INVESTMENT AND INCENTIVES LAW Overview Dr George V

INVESTMENT AND INCENTIVES LAW Overview Dr. George V. Carmona

Constitutional Policy 1987 Constitution Declaration of State Policy Section 20. The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments. Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

Constitutional Policy Article XII. National Economy and Patrimony Section 1. The goal of the national economy: n more equitable distribution of opportunities, income, and wealth; n sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and n expanding productivity as the key to raising the quality of life for all, especially the underprivileged.

Constitutional Policy Article XII. National Economy and Patrimony Section 1. promotion of industrialization and full employment based on: n sound agricultural development and agrarian reform n through industries that make full and efficient use of human and natural resources, which are competitive in both domestic and foreign markets

Constitutional Policy Article XII. National Economy and Patrimony Section 1. Protection of Filipino enterprises against unfair foreign competition and trade practices. n Mandates the optimum development of all sectors of the economy and all regions of the country. n Private enterprises, including corporations, cooperatives, and similar collective organizations are to be encouraged to broaden the base of their ownership.

Constitutional Policy Article XII. National Economy and Patrimony Section 2. state ownership of all lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources. n except agricultural lands, all other natural resources shall not be alienated. n State has to have full control and supervision in the exploration, development, and utilization of natural resources.

Constitutional Policy Article XII. National Economy and Patrimony Section 2. State has to have full control and supervision in the exploration, development, and utilization of natural resources. n Can directly undertake or enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or 60 -40 corporations or associations for a period not exceeding 25 years, renewable for not more than 25 years.

Constitutional Policy Article XII. National Economy and Patrimony Section 2. Power of the president to enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of resources. n n real contributions to the economic growth general welfare of the country. development and use of local scientific and technical resources. Protection of the rights of indigenous cultural communities to their ancestral lands to ensure their economic, social, and cultural wellbeing (Section 5)

Constitutional Policy Economic Activities Being Regulated Allow Relevant ab Provisio le ns of the Fo 1987 rei Constitut gn ion Eq uit y Exploration, utilization and development of natural resources. 40% Section 2, Article XII Operation of public utilities (telecomms, transportation, water, electricity, etc. ) 40% Section 11, Article 12 Ownership of educational Limit of Foreign institutions. 40% Section 4, Article 14 Participation 30% Section 11, Adverstising. Equity Investments in Certain Areas of

Constitutional Policy Section 10. Mandate to Congress with recommendation from NEDA to reserve to Filipinos when the national interest dictates certain areas of investments or to corporations or associations at least sixty per centum of whose capital is owned by such citizens and for it to enact measures to encourage formation and operation of fully owned enterprises.

Constitutional Policy Section 10. Preferential treatment to Filipinos in the grant of rights, privileges, and concessions covering the national economy and patrimony. n rule applies even if a foreigner is more qualified, as long the Filipino is qualified. (Garcia vs. Executive Secretary) Regulation and exercise of authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.

Constitutional Policy Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. Section 18. The State may, in the interest of national welfare or defense, establish and operate vital industries and, upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the Government.

Constitutional Policy Section 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. Section 22. Acts which circumvent or negate any of the provisions of this Article shall be considered inimical to the national interest and subject to criminal and civil sanctions, as may be provided by law.

Legal and Regulatory Environment Executive Order No. 226 (The Omnibus Investments Code of 1987) n Basic law governing investments in the Philippines. n sets forth the rules and parameters within which investments in the Philippines may be made, with emphasis on the grant of incentives to certain sectors.

Legal and Regulatory Environment The Omnibus Investments Code of 1987 Six Books Book I. Investments with Incentives Book II. Foreign Investments Without Incentives Book III. Incentives To Multinational Companies Establishes Regional Or Area Headquarters In The Philippines Book IV. Incentives To Multinational Companies Establishing Regional Warehouses To Supply Spare Parts Or Manufactured Components And Raw Materials To The Asia-pacific Region And Other Foreign Markets Book V. Special Investors Resident Visa Book VI. Incentives Of Export Processing Zone Enterprises

Legal and Regulatory Environment Book II. Foreign Investments Without Incentives n n has been repealed by the Foreign Investments Act of 1991 (Republic Act No. 7042 , as amended by Republic Act No. 8179). Foreign-owned companies not availing of incentives are covered by the provisions of this Act.

