Overview Atty. George V. Carmona, PhD

OverviewOverview

Atty. George V. Carmona, PhDAtty. George V. Carmona, PhD

INVESTMENT INVESTMENT AND AND

INCENTIVES INCENTIVES LAWLAW

Historical PerspectiveHistorical Perspective 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 PerspectiveHistorical PerspectiveGovernment’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 PerspectiveHistorical PerspectiveGovernment’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 PerspectiveHistorical 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 PerspectiveHistorical 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 PerspectiveHistorical Perspective 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 PerspectiveHistorical Perspective 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 PolicyCurrent Policy 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 PolicyCurrent Policy governments have competed in

offering various investment incentives to influence the investors’ location decisions. 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 PolicyCurrent Policy2 VIEWPOINTS ON INVESTMENT

INCENTIVES1. 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.

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 PolicyCurrent 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 PolicyConstitutional Policy

1987 Constitution1987 ConstitutionDeclaration of State PolicyDeclaration of State PolicySection 20.Section 20. The State recognizes the The State recognizes the

indispensable role of the private sector, indispensable role of the private sector, encourages private enterprise, and encourages private enterprise, and provides incentives to needed investments.provides incentives to needed investments.

Section 19.Section 19. The State shall develop a self- The State shall develop a self-reliant and independent national economy reliant and independent national economy effectively controlled by Filipinos. effectively controlled by Filipinos.


Article XII. National Economy and Article XII. National Economy and PatrimonyPatrimony

Section 1.Section 1. The goal of the national economy: The goal of the national economy: more equitable distribution of opportunities, more equitable distribution of opportunities,

income, and wealth; income, and wealth; sustained increase in the amount of goods sustained increase in the amount of goods

and services produced by the nation for the and services produced by the nation for the benefit of the people; and benefit of the people; and

expanding productivity as the key to raising expanding productivity as the key to raising the quality of life for all, especially the the quality of life for all, especially the underprivilegedunderprivileged..



Section 1.Section 1. promotion of industrialization promotion of industrialization and full employment based onand full employment based on: :

sound agricultural development and sound agricultural development and agrarian reform agrarian reform through industries that make full and through industries that make full and

efficient use of human and natural efficient use of human and natural resources, which are competitive in both resources, which are competitive in both domestic and foreign markets domestic and foreign markets

Constitutional PolicyConstitutional PolicyArticle XII. National Economy and PatrimonyArticle XII. National Economy and Patrimony

Section 1Section 1.. Protection of Filipino enterprises Protection of Filipino enterprises against unfair foreign competition and trade against unfair foreign competition and trade practices.practices.

Mandates the optimum development of all Mandates the optimum development of all sectors of the economy and all regions of the sectors of the economy and all regions of the country.country.

Private enterprises, including corporations, Private enterprises, including corporations, cooperatives, and similar collective cooperatives, and similar collective organizations are to be encouraged to broaden organizations are to be encouraged to broaden the base of their ownership.the base of their ownership.

Constitutional PolicyConstitutional PolicyArticle XII. National Economy and Article XII. National Economy and

PatrimonyPatrimonySection 2Section 2.. state ownership of all lands of the state ownership of all lands of the

public domain, waters, minerals, coal, public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other timber, wildlife, flora and fauna, and other natural resources.natural resources.

except agricultural lands, all other natural except agricultural lands, all other natural resources shall not be alienated.resources shall not be alienated.

State has to have full control and State has to have full control and supervision in the exploration, development, supervision in the exploration, development, and utilization of natural resources.and utilization of natural resources.



Section 2Section 2.. State has to have full control and State has to have full control and supervision in the exploration, development, supervision in the exploration, development, and utilization of natural resources.and utilization of natural resources.

Can directly undertake or enter into co-Can directly undertake or enter into co-production, joint venture, or production-production, joint venture, or production-sharing agreements with Filipino citizens, or sharing agreements with Filipino citizens, or 60-40 corporations or associations for a 60-40 corporations or associations for a period not exceeding 25 years, renewable for period not exceeding 25 years, renewable for not more than 25 years.not more than 25 years.

Constitutional PolicyConstitutional PolicyArticle XII. National Economy and Article XII. National Economy and

PatrimonyPatrimonySection 2Section 2.. Power of the president to enter into Power of the president to enter into

agreements with foreign-owned corporations agreements with foreign-owned corporations involving either technical or financial involving either technical or financial assistance for large-scale exploration, assistance for large-scale exploration, development, and utilization of resources.development, and utilization of resources.

real contributions to the economic growth real contributions to the economic growth general welfare of the country. general welfare of the country. development and use of local scientific and technical development and use of local scientific and technical

resources.resources. Protection of the rights of indigenous cultural communities Protection of the rights of indigenous cultural communities

to their ancestral lands to ensure their economic, social, and to their ancestral lands to ensure their economic, social, and cultural well-being (Section 5)cultural well-being (Section 5)

Constitutional PolicyConstitutional PolicyEconomic 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 PolicyConstitutional PolicySection 10. Mandate to Congress with Section 10. Mandate to Congress with

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

Constitutional PolicyConstitutional PolicySection 10. Preferential treatment to Section 10. Preferential treatment to

Filipinos in the grant of rights, Filipinos in the grant of rights, privileges, and concessions covering the privileges, and concessions covering the national economy and patrimony.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 Regulation and exercise of authority over foreign investments within its national foreign investments within its national jurisdiction and in accordance with its jurisdiction and in accordance with its national goals and priorities.national goals and priorities.

