Home » Across Borders » Free Zones – A Separate Customs Territory

BASED on international trade practices, ‘free zones’ are a generally understood to be that part of a country’s territory considered as outside the customs territory insofar as import duties and taxes are concerned particularly when goods are introduced into such territory. Unless there are exceptional circumstances, there are no limitations in the duration of the stay of the goods within the zone. In the Philippines, export processing zones and free ports falls within the concept of ‘free zones’ and are generally treated as separate customs territories. As such, goods introduced into said areas are deemed tax and duty free.

While free zones have long been operating in the Philippines, confusion still remains with regard to the administration and operation of said zones. Part of the reason is the lack of understanding of the concept of ‘free zones’. Another reason is the lack of clear laws and rules on the treatment of goods introduced into the zones and subsequently withdrawn, whether for re-export or for use in the domestic territory.

Export Zones and Free Ports

The law governing export processing zones is Republic Act No. 7916 (The Special Economic Zone Act of 1995). RA 7916 defines an export processing zones as “a specialized industrial estate located physically and/or administratively outside customs territory, predominantly oriented to export production” and that “enterprises located in export processing zones are allowed to import capital equipment and raw materials free from duties, taxes and other import restrictions”. RA 7916 also defines a free trade zone as “an isolated policed area adjacent to a port of entry (as a seaport) and/or airport where imported goods may be unloaded for immediate transshipment or stored, repacked, sorted, mixed, or otherwise manipulated without being subject to import duties” and that “movement of these imported goods from the free-trade area to a non-free-trade area in the country shall be subject to import duties”.

Other than export processing zones, which are under the management and supervision of the Philippine Economic Zone Authority (PEZA), there are other free zones in the country, among them, Subic Freeport, Clark Freeport, Cagayan Freeport and Zamboanga Economic Zone. These free zones are created by separate laws and are governed by their own zone administrations.

In addition, these free zones are considered as separate customs territories under existing laws and regulations.

Admission and Withdrawal

Goods entered into free zones (whether PEZA zones or free trade zones) are considered to have not entered the customs territory and as such, are technically not importations. Goods entered into such zones are normally termed as ‘admissions’ and not ‘importations’. The same rule applies when goods are transshipped from a Manila port (e.g. Port of Manila or MICP) into the PEZA zone or free trade zone. These transshipped goods are not importations.

When goods are withdrawn from the free zones into the customs territory, the same should in general be treated as if imported for the first time into the customs territory. This rule should apply even if the originally admitted goods (raw materials) are subsequently processed or manufactured into finished goods before withdrawal into the customs territory.

When goods are withdrawn from the free zones, the entity (locator) within zone should be treated as the exporter while the consignee in the customs territory should be treated as the importer. Under present rules, it is both the responsibility of the zone locator and the importer to ensure that duties and taxes are paid upon withdrawal into the customs territory.

From an administrative perspective, goods entered into the free zones should be covered by an ‘admission entry’ and goods withdrawn will have to be covered by an ‘import entry’ (in case of home use) or a ‘transshipment permit’ (in case of re-export).

Treatment of Regulated Goods

A major concern for entities located in free zones is whether the goods admitted into free zones are governed by import regulations such as those relating to consumer protection, public health and public safety. It may be argued that in case of PEZA zones, the same should not be applicable considering that goods entered into the zones are normally raw materials to be utilized for export production and thus, not meant for the domestic territory. It is the position of many that import regulations will apply only in cases when the finished goods are withdrawn from the PEZA zones.

This argument, however, may not necessarily apply for goods entered into free trade zones such as Subic Freeport and Clark Freeport. To illustrate, while some of the goods entered into Subic and Clark are meant for export production, many are likewise meant to be used within the zone. When goods are not meant to be used for export production, it is the position of many government agencies that import regulations relating to consumer protection, public health and public safety should apply.

After all, a free zone is merely a separate customs territory and is not necessarily separate from the Philippine state. Hence, all laws of the country, other than customs and tariff laws, remain applicable even within the boundaries of the free zones.

The author is an international trade consultant, and a licensed customs broker. He is a lecturer on logistics, indirect tax and customs, and a lecturer of Ateneo and BayanTrade on Supply Chain Management. Please contact agatonuvero@yahoo.com for your comments.

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