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How To Invest In The Philippines

How to invest in The Philippines

Table of Contents

Message from the Chairman

Foreword

The Philippines – A Profile 1

General

1 What requirements must be complied with before a foreign
corporation can engage in business in the Philippines? 12

2 Is a foreign investor allowed to own 100% of a business entity? 13

3 What is the general policy of the government regarding foreign 13

4 What are the major incentives available to a registration enterprise? 13

5 Are investment incentives transferable? 15

Board of Investment / Philippine Economic Zone Authority

1 Does our proposed project qualify for registration with the BOI/PEZA? 16

2 How does one file an application with the BOI/PEZA? 16

3 What possible obstacle would our application meet? 17

4 How long will it take to obtain BOI/PEZA approval once all
requirements are complied with? 17

5 Assuming approval is obtained, what restrictions are ordinarily
attached? 17

6 How much time is an investor allowed to start his project? 17

Securities and Exchange Commission

1 Why is it necessary to register with the SEC? 18

2 Can the application for registration with the BOI/PEZA and the
SEC be filed simultaneously, or must we wait for BOI/PEZA
approval before going to the SEC? 18

3 How long after the submission of the application and all the
required documents will approval be obtained? 18

4 Is there requirement that directors be residents? 18

4 Is a domestic corporation subject to a minimum subscription and
payment on such subscription? 18

Bangko Sentral ng Pilipinas

1 Can foreign investment funds be inwardly remitted outside of the
banking system? 19

2 Is registration of foreign investment with the BSP required? 19

3 Is inward remittance of foreign investment required to be converted
immediately to Philippine Pesos? 19

4 What are the current regulations regarding profit remittances and
repatriation of capital? 19

Royalties, Technical Service Agreements, Etc.

1 Can we charge royalties and similar fees? 20

2 Are these taxable in the Philippines? 20

3 What rules govern the reimbursement of cost incurred abroad? 20

4 What constitute ‘technology transfer arrangements’? 21

5 How long does it takes to obtain government approval? 21

6 Do we have to get the Bangko Sentral approval to remit the royalty
or agreed fees to the foreign company? What documentary support
is required/ 21

Taxes

1 What are the income tax rates in the Philippines? 22

2 What business taxes are we subject to? 24

3 What are the advantages and disadvantages of s branch vis-à-vis
a domestic subsidiary? 26

4 What effect will a tax treaty with my country have on the tax rates? 26

Regional or Area Headquarters (RHQ) and Regional Operating
Headquarters (ROHQ)

1 What is a RHQ and what are the activities it can engage in? 27

2 What is a ROHQ and what are the activities it can engage in? 27

3 What are the funding requirements for a RHQ and a ROHG? 28

4 What are the taxes applicable and incentives available
to a RHQ / ROHQ? 28

Joint Ventures

1 If we enter into a joint venture with Philippine investors, will the SEC
allow us to hold 51% or more of its equity? 30

2 If we are registered to a 40% equity holding, how can we obtain
control of the operations? 30

3 Are there any requirements that directors and other officers must
be Filipino citizens and/or residents? 30

4 How are joint ventures taxed? 30

Retail Trade

1 Can foreign investor engage in retail trade in the Philippines? 31

2 How is “Retail Trade” defined? 31

3 To what extent is foreign ownership of retail enterprises in the
country permitted? 31

4 What are the criteria to qualify as foreign retailers in the Philippines? 31

5 Can foreign investors a acquire shares in an existing Philippine
retail company? 32

6 What are the duties of a foreign participant with respect to its
capital investment? 32

7 Once it has complied with the requirements for pre-qualification
and registration, what other restrictions must a foreign retailer observe? 32

Rules on Borrowings

1 Can we finance our project through foreign borrowings? 33

2 Are we subject to certain debt-to-equity ratio requirements? 33

3 Can a foreign company borrow from a private individual or a
non-financial institution? 33

Others

1 Could you give some guidelines as to prevailing-

a) Salary rates for office/administrative staff? 34
b) Rentals for office space in Makati? 34
c) Rentals for housing of expatriate executives? 34
d) Cost of acquiring and maintaining automobiles? 35
e) Tuition and school fees for children
and high school students? 35

2 How easily can work permits be obtained for expatriate
executives? 35

3 How easily can expatriate executives obtain clearances for travel
abroad? 35

4 May expatriate executives receive their compensation in foreign
currencies? 36

5 Will the expatriates be allowed to convert into foreign currency
any excess pesos that they may have upon termination of their
assignment? 36

6 Is there any public offering of stock or corporate share I the
Philippines? 36

`APPENDICES

I GNP/GDP and Sectoral Growth Rates 39

II Third Regular Foreign Investment Negative List (E.O. 11) 41

III Incomes Tax Rates for Special Corporations 45

IV Philippine Tax Treaties in Force as of September 2000 47

THE PHILIPPINES
– A PROFILE

Strategic Location, skilled and highly trainable human resources, a stable democratic government and vibrant free enterprise economy make the Philippines an attractive investment destination

Investor considerations The Philippines, with its strategic location, is a gateway to the huge Asian market. Its considerable attractions as an investment destination include:

* A pool of English-speaker who are highly
trainable. Their capabilities and merits as blue-collar workers, technicians professional
and managers have been confirmed in posting with resident foreign firms and with overseas contractors.

* A large potential market for consumer goods on account of its fast-growing population. Its ASEAN affiliation provides further opportunities for access to the large ASEAN Free Trade Area (AFTA).

* The foreign-investor friendly posture of government. It has manifested its commitment to create conditions that attract foreign investments. The processing of foreign investment is facilitated through a one-stop shop at the board of Investment. Liberalized policies and regulations on foreign investment continue to be put in place.

* Availability and accessibility of special economic zone and free ports in various parts of the country where locators are granted fiscal and non-fiscal incentives.

* A highly developed legal system.

Geography and climate The Philippines is an archipelago of approximately 7,100
islands, located in Southeast Asian. It is surrounded in he
north by Japan, Hong Kong, Taiwan, South Korea; in the
south by Singapore, Malaysia and Indonesia; and in the west by Thailand. To the east vast expanse of the Pacific Ocean, which earned for the country the title,” gateway of
the west to Asia”

The total land area of the country is approximately 300,000 square kilometers, about the size of Italy or the state of Arizona in the United States. The country has a tropical climate and two seasons; rainy, from June to November, and dry, between December and May. It is rich in natural resources such as vast arable lands, fishing grounds, forest and extensive mineral reserves.

From north to south, it is divided into the three major island grouping of Luzon, Visayas and Mindanao and for
administrative purposes, in to 16 regions: 7 in Luzon, 3 in the Visayas and 6 in Mindanao.

History The Philippines was colonized by Spain for almost 400
years and then by the United States of America for the next 50 years. It proclaimed its independence from Spain on June 12,1889. As an American ally, it was occupied for 4 years by the Japanese Imperial Army during World War II. It gained its independence from American force in 1946 and enjoyed 26 years of democratic rule until a dictatorship was established in 1972. The 15-years dictatorship was toppled by a peaceful “ people power “ March in 1986 and a democratic government was installed, with Ms. Corazon Aquino as president. Peaceful elections held in May 1992 and in May 1998 ushered in the governments of Presidents Fidel V. Ramos and Joseph E. Estrada, respectively.

The political system Under the 1987 Constitution, the Philippines was and administrative declared a democratic republican state whose system of structure government is the presidential form patterned after the American model. There are 21 departments in the executive branch, more than 200 congressmen and 24 senators seats in the legislative branch, and 15 justices in the Supreme Court (judicial branch)

Philippines law is a consolidation of Anglo-American, Roman and Spanish laws and the indigenous customs and traditions of Filipinos. The 1987 Constitution is the fundamental law of the land. Other sources of Philippine law are the Civil Code, Penal Code, National Internal Revenue Code, Labor Code, and Code of Commerce, Judicial decisions and pronouncement, letters of instructions, administrative rules and regulations, as well as order issued by the three branches of the government constitute part of the law of the land.

For the past several years, the government has been
continuously undertaking stabilization efforts. It worked
towards the attainment of an impressive economic growth to uplift the economic well-being of the greater mass of its constituents through a modified social market environment and through a policy of self-determination by the regions.

The national government veered away from undue
intervention in the market place and its historic centric
posturing through the privatization of some government
owned and controlled corporations. It promoted an
environment conductive to greater private sector participation and responsibility in the economic and social development of the country. Likewise, it developed government powers to the local units and pursued the dispersal of economic activities to the countryside.

