A. GENERAL CONSIDERATIONS IN INVESTING IN THE PHILIPPINES
Before a foreign corporation can open an office in the Philippines, it must first secure the necessary licenses or registration certificates from appropriate government bodies. Generally, the registration process of new entities starts with the Securities and Exchange Commission (SEC).
If the proposed project or activity qualifies for incentives, the foreign investor may file its application with the Board of Investments (BOI) or with the Philippine Economic Zone Authority (PEZA) for registration under the 1987 Omnibus Investments Code Executive Order No. 226 or Republic Act 7916, as the case may be.
For the projects that are located in the Subic Bay Free Port or the Clark Special Economic Zone, the applications shall be filed with the Subic Bay Metropolitan Authority (SBMA) or the Clark Development Corporation (CDC), respectively.
B. CONSTITUTIONAL GUARANTEES
Under the 1987 Constitution, foreign investors are given the same constitutional rights and privileges accorded to local investors. These privileges are provided for in the Omnibus Investments Code of 1987, to wit:
1. Right to repatriate investments. This pertains to the right of a foreign investor to repatriate the entire proceeds of his liquidated
investments. He can remit said proceeds in the currency in which the investment was originally made. The exchange rate to be used is that prevailing at the time of repatriation.
2. Right to remit earnings. This pertains to the right of a foreign investor to remit his earnings in the same currency at the time he made the investment. Furthermore, with the liberalization of foreign exchange, the foreign investor is free to source foreign currency in the open market and remit the same abroad.
3. Right against expropriation. The principles of public use or welfare and of just compensation that are accorded to local investors are also applied to foreign ones. Additionally, said foreign investor can remit the proceeds of the expropriation in the currency in which the investment was originally made, pegged at the exchange rate prevailing at the time of remittance.
4. Right to service foreign loans and contracts This pertains to the right of a foreign investor to remit any amount necessary to comply
with its obligation to meet interest and principal payments on foreign loans and obligations arising from technological assistance contracts.
5. Right to non-requisition of investment. This right pertains to the right of a foreign investor to exclude his investments or property from being requisitioned by the government, except in cases of war or national emergency and only for the duration of those particular eventualities. In the case where his property or investments have been validly requisitioned, the proceeds (just compensation) can be remitted by the foreign investor in the currency in which the investment was originally made, pegged at the exchange rate prevailing at the time of remittance.
C. IT LAW DEVELOPMENTS
The Philippine government has provided an investment-friendly atmosphere, particularly in the field of IT. Over the past decade, the Philippine government has focused on the promotion and development of IT as one of its major policies and strategies for accelerating and sustaining the growth of the services sector. In line with the government’s policy of encouraging wider private sector participation, it enacted Republic Act 8792, otherwise known as the Electronic Commerce Act of 2000 (the “E-Commerce Act”) on June 14, 2000.
The E-Commerce Act provides for the admissibility of electronic data messages, documents, and signatures, and paved the way for the legal validity and recognition of electronic transactions done in the course of profitable and non-profitable activities. The Act also directs all government departments and offices to accept electronic data messages and documents in their transactions, and mandates government agencies to be e-commerce-ready within two years from the time of its effectivity. It also promotes e-commerce in the country, particularly in business-to-business and business-to-consumer transactions where business relations are enhanced and facilitated and consumers are able to find and purchase products online.
As in the Model Law on Electronic Commerce drafted by the United Nations Commission for International Trade Law, the E-Commerce Act penalizes cybercrimes and other computer-related crimes and provides for penalties on computer hacking, introduction of viruses, and piracy of copyrighted works of at least P100,000 and a maximum amount commensurate to the damage incurred, as well as imprisonment of six months to three years, among others. Accordingly, in 2001, the Supreme Court of the Philippines issued the Rules on Electronic Evidence that provided for a framework for the admission of electronic evidence in court proceedings, except in
criminal cases.
The Department of Trade and Industry and the Department of Science and Technology also signed a Joint Department Administrative Order No. 02, Series of 2001 on 28 September 2001, providing for the implementing rules and regulations (IRR, for brevity) on electronic authentication and electronic signatures. This IRR, enacted pursuant to Section 29 of the E-Commerce Act, seeks to establish an environment conducive to electronic commerce by providing a clear, enforceable, stable, and predictable set of guidelines on giving legal validity and recognition to electronic signatures. This measure further strengthened the fundamental principles enshrined in the E-Commerce Act, such as technology neutrality and non-denial of a signature, contract, or a record of legal validity or enforceability solely because it is in electronic form. The IRR on electronic authentication and signatures also provides for liability clauses for unauthorized use of electronic signatures and for incorrect and defective certificates. Moreover, it contained provisions on the recognition of foreign certificates and electronic signatures and a reciprocity clause whereby the benefits granted by the IRR are extended to foreign parties or entities whose countries of origin grant similar benefits to Philippine nationals.
