Industrial Estate or Economic Zone in the Philippines: How to Choose

Choosing an industrial estate or economic zone in the Philippines means deciding where to locate operations, which incentives to accept, and which regulator to deal with. Under Republic Act No. 7916 (the Special Economic Zone Act of 1995), an industrial estate is a tract of land subdivided and developed under a comprehensive plan, with unified management and basic infrastructure, for a community of industries. An ECozone is a selected area that may contain industrial estates, export processing zones, free trade zones, and tourist or recreational centers. Registration with the Philippine Economic Zone Authority (PEZA) is what unlocks the incentives.

Industrial estate, export processing zone, and ECOZONE defined

Republic Act No. 7916 defines the terms that drive site selection:

• Industrial estate (IE) — land subdivided and developed according to a comprehensive plan under unified continuous management, with provisions for basic infrastructure and utilities, with or without prebuilt standard factory buildings and community facilities for a community of industries.
• Export processing zone (EPZ) — a specialized industrial estate located physically or administratively outside customs territory, predominantly oriented to export production. Enterprises there may import capital equipment and raw materials free from duties, taxes, and other import restrictions.
• Free trade zone — an isolated, policed area adjacent to a port of entry or airport where imported goods may be unloaded for transshipment or stored, repacked, sorted, mixed, or otherwise manipulated without import duties. Movement of those goods into the rest of the country is subject to import duties.
• Special economic zone (ECOZONE) — a selected area with the potential to become an agro-industrial, industrial, tourist, commercial, banking, investment, or financial center.

The distinction matters because an ECOZONE may contain any or all of these, and the incentives attach to the zone and to PEZA registration, not to the label on the gate.

How an area becomes an ECOZONE

Section 5 of Republic Act No. 7916 lists the areas initially identified as ECOZONES, including portions of Bataan, Batangas, Cagayan de Oro, Iligan, Saranggani, Laoag, Davao, Cebu, Cavite, Laguna, Rizal, and others, plus all existing export processing zones and government-owned industrial estates, and any private industrial estate that voluntarily applies for conversion.

These areas are developed through private initiative, local government initiative with national government assistance, or national government initiative. The metes and bounds of each ECOZONE are delineated in a proclamation issued by the President upon PEZA's recommendation, in coordination with the local council and land use committees.

The criteria that decide whether a site qualifies

Section 6 of Republic Act No. 7916 sets the criteria for establishing other ECOZONES. A proponent should expect PEZA to evaluate:

• Whether the area is identified as a regional growth center in the Medium-Term Philippine Development Plan or by the Regional Development Council;
• The existence of infrastructure such as roads, railways, telephones, ports, and airports, and the site's capacity to absorb improvements;
• The availability of water source and electric power supply;
• The extent of vacant lands for industrial and commercial development, future expansion, and adjacent residential areas for workers;
• The availability of skilled, semi-skilled, and non-skilled trainable labor in and around the zone;
• A significant incremental advantage over existing economic zones and establishable profitability;
• Strategic location; and
• Situated where controls can easily be established to curtail smuggling.

Areas that do not meet these criteria may still be established as ECOZONES if developed only through local government or private sector initiative under Republic Act No. 6957 (the build-operate-transfer law), with no financial exposure on the part of the national government, provided the area can be easily secured against smuggling and attains a substantial degree of development after five years.

Incentives: what a locator actually gets

Section 24 of Republic Act No. 7916 provides that no local or national taxes shall be imposed on business establishments operating within the ECOZONE. In lieu of taxes, five percent (5%) of gross income earned is remitted to the national government, shared as follows: three percent (3%) to the national government, one percent (1%) to the affected local government units, and one percent (1%) for a development fund for municipalities outside and contiguous to each ECOZONE. The local share is allocated by population (50%), land area (25%), and equal sharing (25%).

Business establishments also enjoy the fiscal incentives under Presidential Decree No. 66 or Book VI of Executive Order No. 226 (the Omnibus Investment Code of 1987), and exporters using local materials as inputs enjoy the benefits under the Export Development Act of 1994.