Furthermore, people empowerment was pursued through the continued implementation on policies such as: (1) the
Comprehensive Agrarian Reform Program (CARP) which
gives farmers ownership over the land they till; (2) the policy to encourage labor-intensive and export-oriented industries; and (3) the take-over by non-government organizations (NGOs) of market intervention activities to protect the interests of the general public.

President Joseph Ejercito Estrada, who won by a landslide in the May 1998 national elections, vowed to continue most of the programs and policies started by his predecessor, President Fidel Ramos . In this regard, the government set a 10-point action program which includes the following:
. Commitment to continue the basic economic and
foreign policy framework of the Ramos administration and to successfully compete in the global economy;
. Initiation of sustainable social safety net programs and a responsive style of governance; and
. Enforcement of a comprehensive peace and order
program, energizing the bureaucracy, devolving
development to the regions and inculcating the
principles of the independence and interdependence, self-reliance and mutual assistance in the civil society.

The Medium-Term Philippines Development Plan (MTPDP) from 1999-2004 essentially fleshes out the Estrada Administration’s 10-point action program as it envisions a sustainable development path anchored on growth and social equity.

Briefly stated, the Estrada administration’s agenda is
consistent with his campaign slogan, i.e., JEEP which stands for justice, environment, economy ,and peace.

The Visiting Force Agreement (VFA) was ratified by the
Senate on May 26, 1999. It will allow US troops to visit the country and to conduct joint military exercise with their Filipino counterparts. The VFA ratification is expected not only the Philippines but also to improve and foster economic and political stability in the region.

The socio-cultural environment

Population There are approximately 76 million Filipino of Indo- Malay, Chinese and Spanish background. The population grows at an annual rate 2.3%. about 62% of the population consist of ages between 15 and 64 years. The highest concentration of people is in the National Capital Region or Metro Manila, Region IV-Southern Tagalog, Region III-Central Luzon and Region VI-Western Visayas.

Labor force About 40% of the total population are of working age of
which 91% are employed. Approximately 500,000 persons enter the labor force every year. Filipino labor is highly trainable and is preferred for its English-speaking ability. A natural inclination attributed to Filipinos is their artistic and creative bent, which is the reason why they have been successful in design and related enterprises.

Language Most Filipinos are bi-lingual, speaking English and Filipino or a native language like Ilocano or Cebuano. A small percentage of the population speaks Chinese or Spanish.

Religion The Philippines is the only one predominantly Christian
country in Asia. About 83% are Roman Catholic, 12% are Protestant or member of other Christian denomination and 5% are Muslims. The latter are mainly concentrated in Mindanao .

Education The Filipino value education highly. They look at it as a
vehicle for a better future. The government provides free
education at the primary and secondary levels. The basic
literacy rate is 93.9%. The Philippines is reported to have
one of the highest number of Master in business
Administration (MBA) graduates in the world. There are 130 MBA schools in the country, among which is the Asian Institute of Management (AIM).

Health The average life expectancy of the Filipino male is 66 years while that of the Filipino female is 71 years.

The Press There are 387 national and local newspapers, at least 138
TV station and 540 radio stations all over the country, a
situation which is reflective of the extent of press freedom in the Philippines.

The economic environment

General market structure The Philippines adheres to the principle of the enterprise
and recognizes the indispensable role of the private sector in the economic development of the country. Among the
structural reforms initiated are liberalization of imports,
deregulation of vital industries, relaxation of investment
rules, privatization of government owned or controlled
corporations, etc. The resurgence of democratic sentiments and the realization that the economy needs to be more competitive and outward looking in order to survive the onslaught of market globalization, have triggered the opening up of the economy.

The Philippines’ membership in the World Trade
Organization (WTO) and participation in the Asian Free
Trade Agreement (AFTA) and the General Agreement on
Tariff and Trade (GATT) are further manifestation of the
government’s commitment to open trade.

Major Economic According to Bangko Sentral ng Pilipinas (BSP) statistics, Indicators the national output or real Gross National Product (GNP)
increased only by .08% from 1997 to 1998, while the Gross Domestic Product (GDP) contracted by .54% during the same period. This situation could be attributed to the regional crisis that hit Asia from mid-1997 to end of 1998.

It has been observed, however, that the Philippines started to recover ahead of other countries in the region because of continued political stability; prudent monetary and fiscal measures; bolder moves towards deregulation, liberalization and privatization; and improved infrastructure development through the expanded build- operate-transfer (BOT) programs.

GNP grew by 2.04% in the first quarter of 1999 compared to the increase of only 1.5%during the first quarter of 1998. GNP, on the other hand, grew by 1.19% during the first quarter of 1999, while it grew by only 1.14% during the first quarter of 1998. As the Asian financial crisis eases up, the Philippines is expected to attain about 3.0% at 3.2% growth rate at the end of 1999. Contributions of the various production sectors to the 1998 gross domestic output are as follows; services, 45.1%; industry, 35.4%, and agriculture 19.5%(See Appendix 1 for details)

Agriculture The main agricultural products of the country are rice, corn, coconut, and sugar. The Philippines is one of the largest exporter of coconut oil and sugar but this comparative advantage has declined over the years due to the development of substitutes and the increase number of
other exporter-countries.

Mining The Philippines is rich in mineral resources. For this reason, among the early industries developed by the colonizers were gold and copper mining. The Mining Act of 1995 liberalized the industry, paving the way for the entry of foreign mining firms with a package of incentives, among which are net operating loss carry-over and accelerated depreciation.

Oil and gas exploration The Philippines is sitting on at least 850 million barrels of oil and 2.7 trillion cubic feet of natural gas. Oil and gas
exploration activities will be extensively pursued under the 30-years Philippines Energy Plan covering the years 1996 to energy department targets show that an average often wells will be drilled during the period 1996 to 2005.

Manufacturing BSP figures show that in terms of positive contribution to
overall growth rate of production value, the dominant
sector for 1998 were; electrical machinery (27.5%);
furniture and fixtures (14.8%); glass and glass products
(11.1%); beverage (10.1%); and chemical plastic and
chemical products (9.9%).

Construction Unlike in the past where the growth of the industry was
usually government-led, the private sector is now seen as a major mover. Private investors continue to show interest in infrastructure project under the expanded BOT programs. At the same time, the government is also pursuing completion of several key infrastructure project in line with its economic growth program.

Utilities Based on the Philippines Energy Plan from 1996 to 2025, a total of P7.7 trillion will be required for the energy program over the 30-years period. The private sector is expected to raise 92% of the financial requirements while the government will finance the balance of about P700 billion.

Total energy requirements are estimated to increase at an
average rate of 6.6% annually for the period 1996 to 2005. To meet the growing demand for electricity, a total of 92,138 MW will be made available during the 30-years period. Power project totaling 12,978 MW, which have to be ready for commissioning between 1996 and 2005, have been firmed up. The Department of Energy has targeted an energy self-sufficiency level of 40% over the period with the setting up of major projects.

Transportation, The aggregate transport, communication and storage communication and sector grew by an average of 6.48% from 1998 to 1998. storage Despite the financial crisis, there were still improvements in land and water transport facilities. The liberalization of the local shipping and aviation industries as well as the
telecommunication industry spurred growth in the sector.

Banking and Finance Data gathered from the BSP showed that the banking system includes 53 commercial banks (of which 12 are either full branches or subsidiaries of foreign banks), 117 thrift banks and 829 rural banks (including head offices and branches throughout the country).

The finance sector grew by 3% in 1998, down from 8% in
` 1997. A regime of high interest rates ushered in by the
currency crisis discouraged loan availments and contracted the bank’s income from intermediation. However, with the improving economic conditions, the finance sector is expected to grow at a higher rate by the end of 1999.

Services, in general The export of consultancy services is one area where the
Philippines is considered to have a competitive advantage.
Specific areas are (a) information technology (IT);(b)
computer software services (customized software
consultancy, contract programming, training and
documentation services, system integration and data entry/data processing services); © consultancy engineering (infrastructure and industrial development project in the following sectors; powers, transportation,
telecommunications, water supply, oil, gas and
petrochemicals, industrial estates and processing plants); and (d) contracting services. Significant opportunities were created for contractors by the government’s policy on privatization and the enactment of the BOT law.