In the area of electronic banking, the Bangko Sentral ng Pilipinas (BSP) issued a circular (BSP Circular No. 269, Series of 2000; in relation to BSP Circular No. 240 on Electronic Banking Services in the Philippines, series of 2000) that provided guidelines for electronic banking activities. The said circular mandated banks interested in engaging or enhancing their electronic banking services to submit an application with the BSP:
1. Adequate risk management process
2. Manual on corporate security policy and procedures intended to cover all pertinent security matters, particularly the following concerns –
a. Authentication
b. Non-repudiation
c. Authorization
d. Integrity
e. Confidentiality
3. Prior satisfactory systems test; and
4. Business continuity planning process and manual.
Moreover, Republic Act 8293, otherwise known as the Intellectual Property Code of the Philippines (IPC, for brevity), which took effect in January 1, 1998, provides for a secure legal regime respecting the protection of intellectual property rights. The IPC was enacted partly to implement the Agreement on Trade-Related Aspects of Intellectual Property, popularly known as the TRIPS Agreement. Subsequently, the Philippine Congress passed a law amending the IPC giving copyright protection to integrated circuit designs. More recent developments in intellectual property law include plans for full compliance with the World Intellectual Property Organization Internet treaties, namely, the WIPO Performances and Phonograms Treaty (WPPT) and WIPO Copyright Treaty (WCT), both of which were ratified by the Philippines in 2002.
Aside from these, the Philippine government has begun to establish comprehensive online access to public information and services. This plan, dubbed as the Government Information Systems Plan, serves as the backbone for optimizing the use of IT in government and serves as the framework for increasing transparency and efficiency in governance.
D. STATUTORY CONSIDERATIONS
EO 226, as amended (The Omnibus Investments Code of 1987)
The Omnibus Investments Code of 1987 consolidates all laws related to domestic and foreign investments. The Code mandates the creation of a Board of Investments (BOI) under the Department of Trade and Industry to formulate an annual Investments Priority Plan (IPP). The IPP lists the preferred areas of investments after consultation with appropriate government agencies and the private sector. It sets the rules and parameters for foreign investments in the Philippines, with incentives granted to certain sectors, under conditions that encourage competition and discourage monopolies.
An important aspect of the law is the provision of fiscal and non-fiscal incentives to preferred areas of investments, pioneer or non-pioneer enterprises, export production, as well as rehabilitation or expansion of existing operations. Pioneer enterprises are registered enterprises engaged in the manufacture, assembly, or production of goods that have not been or are not being produced in the Philippines on a commercial scale; or which uses a formula or method which is new in the Philippines; or those engaged in agricultural and other related activities which are deemed as highly essential in attaining agricultural self-sufficiency or other declared national goals; or
engaged in activities which produce or manufacture non-conventional fuels and utilize non-conventional sources of energy, or use products and raw materials that are not yet produced in the Philippines in large volume. Non-pioneer enterprises refer to all registered producer enterprises not included in the pioneer
enterprise list.
Qualified projects, depending on their category, are granted a host of incentives, including income tax holidays, tax credits, tax and duty exemption for imported raw materials and equipment, hiring of foreign labor, exemption from contractors tax, simplified customs procedure, and other tax incentives. Investors are assured the right to repatriate profits and earnings, payment of foreign loans and interests, and freedom from expropriation. As an attached agency of the Department of Trade and Industry (DTI), the BOI is the implementing agency authorized to grant incentives, set investment priorities programs and promote the country as an investment site.
An investor seeking to avail of the incentives provided for in the Code should choose the preferred area of investments set out in the IPP and register for the same with the BOI. Under the Code, any individual, corporation, partnership, or association that meets the criteria set forth in Article 32 thereof shall be entitled to registration These criteria include:
1. Citizenship requirement.
a. If the applicant investor is a natural person, he must be a Filipino citizen
b. If the applicant investor is a partnership or any other association, it must be organized under Philippine laws with at least 60% of its capital owned and controlled by Filipino citizens.
c. If the applicant investor is a corporation or cooperative, it must be organized under Philippine laws with at least 60% of the capital stock outstanding and entitled to vote owned and held by Filipinos, and at least 60% of the members of the Board of Directors are citizens of the Philippines.
If it does not qualify with the required ownership by Philippine nationals, it may still apply for registration provided that the following are met:
– Proposes to engage in pioneer project/s that is not within the activities reserved by the Constitution or other related laws to Filipinos; or Proposes to export at least 70% of its total production; and
– Obligates itself to attain the status of a Philippine national within 30 years from the date of registration.
