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Investing in the Philippines
Incentives and Restrictions
A foreign investor is offered a lot of incentives when investing in the Philippines. Incentives include tax holidays, tax reduction for labor expenses, and duty-free importation of capital equipment, and are available for companies investing in preferred areas and registered with the Board of Investments (BOI). The sustainability of these incentives has been questioned from time to time. According to some opinions, these incentives create a burden too heavy to carry for the Philippine national economy and therefore should be removed.
To develop the commitment of foreign investors the land lease times were prolonged in January 1995. The lease contract can be made for 50 years and be renewed once for another 25 years.
Restrictions on foreign participation are mentioned in three negative lists. These lists are administered by the National Economic and Development Authority (NEDA). The division into domestic and export enterprises is relevant when talking about investment incentives. The basic idea is not to offer incentives to companies that would use the benefit to compete in the Philippine market with local companies. A domestic market enterprise produces goods or services solely for the domestic market. Domestic market enterprises with more than 40% foreign participation should have a paid-up capital of at least USD 500 000, if advanced technology is not used.
An export enterprise is a manufacturing, processing or service enterprise exporting at least 60% of its output. Also, a trader buying domestically manufactured products and exporting at least 60% of the purchase is regarded as an export enterprise. If the production is not included on A or B negative lists, there are no restrictions concerning foreign ownership.
If the investment is made in a Special Economic Zone (earlier Export Processing Zone), there are no restrictions on foreign participation. However, these companies are required to export the whole production, unless the company has received specific approval from the Philippine Economic Zone Authority (PEZA). This approval is always made in a specific situation and may not be issued beforehand. Once the approval is gained, the domestic sales cannot exceed 30% of the production.
There are plans to continue the economic liberalization program, e.g. list B might be removed entirely and retail trade is already proposed to be opened to foreigners, too.
Investment Negative Lists
List A includes limitations made by constitution or special law.
No foreign participation is allowed in
- mass media
- most licensed professional services (e.g. accountants, lawyers, engineers)
- retail trade
- cooperatives
- private security agencies
- small-scale mining
- fisheries
- rice and corn farming
25% foreign equity is allowed in
- recruitment agencies
- locally funded public works projects
30% foreign equity is allowed in
40% foreign equity is allowed in
- resources development and utilization
- land ownership
- public utilities
- educational institutions
- financing companies
- construction
List B restricts foreign investment for reasons of security, defense, health, morals and protection of small and medium-sized enterprises.
40% foreign participation is allowed in
- explosives
- munitions
- armaments
- dangerous drugs
- massage clinics
- gambling
- domestic market enterprises with capital less than USD 500 000, provided enterprises don't use advanced technology
- small-scale export enterprises with capital less than USD 500 000 depleting natural resources
List C which limited foreign equity by the capacity of existing enterprises was removed in October 1994.
Business Entities
A foreign company may operate in the Philippine markets through an agent or a representative, but also by founding a legal entity. The possible forms of establishment for foreign companies are corporations, partnerships, sole proprietorships, branches, representative offices or regional headquarters.
The most important thing related to separate legal entity is the liability. If a foreign investor is incorporated in the Philippines, the company has a separate legal sphere from the one of its foreign owner. However, the corporate veil can be lifted in some cases and the foreign owner can be made liable for its subsidiary's liabilities. This kind of piercing of the liability has been used even in the Philippines.
It is important to notice that incorporators must be natural persons i.e. other corporations can't be subscribers in a new company. Further, the activities carried out by representative offices and regional headquarters are limited. These can't derive any income from the Philippines. A representative office may only disseminate information, promote products and facilitate orders from its head office's customers. Regional headquarters can serve only as a supervisory, communicative and coordinating center for its affiliates, subsidiaries or branches in the region. They cannot participate in any way in the management of other entities of the same corporation situated in the Philippines.
Business Entities
| FORM | FOUNDERS | LEGAL PERSONALITY | LIABILITY OF OWNERS | MINIMUM CAPITAL | NOTES |
| CORPORATION | 5 - 15 individuals | separate | limited to subscription | PHP 5 000 | incorporaters must be natural persons |
| PARTNERSHIPS |
| A) GENERAL | at least 2 | separate | umlimited | none | registration with the SEC if the capital exceeds PHP 3 000 |
| B) LIMITED | at least 2 | separate | at least one partner with limited liability | none | registration with the SEC if the capital exceeds PHP 3 000 |
| SOLE PROPRIETOR-SHIPS | 1 | none | unlimited | none | advisable only for small-scale business |
| BRANCHES OF FOREIGN COMPANIES | foreign corporation | extension of the foreign corporation | unlimited | none |
|
| REPRESENTATIVE OFFICES | foreign corporation | extension of the foreign corporation | unlimited | none | activities limited |
| REGIONAL HEADQUARTERS | foreign corporation | extension of the foreign corporation | unlimited | none | activities limited |
Registration Procedures
Corporations must be registered with the Securities and Exchange Commission. The registration procedure is eased by the One-Step Action Centers which provide facilities and services for investors to obtain information and documentation needed in one physical location. These centers are situated e.g. at the Board of Investments, and Department of Finance (DOF). The SEC provides a special procedure, the "Express Lane" to facilitate the registration of new corporations. The registration takes one day through the "Express Lane" and one to four weeks otherwise.