Cost of doing business The minimum wage of Filipino labor is equivalent to Php
2233.50 per 8-hour workday in the National Capital Region (NCR). The wage rate outside NCR is slightly lower and is considered one of the most competitive in the region.

The average inflation rate for 1998 was 9.7%. By the end of 1998, inflation had reached 10.3% increasing to 11.5% by January 1999. However, starting February 1999, inflation rates dropped to single digit, reaching 6.7% in May 1999. Interest rates on treasury bills have been averaging 15.3% for all maturity period in 1998. Reeling from the effect of the Asian currency crisis which began during the last quarter of 1997, the value of the peso was pushed down to a cumulative average of P40.39 to a US$ for 1998. However, the peso strengthened to US$38.022 by June 30, 1999.

Foreign trade The Philippines’ major export are manufactured goods like semi-conductor devices and garments, electrical machinery minerals and metals, and agricultural products like coconut products and bananas. Its major imports are capital goods and intermediate goods like petroleum products.

While the Philippines is a net importing country, exports
remain a major stimulus of its economic growth. In addition to physical goods, the export of non-factor services has largely contributed to the expansion of export over the years.

Trade was liberalized through the removal of quantitative
restrictions and the simplification of the tariff table. The
AFTA, which was implemented as of January 1, 1993, will further reduce tariffs on intra-ASEAN trade to not more than 5% by year 2002.

Specifically, under tariff reform programs initiated by the
government, a two-tiered tariff structure of 3% and 10% for raw materials and finished products, respectively, shall be implemented by January 1,2003. Starting January 1, 2004, a uniform tariff rate of 5% shall be imposed on all imported articles.

Foreign debt The debt reduction program of the government has been an area of opportunity for arbitraging by foreign investors. While there are strong pressures to adopt a cap of debt servicing, the government has adhered to a contrary position to protect the credit integrity of the country in the international financial markets.

In March 1998, The Philippines exited from the International Monetary Fund (IMF) assistance program after its full compliance with all the requirements.

Major foreign investors recognize the Philippines as an
attractive investment site in the region. The government
continues to dismantle investment restrictions to allow
participation of foreign investors in a number of project and industries.

Foreign investments The Foreign Investment Act of 1991 was further liberalized by Republic Act 8179, which reduce the requirements for paid-up capitalization of a domestic market enterprise from US$500,000 to US$200,000. Enterprises engaged in activities involving advanced technology of directly employing at least 50 employees can be allowed a minimum paid-up capital of US$100,000.

Growth center The urban centers of Metro Manila, Metro Cebu and Davao City; and the government-owned and private special economic zones are magnets of economic activities. The Philippines Assistance Program is helping in the acceleration of regional development by sponsoring projects in Calabarzon (Cavity, Laguna, Batangas, Rizal, Quezon Provinces), Iloilo, Samar, the Iligan-Cagayan de Oro corridor and General Santos. The Calabarzon Project has resulted in the proliferation of privately owned industrial estate to address the needs of foreign investors.

The withdrawal of the American Armed Forces from
Philippines territory in 1992 made the Subic Naval Base in Olongapo City, the Clark Air Base in Angeles City, and other former US military bases with excellent infrastructure, available for economic, commercial and industrial development. For this purpose, the Bases Conversion Development Authority (BCDA) was created (under Republic Act No. 7227) and mandated to take over these installations and to develop and implement master plans for these areas.

Investors’ interest in these area has been tremendous and is perceived to be sustainable over the next 5 to 10 years. The main factors for increased investors’ interest in these area include fiscal incentives, full administration support for the development of these areas, strategic location and excellent infrastructure, particular the presence of an excellent harbor (Subic) and international airports that meet international standards in Subic and Clark.

Hints for the business visitor

Visitor’s visa A valid passport and visa are required of visitor entering the Philippines. However, visitors with a return ticket who intend to stay for less than 21 days are generally allowed to enter under the 9(a) temporary business visa. This privilege is extended to nationals of countries with which the Philippines has diplomatic relations. Those who wish to stay longer than 21 days may apply for an extension, subject to payment of appropriate fees. It is recommended that details be obtained from the nearest Philippine embassy or consulate.

Foreign intending to stay in the country must meet certain
requirements imposed by the Bureau of Immigration and
Deportation.

Other documents that must be obtained are Alien Certificate of Registration, and Certificate of Residence for Temporary Visitors whose stay will exceed 59 days.

Currency, exchange The Philippine peso (P) is the unit of currency. It is and banks divided into centavos. The notes are in denominations of P1,000, P500, P100, P50,P20 and P10; the coins, P5,P1 and P0.25. With the deregulation of foreign exchange transactions, moneychangers and authorized agent banks (AABS) are allowed to sell and purchase foreign exchange without prior approval of the BSP, save for a few exceptions. There is no restriction on the amount of foreign exchange that can be imported. Moreover, foreign currency may be freely bought and sold outside the banking system. However, the import/export of Philippine currency id limited to P10,000. Any amount exceeding this will require the authorization of the BSP.

International time The Philippine time is eight hours ahead of Greenwich Mean Time (GMT) and thirteen hours ahead of U.S. Eastern Standard Time (EST)

Business hours Government and private offices are generally open from 8
a.m. to 5 p.m., Mondays to Fridays, with lunch break from noon to 1 p.m. However, government agencies engaged in the delivery of critical frontline services and public transactions are encouraged to operate a six-day work week from 7 a.m. to 7 p.m., Mondays to Saturdays, continuously without a lunch break. Some private offices are also open on Saturdays. Generally, commercial banks transact business from 9 a.m. to 3 p.m. and savings banks from 9 a.m. to 5 p.m. Mondays to Fridays.

Statutory holidays Statutory holidays are January 1 (New Year’s Day), April 9 (Araw ng Kagitingan), May 1 ( Labor Day), June 12
(Independence Day), last Saturday of August (National
Heroe’s day), November 1 (All Saints’ Day), November 30 (Andres Bonifacio Day), December 25 (Christmas Day), December 30 (Rizal Day) and December 31 (last day of the year). Maundy Thursday and Good Friday are also regular holidays.

Weight and measures The Philippines in on the metric system and uses the
International System Unit as the sole standard of weight and measures.

Clothing For official meetings, business attire usually consist of a
blouse and skirt or dress with a blazer for woman, and a
business suit and tie or “barong” (Filipino shirt) for men.
Otherwise, it is acceptable to be in casual attire owing to the hot and humid weather.

Hotel and travel As of June 30,1999, the total number of rooms of a
Department of Tourism accredited establishments available for tourist occupancy are about 26,000 in hotels, 6,000 in resorts, and 2,500 in inns all over the country. A number of these tourist facilities which are mostly located in the Makati and Manila areas are of international standards. Several mid-range hotels have been established in other business areas in Metro Manila. The addition of new hotel rooms in expected to meet the growing number of overseas visitors to the country.

Communication Communication link within Metro Manila and key business areas are adequate. Apart from the hotel business centers which service the needs of foreign businessmen, private companies also offer similar services in all urban centers. Cellular phones and paging system have substantially augmented existing landlines.

General

Foreign investment policies, requirements and
incentives

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:

Government agency Project Location

Board if Investments (BOI) Outside of special
economic zones (SEZ)

Philippine Economic Any SEZ under PEZA
Zone Authority (PEZA)

Subic Bay Metropolitan Subic Bay Freeport
Authority (SBMA)

Clark development Clark Special Economic Zone
Corporation (CDC)

John Hay Poro Point John Hay Special Economic Zone
Development Corporation Poro Point Freeport and Special
Economic Zone

Cagayan Economic Cagayan Special Economic
Zone Authority ` Zone

Zamboanga Economic Zamboanga City Special
Zone Authority Economic Zone

2) Is a foreign investor allowed to own 100% of a business entity?

With the liberalization of the foreign investment law, 100% foreign equity
may be allowed in all areas of investment except financial institutes and
those include in the third regular Foreign Investment Negative List which
took effect on October 24, 1998. This list includes:

List A areas reserved to Filipino 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 and 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 enterprises with paid-in capital of less than
US$200,000, unless they involve advanced technology or directly employ at
least 50 employees, in which case, the paid-in capital can be US$100,000
only.

Please refer to Appendix II for the list.

(3) What is the general policy of the government regarding foreign
investment? Is the policy likely to change in the near future?

The government encourages foreign investments which will provide
significant employment opportunities relative to the amount of the capital
being invested; improve productivity of resources; increase volume and value of exports; and provide a foundation for the future development of the
economy.

