The Subic Bay Freeport—Changes Afoot

No, this isn’t about the exciting, coffee-talk-provoking, SBMA-initiated changes as presented by SBMA Chairman and Administrator Roberto Garcia during the recently held State of the Freeport Address (SOFA). Rather, this is about the somewhat tedious, but national government-initiated, changes about to run us over while we are not looking. It is about the rationalization and harmonization of fiscal incentives for Philippine investments.
Okay, so what’s the big deal?

Well, how about the removal of the very legs from which the creation of the Subic Bay Freeport stands? What if an important provision in Republic Act 7227, the law that created the Subic Freeport, to wit, “The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment,” will be repealed?

How about excluding “service enterprises such as, but not limited to, those engaged in customs brokerage, trucking/forwarding services, janitorial services, security services, insurance and/or banking and other financial services, consumer cooperatives, credit unions, consultancy services, restaurants or such other services,” as Registered Enterprises which means they don’t get the incentives previously provided by RA 7227?

And how about putting a sunset provision to our existing incentives, which means it will now be time-bound and performance based?

Yes, it’s a big deal!

But why is the government trying to make all these changes? Confusing and complicated are two words that come to mind. See, over the years, different kinds of incentives were given to various investment promotion agencies (IPAs) like the Philippine Economic Zone Authority (PEZA), Tourism Infrastructure and Enterprise Zone Authority (TIEZA), and Subic Bay Metropolitan Authority (SBMA), among others. The purpose of the present initiative is to rationalize and harmonize all the incentives and to supposedly make the Philippines more competitive than other countries.

Not an easy task. In fact, since 2004, many House and Senate bills had been proposed to create a consolidated investments and incentives code of the Philippines, but most did not gain traction. Understandably so. The majority of IPAs are success stories and you don’t want to mess with something that’s working.

During the 15th Congress (2010-2013), however, four house bills were proposed. These were later consolidated into House Bill No. 4935 titled “The Investments and Incentives Code of the Philippines.”

Sensing the potential adverse effects of the proposed bill to the Subic Bay Freeport, the SBMA submitted a position paper last year to the chairman of the House Committee on Ways and Means basically opposing some of its provisions.

The consolidate bill was approved anyway on third reading during a House plenary session. It is now in the Senate.

The Senate may come out with their own version of the bill which should not be surprising. In fact, the Senate had about a dozen similar proposed bills since the 13th Congress.

But before they did, the Department of Finance (DOF), not to be outdone, came up with another version. The DOF version is more restrictive than that of the House, though. For example, the 25 years sunset provision of 5% tax on gross income earned on the House version is only 10 years on the DOF version. Another, where the House version provides for an income tax holiday (ITH) for export-oriented enterprises, the DOF version does not.

There are a lot of questions affecting the Subic Freeport that are not clear in the proposed bills: Will the application be retroactive? What about the perks of retirees and residents inside the Freeport? What happens to SBMA’s 2% share to LGUs? And more.

But the benefits from the proposed bills, at least according to our lawmakers, far outweigh the disadvantages. The harmonized incentives should be able to provide a more effective policy framework for a more stable and predictable economic climate, should encourage new investors, should streamline regulations which is a requisite in attracting investments, and should lessen the cost of doing business overall. (Note that the shoulds are not meant to be sarcasms.)

Will these changes be good? In the long term and for the country overall, probably yes. For new investors, highly likely. For existing SBF locators, can’t say for sure. For us, the bottom line is that we will lose some of the privileges that we normally get, directly or indirectly, from RA 7227. We will no longer be the “special” kid on the block and will just be akin to an export processing zone. The spirit of the law that created the Subic Bay Freeport will be lost.

Thenceforth we can only go to a corner and cry... at least for the time being.

(SBFCC Newsletter Volume 17 Issue 4)