SECTION 1: Market outlook
1.1 What is the outlook for US investment into your jurisdiction over the next 12 months, given the new US administration's protectionist focus?
The outlook for US investment in the Philippines over the next 12 months is positive.
According to the Philippine Statistics Authority, the US was among the top three investing countries in the Philippines in the fourth quarter of 2016 (the two others were Netherlands and Australia). The US pledged PHP20.1 billion ($403 million) or 16% of the total approved foreign investments.
Philippine President Rodrigo Duterte's shift to a multilateral foreign policy and US President Donald Trump's pull-out from the Trans Pacific Partnership (TPP) arrangement, which excludes the Philippines, are expected to help boost Philippine trade and investments, based on reports from Fitch Ratings and BMI Research (cited in the BusinessWorld, January 28 2017). Although the TPP was believed to be promising for regional integration and economic growth among participants, Fitch said the arrangement was unlikely to be a 'game-changer' inasmuch as the Philippines is among the least exposed to the TPP fallout, and 'may actually find room to swoop in and take the American deals previously limited to bloc members'.
On the other hand, BMI Research noted that President Trump's anti-trade rhetoric 'could see US outward investment decline over the coming quarters as his administration threatens to slap tariffs on companies who refuse to put 'America first' and bring jobs back to the US'. Nomura, in a report dated January 2017, also stated that the Philippines runs a merchandise trade surplus with the US of 0.7% of gross domestic product (GDP).
1.2 Are there any industries in particular that you think are more likely to be affected by the US's new economic stance?
The business process outsourcing (BPO) sector and Filipino workers' remittances will most likely be affected by the US's new economic stance.
Based on a report by London-based research consultancy firm Capital Economics (cited in the Manila Times, February 4 2017), '[i]t has been estimated that around three-quarters of total revenue from the [BPO] sector comes from servicing US companies'. According to Nomura, Trump's commitment to bring jobs back to the US may affect the BPO sector, which caters mostly to US corporates. Nonetheless, the low cost of production and labour in the Philippines makes it an attractive investment location (Willis Towers Watson 2015-2016 Global 50 Remuneration Planning Report cited in the Philippine Daily Inquirer (PDI), April 29 2016; Department of Finance interview cited in PDI, February 4 2016).
Further, remittances from Filipinos working in the US may be affected. Capital Economics noted that the 4 million or so Filipinos currently based in the US send back remittances equivalent to about 3% of the Philippines' GDP, which is the highest of any major emerging market. If the US were to press ahead with a tax on remittances, which it has already threatened to do against Mexico, it could cause remittances from Filipinos to slow down.
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and approval timetable.
The Foreign Investment Act (FIA) liberalised the entry of foreign investment into the Philippines. Pursuant to the FIA, foreign investors are generally treated like their domestic counterparts and required to register with the Securities and Exchange Commission (SEC) (for corporations or partnerships) or with the Department of Trade and Industry (DTI) (for sole proprietorships). Generally, 100% foreign equity may be allowed in all areas of investment except those reserved for Filipinos under existing laws. Registration with the DTI takes one working day, while registration with the SEC takes two to seven working days.
After registration with the SEC or DTI, the entity must register with the Bureau of Internal Revenue (BIR) for tax purposes, and obtain permits and clearances from the local government unit where it will do business. As an employer, the corporation will also have to register with the Social Security System (SSS), Pag-IBIG Fund and PhilHealth. Where necessary to its operations, it must also accredit itself as an importer with the Bureau of Customs. This entire post-registration process may take two to three months.
If the proposed project or activity qualifies for incentives, the foreign investor may file an application for incentives with the appropriate investment promotion agency (IPA). There are currently seven IPAs: the Board of Investments (BOI); Philippine Economic Zone Authority (Peza); Subic Bay Metropolitan Authority; Clark Development Corporation; John Hay Poro Point Development Corporation; Cagayan Economic Zone Authority; and Aurora Pacific Economic Zone and Freeport Authority.
The approval of the IPA usually takes one to two months from the submission of complete documentary requirements, as it will have to undergo a process of evaluation.
2.2 Are there any investment restrictions in specially regulated sectors and is the government entitled to any special rights in these sectors?
