Legal Framework for Philippine Economic Zones

Policy, purposes, and declared objectives

Section 2 declares government policy to translate constitutional mandates into practical realities by encouraging private enterprise and needed investments, and by promoting preferential use of Filipino labor, domestic materials, and locally produced goods to make them competitive.
Section 2 directs the government to actively encourage, promote, induce, and accelerate sound and balanced industrial, economic, and social development through the establishment of special economic zones and measures that attract legitimate and productive foreign investments.
Section 3 establishes the purposes, intent, and objectives to:
- Provide a legal framework for integration, coordination, planning, and monitoring of special economic zones and related economic areas;
- Transform selected areas into highly developed agro-industrial, industrial, commercial, tourist, banking, investment, and financial centers;
- Promote investor flow (foreign and local) into economic zones to generate employment and backward/forward linkages;
- Stimulate repatriation of Filipino capital through an attractive climate and incentives;
- Promote financial and industrial cooperation through technology-intensive industries; and
- Grant special economic zones on certain areas the status of a separate customs territory within the Constitution and national sovereignty.

Core definitions and zone types

“Special economic zones (SEZ)” are selected areas referred to as “ECOZONES” with highly developed or development potential into agro-industrial, industrial, tourist/recreational, commercial, banking, investment, and financial centers (Section 4).
An ECOZONE may contain industrial estates (IEs), export processing zones (EPZs), free trade zones, and tourist/recreational centers (Section 4).
An Industrial estate (IE) is a tract of land subdivided and developed under a comprehensive plan with unified continuous management and basic infrastructure/utilities, with or without prebuilt standard factory buildings and community facilities (Section 4).
An Export processing zone (EPZ) is a specialized industrial estate located physically and/or administratively outside customs territory and oriented predominantly to export production; enterprises may import capital equipment and raw materials free from duties, taxes, and other import restrictions (Section 4).
A Free trade zone is an isolated policed area adjacent to a port of entry (seaport) and/or airport where imported goods may be unloaded, stored, repacked, sorted, mixed, or otherwise manipulated without being subject to import duties; movement from the free-trade area to a non-free-trade area is subject to import duties, and enterprises are granted preferential tax treatment with more lenient immigration laws (Section 4).

Establishment and coverage of ECOZONES

Section 5 identifies initial areas as ECOZONES, subject to Section 6 criteria, including specified portions in numerous provinces and cities, all existing export processing zones, government-owned industrial estates, and any private industrial estate that voluntarily applies for conversion into an ECOZONE (Section 5).
ECOZONES may be developed through any of these schemes (Section 5):
- Private initiative;
- Local government initiative with the assistance of the national government; and
- National government initiative.
The metes and bounds of each ECOZONE are delineated and described in a proclamation issued by the President, upon the recommendation of PEZA, in coordination with the municipal/city council, National Land Use Coordinating Committee, and/or Regional Land Use Committee (Section 5).
Section 6 authorizes additional ECOZONES by presidential proclamation subject to PEZA evaluation and recommendation, based on a detailed feasibility and engineering study conforming to specified criteria (Section 6).
Section 6 also provides that areas not meeting the listed criteria may still be established as ECOZONES if developed only through local government and/or private sector initiative under Republic Act No. 6957 (build-operate-transfer) and without national government financial exposure, subject to smuggling-control securability, and must attain substantial development after five (5) years, using indicators formulated by PEZA.

Governance and PEZA institutional structure

Section 11 creates the Philippine Economic Zone Authority (PEZA) as a body corporate attached to the Department of Trade and Industry.
The PEZA Board has a director general (rank of department undersecretary) appointed by the President, at least forty (40) years of age, with proven probity and integrity, and with a degree in specified disciplines or its equivalent (Section 11).
The director general is assisted by three (3) deputy directors general (policy and planning; administration; operations), appointed by the PEZA Board upon recommendation of the director general, at least thirty-five (35) years old, with proven probity and integrity, with a required degree, and must have career executive service eligibility (Section 11).
The Board is composed of the director general as ex-officio chairman with eight (8) members: representatives of specified national agencies, plus one (1) representative from the labor sector and one (1) representative from the investors/business sector in the ECOZONE (Section 11).
Section 11 provides that the existing Export Processing Zone Authority (EPZA) under Presidential Decree No. 66 evolves into PEZA through executive guidelines issued for that purpose.

