Foreign Investments Reviewer PDF

ATENEO LAW SCHOOL FOREIGN INVESTMENTS LAW
ELECTIVE [ATTY. HOFILENA]

L.T.J.F. 1st Semester S.Y. 2013-2014
FOREIGN INVESTMENTS LAW the foreign business entity

• Licenses and permits
I. Foreign and Domestic Corporations ◦ Certificate of authority – for
regulated industries and businesses
Foreign Corporations ◦ License – general permit to do
• Corporations organized under any laws business
other than those of the Philippines • Where to obtain license/permits
• Reciprocity Clause (Corporation Code) – ◦ Corporations – SEC
foreign corporation's home country ◦ Sole Proprietorship – DTI
allows Philippine Corporations to do ◦ Certificate of authority –
business in it government agency concerned
• Reciprocity clause does not affect the (BSP, Insurance Commission, etc)
status of the foreign corporation • Penalties
• It merely emphasizes the policy of ◦ No access to courts
granting access to foreign corporations ◦ Fines (Sec. 144 Corporation Code)
whose home state also grants access to
Filipino citizens and corporations Summary
Transaction May Sue May be Sued
Philippine Nationals (FIA definitions)
Doing No License: NO No License: YES
• Citizen of the Philippines
Business With License: YES With License: YES
• Domestic partnership or association
wholly owned by Philippine nationals Isolated YES: by mere GR: NO – no
• Domestic corporations Transaction consent or jurisdiction over
voluntary foreign corp.
◦ Organized under Philippine laws
surrender Except: consent
◦ At least 60% of the outstanding through a
capital stock entitled to vote is held contractual
and owned by Filipinos stipulation
• Trustee of funds for pension
◦ Trustee is a Philippine national II. Concept of Doing Business
◦ At least 60% of the fund will accrue
to Filipino beneficiaries Acts of Doing Business
• Corporation owning stocks in a SEC-
Registered enterprise (corporation) FIA Definitions
◦ At least 60% of the outstanding • Soliciting orders, service contracts
capital stock entitled to vote of both • Opening of offices
corporations is held and owned by • Appointing distributors or
Filipinos representatives who are:
◦ At least 60% of the members of the ◦ Domiciled in the Philippines
Board of Directors of both ◦ Staying in the country for a period
corporations must be citizens of the totaling 180 days or more in a
Philippines calendar year
• Participating in the management or
License to Do Business control of any domestic business
• Grants foreign corporation or entity • Any other acts that imply a continuity
access to domestic courts of commercial dealings
• Purpose is to acquire jurisdiction over
Sources:
Republic Act 7042, Foreign Investments Act of 1991
Executive Order No. 226, Omnibus Investments Code of 1987
Villanueva, Cesar, Philippine Corporate Law, Manila: Rex Printing Company, 2010 Page 1 of 13
Not Deemed Doing Business (FIA IRR) bringing the buyer and seller together,
• Mere investment as a shareholder in whether or not a sale is made.
domestic corporations
• Exercise of rights of such investor Primary Purpose vs. Incidental Purpose
(shareholder) • A business activity NOT in the usual
• Having a nominee director or officer to course or purpose of a business entity
represent the foreign investor's interest • It is an incidental activity compared to
in the domestic corporation its purpose
• Appointing a distributor domiciled in the • Eg: a Bank operating a hotel
Philippines which transacts business in
its own name and account License and Capacity to Sue
• Publication of a general advertisement
• Maintaining a stock of goods in the 1. If a foreign corporation does business
Philippines solely for the purpose of in the Philippines without a license, it
having the same processed by another cannot sue before Philippine courts
entity in the Philippines 2. If a foreign corporation is NOT doing
• Consignment by a foreign entity of business in the Philippines, it needs no
equipment with a local company to be license to sue before Philippine courts
used in the processing of products for on an isolated transaction
export 3. If a foreign corporation does business
• Collecting information in the Philippines in the Philippines without a license, a
• Performing services auxiliary to an Philippine citizen which has contracted
existing isolated contract of sale which with said corporation may be estopped
are NOT on a continuing basis from challenging the foreign
corporation's capacity to sue. NOTE:
NOTES: The estoppel doctrine is an exception to
The 180-day stay must fall within the the general rule but is relevant only
“Calendar Year” (Jan. 1 – Dec. 31). If the when a foreign corporation is suing
period falls on 2 different consecutive years, Filipino party.
the duration is deemed for 2 different periods. 4. If a foreign corporation does business
in the Philippine with the required
Engaging in mortgage contracts is not license, it can sue before Philippine
considered as doing business. A foreign courts on any transaction
mortgagee enforcing a mortgage contract is
not considered to be doing business Case Doctrines
Soliciting Orders vs. Advertisements Agilent Tech v Integrated Silicon – to