Constitutional PolicyConstitutional PolicySection 17. In times of national emergency, when Section 17. In times of national emergency, when

the public interest so requires, the State may, the public interest so requires, the State may, during the emergency and under reasonable during the emergency and under reasonable terms prescribed by it, temporarily take over or terms prescribed by it, temporarily take over or direct the operation of any privately owned direct the operation of any privately owned public utility or business affected with public public utility or business affected with public interest.interest.

Section 18. The State may, in the interest of Section 18. The State may, in the interest of national welfare or defense, establish and national welfare or defense, establish and operate vital industries and, upon payment of operate vital industries and, upon payment of just compensation, transfer to public just compensation, transfer to public ownership utilities and other private ownership utilities and other private enterprises to be operated by the Government.enterprises to be operated by the Government.


Section 19. The State shall regulate or Section 19. The State shall regulate or prohibit monopolies when the public prohibit monopolies when the public interest so requires. No combinations interest so requires. No combinations in restraint of trade or unfair in restraint of trade or unfair competition shall be allowed.competition shall be allowed.

Section 22. Acts which circumvent or Section 22. Acts which circumvent or negate any of the provisions of this negate any of the provisions of this Article shall be considered inimical to Article shall be considered inimical to the national interest and subject to the national interest and subject to criminal and civil sanctions, as may be criminal and civil sanctions, as may be provided by law.provided by law.

Legal and Regulatory Legal and Regulatory EnvironmentEnvironment

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.


The Omnibus Investments Code of 1987Six 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


Book II. Foreign Investments Without Incentives

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.


Books III and IV Have been amended by Republic Act

No. 8756

Book VI Has been amended by Special

Economic Zones Act of 1995 (Republic Act 7916, as amended by Republic Act 8748)


Basic Rights and Guarantees Given to Investors

1. REPATRIATION OF INVESTMENTS 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 at the exchange rate prevailing at the time

thereof to meet the payment of interest and the principal on

foreign loans and foreign obligations arising from technological assistance contracts.


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

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 except in the event of war or national emergency and only

for the duration.


Investments with Incentives (Book I)

General Rule 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) at least 50% of production is for exports, if Filipino-

owned enterprise, at least 70% of production is for exports, if majority

foreign-owned enterprise (more than 40% foreign equity)


Types of IncentivesA. Fiscal IncentivesB. Non-Fiscal (Concessions)

given to BOI-registered enterprises


Types of IncentivesA. Fiscal Incentives

1. Income Tax Holiday2. Exemption From Taxes And Duties On

Imported Spare Parts3. Exemption From Wharfage Dues And

Export Tax, Duty, Impost And Fees4. Tax Exemption On Breeding Stocks And

Genetic Materials5. Tax Credits6. Additional Deductions from Taxable

Income


Types of IncentivesB. Non-Fiscal Incentives

1. Employment Of Foreign Nationals2. Simplification of customs procedures3. Importation of consigned equipment4. The privilege to operate a bonded

manufacturing/trading warehouse


Types of IncentivesC. Additional Incentives for

Locating Project in Less Developed Areas

1. Employment Of Foreign Nationals2. Simplification of customs procedures3. Importation of consigned equipment4. The privilege to operate a bonded

manufacturing/trading warehouse


Types of InvestmentsA. Pioneer Areas of Investments 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 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.


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;


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;


A. Pioneer Areas of Investments produce non-conventional fuels

or manufacture equipment which utilizes non-conventional 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)

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 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 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 Investments Act Negative List 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 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.


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.


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.


List B 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.


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;


Defines the term “Doing Business” to include5. 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.


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.


Type of Investments that Can be Made1. 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 domestic market enterprise may change its status to export enterprise if over a three (3) year period it export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent consistently exports in each year thereof sixty per cent (60%) or more of its output.(60%) or more of its output.


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.


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.


Modes of Investment 5. Regional Operating Office a branch office established in the Philippines

engaged in any one of the following services: 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.


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.


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.


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. Corporate Income Tax and VAT2. Exemption from all kinds of local taxes, fees

and charges, except for real property tax on land improvements and equipment;

3. 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. Multiple entry visa, including those of spouse

and unmarried children below age 21;2. Withholding tax of 15% on compensation income

applicable to both alien and Filipino executives holding managerial and technical positions;

3. 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

4. Tax and duty free importation of personal and household effects.


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.


Other Laws Governing Investments3. 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.


Other Laws Governing Investments6. 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.


Other Laws Governing Investments

7. BOT Law (Republic Act No. 6957 as amended by RA No. 7718)

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.


Other Laws Governing Investments7. 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. 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

2. 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.

Overview Atty. George V. Carmona, PhD

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Transcript of Overview Atty. George V. Carmona, PhD