2. Proposal to engage in a preferred project listed or authorized under the prevailing IPP.
a. If the proposed activity is not listed in the IPP –
– At least 50% of its total production is for export or it is an existing producer which will export part of the production under the conditions to be imposed by the BOI; or
– Proposes to engage in the sale abroad of export products bought by it from one or more export producers; or
– Proposes to engage in rendering technical, professional, or other services or in exporting television, motion picture, and musical recordings made or produced in the Philippines
3. Capability of operating on a sound and efficient basis of contributing to the national development of the preferred area in particular and of the national economy in general.
4. Installation or an undertaking to install an accounting system adequate to identify the investments, revenues, costs, and profits and losses of each preferred project undertaken by the enterprise separately from the aggregate figures over the same items, if applicant proposes to engage in activities other than preferred projects.
Fiscal and Non-Fiscal Incentives
As soon as said application is granted and the individual or firm becomes registered, it shall be entitled to several fiscal and non-fiscal incentives granted to registered enterprises. These incentives generally include:
1. Tax exemptions, credits, and deductions
a. Income tax holidays
– Six (6) years for pioneer firms
– Four (4) years for non-pioneer firms
♦ Six (6) years, if non-pioneer firm is located in a less developed area.
– No income tax holiday for registered firms located within Metro Manila, unless they are:
♦ Within a government industrial estate
♦ Service-type projects with no manufacturing facilities
♦ Power generating plants
♦ Exporters with expansion projects
b. Tax credit on raw materials, supplies, and semi-manufactured products
c. Additional deduction from taxable income for labor expense
d. Additional deduction from taxable income for necessary and major infrastructure works
e. Tax and duty exemptions on imported capital equipment
f. Tax credit on domestic capital equipment
g. Exemption from contractor’s tax
h. Tax exemption on importation of breeding stocks and genetic materials
i. Tax credit on domestic breeding stocks and genetic materials
j. Exemption from wharfage dues and any export tax, duty, impost and fee
2. Non-fiscal incentives
a. Employment of foreign nationals
A registered enterprise may be allowed to employ foreign nationals in supervisory, technical, or advisory positions for a period not exceeding five (5) years from its registration (which may be extended upon the BOI’s discretion). However, when the majority of the capital stock of a registered enterprise is owned by foreign investors, the positions of president, treasurer, and general manager or their equivalents may be retained by foreign nationals beyond the five-year period.
b. Simplification of customs procedure
c. Unrestricted use of consigned equipment
d. Access to bonded manufacturing/trading warehouse system
RA 7042, as amended (Foreign Investments Act of 1991)
Under the Foreign Investments Act of 1991 (FIA) a foreign investor is generally allowed to own 100% of any local business enterprise. However, in cases where the enterprise is a financial institution, public utility, or one engaged in defense, mass media (except the recording industry), practice of licensed profession, cooperative and small-scale mining, advertising, and real estate, ownership by foreigners are either limited to a particular percentage of equity or absolutely prohibited. The Foreign Investment Negative List usually provides for a comprehensive list of investment areas where foreign ownership is limited by mandate of the Constitution and specific laws (called the List A), and where it is limited for reasons of security, defense, risk to health and morals and protection of small-and medium-scale enterprises (called the List B).