• Solicitation is a specific transaction thus constitute “doing business”, the activity to be
considered as doing business undertaken is one that is for profit-making
• Advertising is more general (not
directed to a specific client) thus not Alfred Hann v CA – For purposes of having
considered as doing business summons served on a foreign corporation, it is
sufficient that it be alleged that the foreign
Broker vs. Sales Agent corporation is doing business in the Philippines
• An agent receives commission upon the
successful conclusion of a sale Avon Insurance v CA – A single transaction
• A broker earns his pay by merely could qualify a foreign corporation to be doing
Sources:
business in the Philippines if such transaction Steelcase Inc v Design Intl – A letter of intent
indicates an intention of the foreign to enter a bid is not an act sufficient enough to
corporation to do business in the Philippines constitute an intent to do business. A bidder
must win the bid first before acquiring a
B Van Zuiden v GTVL – The mere act of license
exporting from one's own country without
doing any specific commercial acts within the Tuna Processing v Phil Kingford – A foreign
territory of the importing country cannot be corporation not licensed to do business in the
deemed as doing business in the importing Philippines may still gain access to domestic
country courts through an international treaty or
convention (in this case, the recognition the
Eriks Pte v CA – A series of separate deliveries Alternative Dispute Resolution Act of 2004,
for one single order is considered as an New York Convention)
isolated transaction. However, a series of
commercial dealings (unique and independent Universal Shipping v IAC – A foreign entity
from one another) signifies an intent to do may bring an action in Philippine courts to
business in the Philippines. A grant of a 90-day enforce an insurance policy, executed abroad,
credit term is proof of an intention to continue even if it has no license to do business since
transacting with the domestic client. such insurance contract did not arise from a
business transaction done here in the
European Resources v Ingenieuburo – a Philippines.
foreign corporation doing business in the
Philippines without a license may sue in Non-Stock and Non-Profit Foreign Corporation
Philippine courts a Philippine citizen or entity • Such corporations are permitted to
that had contracted with and benefited from it generate profit
• What is prohibited is the distribution of
General Garments v Director of Patents – A profits to its members
foreign entity bringing an action to protect a • Technically, non-stock corporations are
trademark right needs no license to do not required to secure a license since
business in order to access the domestic they are “not doing business”
courts because it does not seek to enforce any • However, in practice, such corporations
contractual right arising from any business still need a license
transaction
III. Vehicles of Doing Business
Litton Mills v CA – where a single act or
transaction of a foreign corporation is not Different Types of Entities
merely incidental or casual but is of such • Domestic Subsidiary
character as distinctly to indicate a purpose on • Branch Office
the part of the foreign corporation to do other • Representative Office
business in the state, such act will be • Regional Headquarters
considered as constituting doing business. • Partnership
Lorenzo Shipping v Chubb – Capacity to sue is Domestic Subsidiary

a personal qualification, thus if successor in • Forming and registering a domestic
interest of the disqualified entity is qualified to corporation with a juridical personality
sue, then the restriction does not apply separate from parent company
• Majority of the incorporators must be
Sources:
natural persons and residents of the ◦ Provide quality control of the