Legal and Regulatory Environment Books III and IV n Have been amended by Republic Act No. 8756 Book VI n Has been amended by Special Economic Zones Act of 1995 (Republic Act 7916, as amended by Republic Act 8748)

Legal and Regulatory Environment Basic Rights and Guarantees Given to Investors 1. REPATRIATION OF INVESTMENTS n entire proceeds of the liquidation of the investments in the currency in which the investment was originally made at the exchange rate prevailing at the time of repatriation. 2. REMITTANCE OF EARNINGS 1. at the exchange rate prevailing at the time thereof 1. to meet the payment of interest and the principal on foreign loans and foreign obligations arising from technological assistance contracts.

Legal and Regulatory Environment Basic Rights and Guarantees Given to Investors 3. FREEDOM FROM EXPROPRIATION n no expropriation by the government of the property represented by the investments or of the property of enterprises except n n n for public use or in the interest of national welfare and defense upon payment of just compensation. sums received as compensation for the expropriated property can be remitted in the currency in which the investment was originally made and at the exchange rate prevailing at the time of remittance. 4. NON-REQUISITION OF INVESTMENT 1. except in the event of war or national emergency and only for the duration.

Legal and Regulatory Environment Investments with Incentives (Book I) General Rule n Investments made in preferred areas of investments as defined by the current Investment Priorities Plan (IPP) may enjoy benefits and incentives. Exceptions (i. e. investment is not listed in IPP) n n at least 50% of production is for exports, if Filipinoowned enterprise, at least 70% of production is for exports, if majority foreign-owned enterprise (more than 40% foreign equity)

Investments with Incentives (Book I) Types of Incentives A. Fiscal Incentives B. Non-Fiscal (Concessions) n given to BOI-registered enterprises

Investments with Incentives (Book I) Types of Incentives A. Fiscal Incentives 1. 2. 3. 4. 5. 6. Income Tax Holiday Exemption From Taxes And Duties On Imported Spare Parts Exemption From Wharfage Dues And Export Tax, Duty, Impost And Fees Tax Exemption On Breeding Stocks And Genetic Materials Tax Credits Additional Deductions from Taxable Income

Investments with Incentives (Book I) Types of Incentives B. Non-Fiscal Incentives 1. 2. 3. 4. Employment Of Foreign Nationals Simplification of customs procedures Importation of consigned equipment The privilege to operate a bonded manufacturing/trading warehouse

Investments with Incentives (Book I) Types of Incentives C. Additional Incentives for Locating Project in Less Developed Areas 1. 2. 3. 4. Employment Of Foreign Nationals Simplification of customs procedures Importation of consigned equipment The privilege to operate a bonded manufacturing/trading warehouse

Investments with Incentives (Book I) Types of Investments A. Pioneer Areas of Investments n required to attain Filipino status (60% Filipino) within thirty (30) years or such longer period as the BOI may determine except enterprises whose production is 100% geared for exports. B. Non-Pioneer Areas of Investments n Foreign investments are allowed up to forty percent (40%) of the outstanding voting capital stock; may be higher if it exports at least 70% of its total production.

Investments with Incentives (Book I) A. Pioneer Areas of Investments 1. engage in the manufacture, processing or production and not merely in the assembly or packaging of goods, products commodities or raw materials that have not been or are not being produced in the Philippines on a commercial scale. 2. use a design, formula, scheme, method, process or system of production or transformation of any element, substance or raw material into another raw material or finished goods which is new and untried in the Philippines;

Investments with Incentives (Book I) A. Pioneer Areas of Investments n engage in the pursuit of agricultural, forestry and mining activities and/or services including the industrial aspects of food processing whenever appropriate, predetermined by the Board, in consultation with the appropriate Department, to be feasible and highly essential to the attainment of the national goal, in relation to a declared specific national food and agricultural program for self-sufficiency and other social benefits of the project;

Investments with Incentives (Book I) A. Pioneer Areas of Investments n produce non-conventional fuels or manufacture equipment which utilizes nonconventional sources of energy; or use or convert to coal or other non-conventional fuels/sources of energy in their production, manufacturing or processing operations.