Investment-related rule shave been liberalized to facilitate entry of foreign
investment. This thrust is expected to continue.

(4) What are the major incentives available to a registered enterprise?

BOI Incentives

An enterprise registered with the Board if Investment pursuant to the 1987
Omnibus Investment Code (Executive Order or EO 226) is entitled to the
following incentives, among others, subject to certain terms and conditions:

a) Income tax holiday (ITH) for six years for pioneer firms and general four
years for non-pioneer firms. If a non-pioneer firm is located in a less

development area, it shall generally be entitled to 6 years ITH. Firms locating within Metro Manila shall not be Granted ITH unless they are:

– with a government industrial estate
– service-type projects with no manufacturing facilities
– power generating plants
– 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 work (cannot be simultaneously enjoyed with the ITH
incentives).

Non-fiscal incentives

Certain non-fiscal incentives are also available to registered enterprises;
among which are: employment of foreign nationals; guaranteed repatriation
of foreign investment and earnings thereon; and importation of consigned
equipment for an unlimited period subject to posting of a re-export bond.

PEZA Incentives

The Special Economic Zone Act of 1995 as amended, 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 to enterprises under Presidential Decree No. 66 or Book VI of EO 226. In additional to the incentives mentioned above for BOI registered enterprises, PEZA-registered exporters enjoy tax and duty exemption on importations of capital equipment, raw materials and other merchandise directly needed in its registered operations. Furthermore,
exporters using local materials as input 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 226 incentives have lapsed, shall remit to the
government a preferential rate 5% of their gross income earned as final tax.

Other incentives

Two other special economic zone 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 the ecozones are similar to the incentives granted to PEZA ecozone enterprise.

Enterprise 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. For additional information, please refer to our publication entitled Subic Bay Freeport, Philippines – A Guide for Foreign and Local Investor.

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 transferable subject to certain conditions.

In the case of tax credit certificate issued pursuant to the Export
Development Act of 1994, said documents are considered negotiable
instrument and may be transferred to any person, natural or juridical, except
to local government units.

Board of Investment/
Philippine Economic Zone
Authority

Registration requirements, application procedures
and approval

1) Does our proposed project qualify of registration with the BOI/PEZA?

To qualify for registration with the BOI for incentive purposes, the proposed foreign investment must be made in any of the following:

a) preferred areas of investment listed in the current Investment Priorities Plan
(IPP). A preferred area may be declared pioneer if it: (1) involves the
manufacturing of processing (not merely assembly or packaging) of goods or raw materials that have not been produced in the Philippines on a
commercial scale; (2) uses a design, formula, scheme, method, process or
system of production or transformation of any element or raw materials into
another raw materials or finished good which is new and untried; (3) engages in agricultural activities/services essential to the achievement of the country’s self-sufficiency program; and (4) produce non-conventional fuels or manufactures equipment which utilize non-conventional sources of energy; provided that the final product in any of the foregoing instances involves substantial use and processing of domestic raw materials;

b) enterprises engaged in preferred non-pioneer area and exporting at least
70% of their output; and

c) projects in less-developed areas provided that the activities in all of the above cases are not reserved for the Philippine nationals.

On the other hand, the project that may qualify for registration with PEZA are those that involve manufacturing for export and the domestic market, free trade, tourism, utilities, facilities enterprises including those engaged in
warehousing and trading operations in the ecozones and development and
operations of ecozones.

2) How does one file an application with the BOI/PEZA?

An application shall be made in the from prescribed by the BOI/PEZA in
two(2) copies and properly sworn to before a notary public. A project
feasibility study is required as one of the primary document supporting the
application for registration.

3) What possible obstacle would our application meet?

The obstacle normally encountered in the filing of the application include non-compliance with the criteria set by the BOI, misinterpretation of the coverage of activities listed in the IPP, failure to submit the required supporting documents and project feasibility study and possible opposition from sectors or enterprises which might be adversely affected by the proposed project. The BOI required publication of the notice of application and conducts hearing if objections to the application are received

For PEZA applicants, the usual problem consists of non-compliance with
some of the criteria set by PEZA and failure to submit required documents
and information.

4) How long will it take to obtain BOI/PEZA approval once all
requirements are complied with?

Under the 1987 Omnibus Investment Code, application filed with the BOI
shall be considered automatically approved if not acted upon by the Board
within twenty (20) working days from official acceptance thereof, subject to
the usual terms and conditions.

In the case of PEZA, the processing and evaluation by the appropriate
department usually takes about two weeks. The decision on the project is
made during the bi-monthly meeting of the PEZA Board.

5) Assuming approval is obtained, what restrictions are ordinarily
attached?

A list of general and specific terms and conditions is normally attached to the approval letters issued by the BOI/PEZA upon approval of the application for registration. The general condition include certain management, financial, operations and marketing restrictions which must be properly complied with so as to avoid grounds for cancellation of registration. The specific terms and conditions which may include nationality, operational and reporting requirements vary depending upon the nature of the business e enterprise.

6) How much time is an investor allowed to start his project?

The amount of time allowed for starting a registration project depends on the period set by the proponent, with the approval of the BOI/PEZA.

Securities and Exchange
Commission

Registration requirements and approval

1) Why is it necessary to register with the SEC?

The SEC is the government agency responsible for the registration, licensing, regulation and supervision of all corporations and partnership organized in the Philippines, including foreign corporations licensed to engage in business or to establish branch office in the Philippines.

2) Can the application for registration with the BOI/PEZA and the SEC
be filed simultaneously, or must we wait for the BOI/PEZA approval
before going to the SEC?

Registration with the BOI/PEZA is required only for purposes of availing
investment incentives. It is preferable to first seek approval from the BOI/
PEZA before filing an application with the SEC.

3) How long after the submission of the application and all the required
documents will approval be obtained?

The processing and approval of the papers take around fifteen (15) working
days from official acceptance of the application.

4) Is there any requirement that director be residents?

A majority of the directors must be resident of the Philippines. The number
of directors must be at least five (5) but not more than fifteen (15). Hence, if there are 5 directors, at least 3 must be residents. However, please see also items 3 on page 31.

5) Is a domestic corporation subject to a minimum subscription and
payment on such subscription?

At least 25% of the authorized capital stock of a domestic corporation must
be subscribed and at least 25% of the subscription must be paid. However,
subscriptions by alien individuals or foreign entities generally be fully
paid. Partial payments of subscriptions by aliens may be allowed subject to
certain conditions.

Bangro Sentral ng Pilipinas

Inward Remittance and Registration of Foreign
Investment, Repatriation of Capital, Remittance
of Dividends

1) Can foreign investment funds be inwardly remitted outside of the
banking system?

Yes, However, said funds cannot be registered as foreign equity investment
with the SEC and the BSP. Consequently, capital repatriation and dividend
remittances can only be serviced using foreign exchange sourced outside of
the domestic banking system.

2) Is registration of foreign investment with the BSP required?

BSP registration is necessary only if the investor wants to make sure that the repatriation of capital and the remittance of dividends, profit and earnings can be made using foreign exchange sourced from the banking system. Otherwise, BSP registration is not necessary.

3) Is inward remittance of foreign investment required to be converted
immediately to Philippine Pesos?

An investor is required to convert his inward remittance of foreign investment of Philippine pesos for purposes of registration with the SEC and the BSP.

4) What are the current regulations regarding profit remittance and
repatriation of capital?

Foreign investments duly registered with the BSP shall be entitled to full and immediate capital repatriation and dividends and/profit remittance privileges without prior BSP approval. Authorized Agent Banks (AABs) are authorized to sell and to remit the equivalent foreign exchange at the exchange rate prevailing at the time of actual remittance (representing sales/divestment proceeds or dividends/profit of duly registration investment) upon presentation of the Bangko Sentral Registration Document.

In the case of unregistered foreign investment, profit remittance and capital
repatriation shall be serviced using foreign exchange sourced from outside
the domestic banking system.

Royalties, Technical Service
Agreements, Etc.

IPO Registration of Technology Transfer
Agreement, Taxation of Royalties and Service
Fees

1) Can we charge royalties and similar fees?

Royalties and similar fees can be charge to operations provided payments
for said fees are covered by a technology transfer agreement (TTA) certified by the Documentation, Information and Technology Transfer Bureau (DITTB) of the Intellectual Property Office (IPO) that said technology transfer agreement conforms with the provision of the Intellectual Property Code (IPC).

