When Is a Philippine Ecozone the Right Location for a Foreign Manufacturer?

By Starlight Business Consulting Services, Inc.

For a foreign manufacturer, choosing where to build a plant in the Philippines is also a tax, customs, and compliance decision. An economic zone (ecozone) can be an excellent home for an export-oriented factory, but it is not automatically the best one. The answer depends on how much you export, what you import, which incentive package you elect, and how much flexibility you need after the plant is running.

This article walks through the questions that decide the matter, using the current rules under the CREATE MORE Act (Republic Act No. 12066) and its Implementing Rules and Regulations (IRR), signed on February 17, 2025.

The short answer

An ecozone is usually the right location when your plant will export most of what it makes, import much of its equipment and materials, and benefit from predictable, centrally administered incentives. It is usually the wrong location when your primary customers are in the Philippine domestic market, or when proximity to local customers or suppliers matters more than tax treatment.

What an ecozone is, in legal terms

The IRR describe an ecozone as a selected area, fixed by presidential proclamation, that operates as a separate customs territory so that goods can move freely, and that must have a permanent customs control or customs office at its perimeter. Industrial estates, export processing zones, ICT parks, and free trade zones all fall within the definition.

That separate-customs-territory feature is what makes ecozones attractive to manufacturers that bring in machinery, components, and raw materials from abroad and ship finished goods out again.

Five conditions that point toward an ecozone

1. Exports will be at least 70% of your output

Under the IRR, a registered export enterprise is one engaged in manufacturing, assembling, or processing that directly exports, or sells to another registered export enterprise for inclusion in that enterprise’s export product, at least 70% of its total production or output.

This is not a one-time test. To keep VAT zero-rating on local purchases, VAT exemption on importation, and duty exemption on imported inputs, the enterprise must meet the 70% export threshold in the preceding year. An enterprise that falls short loses those incentives in the following year, and its VAT zero-rating certificate is valid for only one taxable year at a time.

If your export forecast is firm and stable, this is manageable. If it depends on a customer ramp-up you cannot yet guarantee, build that risk into your decision.

2. You will import capital equipment, spare parts, or raw materials

Registered export enterprises are exempt from customs duties on capital equipment, raw materials, spare parts, and accessories used in the registered activity, provided the items are not produced locally in sufficient quantity, of comparable quality, and at reasonable prices. Importation requires a Certificate of Authority to Import (CAI) from the investment promotion agency (IPA) before the goods arrive.

For a plant with a large imported equipment line or imported bill of materials, the duty and VAT savings on importation can be a major part of the business case.

3. You want certainty on local taxes

Under the 5% Special Corporate Income Tax (SCIT), the rate is paid in lieu of all national and local taxes and local fees and charges. Under the Income Tax Holiday (ITH) or the Enhanced Deductions Regime (EDR), however, a local government may impose a Registered Business Enterprise Local Tax of up to 2% of gross income, in place of other local taxes, fees, and charges.

If avoiding local-tax uncertainty is a priority, the SCIT route removes most of that variable. Whether it is the best overall route is a separate question, covered below.

4. Your activity is on the Strategic Investment Priority Plan

Incentives are granted only to the extent of a registered project or activity listed in the Strategic Investment Priority Plan (SIPP), and IPAs may not accept applications for activities that are not listed.

The 2026 SIPP, approved through Memorandum Order No. 47 on May 21, 2026, covers the production and manufacture of export products with an export requirement of at least 70% of output. It also covers activities that support exporters, including component manufacturing, logistics, testing, and the development and operation of ecozones and industrial parks. Export activities fall under Tier I unless they meet Tier II or Tier III requirements, which matters because the tier affects how long your incentives run. The Board of Investments is still preparing the General Policies and Specific Guidelines that implement the 2026 SIPP, and it has said the 2022 guidelines continue to apply in the meantime. Before you file, confirm with the investment promotion agency which guidelines your registration will be assessed under.

5. You can use the location tiers to your advantage

The period of income tax incentives depends on both industry tier and location. For export enterprises approved by an IPA, the IRR provide an ITH of four to seven years followed by ten years of SCIT or EDR, or the equivalent straight SCIT or EDR period, for a total of 14 to 17 years. Projects in the National Capital Region receive the shortest periods; projects in other areas receive longer ones. Projects with investment capital above PHP 15 billion are approved by the Fiscal Incentives Review Board (FIRB) rather than the IPA, with periods running up to 27 years.

An ecozone outside Metro Manila can therefore offer a longer incentive window than one inside it, which is worth weighing against access to ports, labor, and suppliers.

SCIT or ITH followed by EDR: choose carefully

The IRR allow a registered export enterprise to elect one of three packages: an ITH followed by SCIT or EDR; SCIT from the start of commercial operations; or EDR from the start of commercial operations. The election is irrevocable for the entire entitlement period.

The two main regimes work very differently:

•         SCIT applies a 5% rate to gross income earned, meaning gross sales or revenues from the registered activity less discounts, returns, and direct costs, before administrative expenses.

•         EDR keeps the regular income tax computation, at a 20% corporate income tax rate under CREATE MORE, but adds deductions such as 100% of power expenses, 50% of direct local labor expense, 100% of qualified research and development and training expenses, 50% of domestic input expense, and additional depreciation on buildings and machinery.