Philippines products
• If foreign equity is more than 40% ◦ Can only deal with the clients of the
there must be a minimum paid up parent company
capital of $200,000 (which must be • Does not or is not allowed to generate
remitted into the Philippines). income
• If subsidiary will be exporting goods or • Head office must prove annual inward
generating 60% of its gross sales from remittance of $30,000.00 (not a
abroad it will be considered as an security deposit) to cover operating
Export Enterprise, hence the minimum expenses of the representative office
paid up capital of $200,000 is not
required Regional Headquarters (RHQ)
• Capitalization requirement does not • Functions:
apply to enterprises involving advanced ◦ Coordinate with the other entities of
technology and will employ at least 50 the parent company in the region
employees ◦ Be the coordination and
communication center for its
Branch Office affiliates, subsidiaries and branches
• A 100% foreign-owned entity – does in the Asia-Pacific Region and other
not have a separate entity from its foreign markets
parent corporation • Not allowed to do business or earn
• Parent corporation is liable for the income
liabilities of its branch office • Parent company of the RHQ office may
• Foreign corporation's head office must market and sell products to other
prove: companies except for the RHQ office
◦ Existence in country of origin • Required to deposit an initial remittance
◦ Financial soundness of $50,000.00
◦ Authorization to set up branch • Tax incentives: exemptions from
• Involves $200,000 capitalization corporate income tax, local taxes, fees,
(remitted/deposited) charges and VAT
• If engaged in advanced technology or
the branch office employs at least 50 Partnership
direct employees, only $100,000 • General Rule: Corporations cannot be
capitalization is required partners
• Foreign head office must appoint and • However, the SEC started opening up to
register a resident agent the idea and has allowed corporations
• If resident agent is a foreigner, s/he to form partnerships
should be a holder of a valid Philippine • Must have at least 1 general partner
visa, which entitled the holder to stay (for liability purposes)
in the Philippines for at least 1 year
Summary
Representative Office Cost Domestic Partnership Branch RHQ
• Has limited functions: Corp Office
◦ Undertake information Capital $200K $200K $200K NONE
dissemination Security Generally NONE YES YES
◦ Promote parent company's products Deposit NONE
Sources:
Separate YES YES NO NO ◦ 1990 – SEC – Control Test

Juridical ◦ 2010 – SEC – Grandfather Rule
Entity
Flexibility Stockholder's Not bound Not Not SEC Memo Circular 8 (2013)
of meeting by any bound bound • SEC gave a new interpretation of the
operation Majority of legal by any by any
Board must procedures legal legal rule on Filipino ownership
be Phil. procedu procedu • The required percentage of Filipino
residents res res ownership shall be applied to BOTH:
◦ Total number of outstanding shares
Taxes of stock entitled to vote -AND-
Subsidiary Branch Office Regional HQ ◦ Total number of outstanding shares
of stock whether or not entitled to
Taxed on Only Philippine Not allowed to
vote
worldwide source income is generate
income taxed income • The memo pretty much overturned the
Gamboa v. Teves Case
Dividends paid Branch profit Not subject to
are taxed remittances are local taxes and
Case Doctrines
taxed VAT
Redmont v Macarthur
IV. Grandfather Rule • There is doubt as to the 60:40 rule
since the financial resources originated
Concept and Application from a foreign corporation
• Applies to nationalized industries under • SEC considers the financial resources as
the Philippine Constitution a factor in testing control in a
• 60:40 rule – corporation, in certain corporation
industries, must be at least 60% • “He who controls the financial resources
Filipino-owned wields the power of control”
• Rule states that ownership of the • The economics are now considered in
investing corporation is counting in determining control
calculating how much capital is
controlled by Filipino citizens. This test In Matter of Rehabilitation of Bayantel
is applied up to the 2nd level of • Conversion of Debt into Equity of a
corporate ownership foreign creditor
• It does not consider a corporation, the • Problematic if equity is voting since
majority (50%+1) of which is there is a 40% limit on foreign
controlled by Filipinos, a 100% Filipino ownership
entity • What if the holding exceeds the 40%
• Previously, the control test is applied as limit?
the general rule and the grandfather ◦ There will be a disqualification to
rule is applied in case compliance with hold the nationalized industry but
the 60:40 rule is in doubt no specific penalties will be imposed
(disqualification is merely a status)
Control Test vs. Grandfather Rule
• The SEC, SC and DOJ has been Gamboa v Teves
switching its stand as to which test • Defined the phrase “effective control”
should apply • Contemplates shares that are entitled
◦ 1989 – DOJ – Control Test
Sources:
to vote + receive dividends competition and trade practices

