Foreign Investment Laws in the Philippines.

FOREIGN INVESTMENT LAWS IN THE PHILIPPINES

Introduction

The Philippines is an archipelago of some 7,100 islands in Southeast Asia. Known as the "Gateway of the East to Asia," this developing country has a liberal foreign investment regime. The country, through fiscal incentives and foreign ownership liberalization, seeks to attract foreign direct investments which will assist in its reconstruction and modernization. The new and fresh approach in its foreign investment laws is consistent with economic globalization and cooperation.

The heart of the foreign investment laws in the Philippines lies in the 1987 Constitution, the Omnibus Investments Code 1987, the Foreign Investments Act 1991 and the Special Economic Zone Act 1995. While numerous other legislations one way or another affect foreign investments in the Philippines, this article’s scope is limited to discussing important provisions of the abovementioned legislations.

The Constitution of the Philippines

The 1987 Constitution of the Philippines empowers the Government to regulate foreign investments within its jurisdiction in accordance with national goals and priorities. The Government has exclusive control over the country's natural resources, although the Government may undertake exploration and development through co-production, joint ventures, or production-sharing agreements with Filipinos or entities in which at least 60% of capital is owned by Filipinos. This 60% requirement also applies in relation to foreign ownership of public utilities and educational institutions.

The Constitution further authorizes the Congress, when national interest dictates, to set minimum Filipino ownership requirements in other areas of investments. The Congress subsequently exercised this authority in the Foreign Investments Act 1991, which is discussed later.

The Omnibus Investments Code 1987

The Omnibus Investments Code 1987 (Code) is the major investment law of the Philippines. It deals with private investments - both foreign and local - in recognition that "private sector [is] the prime mover for economic growth [and that] private initiative is to be encouraged."

The main feature of the Code is that it offers highly-coveted incentives to enterprises, which are registered with the Board of Investments (BOI). To be eligible for registration, a corporation must be organized under the laws of the Philippines with at least 60% of its voting capital stock owned by Filipino nationals. In other words, foreign corporations can own up to 40% of Filipino firms to avail of the incentives.

The 40% restriction does not apply to a foreign enterprise engaged in pioneer projects. Pioneer projects include the manufacture or production of goods or raw materials not presently being produced on a commercial scale; the use of a design, formula, process, or production system which is untried in the country; the pursuit of agricultural, mining, or industrial aspects of food processing which is essential to a declared national self-sufficiency program; or the production and/or use of non-conventional fuels. Thus fully foreign-owned corporations may avail of the incentives of registered enterprises if they bring something new or novel to the country.

...

This is a preview of the whole essay

There are numerous other requirements: the registered enterprise must be engaged in a preferred project authorized in the latest Investment Priorities Plan, be exporting at least fifty percent of its production, or be engaged in providing technical or professional services for exportation of television, motion picture, or musical recordings made in the Philippines. The enterprise must also demonstrate its capability to operate on a sound and efficient basis, and to contribute to both the preferred area in which it is engaged, and to the Philippine economy in general.

Incentives for Registered Enterprises

Fiscal Incentives: The code provides for a six-year income tax holiday (ITH) for pioneer enterprises and a four-year ITH for non-pioneer enterprises. During the ITH period, enterprises are fully exempt from income taxes levied by the national government.

Non-pioneer registered enterprises may avail of a six-year ITH if it is located in a less-developed area. The objective is to promote investments in areas with low per capita gross domestic product, low level of investments or employment or infrastructure, and low access to developed urban centers. Moreover, registered enterprises in certain less developed areas may deduct from taxable income up to 100% of any infrastructure and public utility projects they undertake.

Basic Rights and Guarantees: The Code provides foreign investors with the right to: repatriate the entire proceeds of the liquidation of their investments, remit earnings from investments in the currency in which the investment was originally made; remit amounts necessary to meet interest and principal obligations on foreign loans; and be free from expropriation and requisition of investments.

Incentives for Multinationals: The Code incorporates a sweetener for multinational corporations which establish regional headquarters or regional operating headquarters in the Philippines. These multinational corporations are given exemptions from income tax, import tax and various charges and local fees. Further, these multinationals can establish regional warehouses in economic zones, and thereby import goods or inventory for storage in these warehouses and re-export these goods without being subject to internal revenue tax, customs duty, export tax, or local tax.

The Foreign Investments Act 1991

The Foreign Investments Act 1991 (FIA) allows greater foreign equity participation in Philippine businesses. Enterprises may be up to 100% foreign-owned as long as foreign ownership is not otherwise limited by the Foreign Investments Negative List. The Negative List is promulgated by the President and it specifies foreign ownership limits in various economic activities, mainly related to defense, public health and morals, and constitutionally protected areas.

By allowing foreign equity participation in most economic activities, the FIA reinforces the importance of foreign investment in Filipino economy. It also establishes legal certainty as it sets the extent of foreign equity participation in a given business endeavor. The FIA encourages more foreign firms to own Philippine subsidiaries, maintain greater equity interest in Philippine firms, and set up operations in the Philippines where a joint venture is neither desired nor practical.

Special Economic Zones

The Philippines has over seventy-five proclaimed economic zones. These ecozones were mainly created by the Special Economic Zone Act 1995 (Ecozone Act), or by the Philippine Economic Zone Authority pursuant to its authority under the Ecozone Act. The Ecozone Act declares as its objective:

[The transformation of] . . . selected areas in the country into highly developed agro-industrial, industrial, commercial, tourist, banking, investment and financial centers, where highly trained workers and efficient services will be available to commercial enterprises; [and the promotion of] … flow of investors, both foreign and local, into special economic zones which would generate employment opportunities and establish backward and forward linkages among industries.