Department of Finance (DOF) Department Order No. 026.2026, circulated by the Philippine Economic Zone Authority (PEZA) in Memorandum Circular No. 2026-047 in July 2026, adds conditions that belong in the comparison. The additional depreciation allowance applies only to newly constructed or newly acquired buildings, and to machinery and equipment that is not second-hand unless the SIPP allows it, and the registered enterprise itself must own these assets, so a manufacturer that leases its factory building does not get the building allowance. The additional labor deduction covers only directly hired employees in the registered activity, not subcontracted or outsourced workers. Enterprises on EDR are also subject to the Minimum Corporate Income Tax from the fourth taxable year after they start operations, whenever it exceeds the regular tax computed after enhanced deductions. A power-intensive or labor-intensive plant, or one with heavy administrative costs, may come out differently under each regime than a lean, high-margin one. Because the choice cannot be reversed, the right approach is to model both against your actual projected financials before filing.

A registered enterprise must also start commercial operations within three years of registration, unless the SIPP provides otherwise, since the incentive period runs from the start of commercial operations.

Foreign ownership and land

The Foreign Investments Act, as amended by Republic Act No. 11647, allows up to 100% foreign ownership of export enterprises whose products and services fall outside Lists A and B of the Foreign Investment Negative List. A foreign-owned export enterprise must register with the Board of Investments and report on its continuing compliance with the export requirement. If it fails to meet the export ratio, it can be ordered to reduce domestic sales to no more than 40% of total production.

On land, foreign ownership of land remains restricted, so most foreign manufacturers lease. Republic Act No. 12252, signed on September 3, 2025, amended the Investors’ Lease Act to let a foreign investor with an approved and registered investment lease private land for an aggregate period of up to 99 years. The President may impose a shorter period for critical infrastructure and vital services. The lease must be registered with the Registry of Deeds, the leased area is limited to what the registered project reasonably requires, and withdrawing the registered investment ends the lease. The investor must also start the project within three years of signing, or risk revocation of its lease entitlements. Leases within an ecozone are typically arranged with the zone developer, so lease terms deserve the same scrutiny as the incentive package.

When an ecozone may not be the right fit

Consider a location outside an ecozone, or a different registration route, if:

•         Domestic sales are central to the plan. Local sales by a registered enterprise are subject to 12% VAT, and the 70% export requirement leaves limited room for domestic sales.

•         Export volumes are uncertain. Missing the 70% threshold in a given year puts duty and VAT incentives at risk in the next.

•         Your location depends on local proximity. If your customers, suppliers, or workforce are concentrated outside the available zones, the logistics may outweigh the tax benefit.

•         You need maximum flexibility. Registration comes with ongoing reporting, activity-specific accounting, and performance commitments.

It is also worth knowing that the VAT zero-rating on local purchases for registered export enterprises applies regardless of location under the IRR, so VAT treatment alone is not a reason to choose an ecozone.

Compliance obligations that come with registration

Incentives are not automatic once you are registered. Under the IRR, a registered enterprise must:

•         apply annually for a Certificate of Entitlement to Tax Incentives and, for export enterprises, an annual VAT zero-rating certificate;

•         keep an accounting system that separates the registered activity from the rest of the business;

•         file its Annual Tax Incentives Report and Annual Benefits Report on time; and

•         meet the performance commitments in its registration.

Enterprises on EDR have further steps under the same Department Order. They must file a notarized comprehensive summary report with the IPA, per registered project, within 30 days after filing the annual income tax return. This becomes mandatory for taxable years ending December 31, 2026 and later. They must also secure the IPA’s approval of training programs and trade fairs before claiming those deductions, and submit an R&D proposal before starting R&D work. Noncompliance can lead to partial or full disallowance of the deductions for the year. Failure to meet reporting requirements can bring fines of PHP 100,000 for a first violation and PHP 500,000 for a second, with cancellation of registration on a third. Incentives can also be suspended or withdrawn for non-compliance with performance targets or for misrepresentation.

On timing, the IRR require a decision on an application within 20 working days of receiving complete documents, with a single extension of up to 20 more working days.

A practical decision checklist

Before committing to an ecozone site, a foreign manufacturer should be able to answer yes to most of these questions:

1.       Can we reliably export at least 70% of our output every year?

2.       Is our activity listed in the current SIPP, and which tier does it fall under?

3.       Have we compared SCIT against ITH followed by EDR using our own projected numbers?

4.       Do we know our incentive period based on the site’s location and the approving agency?

5.       Is our ownership structure consistent with the Foreign Investments Act and the Negative List?

6.       Have we reviewed the land lease terms and the zone’s fees and rules?

7.       Is our finance team ready for annual certification and reporting?

How Starlight can help

Starlight Business Consulting Services assists foreign investors with company incorporation, registration with investment promotion agencies, tax and incentive planning, and ongoing accounting and compliance. If you are comparing ecozone and non-ecozone sites, we can help you model the incentive options and prepare a registration plan that fits your business.

This article reflects the rules and issuances available as of November 2026. It is for general information only and is not legal or tax advice. Incentive rules and implementing guidelines are updated from time to time; consult a qualified professional about your specific situation.