• The Filipino-controlled stocks do not • The policy of a self-reliant and
mean the total outstanding capital independent national economy does not
stock rule out the entry of foreign goods,
services and investments. It
Gamboa v Teves (M.R.) contemplates neither economic
• Added a qualification - “every share seclusion nor mendicancy in the
must be 60% Filipino-owned international community
◦ Each class (Preferred and Common)
must be 60% Filipino-owned Manila Prince Hotel v GSIS
• Controversial because it has no legal • A difficult case since it seemed to rule
basis that the policy is self-executing
• The “added qualification” may be • “National Patrimony” is not limited to
argued to be merely an obiter national resources but national heritage
• NOTE: See note on SEC Memo Circular is also included
No. 8 Series of 2013 • But is it up to the courts to decide what
is part of the national patrimony and
V. Nationality Restrictions what is not?
Filipino First Policy National Resources

• In the grant of rights and concessions • Regalian doctrine – all lands, waters
covering the national economy and and natural resources are property of
patrimony, the State shall give the State
preference to qualified Filipinos (Art. • Exploitation, development and
XII, Sec 10, 1987 Constitution) utilization of natural resources shall be
• Does not exclude or prejudice foreign under the full control of the State
trade and investments • Options for the State in exploitation
• Filipinos are given priority but should ◦ Direct exploitation activities
they be always allowed to win? ◦ Co-production, joint venture or
production-sharing agreements with
Tanada v Angara Filipino citizens or corporations or
• The WTO Agreement contained “parity associations at least 60% of whose
provisions” and “national treatment” capital is owned by Filipinos
clauses ◦ Small-scale utilization of natural
• It was argued that the clauses placed resources by Filipino citizens –
foreigners on equal footing with granted by Congress by law
Filipinos thus violating the “Filipino First ◦ Technical or financial assistance
Policy” of the Constitution agreements with foreign-owned
• SC ruled that the policy, like the other corporations – entered into by the
principles and State policies, is NOT President
self-executing. It is not an enforceable
constitutional right, but merely a La Bugal Tribal Association v Ramos
guideline for legislation • The Financial/Technical Assistance
• The policy is not aimed to destroy free Agreements (FTAA) should be limited
competition in the foreign and domestic only to “financial and technical
markets but rather to protect Filipino assistance”
enterprises against unfair foreign • FTAA is not a service contract where
Sources:
the foreign entity may participate in the only to transfers from the State to a
management of the enterprise private entity
• Foreign investors, through FTAA's, are
limited only to providing: Chavez v Public Estates Authority
◦ Technical assistance for highly • Reclaimed lands are classified as
technical enterprises alienable public lands
◦ Financial assistance for large-scale • However, they must first be classified
enterprises as agricultural lands in order to be held
• Pretty much the foreign investor is by private corporations and entities
limited to passive participation • If they are not classified as agricultural
lands, private entities are disqualified to
IDEALS v PSALM own them
• Use of water resources means
“extracting the water from its natural or Lee v Republic
original source” • When land previously held by
• Only Filipino entities may extract and disqualified individuals is transferred to
appropriate such resources a qualified individual, the subsequent
• Extraction of water – eg: deep well transfer cures the defect brought by the
extraction disqualification of the transferor
• By law (EPIRA - Electric Power Industry • Land held by the qualified transferee is
Reform Act of 2001), power generation deemed to be cured of the defect
is NOT a public utility hence no
franchise is necessary Public Utilities
• The procurement of the water • Franchises shall be granted only to
resources for power generation is the Filipinos or to corporations organized
task of the National Power Corporation under the laws of the Philippines at
– not the foreign entity managing the least 60% of whose capital is owned by
hydro-power plant such citizens
• All executive and managing officers of
Land Ownership such corporation or association must be
• Regalian doctrine – all lands belong to citizens of the Philippines
the State
• Alienable lands of the public domain JG Summit Holdings v CA
shall be limited to agricultural lands • PHILSECO (Philippine Shipyard and
• Private corporations or associations Engineering Corporation) is NOT a
may not hold alienable lands but may public utility
lease them for a period not exceeding • By nature, a shipyard is not a public
25 years, renewable for not more than utility and no law declares it as such
25 years and not exceeding 1000
hectares in area Bagatsing v CoP
• Individual citizens may lease not more • Petroleum imported abroad and refined
than 500 hectares or acquire more than in the Philippines is not part of the term
12 hectares by purchase or grant “Public Utility”
• A transfer of land from one private • Petroleum extracted in the Philippines,
entity to another private entity is processed and refined here – a public
outside the purview of this prohibition utility since the extraction and refining
• The limits on ownership and lease apply is a service (utility) for the public
Sources:
such entities must be Filipinos