A preview of this Negative List is as follows:
| List A | List B |
| ● No foreign equity – Mass media, except recording – Practice of all professions (limited to Filipino citizens save in cases prescribed by law) a. Engineering (aeronautical, agricultural, chemical, civil, electrical, electronics and communication, geodetic, mechanical, metallurgical, mining, naval architecture and marine, sanitary) b. Medicine and allied professions (medicine, medical technology, dentistry, midwifery, nursing, nutrition and dietetics, optometry, pharmacy, physical and occupational therapy, radiologic and X-ray technology, veterinary medicine) c. Accountancy d. Architecture e. Criminology f. Chemistry g. Customs brokerage h. Environmental planning i. Forestry j. Geology k. Interior design l. Landscape architecture m. Law n. Librarianship o. Marine deck officer p. Marine engine officer q. Master plumbing r. Sugar technology s. Social work t. Teaching u. Agriculture v. Fisheries – Retail trade enterprises with paid-up capital of less than US$2.5 million – Cooperatives – Private security agencies – Small-scale mining – Utilization of marine resources – Ownership, operation, and management of cockpits – Manufacture, repair, stockpiling and/or distribution of nuclear weapons – Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personal mines ● Up to 20% Foreign Equity – Private radio communication network ● Up to 25% foreign equity – Private recruitment – Contracts for the construction and repair of locally-funded public works, except: a. Infrastructure/development projects covered in RA 7718 b. Projects which are foreign funded or assisted and required to undergo international competitive bidding – Contracts for construction of defense-related structure ● Up to 30% foreign equity – Advertising ● Up to 40% foreign equity – Exploration, development, utilization of natural resources – Ownership of private lands – Operation and management of public utilities – Ownership, establishment, and administration of educational institutions – Culture, production, milling, processing, trading excepting retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by products thereof – Supply of materials, goods, and commodities to government-owned and controlled corporation, company, agency, or municipal corporation – Project Proponent and facility Operator of a BOT project requiring a public utilities franchise – Operation of deep sea commercial fishing vessel – Adjustment companies – Ownership of condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation ● Up to 60% foreign equity – Financing companies regulated by the Securities and Exchange Commission (SEC) – Investment houses regulated by the SEC |
● Up to 40% foreign equity a. Firearms (handguns to handguns), parts of firearms and ammunition therefore, instruments or implements used or intended to be used in the manufacture of firearms. b. Gunpowder c. Dynamite d. Blasting supplies e. Ingredients used in making explosives: 1. Chlorates of potassium and sodium 2. Nitrates of ammonium, sodium, barium, Copper (11), lead (11), calcium, and cuprite 3. Nitric acid 4. Nitrocellulose 5. Perchlorates of ammonium, potassium, and sodium 6. Dinitrocellulose 7. Glycerol 8. Amorphous phosphorus 9. Hydrogen peroxide 10. Strontium nitrate powder 11. Toluence f. Telescopic sights, sniper scope, and other similar devices However, the manufacture or repair of these items may be authorized by the Chief of the PNP to non-Philippine nationals; Provided that a substantial percentage of output, as determined by the said agency, is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance – Manufacture, repair, storage and/or distribution of products requiring Defense Department clearance: a. Guns and ammunitions for warfare b. Military ordinance and parts thereof c. Gunnery, bombing, and fire control systems and components d. Guided missiles/missile systems and components e. Tactical aircraft, parts and components thereof f. Space vehicles and component systems g. Combat vessels h. Weapons repair and maintenance equipment i. Military communications equipment j. Night vision equipment k. Simulated coherent radiation devices, components and accessories l. Armament training devices m. Others as may be determined by the Defense Secretary However, the manufacture or repair of these items may be authorized by the Secretary of the DND to non-Philippine nationals; Provided that a substantial percentage of output, as determined by the said agency is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance – Manufacture and distribution of dangerous drugs – Sauna and steam bathhouses, massage clinics, and other like activities regulated by law because of risks posed to public health and morals – All forms of gambling (e.g., racetrack operation) – Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000.00 – Domestic market enterprises which involve advanced technology or employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of US$100,000.00 |
No foreign-ownership restrictions are imposed on export enterprises (i.e., manufacturers, processors, or service enterprises) where at least 60% of output is exported, or traders that purchase products domestically and export at least 60% of such purchases. Foreign-owned firms catering mainly to the domestic market are encouraged to undertake measures that gradually increase Filipino participation in their business by taking in Filipino partners, electing Filipinos to the board of directors, implementing technology transfer to Filipinos, generating more employment for the economy, and enhancing skills of Filipino workers.
Former natural-born Filipinos are granted the same investment rights as a Philippine citizen based on existing investment and related laws. However, former natural-born Filipinos are restricted in some areas such as defense-related activities, exercise of profession, activities covered by the Retail Trade Act, Small Scale Mining Act, Rice and Corn Industry Act and other laws. Also, all industrial enterprises, regardless of the citizenship of owners, are required to comply with existing environmental standards.
Without need of prior approval, a non-Philippine national not otherwise disqualified by law may, upon registration with the Philippine Securities and Exchange Commission (SEC) or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (in case of sole proprietorships), may do business in the Philippines or invest in domestic enterprise up to 100% of its capital, unless participation of non-Philippine nationals is totally or partially proscribed by existing laws.
An investor is considered a non-Philippine national in the following instances:
1. Citizen of a country other than the Philippines;
2. Partnership or association not wholly owned by Filipino citizens;
3. In case of corporations:
a. Organized under foreign laws and which less than 60% of the outstanding capital stock and entitled to vote is owned and held by Filipino citizens;
b. Organized under foreign laws and registered as doing business in the Philippines under the Corporation Code of which less than 100% of the outstanding voting capital stock is owned by Filipinos.
Note that under the FIA, any enterprise seeking to avail of incentives under the Omnibus Investments Code of 1987 must apply for registration with the BOI, and such application must comply with the criteria set forth in the said Code.
