must occur within PEZA for incentive availment. Thirdly, VAT now applies against those operating within PEZA putting them on the same level as regular enterprises. Lastly, CBW’s permits duty-free importation similarly to the abbreviated customs scheme available to PEZA locators.

We see that BOI incentives are superior because, they are not geographically restricted, subject to VAT, and have mechanisms for avoiding the bureaucracy of importing.

Photo by Renaldo Matamoro on Unsplash

This issue is experienced by companies implementing work-from-home arrangements and transferring their registration to BOI.

Indeed, equally as important in the appreciation of the change of the law. Is the stated purpose of PEZA a tool for the government? The PEZA’s structure in the entry of enterprises stands in contrast to the BOI which has no formal participation in terms of where enterprises are set up. The government lost a tool to participate in the decision of where enterprises should invest their capital as no incentive for private industry under this new regime of incentives.

Photo by Handiwork NYC on Unsplash

It is incumbent on the national government to revisit the perks and privileges of the said law. A cogent inquiry into this matter might expand the entitlements of those operating within the zones and/or permit foreign ownership of the real property and the improvements found within.

Atty. Hourani practices law in Cebu City, PhilippinesIf you would like to set an appointment with him, you may reach him here.

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