(MCT Reach oomal ‘Vouune KIS A SURVEY ON THE SYSTEM OF IMPLEMENTATION AND EFFECTIVENESS OF THE TAX AND DUTY PRIVILEGES GRANTED TO SPECIAL ECONOMIC ZONES (ECOZONES) Executive Summary A. Introduction One of the more significant issues involving ECOZONES relates to their economic costs and benefits. The benefits are generally in the form of income and employment generation, foreign exchange earnings and exports, among others; while the cost generally pertains to the revenue foregone by the government as a result of the grant of fiscal incentives. Other cost items likely to result from ECOZONE operations include increase in infrastructure expenditure as well as basic services Since fiscal incentives represent revenues foregone by the government, it is necessary that this issue be seriously considered. Otherwise, the impact of benefits derived from ECOZONES can be neutralized by such revenue foregone, particularly if aggravated by abuses and leakages. This phenomenon usually takes place in the absence of an organized system to deal with the monitoring of incentive availment. 1. Scope and Limitation of the Study ‘The original intention of the study was to cover all ECOZONES. However, some ECOZONES were dropped for various reasons, e.g, the Subic Special Economie and Freeport Zone (SSEFZ) since there is an ongoing World Bank (WB)- funded technical assistance project to review the SSEFZ policy framework’; and John Hay, Poro Point, Morong, Cagayan and Zamboanga ECOZONES which have yet to be operational (as of October, 1997). This notwithstanding, whatever information were derived from these ECOZONES were also considered. In assessing the benefits of ECOZONES, the study limits itself to income, employment and foreign exchange generation, technology transfer, volume and nature of investments and spill-over effects; and in assessing the costs, to the taxes foregone by the government. ' The National Tax Research Center serves as the Technical Secretariat of the inter-agency Executive Committee of the project and sits in its various technical working groups. The WB technical assistance commenced on September 1, 1997 Survey on the Sen of nomenon(NAR Tax Reseach uma Volume X13 Survey Operations The study used a nationwide survey, with a sample size of 356 out of the 643 total locators, drawn proportionately from among the 17 operational ECOZONES as, respondent locators; and for the respondent administrators, developers/operators and local government officials, a purposive sampling, with the following sample sizes: (a) 5 administrators of government ECOZONES, i.e, four from the Philippine Economic Zone Authority (PEZA)-operated zones and one from the Clark Special Economic Zone (CSEZ); (b) 14 developers/operators of private ECOZONES; and (c) 20 local government officials representing the local government units (LGUs) covered by the ECOZONE! B. Concept of ECOZONES ‘There are no exact definitions as to what constitute an economic zone, although its most popular variant, the Export Processing Zone (EPZ), may be defined as a “clearly delineated industrial estate which constitutes a free trade enclave in the customs and trade regime of a country, and where foreign manufacturing firms producing mainly for export benefit from fiscal and financial incentives”. For the World Export Processing Zone ‘Association, on the other hand, EPZs are “all government authorized areas such as free ports, fice trade zones, customs free zones, industrial free zones or foreign trade zones or any other type of zone as from time to time may be included”. According to the United Nations Center on Transnational Corporations there are usually two conceptual approaches to free economic zones: (1) territorial approach which treats a free economic zone as a specifically defined territory to which a certain regime applies; and (2) regime approach which grants benefits to firms located anywhere in the host country as long as they meet certain criteria. 1. Evolution of ECOLONES The very first ECOZONE was established decades ago. The present conventional EPZ combines two older instruments in its concept: industrial estate/park and the free zone or free trade zone. The evolution of the modem EPZ and its variants may be traced to five “development” stages: (1) a zone’s privileges and advantages, instead of being concentrated in a well-defined territoria! area were extended to other enterprises, local or foreign-owned, operating elsewhere in the country (called maquiladora in Mexico or the export processing regime); (2) a number of EPZs have also acquired import- processing functions, i.e., while primarily conceived to help in export promotion they may now serve the domestic markets, such as the Manaus Free Zone in Brazil, dubbed as the world’s first import processing zone; (3) the location of domestic enterprises in EPZs which may be borne by the fact that almost two-thirds of all EPZ enterprises on the System of Implementation z[NERC Tax Research Touro 2 (A Serer on he Volume XLS in developing countries are either fully-owned local firms or joint ventures between domestic firms and foreign partners; (4) the expansion of the concept of the EPZ from a small industrial enclave to a large territory. (China is the best example of this development with its special economic zones (SEZs) which are really large territories, and in its Hainan Zone, the whole province; and in the case of Sri Lanka and Mauritius, the trend has been that the whole country is in the process of becoming one large zone); and (5) the evolution of the classical manufacturing- oriented EPZ into a service-oriented zone as in the Labuan Freeport in Malaysia with offshore financial services such as offshore. banking, offshore insurance, trust business, fund management, investment holding companies. General Features The four common characteristics of an EPZ (Warr, 1989) are: (1) raw materials needed for the production of goods in the zones may be imported duty free and without quantitative restrictions; (2) enterprises in an EPZ are normally exempted from normal income tax provisions for 3 to 10 years; (3) EPZ firms are usually privileged to deal with simplified administrative requirements; and (4) an EPZ consists of a heavily fenced area policed by customs officials to prevent duty free materials from being smuggled into the domestic economy and infrastructure and telecoms are normally superior to those in the host country. Policy Objectives Most of the developing countries set up their EPZs primarily to boost their export industries to generate the much needed foreign exchange earnings. In line with this is the expectation that EPZs would attract foreign investors and reduce unemployment through the jobs that would be created in industries locating in the zones. For most developing countrics, these zones are viewed as a means {0 acquire technology from foreign countries Infrastructures in Selected ECOZONES ‘The infrastructure component of an ECOZONE js a vital prerequisite for its competitiveness. No fiscal incentive will attract investors if they have to contend with delays in the shipment of raw materials and finished products as a result of poor infrastructure facilities. The high cost of putting up competitive infrastructure usually restricts host countries in providing modem and up-to-date facilities in their zones. Some of the sources of funding ECOZONE infrastructures are: (a) budget expenses; (b) foreign loans; and (c) contractual arrangements involving private companies. of np fementation