The IPC provides certain restrictions in the terns and condition of the TTA
particularly those that will adversely affect free competition and trade. It also prescribes certain mandatory provision that should be included in the TTA. Non-conformity with any of these provision of the ICP shall render the TTA unenforceable, subject to some exceptions. For instance, if the agreement contains one or two of the restrictive clauses, the licensing contract must be approved by the registration with the DITTB.

Approval of royalties/fees for the licensing of patents, know-how and trade
secrets is now liberalized unlike before when extensive evaluation of fees is
required if royalty fees exceeded 5% of net sales.

2) Are these taxable in the Philippines?

Royalties and similar fees are taxable at the rate of 33% in 1999 to be
reduced to 32% effective 2000 when payable to a non-resident foreign
corporation. However, the tax rates for the royalties payable to residents of
foreign countries with which the Philippines has a tax treaty vary according to the terms of the respective treaties.

3) What rules govern the reimbursement of cost incurred abroad?

Reimbursement of actual cost incurred abroad for operations such as
maintaining offices, advertising, commission, etc. are allowed provided they are duly supported by documents and that benefits are actually derived by the paying company.

4) What constitute “technology transfer arrangements”?

“Technology transfer arrangements” refer to contacts or agreements
involving the: transfer of systematic knowledge for the manufacturing of a
product or the application of a process, rendering of a service, including
management contracts; and the transfer, assignment or licensing of all forms
of intellectual property rights, including licensing of computer software,
except computer software developed for mass market.

5) How long does it take to obtain government approval?

Within ten (10) days from the filing of the request for certification of
compliance, the DITTB conduct a summary evaluation of the TTA. If the
TTA conforms with the Prohibited Clauses and Mandatory Provisions of the IPC< the DITTB issues a Certificate of Compliance. Otherwise, the DITTB notifies the parties of any violation and requires them to comply with the IPC if they wish to obtain a Certificate of Compliance.

6) Do we have to get the Bangko Sentral approval to remit the royalty
or agreed fees to the foreign company? What documentary support is
required?

`With the liberalization of foreign exchange rules, remittance of royalties, fees or similar payments to a foreign company, net of the applicable taxes, may be made through AABs without need of BSP approval.

The following documents may be required by the AABs to prove the
legitimacy of the transaction: (a) copy of the certification by DITTB of the
IPO; and (b) proof of payment of withholding tax.

Taxes

Income and business Taxes

1) What are the income tax rates in the Philippines?

The income tax rates depend upon the classification of the taxpayers.

A. Individual taxpayers

1. Taxable incime from employment, business, trade and exercise of
professiion including casual tgains, profit, and prizes of P10,000 or less;
except items of income subject to final tax and special treatment,e.g., capital
gains and passive income mentioned in items 4 and 5 below, derived by
resident citizen from all source within and without the Philippines are
subject to the graduated tax rate of 5% to 33%. The top rate will be
reduced to 32% effective 2000.

The top rate (33% or 32%) applies to taxable income in excess of P500,000.

Resident aliens and non-resident citizens are subject to the same graduated
tax rates but only for income derived from all sources within the Philippines.

2. Non-residdent aliens are taxed 25% of gross income from sources within
the Philippines if their stay within the country does not exceed 180 days in a
calendar year. Otherwise, they are taxed on the basis of graduated rates as in (1) above.

3. Aliens who are employed by regional or area or regional operating
headquarters of multinational corporations, representative offices, offshore
banking units, petroleum service contractors and subcontractors are subject
to income tax at 15% of their gross income from such employers (e.g.
salaries, annuities, honoraria and allowance).

4. Net capital gains realized during each taxable year from the sales of shares of domestic stocks not traded in the Philippines Stock Exchange (PSE) are taxed are the rate of 5% on the first P100,000 gains and 10% on the excess over P100,000. For domestic shares listed and traded in the PSE, the tax is ½ of 1% of the gross selling price or gross value in money of the shares of stock sold.

Likewise, there is a tax on share of stock sold, exchanged or otherwise
disposed through initial public offering at the rate of 1%, 2% and 4%,
depending on the proportion of the shares sold, exchanged or otherwise
disposed to the total outstanding shares after listing of the shares of closely
held corporations.

Capital gains on sale of real property are taxed at 6% of gross selling price or fair market value, whichever is higher.

5. Passive income items like interest, dividends, royalties, prizes and other
winning are also taxed at different rates. For instance, dividends received by citizens and residents from a domestic corporation and the shares of an
individual partner in a taxable partnership are taxed at 8% (10% efective
2000). However, the tax on such dividends shall apply only on income
earned on or after January 1, 1998. If the dividends are paid to non-residants, the tax is 20% for those engaged in trade or business and 25% for the others.

B) Corpoate taxpayers

1. Domestic corporations are taxed at 33% (32% effective 2000) of annual
taxable income from worldwode sources with option for 15% tax on gross
income effective Jaunuary 1, 2000 subject to certain conditions. Domestic
corporations are those established under the laws of the Philippines and
include foreign-owned corporations, otherwise known as subsidiaries.

2. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable on Philippine-sourced income at the same rate as
domestic corporations. Such foreign corporation engaged on trade or business in the Philippines (also called resident foreign corporation) is taxes based on net income with the same option to pay 15% tax on gross income effective January 1, 2000. On the other hand, a foreiign corporation not engaged in business or trade in the Philippines ( also known as a nonresident foreign corporation) is taxed based on gross income received.

3. Profits remitted by a brach to its home office are tzxed at the rate of 15%
(except those registered with PEZA). Dividends declared by a domestic
corporation to its foreign parent are generally taxed at 33% (32% effectiive
2000). However, if the home country of the recippient corporation allows an additional credit of 18% ( 17% effective 2000) as tax deemed paid in the
Philippines, the tax is reduced to 15%. Divedends remitted to countiers that
do not impose a tax on offshore dividends qualify for this rate.

Under the Philippine tax treaties with Netherlands, Japan, Germany, Korea
and Austria, a preferential tax of 10% on branch profit remittances is granted. Furthermore, under the tax treaties with these countries, dividends paid are subject to 10% tax if the payor-subsidiary is a company which holds a certain percentage of the capital of the payor subsudiary. Otherwise, the tax on dividends is 15%.

4. All corporations, whether domestic or foreign, are subject to capital gains tax on the sale of share of stock, in the same manner as individual taxpayers. Other income items such as interest and royalties are taxed at various rates. Dividends received by a domestic or resident foreign corporation from a domestic corporation are exemt from tax.

5. A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is imposed on a corporation which is subject to normal
income tax (33%, 32%) beginning on the fourth taxable year immediately
following the year in which such corporation was registered with the Bureau on Internal Revenue, when the minimum income tax is greater than the normal income tax for the taxable year.

Any excess of the minimum corporate income tax over the normal income
tax as computed shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years.

6. Every corporation formed or availed for the purposed of avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation by permitting earnings and profit to accumulate instead of being
divided or distributed is taxed at the rate of 10% for each taxable tar on the
improperly accumulated taxable income.

7. In general, an employer ( individual or corporation) shall pay a final tax of
33% (32% effective 2000) on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file) unless the fringe benefit is required by nature of, or necessary to the trade, business or profession of the employer.

2) What business taxes are we subject to?

Both the national government and the local government impose business
taxes. The rates vary depending on the type of business.

A. National tax

Value added tax (VAT)

1. Ten percent (10%) VAT is imposed on importation of goods and sale, barter, exchange or lease of goods, properties and services in the Philippines, subject to certain exceptions. Goods or properties mean all tangible and intangible objects, including real property, patents,. trademarks and similar rights and movable and personal goods. Services cover performance of all kinds of services in the Philippines for a fee.

Export are generally subject to 0% VAT. VAT exempt goods include such
items as books, fertilizer, livestock and poultry feeds and agricultural and
marine food product in their original state.

2. Gross receipts tax on certain businesses:

a. Bank and other non-bank
financial intermediaries – 0% to 5%

b. Life insurance companies – 5%

c. Common passenger carriers – 3%

d. Electric, gas and water utilities – 2%

e. Others – ranging from
3% to 30%

3. Excise tax on alcohol, tobacco, petroleum and mineral products,
cinematographic films, automobiles, jewelry, etc. at varying rates.