If the enterprise is engaged in preferred areas of investment under the Investment Priorities Plan (IPP) and wants to enjoy the incentives, the company must register with the BOI.
If the investment is situated in any Special Economic Zone, the registration must be made with the Philippine Economic Zone Authority. The Subic Bay freeport and Clark Special Economic Zone are administered by their own authorities and the companies operating in these two areas must register with the Subic Bay Metropolitan Authority or the Clark Development Authority.
Taxation
Taxes are levied both by national and local authorities. The government imposes corporate and individual income taxes, estate and gift taxes. The tax rate on individuals is progressive rising to 35%.
The taxation of corporations depends whether the corporation is resident or not. If the corporation is organized under the laws of the Philippines, it is considered resident. The importance of this division is in the determination whether the corporation is taxed in the Philippines and if so, how. The corporate tax rate is a solid 35%.
In addition, there are indirect taxes like Value Added Tax, excise taxes, percentage taxes and stock action taxes. VAT is 10% of the value of the goods or services sold. VAT is imposed on the gross selling price. Excise taxes are imposed on the goods manufactured or produced in the Philippines for domestic sale or consumption.
Local governments levy real estate tax, graduated business tax, fixed business tax and other fees and charges. National tax laws are enacted by the Philippine legislature and are contained in the National Internal Revenue Code. The Philippine tax system generally suffers from structural problems. There is a lot to develop in the field of enforcement and supervision of taxation, only 12% of labor force pays direct taxes. Possibilities for both legal and illegal "tax planning" are evident.
Registration Procedures Required in the Philippines
The following information and documents are needed for registration with the SEC:
- a copy of the articles of incorporation and bylaws
- the corporate treasurer's affidavit of actual deposit of paid up-capital
- the incorporators' statements of assets and liabilities
- a bank certificate of deposit on paid subscriptions
- authorization by the corporate treasurer for the SEC to verify the corporation's bank accounts
- a written undertaking to change the corporate name if this is similar to or resembles the name of an existing corporation
- the taxpayer identification numbers of the incorporators
- an undertaking to comply with the SEC report requirements
- personal information on directors, officers and stockholders
Besides the regular requirements mentioned above, business entities are also should to register with
- Bureau of Trade Regulations and Consumer Protection (BTRCP)
- registration of business name / single proprietorships
- Central Bank of the Philippines (Bangko Sentral ng Pilipinas)
- registration of foreign investments for purposes of capital repatriation and profit remittances
- Bureau of Internal Revenue (BIR)
- securing tax identification number
- Metro Manila Authority (MMA)
- securing locational clearance/business permit for firms located in Metro Manila
- City Halls/Municipal Offices in the localities where the business will be set up.
- securing building permit and license to do business
- Social Security System (SSS)
- securing employer's SSS-number
- Medicare
- securing membership in the government health care benefits system
- Manila Electric Co. (MERALCO) or local electric utility firms
- securing electric services connection
- Metropolitan Waterworks and Sewerage System or local water utilities administration
- securing water services
The Investments Priority Plan includes e.g.:
- export activities
- agriculture, food and forestry-based industries
- basic industries
- power generation, transportation, telecommunications infrastructure and services
- tourism
- health products and services
- environmental conservation and protection
- modernization and rehabilitation programs
- science and technology-oriented research and development
Labor
The Philippine labor force is about 27 million. Further, the cost of labor is relatively cheap in the Philippines. The labor force is well educated and there is no lack of it. An average Filipino is better educated than his counterparts in the neighboring countries and usually has a satisfactory command of English. Filipinos are highly adaptable and trainable. No wonder it is often said that people are the greatest resource of the Philippines.
However, the top of the Philippine labor, often educated in the US, are as professional and expensive as their western colleagues. Employees are usually paid 13th months' salary. Fringe benefits add up to 30% of the employers' monthly salary and wage expenses.
The unemployment rate in the country is approximately 8-9%. But it is estimated that at least one fifth of the labor force is underemployed when measured in western standards. The population working abroad is also considerable; millions of Filipinos are employed mainly in the US, the Far East and the Gulf region. There has been some notable progress in the Philippine labor market during the last few years. For example, the number of strikes has decreased and can't usually be seen as a threat to an enterprise operating in the country.