Foreign investment restrictions are embodied in the Foreign Investment Negative List (FINL), which provides for two types of restrictions: List A, where foreign ownership is limited by the Philippine Constitution and specific laws; and List B, where foreign ownership is limited for reasons of security, defence, risk to health and morals and protection of small- and medium-scale enterprises.
List A provides a list of industries that foreigners may not invest in, such as mass media and the practice of certain professions, as well as industries where foreign equity is allowed but limited, such as advertising (30% maximum foreign equity), and the operation of public utilities, ownership of private lands, and exploration, development and utilisation of natural resources (40% maximum foreign equity).
List B provides a list of activities where foreign equity is limited to 40%, such as domestic market enterprises with paid-in equity capital of less than the equivalent of $200,000.
The government enjoys special rights in particular sectors based on law. For example, in the case of natural resources, the government may directly undertake such activities or it may enter into co-production, joint-venture, or production sharing agreements with Filipino citizens or with corporations where at least 60% of the capital is owned by Filipino citizens.
2.3 Which authority oversees competition clearance and give a brief overview of the merger clearance process?
The Philippine Competition Commission (PCC) is the authority that oversees competition clearance.
Generally, parties to a merger must notify the PCC in the following situations: the aggregate annual gross revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity of at least one of the acquiring or acquired entities, including that of all entities that the ultimate parent entity controls, directly or indirectly, exceeds PHP1 billion; and the value of the transaction exceeds PHP1 billion.
The PCC has 15 days from the parties' submission of all the required information to determine whether relevant requirements have been completed, and 30 days from commencing its phase I review to determine if a phase II review (more detailed and comprehensive analysis) is needed. If a phase II review is needed, the PCC is given an additional period of 60 days from the parties' receipt of the notice. The entire review process is limited to 90 days from the submission of all the required information for phase I review. When these periods expire without the PCC having promulgated any decision, the merger is deemed approved.
2.4 Are there further approval requirements that foreign investors should be aware of?
Registration with the Bangko Sentral ng Pilipinas (BSP) is required if the foreign exchange requirement needed to service the repatriation of capital and remittance of cash dividends, profits or earnings accruing on foreign investments will be sourced from authorised agent banks (AABs) or their affiliate or subsidiary foreign exchange corporations (AAB-forex corps).
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for US investment in your jurisdiction?
There most common legal entities for US investment include a local subsidiary (through the establishment of a new corporation), representative or liaison office, branch office, regional or area headquarters, and regional operating headquarters.
3.2 What are the key requirements for establishment and operation of these legal entities?
In general, the key requirements for the establishment and operation of all these legal entities are SEC approval, clearances from the local government unit, registration with the BIR, and registration with the SSS, Pag-IBIG Fund and PhilHealth.
A foreign corporation seeking to establish a local subsidiary must have at least five to 15 incorporators, each of whom must hold at least one share. Generally, the minimum paid up capital is PHP5,000, unless otherwise provided by law. As for other legal entities, the capital requirements are as follows:
(a) A representative office is required to have a minimum inward remittance of $30,000 to cover operating expenses.
(b) A branch office is required to put up a minimum paid in capital of $200,000, which can be reduced to $100,000 if the activity involves advanced technology, or the company employs at least 50 direct employees.
(c) A regional headquarters requires the inward remittance of $50,000 annually to cover operating expenses.
(d) A regional operating headquarters requires the minimum capital of $200,000 in the form of a one-time remittance.
For (c) and (d), the endorsement of the BOI is required before the SEC acts upon the application for registration.
SECTION 4: Dispute resolution
4.1 How effective are local courts' enforcement and dispute resolution proceedings, and what should US investors be particularly aware of?
In a study published by the Institute of Developing Economies (Dispute Resolution Systems in Asia (Philippines)) in March 2002 (IED Study), it was found that even if statistics show a high volume of controversies submitted for judicial resolution in the Philippines, there is a growing dissatisfaction in the use of courts for settling disputes. The reasons for this dissatisfaction include: costly and slow process of litigation; rigidity of procedural and technical rules; the adversarial nature of the litigation system; and an inadequacy of legal solutions for resolving complex issues involved in commercial transactions.
The IED Study noted that one important consideration which militates against litigation and favours out-of-court settlement is the culture of the Filipinos that strongly values the preservation of an amicable relationship between parties.
