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Investment Opportunity

Incentives and Restrictions

A foreign investor is offered a lot of incentives when investing in the Philippines. Incentives include tax holidays, tax reduction for labour expenses, and duty-free importation of capital equipment are available for companies investing in preferred areas and registered with the Board of Investments (BOI), Philippines. The sustainability of these incentives has been questioned from time to time. According to some opinions, these incentives create a burden too heavy to carry for the Philippine national economy and therefore should be removed.

To develop confidence of foreign investors on the commitments made by the government of Philippines the land lease times were prolonged in January 1995. The lease contract can be made for 50 years and be renewed once for another 25 years.

Restrictions on foreign participation are mentioned in three negative lists. These lists are administered by the National Economic and Development Authority (NEDA). The division into domestic and export enterprises is relevant when talking about investment incentives. The basic idea is not to offer incentives to companies that would use the benefit to compete in the Philippine market with local companies. A domestic market enterprise produces goods or services solely for the domestic market. Domestic market enterprises with more than 40% foreign participation should have a paid-up capital of at least USD 500 000, if advanced technology is not used.

An export enterprise is a manufacturing, processing or service enterprise exporting at least 60% of its output. Also, a trader buying domestically manufactured products and exporting at least 60% of the purchase is regarded as an export enterprise. If the production is not included on A or B negative lists, there are no restrictions concerning foreign ownership.

If the investment is made in a Special Economic Zone (earlier Export Processing Zone), there are no restrictions on foreign participation. However, these companies are required to export the whole production, unless the company has received specific approval from the Philippine Economic Zone Authority (PEZA). This approval is always made in a specific situation and may not be issued beforehand. Once the approval is gained, the domestic sales cannot exceed 30% of the production.

There are plans to continue the economic liberalization programme, viz. list B might be removed entirely and retail trade is already proposed to be opened to foreigners, too.

 

  • Investment Negative Lists

List A includes limitations made by constitution or special law.

No foreign participation is allowed in:

- mass media
- most licensed professional services (e.g. accountants, lawyers, engineers)
- retail trade
- cooperatives
- private security agencies
- small-scale mining
- fisheries
- rice and corn farming

25% foreign equity is allowed in:

- recruitment agencies
- locally funded public works projects

30% foreign equity is allowed in:

- advertising

40% foreign equity is allowed in:

- resources development and utilization
- land ownership
- public utilities
- educational institutions
- financing companies
- construction

List B restricts foreign investment for reasons of security, defense, health, morals and protection of small and medium-sized enterprises.

40% foreign participation is allowed in:

- Explosives
- Munitions
- Armaments
- dangerous drugs
- massage clinics
- gambling
- domestic market enterprises with capital less than USD 500 000, provided enterprises don't use advanced technology
- small-scale export enterprises with capital less than USD 500 000
- depleting natural resources

List C which limited foreign equity by the capacity of existing enterprises was removed in October 1994.

  • Business Entities

A foreign company may operate in the Philippine markets through an agent or a representative, but also by founding a legal entity. The possible forms of establishment for foreign companies are corporations, partnerships, sole proprietorships, branches, representative offices or regional headquarters.

The most important thing related to separate legal entity is the liability. If a foreign investor is incorporated in the Philippines, the company has a separate legal sphere from the one of its foreign owner. However, the corporate veil can be lifted in some cases and the foreign owner can be made liable for its subsidiary's liabilities. This kind of piercing of the liability has been used even in the case of domestic enterprises in the Philippines.

It is important to notice that incorporators must be natural persons i.e. other corporations can't be subscribers in a new company. Further, the activities carried out by representative offices and regional headquarters are limited. These can't derive any income from the Philippines. A representative office may only disseminate information, promote products and facilitate orders from its head office's customers. Regional headquarters can serve only as a supervisory, communicative and coordinating center for its affiliates, subsidiaries or branches in the region. They cannot participate in any way in the management of other entities of the same corporation situated in the Philippines.

Note:

  • Corporation

5 - 15 individuals separate limited to subscription PHP 5,000 ;incorporators must be natural persons

  • Partnerships

A) GENERAL at least 2 separate unlimited none registration with the SEC if the capital exceeds PHP 3,000
B) LIMITED at least 2 separate at least one partner with limited liability none registration with the SEC if the capital exceeds PHP 3,000

  • Sole Proprietorships

1 none unlimited none advisable only for small-scale business.