Educational Institutions
• Constitutional Limits: Retail Trade Law
◦ Ownership is limited to Filipino
citizens or corporations 60% Republic Act 8762
Filipino-owned • Retail – the occupation of habitually
◦ Exceptions: Those established by selling direct to the general public
religious groups or mission boards merchandise or goods for consumption
◦ Control and administration shall be • This Act is NOT applicable to:
vested in the citizens of the ◦ Sales by a worker or producer if his
Philippines capital does not exceed Php100,000
◦ No educational institution shall be ◦ Sales by a farmer selling products
established exclusively for aliens of his farm
◦ Exception: schools for foreign ◦ Sales in restaurants by a hotel
diplomatic personnel and their owner provided the restaurant is
dependents incidental to the hotel business
• It does not matter if the restricted ◦ Sales limited to products
activity is primary or incidental to the manufactures by a manufacturer
overall business of the foreign entity. through a single outlet irrespective
The restriction still applies of capital
• Eg: Hospitals having a nursing school
◦ Hospital is not regulated/restricted Categories of Foreign Equity Participation
◦ School is regulated/restricted Category Paid Up Capital May be Owned by
A Less than $2.5 Filipino citizens and
Crisostomo v SEC Million corporations 100%
• Foreigners practicing professions in the Filipino-owned
Philippines – a regulated activity
B $2.5 - $7.5 May be wholly owned
• But mere investment in a corporation
Million by foreigners
(eg: foreign doctors investing in a
domestic hospital corporation) is not C $7.5 Million and May be wholly owned
deemed to be a practice of profession above by foreigners
[for establishing stores
• But public hospitals are considered
- $830,000 per store]
public utilities thus ownership is still
regulated D Enterprise May be wholly owned
selling luxury by foreigners
Mass Media and Advertising products [for establishing stores
- $250,000 per store]
• Ownership and management of mass
media shall be limited to Filipino NOTE: The amounts are in US dollars
citizens and corporations or
associations wholly-owned and Qualifications of Category B & C Investments
managed by Filipinos (100% ownership 1. Net worth:
and control) 1. $200 Million net worth of the parent
• Only Filipino citizens or corporations corporation for category B & C
70% Filipino-owned shall be allowed to 2. $50 Million net worth of the parent
engage in the advertising industry corporation for category D
• All executive and managing officers of 2. 5 retailing branches or franchises
anywhere around the world unless the
Sources:
retailer has at least 1 store capitalized franchise for the operation of a public
at $25 Million utility to a corporation already in
3. 5-year track record in retailing existence but without the requisite
4. Reciprocity rule: The country or States Filipino capitalization
of such foreigners also allow Filipino • Primary Franchise – to invest a body of
retailers in such country or State men with corporate existence
(formation)
B & C Investments – IPO Requirement • Secondary Franchise – the privilege to
• If foreign ownership exceeds 80% operate as a public utility (operation)
• Required to offer a minimum of 30% of • The Secondary Franchise is the one
equity to the public regulated by law
• Within 8 years from the start of its
operations Roque v COMELEC
• The foreign entity (Smartmatic) is given
Espina v Zamora a specific and limited technical task
• The constitutionality of the Retail Trade • At the end of the day, the foreign entity
Act is questioned is merely a service provider and lessor
• While the Constitution mandates bias in of goods and services to COMELEC
favor of Filipino business, it also • The COMELEC retains exclusive control
recognizes the need to do business with and supervision of the electoral process
the rest of the world on the bases of
equality and reciprocity Sui Bi v CA
• There is a Constitutional provision • Funding by a foreigner is allowed:
allowing congress discretion to reserve ◦ If it is a donation in good faith
to Filipinos certain areas of investments ◦ If it is really a loan
upon recommendation of NEDA ◦ If there is no intent for the foreigner
• Reservation of certain industries is an to acquire interest over the business
exercise of Police power of the State being invested in or circumvent the
limitations set by law
Anti-Dummy Law • What is prohibited by the anti-dummy
• If a party makes it appear that a law were the acquisition by an alien for
Filipino owns a franchise or right when himself of private lands in the
in fact he is not Philippines
• Prohibitions on:
◦ Ownership (60-40 rule) VI. Investment Incentives
◦ Acts of management
◦ Exception: Technical personnel Omnibus Investments Code
whose employment may be • Not later than the end of March of
authorized by the Secretary of every year, the Board of Investments
Justice shall submit to the President an
Investment Priorities Plan
People v Quasha • The Board of Investments may, at any
• The Constitution does not prohibit the time, add additional areas in the plan
mere formation of a public utility or alter any of the terms thereof
without the required formation of
Filipino capital. Preferred Investments
• What is prohibited is the granting of • Pioneer Enterprises
Sources:
◦ Enterprise which uses a formula,

