DOF to stop creation of new freeport zones

MANILA, Philippines - The Department of Finance (DOF) wants a stop to the creation of new freeport zones as part of government’s bid to plug loopholes in the grant of income tax holidays.

Finance Secretary Cesar Purisima, in an earlier roundtable discussion with The STAR, revealed that they are eyeing a comprehensive review and rationalization of the country’s fiscal incentive policy in order to raise additional revenues for government.

Purisima earlier announced plans to raise the government’s tax efforts from a low of 13.6 percent by launching a no-nonsense campaign against smugglers and tax evaders. The objective was to reduce the projected fiscal deficit of P350 billion without having to raise or impose new taxes.

In particular, he said they want to take a look at the different laws and programs that offer income tax holidays to both local and foreign investors, and see if these are still needed.

Purisima noted that in the case of foreign investments, various tax treaties already offer incentives to these investments so that additionally offering them income tax holidays may no longer be necessary.

The review would include income tax holidays being offered under various laws and rules, including the Omnibus Investments Code, the Investment Priorities Plan (IPP) being implemented by the Board of Investments (BOI), the Bases Conversion and Development Authority (BCDA) law which provides for incentives to locators in Subic and Clark Freeport Zones, laws that created other freeport and export processing zones (Cagayan and Zamboanga), the Philippine Export Processing Zone (PEZA) law, among others.

The Omnibus Investments Code, for instance, provides for an income tax holiday of six years for new pioneer firms and four years for new non-pioneer firms. Registered expanding firms shall be entitled to three years of exemption from income taxes.

Also part of the rationalization of the fiscal incentive policy, he questioned the need for creating new freeport zones that offer, among other incentives, income tax holidays to locators.

Former Subic Bay Metropolitan Authority (SBMA) head Felicito Payumo earlier noted that with the recent conversion of the Bataan Export Processing Zone into a freeport, other legislative bills providing for the conversion of the three other government–run special economic zones, namely, Cavite, Mactan and Baguio would not be far behind.

Payumo revealed that there are more than two dozen bills filed in the House of Representatives creating new freeports across the country, some as large as entire provinces.

He pointed out that there is no difference between an SEZ and a freeport as far as their ability to attract job -creating manufacturing plants are concerned. Both grant income tax holiday and duty and tax-free importation of capital equipment, raw materials and supplies.

“But only a freeport, being operated as a separate customs territory, guarantees a free and unimpeded flow of goods, including consumption goods such as oil, liquor, cigarettes, chocolates, etc. without payment of duties and taxes, provided they are consumed within or exported out of the freeport. They are brought to the warehouse without inspection unless a prior derogatory report or tip has been received about the shipment,” he said.

Payumo emphasized that the problem lies with the fact that unscrupulous traders will wait until they establish a “contact” that can facilitate the exit through the gate. “The really nefarious ones would even misdeclare contraband goods, such as prohibited drugs, as consumption goods. How else were the 746 kilos of metamphetamine chemicals brought in and warehoused inside Subic Bay Freeport until they were discovered?” he said.

On the other hand, he said a report by the Bureau of Customs showed that there was hardly any smuggling committed in the PEZA-authorized SEZs. “There was hardly any smuggling committed in the PEZA-operated SEZs. Capital equipment and raw materials find no buyer in the domestic market, while a certain percentage of the finished products are allowed entry inside the customs territory provided duties and taxes are paid,” he added.

Payumo pointed out that each bill proposing the creation of ecozones with freeport status carries a P2 billion budget proposal for the development and operation of an ecozone. All together, the 25 proposed ecozones’ impact on the budget is P50 billion, apart from the holes they will punch into the customs collection administration, he added.

He said that the wisdom of leaving to the private sector the task of developing new ecozones was proven by the results. From P33 billion in 1994, investments in ecozones now totaled P1.56 trillion, exports increased from $2.74 billion in 1994 to $37.35 billion accounting for 86 percent of total manufactured exports, and direct employment from 91,880 in 1994 to 697,187, all of these attained by the 225 special ecozones without freeport status or funding from the National Government.