RA 8756 (Incentives to Corporations Establishing RHQ or ROHQ)
Seeking to encourage wider foreign participation in the country’s economic activities, the Philippine legislature enacted Republic Act 8756, granting incentives and providing for terms and conditions for the establishment and operation of Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ) of multinational companies.
An RHQ is an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communication, and coordination center for its subsidiaries, branches, or affiliates in the Asia-Pacific region and other foreign markets. It does not earn or derive income in the Philippines. An ROHQ, is a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries, or branches in the Philippines, in the Asia-Pacific region, and in other foreign markets. These qualifying services include the following:
1. General administration and planning;
2. Business planning and coordination;
3. Sourcing and procurement of raw materials and components;
4. Corporate finance advisory services;
5. Marketing control and sales promotion;
6. Training and personnel management;
7. Logistic services;
8. Research and development services and product development;
9. Technical support and maintenance;
10. Data processing and communication; and
11. Business development.
The following is an outline of the licensing requirements for RHQ and ROHQ:
LICENSING REQUIREMENTS
| REGIONAL OR AREA HEADQUARTERS | REGIONAL OPERATING HEADQUARTERS |
| ● Secure license with the Philippine Securities and Exchange Commission (SEC), upon favorable recommendation of the Board of Investments (BOI)
● Minimum requirements: 1. Certification from the Philippine Consulate Embassy, or duly authenticated certification from the Philippine Dept. of Trade and Industry or its equivalent in the foreign firm’s home country that the firm is engaged in international trade with affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets 2. Certification from the principal officer of the firm that the firm has been authorized by its Board of Directors to establish its RHQ in the Philippines, specifying the following: a. Activities of the RHQ shall be limited to acting as supervisory, communication, and coordinating center for its subsidiaries, branches, and affiliates in the region b. RHQ will not derive any income from sources within the Philippines c. RHQ shall notify the BOI and the SEC of any decision to close down or suspend its operations 15 days before the same is effected 3. An undertaking that the multinational company will remit into the Philippines such amount of money as may be necessary to cover RHQ’s operations but which amount shall not be less than US$50,000.00 or its equivalent in other foreign currencies 4. An undertaking that any violation of the Omnibus Investments Code and its implementing rules and regulations shall constitute sufficient cause for the cancellation of RHQ’s license to operate |
● Secure license with the Philippine SEC, upon favorable recommendation of the BOI
– However, ROHQs of banking and financial institutions, required to secure licenses from both the SEC and the Bangko Sentral ng Pilipinas (BSP). ● Minimum requirements: 1. Certification from the Philippine Consulate Embassy, or duly authenticated certification from the Philippine Dept. of Trade and Industry or its equivalent in the foreign firm’s home country that the firm is engaged in international trade with affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets 2. Certification from the principal officer of the firm that the firm has been authorized by its Board of Directors to establish its ROHQ in the Philippines, specifying the following: a. ROHQ may engage in any of the following qualifying services – ♦ General administration and planning ♦ Business planning and coordination ♦ Sourcing and procurement of raw materials and components ♦ Corporate finance advisory services ♦ Marketing control and sales promotion ♦ Training and personnel management ♦ Logistic services ♦ Research and development services and product development ♦ Technical support and maintenance ♦ Data processing and communication ♦ Business development b. ROHQ, prohibited from offering qualifying services to entities other than its affiliates, branches, or subsidiaries c. ROHQ shall notify the BOI, the SEC, and the BSP, as the case may be, of any decision to close down or suspend its operations 15 days before the same is effected 3. An undertaking that the multinational company will remit into the Philippines such amount of money as may be necessary to cover ROHQ’s operations but which amount shall not be less than US$200,000.00 or its equivalent in other foreign currencies 4. An undertaking that any violation of the Omnibus Investments Code and its implementing rules and regulations shall constitute sufficient cause for the cancellation of ROHQ’s license to operate |
Once the RHQ or ROHQ obtains its license, it shall be entitled to the following incentives:
SCHEDULE OF INCENTIVES
| REGIONAL OR AREA HEADQUARTERS | REGIONAL OPERATING HEADQUARTERS |
| ● Exemption from income tax and branch profits remittance tax
● Exemption from value-added tax (VAT, for brevity) ● Sale or lease of goods and property and rendition of services to RHQs shall be zero-rated for purposes of VAT ● Exemption from all kinds of local government taxes, fees, or charges, except real property tax on land improvements and equipment ● Tax and duty free importation of training materials and equipment
|
● Subject to 10% preferential tax rate on taxable income
● Subject to branch profits remittance tax ● Subject to 10% VAT ● Exemption from all kinds of local government taxes, fees, or charges, except real property tax on land improvements and equipment ● Tax and duty free importation of training materials and equipment |
In addition, the law allows foreign personnel of RHQs and ROHQs of multinational companies and their respective spouses and unmarried children under 21 years of age to be issued multiple entry special visas which shall be valid for three (3) years. Income derived from their work in the RHQs and ROHQs shall be subject to a preferential income tax rate of 15%, provided that the same rate shall be imposed on Filipino employees occupying similar positions. Moreover, said expatriates shall be entitled to tax and duty free importation of personal and household effects and exempted from travel tax and special immigration fees and requirements.
