LGUs’ share in foreign investments
The Constitution requires Government to promote the preferential use and adopt measures to enhance the competitiveness of Filipino labor, domestic materials, and locally produced goods. In pursuit of this policy, special economic zones in suitable and strategic locations have been created and spread across the Philippines to attract legitimate and productive foreign investments.
Philippine history shows that the very first economic zone was the Bataan Export Processing Zone, which was created in 1972 through Presidential Decree No. 66. Since then, ecozones have been created across various local government units (LGUs), initially starting in Clark and Subic Bay, covering different sectors of business. Economic zones were later created in Camp John Hay, Poro Point, Cagayan, Zamboanga, Aurora, and within major cities such as Makati, Taguig, and Cebu. The Special Economic Zone Act (RA 7916), provides that economic zones are meant to be developed into self-reliant and self-sustaining centers, and shall generate employment opportunities for their own inhabitants and those of nearby towns and cities.
Under the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE, an economic zone is defined as a selected area which is to be operated and managed as a separate customs territory that is highly developed or has the potential to be developed into an agro-industrial, industrial, information technology, or tourist/recreational area, whose metes and bounds are fixed or delimited by presidential proclamations and is within a specific geographical area which includes industrial estates, export processing zones, ICT parks and centers, and free trade zones. CREATE likewise recognizes vertical economic zones, such as, but not limited to, buildings, selected floors within buildings, and selected areas on a floor. As of this time, there are more than 400 economic zones operating in the Philippines.
With the successful proliferation and growth of economic zones, questions have been raised seeking clarification on the revenue allocated for LGUs where these ecozones operate. Under Article X of the 1987 Constitution, LGUs have the power to create their own revenue sources, levy taxes, and share in national tax collections, subject to limitations set by Congress. This highlighted the need to balance the concept of “separate customs territory” and consider the revenue-raising powers of LGUs.
For instance, Section 24 of RA 7916 states that in lieu of all national and local taxes, registered business enterprises (RBEs) enjoying the 5% special corporate income tax (SCIT) with the Philippine Economic Zone Authority (PEZA) are only required to remit a portion of their gross income — 2% — directly to the local government. Another example is Section 12 of the Subic Special Economic Zone where Section 12 of RA 7227 provides that of the 5% SCIT, 2% goes to the Subic Bay Metropolitan Authority for distribution to the LGUs affected by the declaration of and contiguous to the zone, such as the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino, and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa, and Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and equal sharing (25%).
However, it is said that CREATE Act did not clarify whether RBEs enjoying an Income Tax Holiday (ITH) or those that transitioned to the Enhanced Deduction Regime (EDR) are subject to local taxes. In response to this issue, the Secretary of Finance issued Department Order No. 33-2023, creating guidelines that RBEs that previously enjoyed local tax exemptions would continue to benefit from these under the CREATE Act. However, it left open whether new RBEs registered under CREATE also enjoyed the same exemption.
CREATE MORE (the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy Act) introduced updates, addressing ambiguities in the local taxation of RBEs, and aligning the concept of economic zones with local autonomy. One of the key provisions introduced is the concept of Registered Business Enterprise Local Tax (RBELT), which grants LGUs to impose local taxes to RBEs enjoying ITH or EDR within ecozones. RBELT may be imposed by LGUs by way of an ordinance at a rate not exceeding 2% of the gross income of registered projects or activities.
CREATE MORE is set to create a framework on the revenue-share of LGUs from foreign investments. In cases where an RBEs’ activities span multiple jurisdictions, 50% of the revenue will be divided equally among the involved LGUs, while the remaining 50% will be shared based on their population. Moreover, cities retain their whole share while municipalities remit 50% of their share to the province where they belong.
CREATE MORE also updates provisions on One-Stop Action Centers. To recall, in BCDA v. Baguio, the Court held that IPAs (investment promotion agencies) could not impose business permit fees through One-Stop Action Centers as this power pertains to the LGU. CREATE MORE now provides that LGUs may delegate the functions of processing and granting business permits to IPAs.
Lastly, Section 29 of CREATE MORE clarifies that businesses that avail of the 5% tax on gross income prior to the CREATE Act will retain their exemptions from local taxes, fees, and charges until Dec. 31, 2034. This provision provides stability and certainty for investors who are still in the process of completing their investments.
With CREATE MORE, the power of LGUs to impose taxes and fees on RBEs has been clarified. By establishing the RBELT, the law promotes better coordination between IPAs, LGUs, and RBEs — paving the road to encourage more foreign investment, and clearly delineates the revenue share of local government units.
The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and is not offered as, and does not constitute, legal advice or legal opinion.
Aaron Arwin C. Cheng is an associate of the Tax department of the Angara Abello Concepcion Regala Cruz Law Offices.
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