The Ecozone Act allows both private and public sectors to develop the following classes of ecozones: industrial estates, export processing zones, free trade zones, tourist/recreational centers, agro-industrial economic zones, information technology parks, and investment, commercial, banking, and financial centers. Ecozones are treated as separate customs territories. Businesses in ecozones are exempt from national and local taxes, but must remit 3% of gross income to the Government, and 2% to the local municipality. Moreover, enterprises in ecozones are entitled to the fiscal incentives under Presidential Decree No. 66, or the incentives for export processing zones under the Code.

Additionally, like the Code, the ecozone guarantees the protection of assets, profits, and other interests of investors. There are generally no ownership restrictions in ecozones.

Conclusion

The foreign investment laws in the Philippines incorporate concepts and themes which are conducive to attract foreign investment. Through the Code, foreign investors can avail of useful fiscal incentives as well as the advantages of setting up regional headquarters, operating headquarters, and warehouses. The FIA enables foreign investors to enjoy greater equity participation. Besides fiscal and equity incentives, the Ecozone Act enables foreign investors to locate enterprises in specialized ecozones to get the benefit of improved infrastructure and facilities therein.

While these laws are positive developments, there are still opportunities for improvements. Efforts in the years ahead must include: harmonizing and reconciling all the foreign investment laws, liberalizing foreign ownership restraints on non-pioneer enterprises, adopting long-term Investment Priorities Plan and Negative List to ensure certainty, reducing bureaucracy to eliminate corruption, complexity and abuse, and streamlining registration procedures and rules. The ultimate goal is to attract foreign capital into the national economy, and the laws should therefore open the economy to foreign investments as much as possible without compromising other national interests.

Bibliography

Primary Materials

Exec. Order No. 139, Fifth Regular Foreign Investment Negative List (2002)

Exec. Order No. 226, Omnibus Investments Code (1987)

Republic Act No. 7042, Foreign Investments Act (1991)

Republic Act No. 7916, Special Economic Zone Act (1995)

Republic Act No. 7918 (1995)

Republic Act No. 8756 (1999)

The Constitution of the Philippines (1987)

Secondary Materials

Claro Parlade, Foreign Direct Investment in the Philippines (Sweet & Maxwell-Asia 1997).

Frank Sader, Attracting Foreign Direct Investment Into Infrastructure (The Int'l Fin. Corp. and the World Bank 2000).

Joaquin Cunanan & Co., How To Invest In The Philippines 13-14 (2002), available at http:// www.pwcglobal.com .

Nagesh Kumar, Globalization and the Quality of Foreign Direct Investment (Oxford 2002).

Nagesh Kumar, Globalization, Foreign Direct Investment and Technology Transfers (Routledge 1998).

Silahis O. Peckley, Information and Communications Technology - RP Has Potential to Become Asia's E- Services Hub, Business World (Phil.), Nov. 22, 2002, at 16.

Sonia M. Zaide, The Philippines: A Unique Nation 6 (2nd ed. 1999).

Susan McMillan, Foreign Direct Investment in Three Regions of the South at the End of the Twentieth Century (MacMillan Press Ltd. 1999).

Theodore H. Moran, Foreign Direct Investment and Development (Inst. for Int'l Econs. 1998).

See Philippines Const. (1987), available at www.chanrobles.com/philsupremelaw1.htm.

Id. art. 12.

Id.

Id. arts. 12 and 15.

Id. art. 12.

Exec. Order No. 226, Omnibus Investments Code (1987) (Phil.), available at www.chanrobles.com/default8eono226.htm.

This essay only deals with the Code in so far it is relevant to foreign investment.

Art. 2, supra note 6.

Id. art. 32

Id.

Id. art. 17.

The Priorities Plan is an annually updated plan prepared by the BOI that sets forth, among other things, categories of economic activity that are to be encouraged. Some "preferred" areas of investment are: ICT, infrastructure, energy sources, drugs and medicine, engineered products, and tourism.

Art. 32, supra note 6.

Republic Act No. 7918 (1995) (Phil.), available at www.chanrobles.com/republicactno7918.htm, art. 39.

Art. 40, supra note 6.

Id.

Id. art. 38.

Republic Act No. 8756 (1999) (Phil.), available at http://www.disini.ph/res_ra8756.html, § 6, art. 64.

Id. § 6, art. 67.

Id. § 6, art. 66.

Id. § 7, art. 69.

Republic Act No. 7042, Foreign Investments Act (1991) (Phil.), available at www.dti.gov.ph/contentment/7/11/files/fia_law.rtf.

Id. § 3.

See, for example, Exec. Order No. 139, Fifth Regular Foreign Investment Negative List (2002) (Phil.).

See Official Web Site of the Board of Investments, at www.boi.gov.ph/

See § 3 of Republic Act No. 7916, Special Economic Zone Act (1995) (Phil.), amended by Republic Act No. 8748 (1995), available at www.chanrobles.com/specialeconomiczoneact.htm.

Id. § 4.

Id. § 24.

The incentives include net operating loss carry over, accelerated depreciation, exemption from export tax, foreign exchange assistance, financial assistance, and exemption from local taxes and licenses: Presidential Decree No. 1786 (1981) (Phil.), available at www.chanrobles.com/presidentialdecreeno1786.htm.

Registered enterprise established in an export-processing zone is entitled to the general incentives provided by the Code, and is also exempt from the payment of local government fees or taxes, except real estate taxes: § 18, supra 27.

Id. § 7.

Id.