Aware of these issues, the government is currently implementing long-term reform strategies to improve judicial efficiency, decongest court dockets and reduce court delays (USAID Report dated March 24 2017).
4.2 Does your jurisdiction have a bilateral investment protection treaty with the US and is that commonly used by investors?
The Philippines currently does not have a bilateral investment protection treaty with the US.
4.3 Do local courts respect foreign judgments and are international arbitration awards enforceable?
Local courts respect foreign judgments and international arbitration awards are enforceable.
As regards foreign judgments, the Philippine Rules of Civil Procedure provide for the effects of a foreign judgment as follows: in case of a judgment upon a specific thing, the judgment is conclusive upon the title to the thing; and in case of a judgment against a person, the judgment is presumptive evidence of a right as between the parties and their successors in interest by a subsequent title. In either case, the judgment may be repelled by evidence of a want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact.
As for international arbitration awards, the Philippines has signed and ratified the New York Convention, which provides for the reciprocal recognition and enforcement of foreign arbitral awards. Pursuant to the Special Rules on Alternative Dispute Resolution, any party to a foreign arbitration may petition the local court to recognise and enforce a foreign arbitral award.
SECTION 5: Forex controls and local operations
5.1 What foreign currency or exchange restrictions should foreign investors be aware of?
The BSP allows Philippine residents and non-residents to purchase foreign exchange from AABs and AAB-forex corps and from non-bank entities operating as foreign exchange dealers and/or money changers to fund legitimate foreign exchange obligations, subject to the provision of information and/or documents on the underlying obligations.
There is no mandatory foreign exchange surrender requirement for residents' foreign exchange earnings, which may be sold for pesos, retained in foreign currency, and/or deposited in foreign currency accounts in the Philippines or abroad. The registration of foreign investments either with the BSP or custodian banks is optional, unless the foreign exchange which will be used to service the repatriation of capital and/or the remittance of related earnings will be sourced from AABs and AAB-forex corps. Foreign exchange purchases from AABs and AAB-forex corps for non-trade current account transactions (such as travel, medical and educational expenses, royalties, copyright, patent, franchise and licensing fees) of up to $500,000 (for individuals) and $1 million (for corporates/other entities), or its equivalent in other foreign currencies, require only the submission of a BSP-prescribed application form to the foreign exchange selling institution. Foreign exchange in excess of the aforementioned thresholds requires the submission of supporting documents evidencing the underlying transaction.
SECTION 6: Tax implications
6.1 Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for US investors into the country?
There are tax structures useful for US investors. Specifically, the government offers tax incentives to qualified entities that are registered pursuant to investment laws (see section 6.4). US investors can also avail of the benefits under the income tax treaty between the US and the Philippines (see section 6.5).
6.2 Has your jurisdiction benefited from the recent trend of US companies pursuing inversion structures? If yes, do you believe this will be threatened under the new administration?
6.3 What are the applicable rates of corporate tax and withholding tax on dividends?
The applicable rate of corporate income tax for domestic corporations is 30% on net income from all sources. Resident foreign corporations, or corporations incorporated in a foreign country and engaged in trade or business in the Philippines through a branch office are taxed only for income derived within the Philippines.
Representative offices and regional or area headquarters that do not earn or derive income from the Philippines are not subject to corporate income tax. Regional operating headquarters are taxed at a rate of 10% on their taxable income derived from within the Philippines. Non-resident foreign corporations are taxed on gross income received from sources within the Philippines at 30%, except for reinsurance premiums, which are exempt.
Dividends received by Philippine and resident foreign corporations from a domestic corporation are not taxable. Dividends distributed by a Philippine company to a non-resident foreign corporation are taxed at a rate of 15%, provided that the country of the foreign recipient allows a tax credit of 15%; otherwise, dividends are taxed at a rate of 30%. The final withholding tax may be reduced under an applicable treaty.
6.4 Does the government have any tax incentive schemes in place?
The government has tax incentive schemes in place for qualified entities that are registered in accordance with investment laws. For instance, the recently approved 2017 Investment Priorities Plan (IPP) provides a list of government priority investments formulated by the BOI that may be eligible for tax incentives. Priority investment areas include manufacturing activities, agriculture, infrastructure and energy projects. Tax incentives include income tax holiday for a certain period, exemption from taxes and duties on imported spare parts, exemption from wharfage dues and export tax, duty, impost and fees, reduction of the rates of duty on capital equipment, spare parts and accessories, tax exemption on breeding stocks and genetic materials, tax credits and additional deductions from taxable income.