Other features locators weigh:

• Separate customs territory. Section 8 states that ECOZONES are managed and operated by PEZA as separate customs territory.
• Domestic sales. Goods manufactured in an ECOZONE may be sold domestically, subject to taxes on raw materials and PEZA regulations, but a negative list of industries drawn up by PEZA bars local sales for listed industries.
• Land leases. Section 30 allows lands and buildings in each ECOZONE to be leased to foreign investors for a period not exceeding fifty (50) years, renewable once for not more than twenty-five (25) years, under Republic Act No. 7652 (the Investors' Lease Act).
• Immigration. Section 10 grants permanent resident status within the ECOZONE to an investor whose initial investment is not less than One hundred fifty thousand dollars ($150,000), together with the spouse and dependent children under twenty-one.
• Registration. Business enterprises within a designated ECOZONE are required to register with PEZA to avail of all incentives and benefits under the Act, and PEZA is directed to establish a one stop shop center for the registration of new enterprises in the ECOZONE.

Special regimes: the Aurora Pacific Economic Zone

Not every economic zone is administered by PEZA. Republic Act No. 10083 amended Republic Act No. 9490, the Aurora Special Economic Zone Act of 2007, renaming it the Aurora Pacific Economic Zone and Freeport Act of 2010 and creating the Aurora Pacific Economic Zone and Freeport Authority (APECO). The Aurora Ecozone covers two parcels in Casiguran, Aurora, with areas of 496 hectares and 12,427 hectares respectively.

Under the amended Section 4, the Aurora Ecozone is managed and operated as a separate customs and taxation territory, and may grant incentives such as tax and duty-free importations of raw materials, capital, and equipment to registered enterprises. Removal of goods to the rest of Philippine territory is subject to customs duties and taxes. The amended Section 5(C) imposes a five percent (5%) tax on gross income earned in lieu of local and national taxes, except real property tax on land, distributed as three percent (3%) to the national government, one percent (1%) in equal shares to the province and municipality, and one percent (1%) to APECO.

Frequently asked questions

What is the difference between an industrial estate and an economic zone in the Philippines? An industrial estate is land subdivided and developed under a comprehensive plan with unified management and basic infrastructure for a community of industries. An ECOZONE is a broader selected area that may contain industrial estates, export processing zones, free trade zones, and tourist or recreational centers.

Do I need to register with PEZA to get ecozone incentives? Yes. Under Republic Act No. 7916, business enterprises within a designated ECOZONE must register with PEZA to avail of the incentives and benefits provided by the Act.

What taxes do ecozone locators pay? No local or national taxes are imposed on business establishments operating within the ECOZONE. Instead, five percent (5%) of gross income earned is remitted, shared among the national government, affected local government units, and a development fund.

Practical takeaways

• Confirm the legal character of the site: an industrial estate, an export processing zone, a free trade zone, or a full ECOZONE each carries different customs and tax treatment.
• Check the Section 6 criteria — regional growth center status, infrastructure, water and power, vacant land, labor supply, strategic location, and anti-smuggling controls.
• PEZA registration is the gateway to the five percent (5%) gross income earned regime and other fiscal incentives.
• Foreign investors should note the fifty (50)-year lease term under Section 30, renewable once for not more than twenty-five (25) years.
• Zones outside the PEZA framework, such as the Aurora Ecozone under Republic Act No. 10083, have their own authority and incentive rules, so verify which regime governs the site.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 7916 - AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS FOR THE CREATION, OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN THE PHILIPPINES, CREATING FOR THIS PURPOSE, THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA), AND FOR OTHER PURPOSES

• REPUBLIC ACT NO. 10083 - AN ACT AMENDING REPUBLIC ACT NO. 9490, OTHERWISE KNOWN AS THE "AURORA SPECIAL ECONOMIC ZONE ACT OF 2007"

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.