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Government urged to rethink PEZA stance

In efforts to spur growth outside of Metro Manila, the Duterte administration recently issued Administrative Order 18. Read more.

Manila, 2 August 2019 - The Duterte administration issued Administrative Order 18 (AO 18) which bans the processing of new economic zone applications in Metro Manila. The purpose is to spur and encourage growth outside of Metro Manila. The following shall not be covered by AO 18:

In efforts to spur growth outside of Metro Manila, the Duterte administration recently issued Administrative Order 18 (AO 18), banning the processing of new economic zone applications in the area. The following are not covered by AO 18:

  • Applications submitted to Office of the President (OP) as of the effectivity date and found to be without deficiencies in the supporting documents;
  • The Office of the President, prior to the date of effectivity, has already notified PEZA of deficiencies in the supporting documents, and PEZA satisfactorily addresses such deficiencies within 30 days from the effectivity date; and
  • The Office of the President, from the date of effectivity thereafter, has already notified PEZA of deficiencies in the supporting documents, and PEZA satisfactorily addresses such deficiencies within 30 days from receipt of notice of such deficiencies.

The exclusion of an application from this moratorium shall not be construed as a guarantee that the same shall be granted. The AO 18 took effect upon publishing last June 17, 2019.

With only 30-40% of the supply in Metro Manila being PEZA-registered, AO 18 puts more pressure on the current supply-demand situation in the area, resulting in: 1) PEZA-registered companies competing for the remaining PEZA-registered spaces in Metro Manila; and 2) landlords with PEZA-registered spaces asking for higher rental rates.

Few locations beyond Metro Manila are equipped for the demands of the outsourcing industry for completed PEZA-registered buildings and qualified labor pool. Based on the PEZA list of ecozones, only Cebu City, Iloilo City, Pampanga City, Cagayan de Oro City and Naga City have available PEZA-registered buildings. Colliers supports the thrust of the government in developing and expanding opportunities in other regions; however, the timeline of this endeavor can be further improved to address both the short- and long-term goals and challenges of involved parties.

An alternative option for PEZA-registered companies is to explore the benefits of registering with the Board of Investments (BOI). While PEZA limits companies to registered buildings and/or IT-parks, BOI grants tax incentives regardless of a firm’s location. The benefits of this solution may be short-lived however, with the Package 2 of the Comprehensive Tax Reform Program (better known as the TRABAHO Bill), likely to be refiled this month when Congress resumes. The TRABAHO Bill intends to rationalize the tax incentives given to both BOI- and PEZA-registered enterprises and prescribe a single agency to grant tax incentives. This affects the economy as companies are on a “wait-and-see” stance until the incentives under the bill are finalized.

According to Alaine Yap, Colliers’ associate director for office services, “While the effectivity of the moratorium is immediate, it is critical for the government to extend time and consideration for PEZA-registered companies to plan for this outlook.” Based on available data, the outsourcing industry contributes about $24 billion annually to the Philippine economy, with over 1.3 million full-time employees, excluding the jobs generated by support segments such as retail. The outsourcing industry has shown volatility in the recent past. In 2017, geopolitical concerns in relation to Trump espousing a protectionist policy resulted in postponement of expansion plans within the industry. Despite the challenges encountered, the industry bounced back significantly in 2018. This demand was accommodated with the boost in approvals of PEZA applications in Q4 2017.

Moreover, Yap states, “Addressing the immediate growth needs of the outsourcing industry – a major contributor to the current landscape – ultimately adds notable value to the economy. Along with this, our lawmakers and government officials can continue to improve the policies and incentives for all business sectors in the Philippines.” Finance Secretary Carlos Dominguez assures that government is “not eliminating tax incentives,” but rather rationalizing the granting of incentives so that they are allocated to the intended industries. Incentives are therefore time-bound, performance-based, and targeted. Both the Department of Trade and Industry and the Department of Finance are working on possible amendments to the TRABAHO Bill that will make it more amiable to the business sector.

For the remainder of 2019, there are only 50,000 sqm of new PEZA supply expected, with 170,000 sqm and 38,000 sqm for the years 2020 and 2021, respectively. Colliers believes that considerations to approve additional PEZA supply in Metro Manila will maintain a healthy market and economy for the immediate-term, while allowing companies to plan for long-term sustainable growth in provincial locations – remaining aligned with the government’s goals.

Globalization is continuously transforming, and the Philippines retains its strong momentum at the forefront of the outsourcing industry. Thus, all sectors are encouraged to expedite developments and approvals of ecozones in provincial locations to benefit from the opportunities of the rapidly growing outsourcing industry.