Transcript Overview Dr. George V. Carmona

INVESTMENT AND
INCENTIVES LAW
Overview
Atty. George V. Carmona, PhD
Historical Perspective
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Industrialization has been a major development
goal for the Philippines since its independence.
Its pace has been slow by comparison with the
our neighboring countries, particularly the
ASEAN.
country has undergone several trade and
investment policy regimes in its pursuit for
industrialization.
Historical Perspective
Government’s Trade And Investment Policy Regimes
1950s and 1960s
 the country was a classic case of the 'import
substitution syndrome'
 based on the expansion of consumer goods production
for the domestic market behind high protective walls.
 gave rise to import-dependent, inward-looking and
capital intensive industries and an oligopolistic
industrial structure characterized by unrealized scale
economies.
Historical Perspective
Government’s Trade And Investment Policy Regimes
1970s and 1980s
 When the goal of industrialization was not achieved
attempts towards the promotion of exports were made.
 Reforms were made but the underlying weaknesses of
the economy were not resolved.
 Inability to keep pace with the fast growing economies
in the region, pressures were mounting, both from
internal and external sources, for the country to
undergo industrial restructuring.
Historical Perspective
Government’s Trade And Investment Policy
Regimes
1980s to 1990s
 the country finally opted to adopt policies to
shift to an outward orientation by unilaterally
liberalizing trade, foreign investment and the
exchange rate.
Historical Perspective

trend in the 1990s and beyond is to go global as
a result of the more liberalized trade and
investment environment prompted by the
formation of the GATT/WTO and the regional
trading blocs like EU, APEC, AFTA and
NAFTA.
Historical Perspective
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Trade and economic relations between and
among member economies of these trading
blocs are governed by agreed guiding principles
and objectives.
APEC advocates free and open trade and
investment as one of its trade and investment
policy priorities
Historical Perspective
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recent developments in the regional and
international arena pose several challenges for
the Philippine government.
Philippines is challenged to affirm its
commitment to liberalization and deregulation
in order to take advantage of the opportunities
that lie ahead as a result of the movements
towards the globalization of the trade and
investment environments.
Current Policy
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In the last two decades, developing countries
liberalized their policies to attract foreign direct
investment (FDI) inflows.
FDI as a potential source of employment and
exports along with spillover benefits from the
knowledge and technology that FDI inflows
bring.
Current Policy
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governments have competed in offering various
investment incentives to influence the investors’
location decisions.
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incentives include fiscal measures such as reduced
tax rates on profits, tax holidays, import duty
exemptions and accounting rules allowing
accelerated depreciation and loss carry forwards for
tax purposes.
Current Policy
2 VIEWPOINTS ON INVESTMENT
INCENTIVES
1. early literature on the determinants of FDI viewed
investment incentives as a relatively minor
determinant.
 investors are influenced in their decisions by strong
economic fundamentals of the host economies.
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market and political factors like market size and level of
real income, worker skill levels, availability of
infrastructure and other resources that facilitate efficient
specialization of production, trade policies, and political
and macroeconomic stability.
Current Policy
2 VIEWPOINTS ON INVESTMENT
INCENTIVES
2. With increasing globalization and the liberalization
of trade and capital flows, the view on the limited
effect of incentives on FDI has changed.
 Econometric studies now suggest that incentives have
become more significant determinants of FDI flows

FDI is lower in regions with higher corporate taxes
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:
 more equitable distribution of opportunities, income,
and wealth;
 sustained increase in the amount of goods and
services produced by the nation for the benefit of the
people; and
 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:
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sound agricultural development and agrarian
reform
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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.
 Mandates the optimum development of all sectors of
the economy and all regions of the country.
 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.
 except agricultural lands, all other natural resources
shall not be alienated.
 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.
 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.
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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 well-being
(Section 5)
Constitutional Policy
Economic Activities Being Regulated
Allowable
Foreign
Equity
Relevant Provisions of
the 1987
Constitution
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 institutions.
40%
Section 4, Article 14
Adverstising.
30%
Section 11, Article 16
Ownership of public and private land.
0%
Section 7, Article 12
Ownership of mass media.
0%
Section 11, Article 16.
Limit of Foreign Equity Participation in Certain Areas of
Investments
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.
 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)
 Basic law governing investments in the
Philippines.
 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 Asiapacific 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
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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
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Have been amended by Republic Act No. 8756
Book VI
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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
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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
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at the exchange rate prevailing at the time thereof
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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
no expropriation by the government of the property
represented by the investments or of the property of
enterprises except
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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
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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
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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)
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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)
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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
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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
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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
 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.
 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
 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
 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)
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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
 enumerates the areas of economic activities
reserved, whether partially or totally, for
Philippine nationals.

List A – enumerates the areas of activities
reserved to Philippine nationals by mandate of the
Constitution and specific laws

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

List B – contains the areas of activities and
enterprises reserved to Philippine nationals
pursuant to law.

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
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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 .
Investments with Restrictions
List A
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restricts foreign investment in the practice of licensed
professions as well as in the following industries:
mass media, small-scale mining, private security
agencies, and the manufacture of firecrackers and
pyrotechnic devices.
Foreign ownership ceilings are imposed on
enterprises engaged in, among others, financing,
advertising, domestic air transport, public utilities,
pawnshop operations, education, employee
recruitment, public works construction and repair
(except Build-Operate-Transfer and foreign-funded
or assisted projects), and commercial deep sea fishing.
Investments with Restrictions
List A

The exploration and development of natural resources
must be undertaken under production sharing or similar
arrangements with the government. For small-scale
projects, a company should be at least 60 percent
Filipino-owned to qualify. High-cost and high-risk
activities such as oil exploration and large-scale mining
are open to 100 percent foreign ownership. In 1998,
private domestic construction was deleted from List A,
lifting the 40 percent foreign ownership ceiling previously
imposed on such entities.
Investments with Restrictions
List A

Rural banking remains completely closed to foreigners.
In securities underwriting, the limit on foreign ownership
was raised from 40 percent to 60 percent in 1997. The
limit for financing companies was also raised to 60
percent in 1998. The insurance industry was opened up to
majority foreign ownership in 1994 with minimum capital
requirements increasing along with the degree of foreign
ownership.

In retail trade, foreign equity remains banned in retail
companies capitalized at less than $2.5 million.
Investments with Restrictions
List B
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foreign ownership in enterprises is generally
restricted to 40% due to national security,
defense, public health, and safety reasons.
protects domestic small- and medium-sized
firms by restricting foreign ownership to no more
than 40 percent in non-export firms capitalized at
no less than US$200,000.
Foreign Investment Act
(repealed Book II)
Defines the term “Doing Business” to include
1. soliciting orders;
2. service contracts;
3. 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

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

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

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

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

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

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

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

a branch office established in the Philippines engaged in
any one of the following services:
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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
 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
 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
 transfer of systematic knowledge for the
manufacture of a product or the application of a
process;
 rendering of a service, including management
contracts;
 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

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.

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.

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)

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 )

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 )

provides for incentives to business enterprises in the export
industry. .
4. The Investor's Lease Act (Republic Act No. 7652)

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

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

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)

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)

liberalized the implementation of the BuildOperate-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)

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.