RA 8762 (Retail Trade Liberalization Act of 2000)
As a rule, Philippine retail enterprises must be owned and operated by Philippine citizens or corporations or entities owned exclusively by Philippine citizens. However, under the Retail Trade Liberalization Act of 2000, foreign investors coming from countries that allow the entry of Filipino retailers are now allowed to invest in retail trade business in the Philippines, provided they comply with the requirements for capitalization, net worth, and other criteria.
Foreign-owned partnerships, associations, and corporations organized under Philippine laws may, upon registration with the SEC and the Department of Trade and Industry (DTI), or with the DTI alone in case of sole proprietorship, engage or invest in the retail trade business under the categories in the succeeding table:
| CATEGORY | PAID-UP CAPITAL | FOREIGN OWNERSHIP | OTHER CONDITIONS |
| A
B
C
D
|
● Equivalent in Philippine pesos (PhP) of less than US$2.5 million
● Equivalent in PhP of US$2.5 million but less than US$7.5 million
● Equivalent in PhP of US$7.5 million or more
● Specializing in high-end or luxury products
● Equivalent in PhP of US$250,000.00 per store |
● Not allowed
● Reserved exclusively for Filipino citizens and corporations wholly owned by Filipino citizens (see discussion on Constitutional Guarantees and Prohibitions)
● May be wholly owned by foreigner except for the first two (2) years after the effectivity of this law (two-year period will last up to year 2002) wherein foreign ownership shall be limited to 60% of the total equity
● May be wholly owned by foreigner
● May be wholly owned by foreigners |
● In no case shall the investments for establishing a store be less than the equivalent in PhP of US$830,000.00
● In no case shall the investments for establishing a store be less than the equivalent in PhP of US$830,000.00
● High-end/luxury products are goods which are notnecessary for life maintenance and whose demand is generated in large part by the higher income groups (ex: jewelry, branded apparel, leisure and sporting goods, electronics and other personal effects. |
The law further imposes the following qualifications for foreign retailers before they are allowed to engage in such business in the Philippines:
1. A minimum of US$200 Million net worth in its parent corporation for Categories B and C, and US$ 50 Million net worth in its parent corporation for Category D;
2. Five (5) retailing branches or franchises in operation anywhere around the world unless such retailer has at least one (1) store capitalized at a minimum of US$25 Million; and
3. Five (5)-year track record in retailing.
Note that a qualified foreign retailer is not allowed to engage in certain retailing activities outside their accredited stores through the use of mobile or rolling stores or carts, sales representatives, door-to-door selling, restaurants and sari-sari stores and such other similar means.
RA 7916, as amended (The Special Economic Zone Act of 1995)
The Special Economic Zone Act of 1995 provides a framework for establishing special economic areas called ecozones throughout the country, whereby companies and industries establishing their operations therein are given incentives and privileges. An ecozone is a selected area with highly developed enterprises, or with the potential to be developed into agro-industrial, industrial, tourist/recreational, commercial, banking, investment, and financial centers.
Firms registered with the Philippine Export Zone Authority (PEZA) and operating within the ecozones are entitled to similar incentives granted to those enterprises covered by the Omnibus Investments Code of 1987 and by Presidential Decree 66 which include:
1. All incentives for BOI-registered enterprises (e.g., income tax holidays)
2. Preferential tax rate of 5% on gross income in lieu of all national and local taxes, after the lapse of income tax holiday
3. Deduction from the national government’s share (3% out of the 5% final tax) of an amount equivalent to ½ of the value of training expenses incurred in developing labor or for management programs
Additionally, PEZA-registered firms are given tax and duty exemptions on importations of capital equipment, raw materials, and other merchandise directly needed in their operations.
Aside from the establishment of ecozones and providing for incentives to firms operating within said areas, other special economic zones were established under separate laws. These are the Subic Bay Free Port Zone (under the administration of the Subic Bay Metropolitan Authority), the Clark Field Development Zone (under the management of the Clark Development Corporation), and the special economic zones in Zamboanga City (located in the southwestern Mindanao) established by Republic Act 7903, and in the province of Cagayan (in the northern Luzon) established by Republic Act 7922. Firms located in these special economic zones are entitled to the same benefits and privileges extended to PEZA-registered firms.