B. Local tax on certain business

1. Manufactures, wholesalers, exporters and contractors are subject to
granted taxes on certain amounts of sales/gross receipts and percentage
taxes at minimum rates ranging from .375% to .75% on the amount not
subject to granted taxes, depending on the place where business is
conducted. For essential commodities, the rates are 50% lower. Retailers are subject to 2% tax if their gross receipts are P400,000 or less and to 1% tax if in excess of P400,000.

2. Banks and other financial institution – percentage tax at maximum rates
ranging from .50% to .75% depending on the locality of the business.

3. Others – varying rates

Aside from the above business taxes, there are other taxes levied in the
Philippines such as:

a. Real estate tax

b. Stamp tax on certain documents, instruments and related
transactions such as issuance of share of stock, evidence of indebtedness, transfer or real property, lease contracts,
insurance policies, etc.

c. Community tax

d. Overseas communication tax

3) What are the advantage and disadvantage of a branch vis-à-vis a
domestic subsidiary?

Advantages and disadvantages from legal and tax viewpoint of a branch
compared to a domestic subsidiary are as follows:

(a) Branch offices are taxed only on their net income from source in the Philippines while subsidiaries are taxed in their worldwide income. In both case, however, a relief from double taxation may be granted subject to the provisions of applicable tax treaties. (Refer to the questions on taxes applicable to corporate taxpayers.)

(b) There are generally fewer formalities involved in opening a branch
than incorporating a subsidiary.

(c) In terms of staffing, a subsidiary normally requires a complete set of corporate officers whereas a branch is able to operate with only a resident agent, who may also be the general manager, as its officer.

(d) Since a subsidiary has a separate juridical personality, a foreign parent company is protected from contractual and other liabilities incurred by its Philippine subsidiary; the liabilities of the branch office extend to that of its home office.

(e) A branch is allowed to claim. as deduction from income tax purposes, allocated head office expenses subject to certain requirements, while a subsidiary is not allowed to claim the same.

(f) Profit remittance by a branch registered with the PEZA is exempt
from branch profit remittance tax while dividends remittance by a
subsidiary is payable.

4) What effect will a tax treaty with my country have on the tax rates?

A tax treaty is designed primarily to eliminate double taxation on foreign
investors who otherwise have to pay taxes on the Philippines and in their
home countries on the same income.

Please refer to Appendix IV for a list of tax treaties.

Regional or Area
Headquarters (RHQ)
and Regional Operating
Headquarters (ROHQ)

Scope of activities, Remittance
and Funding Requirements, Taxes, Incentives

1) What is a RHQ and what are the activities it can engage in?

Republic Act (R.A.) No. 8756 (amending the Omnibus Investments
Code of 1987, and approved on November 1999), defines RHQ as an
office whose purpose is to act as an administrative branch of a
multinational company engaged in international trade which
principally serves as a supervision, communications and coordination
center for its subsidiaries, branches or affiliates in the Asia-Pacific
Region and other foreign market and which does not earn or derive
income in the Philippines.

The activities of the RHQ are limited to acting as a supervisory,
communications and coordinating center of its subsidiaries, affiliates
and branches in the region.

It is neither allowed to derive any income from sources within the
Philippines and to participate in any manner in the management of
any subsidiary or branch office it might have in the Philippines nor or
solicit or market goods and services whether on behalf of its mother
company or its branches, affiliates, subsidiaries or any other
company.

2) What is a ROHQ and what are the activities it can engage in?

ROQH is a foreign business entity which is allowed to derive income
in the Philippines by performing qualifying services to its affiliates,
subsidiaries or branches in the Philippines, in the Asia-Pacific Region
and in other foreign markets as follows:

– General administration and planning;
– Business planning and coordination;
– Sourcing / procurement of raw materials and components;
– Corporate finance advisory services;
– Marketing control and sales promotion;
– Training and personnel management;
– Logistic service;
– Research and development services and product development;
– Technical support and maintenance; and
– Data processing and communication

A ROQH is prohibited from offering qualifying services to entities
other than its affiliates, branches or subsidiaries as declared in its
registration with the Securities and Exchange Commission (SEC).
Neither is it allowed to directly and indirectly solicit or market goods
and services whether on behalf of their mother company, branches,
affiliates, subsidiaries or any other company.

3) What are the funding requirements for a RHQ and a ROHQ?

The initial funding requirements for a RHQ of a multinational
corporation is US$50,000. Within 30 days from receipt of the SEC
certificate of registration, the multinational corporation must submit a
certificate if inward remittance from a local bank showing that it had
remitted US$50,000. It must also annually remit at least US$50,000
or its equivalent in other foreign currency within 30 days from
anniversary date of its registration to cover its operations in the
Philippines.

A ROHQ is required to initially remit the amount of US$200,000 or
its equivalent in other foreign currencies. Within 30 days from receipt
of its certificate of registration, the multinational corporation must
submit to the SEC a certificate of inward remittance from a local
bank showing that it had remitted US$200,000.

4) What are the taxes applicable and incentives
available to a RHQ / ROQH?

ROQH are exempt from income tax and VAT while their purchases of
goods and services and lease of goods and property are zero rated.
On the other hand, ROHQs are subject to 10% preferential rate on
taxable income and are subject to 10% VAT.

RHQs and ROHQs are granted the following incentives:

a) Exemption from all kinds of local taxes, fees and charges except
for real property tax on land improvements and equipment;

b) Tax and duty free importation of training
materials and equipment; and

c) importation of motor vehicles subject to the payment of
corresponding taxes and duties.

Expatriates if RHQs and ROHQs are entitled to the following incentives:

a) Multiple entry special visa, including those of spouses and
unmarried children below age 21;

b) Withholding tax of 15% on salaries, wages, annuities, and other
` emoluments of expatriates;

c) Travel tax exemption; and

d) Tax and duty free importation of personal and household effects.

In addition, Filipino employed and occupying the same position as
those of aliens employed by these multinational companies have the
option to be subject to a preferential tax rate of 15% on gross income
received.

Joint Ventures

Foreign Equity, Control, Officers and Directors,
Applicable Tax Policies

1) If we inter into a joint venture with Philippine investor, will the SEC
allow us to hold 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. (please refer to Appendix II).

2) If we are restricted to a 40% equity holding, how can we obtain 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 arrangement that could provide a minority group with working control. These arrangements include: (a) diffusion of majority ownership, (b) licensing agreement, and (c) voting trust agreement 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 ti invest in the enterprise will be violated.

3) Are there any requirements that directors and other officers must be
Filipino citizen and /or residents?

The majority of the directors must be residents of the Philippines and the secretary must be a resident Filipino citizen. Although not required by law, the SEC, as a matter of policy, also requires the treasurer to be a resident. However, in the case of banks and domestic air carriers, at least two-third of the members of the board of directors must be citizen 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 ventures is taxed like a corporation. The shares 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 of engaging in petroleum operation is not subject to the corporation income tax. Only the joint share partners will be taxed on their respective shares.

Retails Trade
Definition, prequalification criteria, capitalization requirements, restrictions.
1) Can foreign investors engage in retail trade in the Philippines?

Yes, Republic Act (RA) No. 8762 or the Retail Liberalization Act of 2000 was approved on February 15, 2000 while its implementing rules and regulations took effect in August 2000. It paved the way for the entry of foreign participants who meet capitalization, net worth, and other requirements under the Act.
2) How is “Real Trade” defined?

“Retail Trade” shall mean any act, occupation or calling of habitually selling direct to general public merchandise, commodities or goods for consumption subject to certain exceptions.

3) To what extent is foreign ownership of retail enterprises in the country
permitted?

Foreign ownership on Philippine retail enterprises depends on the value of the enterprise’s capitalization. Retail ventures with paid-up capital less than the peso equivalent of US$2,500,000 (Category A) is limited to Filipinos. Initially, within tow years after the Act becomes effective (until March 26, 2002), foreign investors can own only up to 60% of retail enterprises with paid-up capital between $250 million and $750 million (Category B). Full foreign ownership of such ventures will be permitted after this two-year period.

Enterprises that have paid-up capital greater than $750 million (Category C) as well as those that are engaged in the retail of high-end or luxury items (Category D) are fully open to foreign investors. The investment for opening a store in Categories B and C should not be below the peso equivalent of US$830,000.

4) What are the criteria to qualify as foreign retailers in the Philippines?

