Revisiting the activities and incentives of logistics enterprises

By John Paul M. Vargas, 9 January 2014

To stimulate foreign investments and generate employment in the Philippines, the Special Economic Zone Act of 1995 (Republic Act No. 7916), more commonly as the Philippine Economic Zone Authority (PEZA) law, established selected areas in the country as special economic zones (ecozones). Within these ecozones, foreign and local investors are able to establish certain businesses that are given fiscal and non-fiscal incentives.

Among the many enterprises that may operate within the ecozones are logistics services enterprises (previously classified as warehousing/logistics facilities enterprises) with the following types of warehousing and logistics operations:1. establishment of a warehouse facility for the storage, deposit, safekeeping of goods for subsequent transfer directly to the ecozone plant of the PEZA-registered export enterprise-owner/consignee thereof;2. importation or procurement from local sources and/or from other PEZA-registered enterprises of goods for resale, or for packing/covering (including marking, labeling), cutting or altering to customers’ specification, mounting and/or packaging into kits or marketable lots thereof for subsequent sale, transfer or disposition to export-producer enterprises registered with PEZA, Subic Bay Metropolitan Authority, Clark Development Corp., Board of Investments operating Customs Bonded Manufacturing Warehouses, other Investment Promotion Agencies, and to overseas clients, for direct export, or for consignment to PEZA-registered export enterprises; or3. a combination of both.

While companies opting to establish logistics services enterprises obviously want to avail of incentives that PEZA may grant, their main consideration for choosing an ecozone as a business hub are the following:1. proximity to a significant number of export producer enterprises that are their existing clients, or could be targeted as potential clients; and2. enjoyment of the tax and duty free importation privilege as an economic zone separate from customs territory.

Contextually, as defined under RA 7916, ecozones are considered as outside the Philippine customs territory and are operated by PEZA as a separate customs territory. Therefore, all merchandise brought into the ecozones by these registered enterprises, except prohibited merchandise, are not subject to customs and internal revenue laws and regulations of the Philippines nor to local tax ordinances, pursuant to Section 1 of Rule VIII of the implementing rules of RA 7916 in relation to Section 17 of Presidential Decree No. 66.In this regard, PEZA issued Resolution No. 02-057, dated March 12, 2002, providing that the incentives granted to logistics services enterprises shall be limited to the tax- and duty-free importation privilege on goods they procure and supply to the ecozone export producer enterprises.

In relation to this, the registration agreement entered by PEZA and the logistics services enterprise prior to the start of the latter’s commercial operations generally provides that a registrant’s incentives shall be limited to tax and duty-free importation of goods subsequently transferred to its clients.

Moreover, Resolution No. 97-366, dated Nov. 11, 1997, imposes a restriction that logistics services enterprises must have no local sales or in no case shall have articles or goods covered by their warehousing operations be brought to the domestic or customs territory.

Simply put, a logistics services enterprise is prohibited from engaging in activities that will generate income from sources within the customs territory since the same shall be considered local sales expressly prohibited under the rules. Thus, non-PEZA registered companies within the customs territory are proscribed from engaging the services of logistics services enterprises for purposes of enabling the former to enjoy tax- and duty-free importation of goods sold to their PEZA-registered clients, thereby avoiding the cost of capital tied up in the payment of customs duties and VAT.In addition, the goods supplied by the logistics services enterprise must actually be imported by its client. Hence, the importer of record may either be the client itself or the logistics services enterprise with all import documents consistently reflecting such information. Any violation of the policies shall be sufficient ground for revocation of the violator’s PEZA registration.

Thus, the continued viability of a logistics services enterprise is dependent on its capacity to comply with the rules and regulations set forth by PEZA, most especially the conditions expressed in its registration agreement. Since these ecozone enterprises are privileged to enjoy an array of investment incentives, it is but reasonable to require evenhanded compliance with the stipulated conditions -- clearly, a healthy respect for contractual arrangements and legislative concessions.

The author is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.