PEZA powers, ECOZONE operations, and administration

Section 12 requires the PEZA Board to:
- Set general policies on establishment and operations of ECOZONES and related zone types;
- Review proposals and endorse establishment to the President based on Section 6 criteria, and facilitate and assist organization;
- Regulate and undertake establishment, operation, and maintenance of utilities/services/infrastructure in ECOZONES and fix just, reasonable and competitive rates, fares, charges, and fees;
- Approve the annual PEZA budget and ECOZONE development plans;
- Issue implementing rules and regulations insofar as Board powers/functions are concerned; and
- Render annual reports to the President and Congress.
Section 13 grants PEZA power to operate, administer, manage, and develop ECOZONES; register, regulate, and supervise enterprises efficiently and decentrally; coordinate with LGUs and exercise general supervision over development and operations; and provide and manage infrastructure through specified mechanisms (including build-operate-transfer or joint ventures) (Section 13).
Section 13 further grants PEZA authority to create/operate functional units, use a corporate seal, contract, lease, dispose of property, sue and be sued, and coordinate development plans and policy/program formulation with national agencies and LGUs (Section 13).
Section 14 makes the director general the overall coordinator with supervision and general direction, including safeguarding ECOZONE lands/buildings/records/monies/credits/properties and rights, ensuring revenue collection and budget application, ensuring proper discharge of duties, and representing ECOZONE in business matters after Board approval (Section 14).
Section 14 authorizes the director general to:
- Acquire jurisdiction over protests/complaints/claims on administrative matters;
- Recommend approval/refusal/amendment/termination of ECOZONE franchises, licenses, permits, contracts, and agreements consistent with Board policies;
- Require removal/demolition of structures built without necessary permits and, after sixty (60) days from notice and failure to comply, summarily cause removal/demolition at the owner’s expense, notwithstanding contrary laws/decrees/orders/issuances (Section 14);
- Take emergency measures for fires, floods, and storms/natural/public calamities; and
- Prepare physical and economic development plans (including zoning and land subdivision) and issue rules for Board approval (Section 14).
Section 15 provides that each ECOZONE is organized and administered by an ECOZONE executive committee composed of the administrator (appointed by PEZA Board upon director general recommendation) and one deputy administrator (appointed by the Board upon director general recommendation).
Section 15 requires creation of an ECOZONE advisory body with members including: president of the investors association, the provincial governor, the mayor(s) of the host municipality/city/ies, the president of an accredited labor union in the ECOZONE, a business sector representative in the periphery, and a PEZA representative.
Section 15 grants the advisory body authority to advise management on policy initiatives and assist in settling labor-enterprise problems.

Separate customs territory; security; immigration

ECOZONES must be managed and operated by PEZA as separate customs territories (Section 8).
PEZA is vested with authority to issue certificates of origin for products manufactured or processed in each ECOZONE consistent with prevailing rules of origin and relevant DTI and/or Department of Finance regulations (Section 8).
Section 9 places defense of the ECOZONE and security of its perimeter fence under the national government in coordination with PEZA.
Military forces sent for defense must not interfere in ECOZONE internal affairs, and defense expenditures are borne by the national government; PEZA may establish internal security and firefighting forces (Section 9).
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), including the investor’s spouse and dependent children under twenty-one (21) years of age.
Section 10 gives such persons freedom of ingress and egress to and from the ECOZONE without need of special authorization from the Bureau of Immigration.
PEZA must issue working visas renewable every two (2) years to foreign executives and other aliens with highly-technical skills no Filipino in the ECOZONE possesses, as certified by the Department of Labor and Employment; PEZA must report names of aliens granted permanent status and working visas to the Bureau of Immigration within thirty (30) days after issuance (Section 10).