Foreign entity that will engages in the retail business or invest in a retail store in the Philippines must meet the following criteria:

a. Net worth at least US$200 million of the parent corporation, for those that want to establish Categories B and C enterprises, and net worth of at least US$50 million for Category D;

b. Ownership of at least 5 retail stores or franchise anywhere in the world or at least one branch with capitalization of US$25 million or more;

c. Five-year track record in retailing; and

d. The foreign retailer’s home country offers reciprocal benefits to Filipinos.

5) Can foreign investors acquire share in an existing Philippine retail
company?

Yes, as long as the net worth of the existing local store is at least the peso equivalent of US$2,500,000. For the first two years after the Act becomes effective, foreign investors may acquire a maximum of 60% of the local store’s shares.

After the two-year period, the extent of stock acquisition will be made consistent with the allowable foreign participation in the different categories, as mentioned above.

6) What are the duties of the foreign participant with respect to its capital
investment?

At the outset, the foreign retailers must secure from the Bangko Sentral ng Pilipinas (BSP) and the Department of Trade and Industry (DTI) a certification confirming the inward remittance of its minimum capital investment. The Securities and Exchange Commission (SEC) will monitor the use of these funds in actual Philippine operations. The foreign investor is required to maintain this minimum capital amount unless it has notified the SEC and DTI that it intends to repatriate its capital and cease Philippine operations.

7) Once it has complied with the requirements for prequalification and
registration, what other restrictions must a foreign retailer observe?

a) Philippine-made products must constitute at least 30% of the aggregate inventory cost of foreign retailers classified under Category B or C. The corresponding figure for Category D stores is 10%. This is required until March 26, 2010, or ten tears after the effectivity of the Retail Trade Liberalization Act.

b) Foreign retailers are prohibited from engaged in trade outside its accredited stores. Specially, the use of mobile carts, door-to-door
selling, restaurants and sari-sari stores, and other retailing activities
similar to these are prohibited.

c) Within eight years after the start of operations, Category B or C retail establishments with at least 80% foreign-ownership are required to offer 30% of its shares to the public.

Rules on Borrowings

Foreign and Domestic Credit

1) Can we finance our project through foreign borrowings?

The government prefers foreign equity investment to foreign borrowings. In general, foreign borrowings require prior approval of and/or registration with the Bangko Sentral ng Pilipinas in order that repayment of principal and remittance of interest may be serviced using foreign exchange purchased from the Philippine banking system.

Under present rules, loans that may qualify for prior Bangko Sentral ng Pilipinas approval/registration are those intended to finance the following types of projects:

a. Export oriented projects;
b. BOI-registered projects;
c. Projects listed in the Investment Priorities Plan;
d. Projects listed in the Medium-Term Public Investment Program; and other projects that may be declared priority under the country’s socio-economic development plan by the National Economic Development Authority or by Congress.

All the above loans, regardless of maturity, shall exclusively finance foreign
exchange requirements of eligible projects, provided that loans of direct and
indirect exporters and public sector borrowers may finance both foreign
exchange costs and local of their respective projects.

2) Are we subject to certain debt-equity ratio requirements?

All enterprises registered with BOI, PEZA and the other economic zone
authorities are required to maintain a debt-to-equity ration of at least 75:25
during the entire duration of their registration with the concerned government agency.

3) Can a foreign company borrow from a private individual or private
non-financial institution?

Yes, A foreign company can borrow from a private individual or private non-financial institute.

Others

Salaries, Rentals (Home and Office Space), Postal
Services and other information

1) Could you give some guidelines as to prevailing-

a) salary rates for office/administrative staff?

Secretary – P7,000 to P30,000 per month
Accountant – P12,000 to P30,000 per month
Messenger – P6,000 to P9,000 per month
Driver – – P7,000 to P12,000 per month

Mail service- – Post office box facilities are available at a rental fee ranging
from P480-P1,440 per year. Door to door mail delivery service is also
available at variable rates.

Telegram, telex, telecopier and telephone services – Many message-
transmitting companies operation in the Philippines. Monthly rentals vary from a low of about P300 to a high of P5,000.

b) rentals for office space in Makati?

Office spaces in Makati may be rented at a low of P450 to a high
of P800 per square meter per month.

c) rentals for housing of expatriate executives?

Hotels and Lodging – The room rates range from US$60 to
US$310 per day.

Apartments – Monthly rental for a one-bedroom furnished apartment specially in the Makati area varies from P30,000 to P70,000 per month while a two/three/ four bedroom apartment will cost
about P35,000 to P70,000 per month.

Houses in Village – The main residential areas in Metro Manila where foreigners may look for houses are in Makati – Forbes Park, San Lorenzo, Urdaneta, Bel-air, San Miquel, Dasmariñas; in Ortigas – Greenhills, Valle Verde, Corinthian; and in Ayala Alabang.

The monthly rentals for the houses on the above villages range
from P80,000 to P270,000. Modern houses with spacious lawns and
swimming pools will fall under the higher rental range. A deposit is generally required and may range from the equivalent of six month to two years rental.

d) Cost of acquiring and maintaining automobiles?

Cost of new automobiles ranges from a low of about P450,000
(for subcompact cars) to a high of P4,000,000 for luxury cars.

The Philippines has recently deregulated the oil industry such that gasoline
stations may set their own prices. The price of gasoline vary on a daily basis but current indicative prices (as of October 1999) are approximately P13 for premium gasoline and unleaded gasoline and P9.90 for diesel.

e) Tuition and school fees for children and high school students?

The annual school fees for an equivalent US standard school start from
US$10,000 approximately.

Other schools offering high standards of education but charging lower tuition fees of around P50,000 annually are also available.

2) How easily can work permits be obtained for expatriate executives?

Work permits can be easily obtained provided the requirements are
complied with. Applications for work permits are filed with the Department of Labor and Employment (DOLE), while applications for employment visas are filed with the Bureau if Immigration and Deportation (BID). The work permits is required before aliens are granted employment visas by the BID.
Some of the documents required are:

1 Curriculum vitae
2 Contract of employment
3 Understudy by the employer to provide for a Filipino
understudy program.

Work permits and employment visas are usually valid for one year starting
from the date of issue. They maybe renewed depending upon the terms of
the contract between the employer and the employee.

3) How easily can expatriate executives obtain clearances for travel
abroad?

Aliens with employment visas are usually required to obtain exit clearance
and re-entry permit from the BID every time such aliens travel abroad.
However, an alien may obtain a multiple exit and re-entry permit from the
BID which will allow the alien to travel abroad without going to the BID
every time he travels.

4) May expatriate executive receive their compensation in foreign
currencies?

Yes. They may receive their compensation in foreign currencies. However,
this compensation will still be include in their taxable income.

5) Will the expatriates be allowed to convert into foreign currency any
excess pesos that they may have upon termination of their assignment?

Yes. They will be allowed to convert any excess pesos upon termination of
their assignment in the Philippines.

6) Is there any public offering of stock or corporate shares in the
Philippines?

Yes. stock trading is held in the Philippines Stock Exchange from Mondays to Fridays. Trading is limited to securities approved and registration with the SEC.

Please refer to Section A.4 of “Income and Business Taxes” for tax treatment of traded stocks.

Appendices

Appendix 1

GNP / GDP by Industrial Origin and Sectoral Growth Rates
(in Million Pesos, at constant 1985 prices)

Industry 1997 1998 Growth (%) 1999 Growth (%) 2000 QI

1. Agricultural, Fishery
and Forestry 185,004 173,106 -6.4 183,407 6.0 47,151

2. Industry Sector 320,689 313,881 -2.1 316,650 0.8 76,713

A. Mining and Quarrying 10,338 10,624 2.8 9,736 -8.4 2,903

B. Manufacturing 223,672 221,151 -1.1 224,667 1.6 53,872

C. Construction 57,322 51,791 -9.6 50,988 1.6 12,578

D. Electricity, Gas and Water 29,357 30,315 3.3 31,259 3.1 7,360

3. Services 387,458 400,918 3.5 417,325 4.1 101,050

GNP / GDP by Industrial Origin and Sectoral Growth Rates
(in Million Pesos, at constant 1985 prices)
(continuation)