  • Branches of Foreign Companies 

foreign corporation: extension of the foreign corporation unlimited.

  • Representative Offices

foreign corporation: extension of the foreign corporation unlimited none; activities limited.

  • Regional Headquarters

foreign corporation: extension of the foreign corporation unlimited none; activities limited.

Registration Procedures

Corporations must be registered with the Securities and Exchange Commission. The registration procedure is eased by the One-Step Action Centers which provide facilities and services for investors to obtain information and documentation needed in one physical window or location. These centers are situated e.g. at the Board of Investments, and Department of Finance (DOF). The SEC provides a special procedure, the "Express Lane" to facilitate the registration of new corporations. The registration takes one day through the "Express Lane" and one to four weeks otherwise.

If the enterprise is engaged in preferred areas of investment under the Investment Priorities Plan (IPP) and wants to enjoy the incentives, the company must register with the BOI.

If the investment is situated in any Special Economic Zone, the registration must be made with the Philippine Economic Zone Authority. The Subic Bay Freeport and Clark Special Economic Zone are administered by their own authorities and the companies operating in these two areas must register with the Subic Bay Metropolitan Authority or the Clark Development Authority.

Taxation

Taxes are levied both by national and local authorities. The government imposes corporate and individual income taxes, estate and gift taxes. The tax rates on individuals are progressive, rising to 35%.

The taxation of corporations depends on whether the corporation is resident or non-resident. If the corporation is organized under the laws of the Philippines, it is considered resident. The importance of this division is in the determination whether the corporation is taxed in the Philippines; and if so, how. The corporate tax rate is a solid 35%.

In addition, there are indirect taxes like Value Added Tax, excise taxes, percentage taxes and stock action taxes. VAT is 10% of the value of the goods or services sold. VAT is imposed on the gross selling price. Excise taxes are imposed on the goods manufactured or produced in the Philippines for domestic sale or consumption.

Local governments levy real estate tax, graduated business tax, fixed business tax and other fees and charges. National tax laws are enacted by the Philippine legislature and are contained in the National Internal Revenue Code. The Philippine tax system generally suffers from structural problems. There is a lot to develop in the field of enforcement and supervision of taxation, only 12% of labour force pays direct taxes. Possibilities for both legal and illegal "tax planning" are evident.

Registration Procedures Required in the Philippines

The following information and documents are needed for registration with the SEC:

- a copy of the articles of incorporation and bylaws
- the corporate treasurer's affidavit of actual deposit of paid up-capital
- the incorporators' statements of assets and liabilities
- a bank certificate of deposit s on paid-up subscriptions
- authorization by the corporate treasurer for the SEC to verify the corporation's bank accounts
- A written undertaking to change the corporate name if this is similar to or resembles the name of an existing corporation.
- the taxpayer identification numbers of the incorporators
- an undertaking to comply with the SEC report requirements
- Personal information on directors, officers and stockholders.

Besides the regular requirements mentioned above, business entities are also required to register with:

- Bureau of Trade Regulations and Consumer Protection (BTRCP): registration of business name / single proprietorships
Central Bank of the Philippines (Bangko Sentral nag Pilipinas): registration of foreign investments for purposes of capital, repatriation and profit remittances
- Bureau of Internal Revenue (BIR): securing tax identification number
- Metro Manila Authority (MMA): securing vocational clearance/business permit for firms located in Metro Manila
- City Halls/Municipal Offices in the localities where the business will be set up: Securing building permit and license to do business
- Social Security System (SSS): Securing employer's SSS-number
- Medicare: Securing membership in the government health care benefits system
- Manila Electric Co. (MERALCO) or local electric utility firms: Securing electric services connection
- Metropolitan Waterworks and Sewerage System or local water utilities administration:
- Securing water services

The Investments Priority Plan includes:

- export activities
- agriculture, food and forestry-based industries
- basic industries
- power generation, transportation, telecommunications infrastructure and services
- tourism
- health products and services
- environmental conservation and protection
- modernization and rehabilitation programmes
- Science and technology-oriented research and development.