Business rules; fiscal incentives; taxes; customs effects

Section 21 requires PEZA, in coordination with DTI and NEDA, to formulate the strategy and priorities of each ECOZONE, consistent with medium-term national development plan priorities, and encourages private sector participation in construction and operation of public utilities/infrastructure using schemes allowed by Republic Act No. 6957.
Section 22 directs PEZA to conduct immediately, in coordination with appropriate authorities and neighboring cities/municipalities, a survey of physical/natural assets and potentialities of ECOZONE areas under its jurisdiction.
Section 23 entitles business establishments operating within ECOZONES to fiscal incentives provided under Presidential Decree No. 66, or Book VI of Executive Order No. 226 (Omnibus Investment Code of 1987), and grants exporters using local materials tax credits with benefits provided under the Export Development Act of 1994.
Section 24 mandates a tax substitution rule: no taxes, local and national, are imposed on business establishments within the ECOZONE; instead, a five percent (5%) share of gross income earned by all businesses and enterprises in the ECOZONE is remitted to the national government.
Section 24 requires the 5% share distribution as follows:
- Three percent (3%) to the national government;
- One percent (1%) to affected local government units in proportion to population, land area, and equal sharing factors; and
- One percent (1%) to a development fund for development of municipalities outside and contiguous to each ECOZONE.
Section 24 provides an LGU distribution formula for affected local government units: Population—fifty percent (50%), Land area—twenty-five percent (25%), Equal sharing—twenty-five percent (25%).
Section 25 subjects all income derived by persons and all service establishments in the ECOZONE to taxes under the National Internal Revenue Code.
Section 26 allows goods manufactured by an ECOZONE enterprise to be made available for immediate retail sales in the domestic market subject to payment of corresponding taxes on raw materials and other regulations adopted by PEZA.
Section 26 requires a PEZA-drawn negative list of industries to protect domestic industry; enterprises in listed industries cannot sell products locally, and the negative list must be regularly updated by PEZA.
Section 26 requires PEZA, in coordination with DTI and the Bureau of Customs, to jointly issue implementing rules and guidelines for domestic sales implementation.
Section 27 applies existing banking laws and BSP rules and regulations to banks and financial institutions established in ECOZONES and to other ECOZONE-registered enterprises, including rules on foreign exchange/current accounts, borrowings, foreign investments, bank establishment/operation, foreign currency deposit units, offshore banking units, and other BSP-supervised financial institutions.
Section 28 permits outward remittance of after-tax profits and other earnings of foreign investments without prior BSP approval through banks licensed by BSP in the ECOZONE, provided the foreign investment has been previously registered with BSP.
Section 29 authorizes expansion or reduction of ECOZONE areas and empowers the government to acquire private lands within or adjacent to the ECOZONE by purchase/negotiation/condemnation for consolidation for zone development, right of way to the ECOZONE, and watershed/natural asset protection.
Section 30 allows leasing of lands and buildings in each ECOZONE 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; leasehold rights under long-term contracts may be sold/transferred/assigned subject to Republic Act No. 7652 conditions.
Section 31 allows agricultural lands to be converted for residential, commercial, industrial, and other non-agricultural purposes subject to Republic Act No. 6657 and other existing laws.
Section 32 authorizes private shipping and related businesses, including private container terminals, to operate freely in ECOZONES subject only to minimum reasonable local regulations prescribed by PEZA.
Section 32 requires PEZA, in coordination with DOTC, to maintain a shipping register for each ECOZONE as a business register of convenience for ocean-going vessels and issue related certifications; ships of all sizes/nationalities may access ECOZONE ports subject only to reasonable requirements prescribed by PEZA in coordination with appropriate agencies.
Section 33 requires PEZA, in coordination with appropriate agencies, to take concrete and appropriate steps and enact proper measures for protection of the local environment.
Section 34 requires investors desiring to terminate operations to comply with PEZA-prescribed requirements and procedures, particularly clearing of debts; it allows transfer of assets and outward remittance of funds subject to rules/guidelines/procedures jointly prescribed by BSP, the Department of Finance, and PEZA.
Section 35 requires business enterprises within a designated ECOZONE to register with PEZA to avail of incentives and benefits under the Act.
Section 36 requires PEZA to establish a one stop shop center to facilitate registration of new enterprises; all government agencies involved in registration, licensing, or permits must assign representatives to attend to investors’ requirements.

Labor relations and workforce restrictions

Section 37 provides that, except as otherwise provided in the Act, labor-management relations in ECOZONES are governed by the Labor Code of the Philippines, and employees must receive salaries/benefits and working conditions not less than those under the Labor Code and other Philippine laws/issuances/rules and regulations of the Department of Labor and Employment.
Section 38 requires creation of a tripartite body with one representative each from the Department of Labor and Employment, labor sector, and business/industry sectors to formulate a social pact mechanism for industrial peace within thirty (30) days after the Act’s effectivity.
Section 39 requires PEZA, in coordination with the Department of Labor and Employment, to prescribe a master employment contract for ECOZONE enterprise staff and workers with terms providing salaries/benefits not less than those in the Act, the Philippine Labor Code (as amended), and other relevant national issuances.
Section 40 limits employment of foreign nationals hired by ECOZONE enterprises in supervisory, technical, or advisory capacity to not more than five percent (5%) of the workforce without express authorization of the Secretary of Labor and Employment.
Section 41 requires PEZA, in coordination with the Department of Labor and Employment, to promulgate measures and programs expanding ECOZONE services to help local governments of nearby areas meet migrant worker needs.
Section 42 provides an additional deduction equivalent to one-half (1/2) of the value of training expenses incurred in developing skilled/unskilled labor or managerial/management development programs by ECOZONE enterprises, deductible from the national government’s share of the three percent (3%) under Section 24.
Section 42 requires PEZA, the Department of Labor and Employment, and the Department of Finance to jointly review the incentive scheme every two (2) years or when circumstances so warrant.