Industry 1997 1998 Growth (%) 1999 Growth (%) 2000 QI

A. Transportation
Communication and
Storage 55,067 58,640 6.5 61,736 5.3 15,358

B. Trade 135,326 138,641 2.4 145,406 4.9 33,241

C. Finance and Housing 90,806 93,510 3.0 94,661 1.2 23,866

D. Services 108,259 110,127 3.6 115,532 4.9 28,585

Gross Domestic Product (GDP) 893,151 887,905 -0.6 917,382 3.3 224,914

Net Factory Income From
Abroad 37,507 46,481 23.9 51,174 10.0 13,651

Gross National Product (GNP) 930,658 934,386 0.4 968,556 1 238,565
Source: Bangko Sentral ng Pilipinas

Appendix II

Third Regular Foreign Investment Negative List
(E.O. No. 11)

List A: FOREIGN OWNERSHIP IS LIMITED BY MANDATED OF THE
CONSTITUTION ANS SPECIFIC LAWS

No Foreign Equity

1) Mass media, except recording (article XVI, Section II of the
Constitution; Presidential Memorandum dated May 4, 1994)

2) Services involving the practice of licensed professions save in cases
prescribed by law. [Article XIV Section 14 of the Constitution; Section
1 of Republic Act (RA) 5181]

3) Retail trade (Section 1 of RA 1180)

4) Cooperation (Chapter III, Article 26 of RA 6938)

5) Private security agencies (Section 4 of RA 5487)

6) Small-scale mining (Section 3 of RA 7076)

7) Utilization of marine resources in archipelagic waters, territorial and
exclusive economic zone (Article XIII, Section 2 of the Constitution)

8) Ownership, operation and management of cockpits [Section 5 of
Presidential Decree (PD) 449]

9) Manufacture, repair, stockpiling and/or distribution of nuclear
weapons. (Article II, Section 8 of the Constitution)

10) Manufacture, repair, stockpiling and/or distribution of biological,
chemical and radiological weapons (Various treaties to which the
Philippines is a signatory and conventions supported by the
Philippines)

11) Manufacture if firecrackers and other pyrotechnic devices
(Section 5 of RA 7183)

Notes:
(a) Amended by RA No. 8762; see pages 31 & 32 on Retail Trade for
the update.
(b) For items 9 and 10, domestic investments are also prohibited
(Article II, Section 8 of the Constitution and conventions / treaties
to which the Philippines is a signatory).

Up to Twenty-Five Percent Equity

12) Private recruitment, whether for local or overseas employment
(Article 27 of PD 442)

13) Contracts for the construction and repair of locally funded public
works except:

a. infrastructure/development projects covered in RA 7718 or the
b. projects which are foreign funded or assisted and required to
undergo international competitive bidding [Commonwealth Act
(CA) 541 as amended by PD 1594; Letter of Instruction NO. 630;
Section 2a of RA 7718].

Up to Thirty Percent Foreign Equity

14) Advertising (Article XVI, Section 11 of the Constitution)

Up to Forty Percent Foreign Equity

15) Exploration, development and utilization of natural resources

Note: Full foreign participation is allows through financial or
technical assistance agreement with the President
(Article XII, Section 2 of the Constitution)

16) Ownership of private lands (Article XII, Section 7 of the Constitution,
Chapter 5, Section 22 of CA 141)

17) Operation of management of public utilities (Article XII, Section 11 of
Constitution; Section 16 of CA 146)

18) Ownership/establishment and administration of educational institutions
(Article XIV, Section 2 of the Constitution)

19) Engaging in the rice and corn industry (PD 194)

20) Contracts for the supply of materials, goods and commodities to
government-owned or controlled corporation, company, agency or
municipal corporation (Section 1 of RA 5183)

21) Project proponent and facility operation of a BOT project requiring a
public utilities franchise (Article XII, Section 11 of the Constitutions;
Section 2a of RA 7718)

22) Operation of deep sea commercial fishing vessels
(Section 27 of RA 8550)

23) Adjustment companies
(Section 323 of PD 612 as amended by PD 1814)

24) Ownership of condominiums
(Section 5 of RA 4726)

Up to Sixty Percent Foreign Equity

25) Financing companies regulated by the SEC
(Section 6 of RA 5980, as amended by RA 8556)

26) Investment houses regulated by the SEC
(PD 129 as amended by RA 8366)

Note: For items 25 and 26, no foreign national may be allowed to own
stock in financing companies or investment houses unless the country
of which he is a national accords the same reciprocal rights to
Filipinos.

LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY, DEFENSE, RISK TO HEALTH AND MORALS, AND PROTECTION OF SMALL AND MEDIUM-SCALE ENTERPRISES

Up to Forty Percent Foreign Equity

1 Manufacture, repair, storage and/or distribution of products and
ingredients used in the manufacture of firearms, gunpowder,
dynamite, ingredients used in making explosive, telescopic sights and
other similar devices requiring Philippine National Police clearance.
(RA 7042, as a amended by RA 8179)

2 Manufacture ,repair, storage and/or distribution of products such as
guns other ammunitions, military aircraft, vessels, equipment and
training devices and parts and components thereof, requiring
Department of National Defense (DND) clearance, and other as may
be determined by the Secretary of the DND. (RA 7042, as amended
by Republic Act 8179)

3 Manufacture and distribution if dangerous drugs
(RA 7042, as amended by RA 8179)

4 Sauna and steam bathhouses, massage clinics and other like activities
regulated by law because of risk they impose to public health and
morals (RA 7042, as amended by RA 8179)

5 Other forms of gambling, e.g., race track operation
(RA 7042, as amended by RA 8179)

6) Domestic market enterprises with paid-in equity capital of less than the
equivalent of US$200,000 (RA 7042, as amended by RA 8179)

7) Domestic market enterprises which involve advanced technology or
employ at least 50 direct employees, with paid-in capital of less than the
equivalent of US$100,000 (RA 7042, as amended by RA 8179)

Appendix III

Income Tax Rates for Special Corporations

Entity Rate Taxable Base

International
2.5%
Gross Philippine Billing
originating from the
Philippines

Nonresident foreign
Corporation
33% (1999)
32% (effective 2000)
Gross income
from Philippine sources

Nonresident owner
or lessor of aircraft,
machinery and other
equipment
7.5%
Gross rentals or fees

Nonresident owner or
lessor of vessels
chartered by Philippine
national as approved
by MARINA
4.5%
Gross rentals, lease or
charter fees within the
Philippine

Nonresident
cinematographic
film owners, lessors
or distributors
25%
Gross income from
Philippine sources

Offshore banking
units (OBUs) and
foreign currency
deposits units (FCDUs)
authorized by the BSP
10%
Income from foreign
currency transactions
with local commercial
banks, including branches
of foreign banks that
may be authorized by the
BSP to transact business
with OBUs and FCDUs,
including any interest income
from foreign currency loans
granted to residents.

Entity Rate Taxable Base

Subcontractors engaged
in petroleum operations

Regional operating
headquarters

8% final tax

10%
Gross income from
service contract

Taxable income from
authorized activities

Note:
Reinsurance premiums are exempt; interest on foreign loan contracted on or after
August 1, 1986 is taxed at 20% capital gains on disposition of shares of stock of domestic corporation are subject to ½%, or 10% tax, as in the case of ordinary corporations.

Appendix IV

PHILIPPINE TAX TREATIES IN FORCE AS OF SEPTEMBER 2000

Effective

1) RP-Singapore January 01, 1977
2) RP-Canada January 01, 1977
3) RP-France January 01, 1978
4) RP-United Kingdom January 29, 1978
5) RP-Pakistan January 01, 1979
6) RP-Australia January 01, 1980
7) RP-Japan January 01, 1981
8) RP-Belgium January 01, 1981
9) RP-New Zealand January 01, 1982
10) RP-Finland January 01, 1982
11) RP-Indonesia January 01, 1983
12) RP-Austria January 01, 1983
13) RP-United State of America January 01, 1983
14) RP-Thailand January 01, 1983
15) RP-Germany January 01, 1985
16) RP-Malaysia January 01, 1985
17) RP-Korea January 01, 1987
18) RP-Sweden January 01, 1990
19) RP-Italy January 01, 1990
20) RP-Netherlands January 01, 1992
21) RP-Brazil January 01, 1992
22) RP-Spain January 01, 1994
23) RP-India January 01, 1995
24) RP-Israel January 01, 1997
25) RP-Norway January 01, 1997
26) RP-Romania January 01, 1998
27) RP-Russia January 01, 1998
28) RP-Denmark (Re-negotiated) January 01, 1998
29) RP-Hungary April 08, 1998

Note:
(a) The Protocol amending the RP-Belgium Tax Treaty on Income
took effect January 1, 2000.