design or system of production Basic Rights and Guarantees
which is new and untried inn the • Repatriation of Investments
Philippines • Remittance of Earnings
◦ Manufacture of goods, raw materials • Foreign Loans and Contracts – Right to
which are not being produced in the remit to meet the payments of foreign
Philippines on a commercial scale loans and obligations arising from
◦ Agriculture, forestry and mining technological assistance contracts
activities and/or services including • Freedom from expropriation – except
the industrial aspects of food for public use in the interest of national
processing welfare or defense and upon payment
◦ Production of non-conventional fuels of just compensation
or manufactures equipment which • Requisition of Investment – No
utilize non-conventional sources of requisition of the property invested
energy except in the event of war or national
• Non-Pioneer Enterprises emergency and only for the duration
◦ All registered producer enterprises thereof
other than pioneer enterprises
Common Incentives to Registered Enterprises
Registration of Enterprises (Qualifications) • Income Tax Holiday – Full exemption
1. Citizenship Requirements from income tax
• General Rule: Filipino citizens or ◦ 6 Years for pioneer firms
corporations 60% Filipino-owned ◦ 4 Years for non-pioneer firms
• Exceptions: ◦ Extension for another year in each
◦ Pioneer activities (not within the of the following cases:
activities or industries reserved ▪ the project meets the prescribed
by the Constitution) ratio of capital equipment to the
◦ Export enterprises (at least 70% number of workers set by the
of total production is exported) Board
2. Listed Activity – The activity is listed in ▪ Utilization of indigenous raw
the current Investments priorities plan. materials at rates set by the
If not on the list, the entity may still be Board
registered if the at least 50% of the ▪ Net foreign exchange savings or
total production of the business is for earnings amount to at least
export US$500,000 annually during the
3. Capacity to Operate – Applicant is first 3 years of operation
capable of operating in a sound and ◦ Maximum period for enjoying the
efficient basis of contributing to the tax holiday incentive – 8 years
national economy • Additional Deduction for Labor Expense
4. Separate Accounting System – If ◦ Additional deduction of 50% of the
applicant is engaged in another wages from the taxable income
enterprise other than the preferred ◦ The additional deduction is allowed
projects, it has an accounting system for the first 5 years from
adequate to identify the records of the registration
preferred project separately from the ◦ Additional deduction is doubled
aggregate accounting records of the (100%) if activity is located in less
whole enterprise
Sources:
developed areas have been waived had these items