LABOR RATINGS IN SELECTED ASIAN COUNTRIES
| Managerial Labor | Production Labor |
| | Quality | Availability | Cost | Quality | Availability | Cost |
| Philippines | 3 | 1 | 1 | 3 | 1 | 2 |
| Vietnam | 10 | 5 | 1 | 3 | 1 | 1 |
| Malaysia | 5 | 5 | 5 | 3 | 3 | 3 |
| China | 10 | 10 | 1 | 5 | 1 | 1 |
| Indonesia | 10 | 10 | 2 | 5 | 1 | 1 |
| Thailand | 10 | 10 | 4 | 4 | 2 | 1 |
| Japan | 1 | 1 | 10 | 1 | 10 | 10 |
| Singapore | 1 | 10 | 8 | 1 | 10 | 8 |
| Taiwan | 1 | 8 | 9 | 1 | 9 | 8 |
| Hong Kong | 1 | 10 | 10 | 1 | 10 | 8 |
| South Korea | 5 | 10 | 9 | 1 | 8 | 7 |
| Ratings: | 1 - best grade available |
| 5 - average grade |
| 10 - worst grade |
Location
The authorities of the Special Economic Zones have some of the power of governmental bodies, for example, labor permits can be issued by the local authorities and the procedure is said to be easier, quicker and more flexible than the regular one. Also, the strict provisions of the Philippine Labor Code on the use of foreign labor are interpreted in a foreigner friendly way.
Manufacturers located in the Special Economic Zones are entitled to financial incentives such as tax holidays, tax deduction for labor expenses and, with minor exceptions, exemption from almost all duties on imports and exports, and from national and local taxes. Foreign companies can also own up to 100% of companies that export at least 70% of their production.
Most zones offer one-stop services for new and existing investors. They handle various bureaucratic requirements, from immigration to registering with the Securities and Exchange Commission and the Board of Investments.
The future of the two former US military bases, Subic Bay and Clark, looks bright, although there are a few questions to be answered. The flow of investments is growing, but the pace might not be fast enough. Despite their cheap land leases topped with duty-free imports and low, 5%, profits tax, many firms still prefer sites with better domestic transport links. Industrial estates at Cavite and Laguna, two places closer to Manila, have each attracted more investment than Clark and Subic combined in 1995. Moreover, the former bases are both between two and three hours by road from Manila, and in the rainy season mudslides can force long detours. There are plans to link Clark and Manila by rail and to build a Clark-Subic highway, but they will take years to come to fruition. Still, both economic zones hold an ace in the form of their former military airstrips and their core competence will be in industries requiring excellent international connections, like manufacturing or assembling for export. Clark has no outlets to the sea, but its future as an aviation hub may ultimately prove bigger than Subic's.
All the Philippine laws are applicable in these special areas with the exemptions regarding taxation and foreign exchange provisions. However, the personal character of the heads of the areas may have an influence on every day life. For example, these heads can guarantee the enterprises present in the area that the employees will not strike. Although this kind of restriction of the employees' rights has no basis in the Labor Code or other legislation, it still appears to be very effective.
Metro Manila
Finding flats in Metro Manila might these days cause problems, especially in the center of Makati. For example, a 22-story building was entirely sold before the building work began. And even 70-story buildings are planned to the financial heart of the Philippines, Makati. This gigantic boom in the property market has also affected prices: the price for a first-class apartment in Makati area has risen almost 50% over two years ago. Reasons for this include the increased political stability in the country, the growth of the GNP and the development of the Manila stockmarket. The real estate market also provides a stable and long term form of investment. The demand for office space is said to grow roughly 16% annually. The ASEAN area is developing into a regional market and Manila with the lowest sale price of office space seems to be very attractive.
In 1995, surveys showed that only 13% of international and 28% of domestic companies own their apartments. If the political stability is preserved, this is a factor which is certainly about to change. But the political stability is not the only threat to the property market. The financial district might be relocated, for example, to Fort Bonifacio, a former military camp, centrally situated and connected with major expressways. This 214-hectare area was auctioned in January 1995 and the winning bid set a new record in the Philippine auction history with USD 1.6 billion.
Subic Bay and Clark Airfield
In 1947, the USA was granted a lease on 23 military bases, including the two major ones at Clark and Subic Bay in Luzon. The expiry of the agreement in 1991 brought about the total withdrawal of the American forces by the end of 1992. Subic Bay and Clark were deserted, and devastated when Mt. Pinatubo smothered them in volcanic rubble.
The former US Naval Facility, Subic Bay, is located 80 km northwest of Manila. The Americans left USD 8 billion worth of infrastructure there, most important being an airport, 14 piers, an internal road network and buildings. The first stages of the conversion into civil use and cleaning the bay of volcanic ash were done by volunteers, who are striving to make Subic a model of the new Philippines, with cleaner nature, better enforcement of laws, less bureaucracy, enhanced safety and no corruption. The difference is visible, for example the whole registration process of a new company can be completed with a single authority. Over 42 000 employees displaced by the withdrawal of the US Armed Forces provide a pool of highly skilled and English-speaking workers, who are mainly already employed by over 130 companies operating in the base (February 1996).
Clark Special Economic Zone, once the biggest American air base facility outside the USA, was more damaged by Mt. Pinatubo eruption and widespread looting than Subic. USD 4 billion of infrastructure left by Americans includes two 3.2 km runways and large military aviation complex. The third runway is being built to turn Clark into Manila's premier airport in 1998.