Foreign Investment Act (repealed Book II) n n Seeks to open up more areas of the Philippine economy to foreign investment, although maintaining constitutional and statutory restrictions in certain nationalized enterprises as much as 100 % foreign equity is allowed in areas of activity not otherwise found in what is now known as the Foreign Investments Act Negative List

Foreign Investment Act (repealed Book II) Foreign Investments Act Negative List n enumerates the areas of economic activities reserved, whether partially or totally, for Philippine nationals. n List A – enumeratea the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws n mass media, retail trade, advertising and public utilities, which are reserved for Philippine nationals by the mandate of the Constitution and specific laws.

Foreign Investment Act (repealed Book II) Foreign Investments Act Negative List n List B – contains the areas of activities and enterprises reserved to Philippine nationals pursuant to law. n includes those areas which are either defense-related, requiring prior clearance and authorization from the Department of National Defense, or with implications on public health and morals.

Foreign Investment Act (repealed Book II) Foreign Investments Act Negative List n List C – contains the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments.

Foreign Investment Act (repealed Book II) Defines the term “Doing Business” to include 1. 2. 3. soliciting orders; service contracts; opening offices, whether called liaison offices or branches; 4. appointing representatives or distributors domiciled in the Philippines who in any calendar year stay in the country for a period of one hundred eighty (180) days or more;

Foreign Investment Act (repealed Book II) Defines the term “Doing Business” to include 5. participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and 6. any other act or acts that imply a continuity of commercial dealing or arrangements, and contemplate to that extent the acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain, or the purpose and object of the business organization.

Foreign Investment Act (repealed Book II) Not considered doing “Doing Business” 1. mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business; 2. exercise of such rights as an investor; 3. having a nominee or officer to represent its interests in such corporation; and 4. appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

Foreign Investment Act (repealed Book II) Type of Investments that Can be Made 1. Foreign Investments in Export Enterprises n Can be up to 100% if products and services do not fall within Lists A and B of the Foreign Investment Negative List. 2. Foreign Investments in Domestic Market Enterprises n Non-Philippine nationals may own up to 100% of domestic market enterprises unless prohibited or limited by existing law or the Foreign Investment Negative List n domestic market enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60%) or more of its output.

Foreign Investment Act (repealed Book II) Modes of Investment 1. Domestic Subsidiary n a corporation which, while incorporated and existing under Philippines laws, is either wholly-owned or at least majority-owned by a foreign "parent" corporation. . 2. Branch n an extension of the foreign corporation (i. e. , incorporated and existing under foreign laws), but may engage in exactly the same activities as its parent company.

Foreign Investment Act (repealed Book II) Modes of Investment 3. Representative Office n promotes the products and/or services of the Company it represents, but cannot conclude contracts with local entities on behalf of its parent Company. . 4. Regional or Area Headquarters n an administrative branch which principally acts as a supervision, communications and coordination center for the subsidiaries, branches or affiliates of a multinational company in the Asia-Pacific Region.

Foreign Investment Act (repealed Book II) Modes of Investment 5. Regional Operating Office n a branch office established in the Philippines engaged in any one of the following services: n n n n 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; etc.

Foreign Investment Act (repealed Book II) Modes of Investment 6. Joint Venture n a cooperative arrangement of corporations, whether foreign or domestic, to jointly perform a single, specific undertaking or project with each of the partners contributing to the performance. 7. Merger or Consolidation n occurs when one or more existing corporations are absorbed by another corporation which survives and continues the combined business.

Foreign Investment Act (repealed Book II) Modes of Investment 8. Technology Transfer Arrangement n transfer of systematic knowledge for the manufacture of a product or the application of a process; n rendering of a service, including management contracts; n transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software, except computer software developed for mass market.