Registration with the SEC and BSP
Any corporation or partnership or other entity, including foreign corporations licensed to do business or to set up a branch in the Philippines, is required to register with the Securities and Exchange Commission (SEC) before starting its operations. If it wants to repatriate capital or remit dividends and earnings using foreign currency sourced from the Philippine banking system, it must register its investment with the Bangko Sentral ng Pilipinas (BSP). The capital is repatriated and the profits and dividends are remitted by the banks in the desired foreign currency, and at the prevailing exchange rate. Unregistered foreign investments are allowed to source their foreign exchange from sources outside the Philippine banking system.
Taxation
Taxes on Individuals. In the case of individual taxpayers, the worldwide income of resident Filipino citizens are subject to Philippine income tax, while only Philippine-sourced income of resident aliens and non-resident aliens are subject to the said tax. The tax rates imposed on individual taxpayers are graduated from 5% to 33%, with the top rate imposed on persons with taxable incomes in excess of PhP500,000.00 per year. However, in the case of individual non-resident aliens whose stay in the Philippines does not exceed 180 days in a calendar year, they are taxed at 25% of their gross income from Philippine sources.
Corporate Taxes. Domestic corporations, or those established under the laws of the Philippines, are taxed at 32% on their net taxable income derived from all sources. The same tax rate is imposed on foreign corporations, whether or not engaged in trade or business in the Philippines, on their income derived in the Philippines. However, a foreign corporation engaged in trade or business in the Philippines, called a resident foreign corporation, computes its income tax liability based on its net income and has the option to pay 15% tax on gross income. A non-resident foreign corporation, which is a foreign corporation not engaged in trade or business in the Philippines, is taxed on its gross income.
The following are additional points to consider as regards individual and corporate taxation in the Philippines:
| Individual Taxpayer | Corporate Taxpayer |
| ● 15% tax rate imposed on income (salaries, annuities, honoraria, allowances, etc.) of aliens employed in the following:
– Regional or area headquarters or regional operating headquarters of multinational corporations – Representative offices – Offshore banking units – Petroleum service contractors/subcontractors ● Capital gains tax on sales of shares of domestic stocks: – 5% on the first PhP100,000.00 gains and 10% on the excess over PhP100,000.00, if the stock is not traded in the Philippine Stock Exchange (PSE) – ½ of 1% of the gross selling price or gross value in money of the stock sold, if stock sold is listed in the PSE ● Tax on stocks sold or disposed at initial public offering – Tax rate (1%, 2%, 4%) varies according to the proportion of the shares sold or disposed to the total outstanding shares after listing ● Capital gains tax of 6% based on the gross selling price or fair market value, whichever is lower, on the sale of real property ● Tax on passive income (e.g., interest, dividends, prizes, royalties, and other winnings) ● Final tax of 32%, imposed on the individual employer, on the grossed-up monetary value of fringe benefits given to employees, except rank-and-file, unless the fringe benefit is required by the nature of the trade, business, or profession of the employer |
● 10% tax on net taxable income
– Proprietary educational institutions and non-profit hospitals ● Final tax of 10% – For foreign currency deposit units and offshore banking units, on their income from foreign currency transactions with local commercial banks, authorized branches of foreign banks, and depository banks under the foreign currency deposit system ● 15% branch profits remittance tax – Excluding those registered with PEZA ● General tax of 30% imposed on dividends declared by a domestic corporation to its parent company – If country of the recipient foreign corporation grants a tax credit of 15% as tax deemed paid in the Philippines, tax is reduced to 15%. ● Capital gains tax on sales of shares of domestic stocks: – 5% on the first PhP100,000.00 gains and 10% on the excess over PhP100,000.00, if the stock is not traded in the Philippine Stock Exchange (PSE) – ½ of 1% of the gross selling price or gross value in money of the stock sold, if stock sold is listed in the PSE ● Tax on passive income, such as dividends and royalties – Exempt from tax are dividends received by a domestic corporation and a resident foreign corporation from a domestic corporation ● Final tax of 32%, imposed on the corporate employer, on the grossed-up monetary value of fringe benefits given to employees, except rank-and-file, unless the fringe benefit is required by the nature of the trade, business, or profession of the employer |
Aside from the taxes imposed on the abovementioned items, there are certain business taxes imposed by both the national and local governments to individual and corporate taxpayers, as follows:
| National Tax | Local Tax |
| ● Generally, 12% value-added tax (VAT) imposed on:
● Importation of goods ● Sale, barter, exchange, or lease of goods, properties, services in the Philippines, with certain exceptions ● Gross receipt tax on the following endeavors: ● 0%-5%, on bank and other non-bank financial intermediaries ● 5%, on insurance companies ● 3%, on common passenger carriers ● 2%, on electric, gas, and water utilities ● 3%-30%, on other businesses ● Excise tax on certain products (e.g., tobacco, alcohol, mineral and petroleum products, jewelry, automobiles, etc.) ● Documentary stamp tax ● Overseas communication tax |
● Real estate tax
● On manufacturers, wholesalers, exporters, and contractors: – Percentage tax on sales or gross receipts, imposable rate depending on the place where the business is situated ● Percentage tax on banks and other financial institutions
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Pursuant to the provisions of the E-Commerce Act, the Bureau of Internal Revenue (BIR) allows taxpayers to avail of the Electronic Filing and Payment System (EFPS) in the filing of returns and the payment of taxes (BIR Revenue Regulations 9-2001; 03 August 2001). A taxpayer interested to e-file his tax returns and e-pay the tax due may enroll with the BIR and any of its authorised agent banks.