National coordination; autonomy; transfers

Section 43 requires PEZA to determine ECOZONE development goals within national development plans/policies/goals, and the administrator (upon PEZA Board approval) must submit ECOZONE plans/programs/projects to the Regional Development Council for inclusion in the overall regional development plan.
Section 44 preserves LGU autonomy and identity: cities are governed by their charters, and municipalities operate and function under Republic Act No. 7160 (Local Government Code of 1991).
Section 45 retains autonomy and independence of privately-owned industrial estates while requiring PEZA monitoring for incentive implementation.
Section 46 transfers relevant Board of Investments functions over industrial estates and agri-export processing estates to PEZA, and transfers resources of government-owned industrial estates and similar bodies (except Bases Conversion Development Authority and areas under Republic Act No. 7227) to PEZA as holding agency; those entities are detached from mother agencies and attached to PEZA for policy/program/operational supervision.
Section 46 provides that Boards of affected government-owned industrial estates are phased out, retaining only management level and an appropriate number of personnel.
Section 46 entitles government personnel not retained by PEZA or within an ECOZONE government office to separation pay and retirement/other benefits under applicable laws at the time of separation, with a minimum separation pay of one and one-fourth (1 1/4) month of every year of service.

Funding, precedence, presidential actions, and limits

Section 47 transfers all funds of the former EPZA to PEZA upon effectivity; thereafter, sums needed to augment capital outlay must be included in the General Appropriations Act as an equity of the national government.
Section 47 states additional funding comes from annual subsidies/appropriations/assets of absorbed zone bodies, proceeds from rent, PEZA-authorized fees/charges/revenue instruments, proceeds from PEZA bonds (domestic and abroad), and advance rentals/license fees/other charges an investor advances for.
Section 48 establishes that national laws prevail over ECOZONE rules/regulations/standards unless a clear intent in this Act or other Acts of Congress gives ECOZONE-specific powers/privileges not otherwise allowed by existing laws.
Section 49 authorizes the President to advance, subject to existing laws, out of Office of the President savings, funds necessary to organize an ECOZONE, reimbursed by PEZA under reasonable terms and conditions.
Section 50 excludes economic zones and areas created or to be created under Republic Act No. 7227 or other special laws governed by authorities constituted pursuant thereto.
Section 50 further provides that any provision granting benefits/privileges less than those granted or imposing burdens more onerous does not apply to special-law-created zones.
Section 51 mandates that privileges/benefits/advantages/exemptions granted to special economic zones under Republic Act No. 7227 must ipso-facto be accorded to special economic zones already created or to be created under Republic Act No. 7916, and that free port status is not vested upon new special economic zones.

Rules on SEZ privilege interaction; implementation; transition

Section 55 requires multiple agencies (DTI, NEDA, Department of Finance, Bureau of Customs, Department of Agrarian Reform, DILG, PEZA, and technical representatives of the Committee on Economic Affairs of both Houses) to formulate the implementing rules and regulations within ninety (90) days after approval.
Section 55 provides implementing rules take effect fifteen (15) days after publication in a newspaper of general circulation in the Philippines.
Section 56 provides that before effectivity of the implementing rules and regulations, Presidential Decree No. 66 (as amended) and its implementing rules and regulations remain in force.

Relations of laws; separability; repeals; construction

Section 52 states the Act is separable: if one or more provisions are declared unconstitutional, the rest remains valid.
Section 53 directs that PEZA and ECOZONE powers and functions are intended to establish decentralization of governmental functions and an efficient relationship among ECOZONE, central government, and LGUs.
Section 54 provides that all laws/acts/presidential decrees/executive orders/proclamations/administrative regulations inconsistent with the Act are amended, modified, superseded, or repealed accordingly.