Entities registered in economic zones (for example Peza) may also be entitled to tax incentives such as income tax holiday for a certain period and/or a five percent gross income tax thereafter, tax and duty free importation, zero percent value added tax on the purchase of goods and services, exemption from withholding taxes on payments of local buyers from customs territory, and exemption from payment of any and all local government fees, imposes, licenses, or taxes.
6.5 Are there any reciprocal tax arrangements between your jurisdiction and the US? If so, how can they aid investors?
The Philippines has a tax treaty with the US with respect to income taxes. The treaty provides tax benefits for US investors by establishing maximum rates of withholding tax in the source country on income payments flowing to residents of the other country.
6.6 Do you think that the introduction of new rules and regulations in the US, such as the Bring Jobs Home Act, is likely to have an impact on investment into your country?
The introduction of new rules and regulations in the US, such as the Bring Jobs Home Act, is likely to have an impact on US investment in the Philippines. The Bring Jobs Home Act provides incentives for business taxpayers who relocate their businesses from foreign countries to the US. Despite this, it is still cost competitive to locate in the Philippines because of the skilled workforce, and low cost of production and labour. For instance, the Philippines has gained recognition as a BPO location due to the availability of professionals with the required language skills, cultural affinity with the US, and strong customer service orientation (see Philippine Development Plan 2011-2016 published by the National Economic Development Authority).
|About the author|
Aris Gulapa is the managing owner of Gulapa Law and a partner at Gulapa & Baclay, the New York affiliate of Gulapa Law. Before setting up Gulapa Law, Gulapa was a partner at Gatmaytan Yap Patacsil Gutierrez & Protacio from October 2011 to September 2015. He worked as an associate in SyCip Salazar Hernandez & Gatmaitan (December 2003 to June 2006); Kelvin Chia Partnership (Singapore and Vietnam offices, July 2006 to June 2008); and Anderson Mori & Tomotsune (Tokyo office, July 2008 to June 2010). He was also research assistant to professor Harry First, the former head of the Antitrust Bureau of the Office of the Attorney General of New York, from September 2010 to May 2011.
Gulapa is ranked by Chambers & Partners Asia Pacific/Global as a leading Philippine lawyer in the Projects/Infrastructure and Corporate/M&A fields. He is named a Leading Individual in real estate and construction by Legal500. Gulapa is also one of Asian Mena's 'Commended External Counsels' for 2017. He graduated with a juris doctor degree from Ateneo Law School in 2003 (with honours) and obtained his master of laws in trade regulation (Vanderbilt scholar) from New York University in 2011. In addition to his admission to the Philippine bar in 2004, Gulapa was also registered as a foreign attorney in Vietnam from 2006 to 2011 and was admitted to the New York bar in 2014.
|About the author|
Oliver Baclay, Jr.
Oliver Baclay, Jr. heads the intellectual property department and is a partner at Gulapa Law, as well as at Gulapa & Baclay, the New York affiliate of Gulapa Law. Prior to joining Gulapa Law, he was a senior associate of the intellectual property department at Cruz Marcelo and Tenefrancia (June 2013 to February 2015). He was also a senior associate of the intellectual property department at Villaraza Cruz Marcelo & Angangco (January 2013 to June 2013), and an associate of the same firm (April 2009 to December 2012).
Baclay graduated with a juris doctor degree from Ateneo Law School in 2008 (with honours) and obtained his master of laws in intellectual property from New York University in 2016 (Competition, Innovation and Information Law Program). He also took a patent experts course sponsored by the Japan Patent Office in 2012, and an advance course on patents at the World Intellectual Property Office eLearning Centre in 2014. He ranked third in the 2008 Philippine bar examinations and was admitted to the New York bar in 2015.
|About the author|
Marie Yasmin Sanchez
Yas Sanchez is a senior associate at Gulapa Law. Prior to joining Gulapa Law, she was a junior associate at Gatmaytan Yap Patacsil Gutierrez & Protacio from January 2013 to October 2015. Sanchez completed her juris doctor degree at the Ateneo Law School in 2012, where she graduated with honours and the Best Thesis Award. She was admitted to the Philippine bar in 2013.
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