RA 8293 (Intellectual Property Code of the Philippines)
As earlier mentioned, the Intellectual Property Code of the Philippines (IPC) provides a legal framework that secures the intellectual property rights of authors, inventors, scientists, engineers, artists, writers and composers, among others. Under the IPC, intellectual property consists of copyright and related rights; trademarks and service marks; geographic indications; industrial designs; patents; layout designs or topographies of integrated circuits, and protection of undisclosed information. The Intellectual Property Office (IPO) is tasked to administer and implement the provisions of the IPC within the Philippines.
The IPC espouses a principle of reciprocity, whereby any person who is a national or is domiciled or has a real and effective industrial establishment, in a country which is a party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to Philippine nationals by law, shall be entitled to the benefits under such convention, treaty, or reciprocal law. Conversely, the IPC also provides for reverse reciprocity. This principle states that any condition, restriction, or limitation imposed by a foreign country’s law on a Philippine national seeking protection of intellectual property rights in that foreign country shall reciprocally be enforceable upon nationals of said country within the Philippine jurisdiction.
The IPC regulates technology transfer arrangements (TTA) and requires that TTAs be registered with the Documentation, Information, and Technology Transfer Bureau of the IPO. A TTA is a contract or agreement involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts, and the transfer, assignment, or licensing of all forms of intellectual property rights, including licensing of software except computer software developed for the mass market.
As expressly provided for in the IPC, a TTA must provide among others, that:
1. The governing law in the interpretation of the agreement shall be Philippine law, and venue for litigation shall be the proper court where the licensee has its principal place of business;
2. There shall be continued access to technical and processual improvements during the period of the TTA;
3. If there is a provision for arbitration, the arbitration procedure provided for in the Philippine Arbitration Law or the UNCITRAL’s Arbitration Rules or the Rules of Conciliation and Arbitration of the International Chamber of Commerce shall apply, and the venue of the arbitration shall be the Philippines or any neutral country; and
4. The Licensor shall bear the payment of Philippine taxes imposed on the TTA.
Furthermore, a TTA must not contain any of the following prohibited clauses:
1. Imposing on the licensee an obligation to acquire from specific sources inputs, other raw materials, and technologies, or of permanently employing personnel indicated by the licensor;
2. Allowing the licensor the right to fix the selling prices of goods produced by the licensee;
3. Restricting the volume and structure of production;
4. Prohibiting the use of competitive technologies in a non-exclusive TTA;
5. Establishing a full or partial purchase option in favor of the licensor;
6. Obligating the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use ofthe licensed technology;
7. Requiring payment of royalties to the owners of patents for patents which are not used;
8. Prohibiting the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor;
9. Restricting the use of the technology supplied after the expiration of the TTA, except in cases where the early termination of the TTA is due to reason/s attributable to the licensee;
10. Requiring payments for patents and other industrial property rights after their expiration;
11. Requiring that the technology recipient shall not contest the validity of any of the patents of the technology supplier;
12. Restricting the research and development activities of the licensee that are designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes, or equipment;
13. Preventing the licensee from adapting the imported technology to local conditions or from introducing innovations to it, as long as it does not impair the licensor’s quality standards; and
14. Other anti-competition clauses.
However, the aforesaid prohibition against anti-competition clauses does not apply in exceptional cases where the Philippine economy shall reap substantial benefits, such as high technology content, increase in foreign exchange earnings, employment generation, or countryside industrial dispersal or use of raw material as
substitute inputs.
