How to Invest In The Philippines
(by Joaquin Cunanan & Co.)
1. What requirements must be complied with before
a foreign corporation can engage in business in the Philippines?
Before a foreign corporation can engage in
business in the Philippines, it must first secure the necessary
licenses or registration certificates from the appropriate
government agencies. Generally, the registration process
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 appropriate government agency depending on the
project's location, as follows:
• Board of Investments (BOI) –
for projects outside any of the special economic zones (SEZ)
• Philippine Economic Zone Authority (PEZA) –
for projects to be located in any of the SEZ's under the
PEZA
• Subic Bay Metropolitan Authority – for projects
to be located in the Subic Bay Freeport
• Clark Development Corporation – for projects
to be located in the Clark Special Economic Zone
• Cagayan Economic Zone Authority – for projects
to be located in the Cagayan Special Economic Zone
• Zamboanga Economic Zone Authority – for projects
to be located in the Zamboanga City Special Economic Zone
2. Is a foreign investor allowed
to own 100% of a business entity?
With the liberalization of the foreign investments
law, 100% foreign equity may be allowed in all areas of
investment except financial institutions and those included
in the Foreign Investment Negative List (FINL). Executive
Order (EO) No. 11 has been issued approving the Third FINL
which takes effect on October 24, 1998. This list includes:
List A – areas reserved
to Filipinos by mandate of the Constitution and special
laws such as but not limited to:
a. Mass media except recording, practice
of licensed profession, retail trade, cooperative, small
scale mining, etc., where foreign ownership is prohibited.
b. Advertising, ownership of land, operation and management
of public utilities, etc., where only minority foreign ownership
is allowed.
List B – areas that
are defense related, those with adverse effects on public
health and morals and domestic market enterprise with paid-in
capital of less than US$2000,000, unless they involve advanced
technology or directly employ at least 50 employees, in
which case, the paid-up capital can be US$100,000 only.
3. What is the general policy of
the government on foreign investments? Is this policy likely
to change in the near future?
The government encourages foreign investments
which will provide significant employment opportunities
relative to the amount of capital being invested; and provide
a foundation for the future development of the economy.
Investment-related rules have been liberalized
to facilitate entry of foreign investments. This thrust
is expected to continue.
4. What are the major incentives
available to a registered enterprise?
An enterprise registered with the Board of
Investments pursuant to the 1987 Omnibus Investments Code
(EO 226) is entitled to the followed incentives, among others,
subject to certain terms and conditions:
a. Income tax liability holiday (ITH) for
six years for pioneer firms and generally four years for
non-pioneer firms. If a non-pioneer firm is located in a
less developed area, it shall generally be entitled to 6
years ITH. Firms locating within Metro Manila shall not
be granted ITH unless they are:
i. Within a government industrial estate
ii. Service-type projects with no manufacturing facilities
iii. Power generating plants
iv. Exporters with expansion projects
b. Tax credit on raw materials, supplies, and semi-manufactured
products
c. Additional deduction from taxable income for labor expense
(cannot be simultaneously enjoyed with the ITH incentive)
d. Additional deduction from taxable income for necessary
and major infrastructure works (cannot be simultaneously
enjoyed with the ITH incentive)
Certain non-fiscal incentives are also available
to registered enterprises, among which are: employment of
foreign nations, guaranteed repatriation of foreign investments
and earnings thereon, and importation of consigned equipment
for an unlimited period subject to posting of a re-export
bond.
The Special Economic Zone Act of 1995 mandates
the PEZA to operate, administer, manage and develop Special
Economic Zones or Ecozones.
Business enterprises operating within Ecozones
shall be entitled to the incentives granted to registered
enterprises under Presidential Decree No. 66 or Book VI
of EO 226. In addition to the incentives mentioned above
for BOI-registered enterprises, PEZA-registered exporters
enjoy tax and duty exemptions on importations of capital
equipment, raw materials and other merchandise directly
needed in its registered operations.
Furthermore, exporters using local materials
as inputs shall enjoy the same benefits provided for in
the Export Development Act of 1994. Moreover, in lieu of
paying all local and national taxes, business enterprises
within the Ecozone, whose PD 66 or EO 266 incentives have
lapsed, shall remit to the national government a preferential
rate of 5% of their gross income as final tax.
Two other special economic zones were created
under two separate special laws. These are the Cagayan Special
Economic Zone and the Zamboanga City Special Economic Zone.
The incentives granted to those that will locate in these
ecozones are similar to the incentives granted to PEZA ecozone
enterprises.
Enterprises allowed to operate within the
Subic Bay Freeport (SBF) shall, in lieu of paying all other
taxes, pay a final tax of 5% of gross income provided their
income from local (non-export) sales shall not exceed 30%
of their income from all sources.
Enterprises locating within the Clark Special
Economic Zone (former American Airbase at Clark Field) and
Poro Point Special Economic and Freeport Zone (former Wallace
Air Station and its adjoining areas) are granted incentives
similar to those given to SBF enterprises.
5. Are investment incentives transferable?
In general, investment incentives are not
transferable. Tax credit certificates may, however, be transferred
subject to certain conditions.
In the case of tax credit certificates issued
pursuant to the Export Development Act of 1994, said documents
are considered negotiable instruments and may be transferred
to any person, natural or juridical, except to local government
units.
Joint Ventures
1. If we enter into a joint venture
with Philippine investors, will the SEC allow us to 51%
or more of its equity?
The SEC will allow foreign equity in excess
of 50% provided the area of activity involved is not covered
by the third regular foreign investments negative list under
EO No. 11.
2. If we are restricted to a 40%
equity holding, how can we assure ourselves of control of
the operations?
In general, control of an enterprise goes
to the group which has the power to determine its policies
and the manner in which the enterprise is to be run, and
such assurance of control is obtained through majority ownership
of the voting capital stock of the corporation. There are,
however, certain arrangements that could provide a minority
group with working control. These arrangements include:
(a) diffusion of majority ownership, (b) licensing agreements,
and (c) voting trust arrangements among stockholders.
It is also advisable that the SEC be consulted
in any arrangement involving voting rights to ascertain
that no condition of the permit to invest in the enterprise
will be violated.
3. Are there any requirements that
directors and other officers must be Filipino citizens and/or
residents?
The majority of the directors must be residents
of the Philippines and the secretary must be a resident
Filipino citizen. However, for banks and banking institutions
and domestic air carriers, at least two-thirds of the members
of the board must be citizens of the Philippines. For a
firm engaged in a nationalized or partially nationalized
activity, the maximum number of foreign directors must not
exceed the proportion of actual foreign equity in the firm,
and all of its executive and managing officers must be Filipino
citizens.
4. How are joint ventures taxed?
An unincorporated joint venture is taxed
like a corporation. The share of the joint venture partners
will no longer be taxable to them because they partake of
dividends if paid to a domestic or resident corporation.
However, an unincorporated joint venture
formed for the purpose of undertaking a construction project
or engaging in petroleum operations is not subject to the
corporate income tax. Only the joint venture partners will
be taxed on their respective shares.
For more information, please contact:
Usec. Eduardo
Jarque, Jr
Undersecretary, Tourism Planning and Promotions
DOT Building
Agrifina Circle, Rizal Park
Manila 1000
Voice: (2) 536 0496/525 1805
Fax: (2) 525 6538
ejarquejr@tourism.gov.ph
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