Foreign Investment Act (repealed Book II) Modes of Investment 9. Management Contract n foreign corporation shall undertake to manage all or substantially all of the business of a domestic corporation.

Regional Headquarters and Regional Operating Headquarters (Books III and IV, as amended) Incentives Granted to RHQ and ROHQ 1. 2. 3. n Corporate Income Tax and VAT Exemption from all kinds of local taxes, fees and charges, except for real property tax on land improvements and equipment; Tax and duty free importation of training materials and equipment; and Importation of new motor vehicles subject to the payment of corresponding taxes and duties.

Regional Headquarters and Regional Operating Headquarters (Books III and IV, as amended) Incentives Granted to RHQ and ROHQ 1. 2. 3. n Corporate Income Tax and VAT Exemption from all kinds of local taxes, fees and charges, except for real property tax on land improvements and equipment; Tax and duty free importation of training materials and equipment; and Importation of new motor vehicles subject to the payment of corresponding taxes and duties.

Regional Headquarters and Regional Operating Headquarters (Books III and IV, as amended) Incentives Granted to Ex-Pats 1. 2. 3. 4. Multiple entry visa, including those of spouse and unmarried children below age 21; Withholding tax of 15% on compensation income applicable to both alien and Filipino executives holding managerial and technical positions; Travel tax exemption issued by the Philippine Tourism Authority (PTA) upon recommendation of the Board of Investments (BOI) during the expatriate’s assignment in the country; and Tax and duty free importation of personal and household effects.

Legal and Regulatory Environment Other Laws Governing Investments 1. The Bases Conversion and Development Act of 1992 (Republic Act No. 7227) n sets forth the grant of incentives to industries and enterprises which establish their plants and offices within the Subic Bay Freeport Zone. 2. The Special Economic Zone Act of 1995 (Republic Act No. 7916 ) n sets forth the grant of incentives to industries and enterprises which situate their operation within Special Economic Zones.

Legal and Regulatory Environment Other Laws Governing Investments 3. The Export Development Act of 1994 (Republic Act No. 7844 ) 1. provides for incentives to business enterprises in the export industry. . 4. The Investor's Lease Act (Republic Act No. 7652) 1. grants to foreign investors the privilege of leasing private lands for a period of fifty (50) years [initial] which may be renewed for another twenty-five (25) years. 5. Republic Act No. 7721 n liberalized the entry and operations of foreign banks and financial institutions in the Philippines.

Legal and Regulatory Environment Other Laws Governing Investments 6. Republic Act No. 7888 1. grants authority to the President of the Philippines to suspend the nationality requirement under the Omnibus investments Code [Executive Order No. 226] in the case of equity investments by multilateral financial institutions like the Asian Development Bank [ADB] or the International Finance Corporation [IFC]. 7. The Build-Operate-Transfer Act [BOT] (Republic Act No. 6957 as amended by RA No. 7718) n Projects undertaken under the BOT Law which cost more than One Billion Pesos shall be entitled to the incentives under the Omnibus Investments Code regardless of its inclusion or non-inclusion in the yearly Investment Priorities Plan.

Legal and Regulatory Environment Other Laws Governing Investments 7. BOT Law (Republic Act No. 6957 as amended by RA No. 7718) n liberalized the implementation of the Build. Operate-Transfer Scheme in certain projects, eased the restrictions on government financing and setting and imposition of tolls and charges and wholly foreign-owned corporations are allowed to undertake certain projects under this scheme.

Legal and Regulatory Environment Other Laws Governing Investments 7. BOT Law (Republic Act No. 6957 as amended by RA No. 7718) n In addition, these projects may be granted government support or contributions, either in the form of: 1. 2. partial financing from direct government appropriations and/or from Official Development Assistance of foreign government or institutions, up to fifty percent (50%) of the project cost, and such government undertakings as cost sharing with the agency or local government unit (LGU) involved in the project, or credit enhancements which include a guarantee by the Government on the performance of the obligation of the agency or LGU under its contract with the project proponent.