• Exemption from Contractor's Tax been imported
◦ Registered enterprise shall be ◦ Such items are purchased from a
exempt from contractor's tax domestic producer
whether national or local • Tax Credit for Duties on Raw Materials
• Simplification of Customs Procedure ◦ Provided, taxes on raw materials
◦ Simplified procedure for the and supplies domestically purchased
importation of equipment, spare are indicated as separate items in
parts, raw materials and supplies the sales invoice
and exports of processed products • Access to Bonded Manufacturing or
• Unrestricted Use of Consigned Trade Warehouse System
Equipment ◦ For registered export oriented
◦ Provided that such consigned enterprises
equipment is for the exclusive use ◦ Subject to the guidelines issued by
of the registered enterprise the Board
• Employment of Foreign Nationals • Exemption from Taxes and Duties on
◦ Registered enterprise may employ Imported Spare Parts
foreign nationals in supervisory, ◦ Enjoyed by exporters (70% of total
technical or advisory positions for a production is exported)
period not exceeding 5 years from ◦ Such spare parts imported must not
registration be locally available
◦ Period is extendible at the discretion • Exemption from Wharfage Dues, Export
of the Board Tax, Duty, Impost and Fee
◦ When majority of the capital stock ◦ Exports by a registered enterprise
of the enterprise is owned by of its non-traditional export
foreign investors, the position of products shall be exempt from any
President, Treasurer and General wharfage dues and export tax
Manager may be retained by foreign
nationals Incentives to Less-Developed-Area
• Exemption on Breeding Stock and • When a registered enterprise is located
Genetic Materials in a less-developed-area
◦ Importation of such stock and • Nationality is not a factor/qualification
materials shall be exempt from all • Shall be entitled to the incentives of a
taxes and duties pioneer registered enterprise
◦ Within 10 years from date of • When enterprise is located in an area
registration lacking in public utility or major
◦ Provided that such stocks and infrastructure:
genetic materials are: ◦ May deduct from taxable income
▪ Not locally available 1005 of the cost of infrastructure or
▪ Reasonably needed in the public utility it has built in the area
enterprise ◦ Any amount not deducted for a
▪ Approved by the Board particular year may be carried over
• Tax Credit on Domestic Breeding for subsequent years not exceeding
Stocks and Genetic Materials 10 years from commercial operation
◦ Equivalent to 100% of the value of
the taxes and duties that would Garcia v BOI
Sources:
• Does the investor have the right to the incentive

make the final decision on the location
of the Petrochemical Plant, the Remittance of Profits
certificate of registration of which is • Profits may be remitted without prior
issued by the Board of Investments? BSP approval
• Supreme Court ruled in the NEGATIVE • Remittance must be done through any
• The right of “final choice” is not granted of the banks licensed by BSP in the
since the investor's choice is always ECOZONE
subject to the approval of the BOI • Provided, that such foreign investments
• The petrochemical industry is essential in said enterprises have been
to the national interest thus the State previously registered with the BSP
must exercise its police power in
regulating the industry to its advantage Special ECOZONES Under Bases Conversion
• The Constitution provides that it is the and Development Act
duty of the State to regulate and • Wallace Airbase
exercise authority over foreign • Clark Airbase
investments in accordance with its • Subic
national goals and priorities • Camp John Hay
Economic Zones John Hay People's Coalition v Lim

• Implementing Agencies • The grant of tax immunity and financial
◦ NEDA incentives as contained in Presidential
◦ PEZA Proclamation 420 is unconstitutional
◦ DTI • Under RA 7227, it is only the Subic SEZ
• Business establishments operating which was granted by Congress with
within the ECOZONES shall be entitled tax exemption and similar incentives
to the fiscal incentives under the • Absent a legislative act, the President
Omnibus Investments Code cannot extend the same incentives to
• Business establishments within an Camp John Hay (a special economic
ECOZONE shall register with the PEZA zone still to be created) through a mere
to avail of the incentives executive proclamation
• PEZA shall establish a one stop shop • The president alone cannot create the
center in the ECOZONE for the purpose SEZ (special economic zone) because
of facilitating the registration of new under RA 7227, it expressly requires
enterprises the concurrence of the affected LGU's
Tax Exemptions Coconut Oil Refiners v Torres

• In lieu of all taxes (income taxes), • The tax and duty-free importations of
business establishments shall pay 5% raw materials, capital and equipment
of gross income are merely examples and NOT an
• Distribution of the 5%: exhaustive list
◦ 3% - National Government • The legislative intent is that all
◦ 1% - LGU or LGU's (pro-rated) consumer goods entering the special
◦ 1% - Development fund of ECOZONES which satisfy the needs if
municipalities outside the ECOZONE the zone and are consumed there are
• Real Property Taxes are not included in NOT subject to duties and taxes
• There is also no violation of the right to
Sources:
equal protection of the laws because • Proceeds of the loan must be used in
substantial distinctions lie between the the investments priority plan (one of
establishments inside and outside the the criteria for approval)
zone, justifying the difference in their
treatment STEP 2 – Registration of Foreign Loan
• Registration of the actual loan
NOTE: Service enterprises operating within ◦ Eg: If the loan agreed upon is $1
the zones (eg: janitorial services) are NOT Million but only $500,000 was
entitled to the incentives because they are not drawn out
“export” enterprises ◦ The BSP approves the $1 Million
loan agreed upon
VII. Foreign Exchange Controls ◦ But what is registered is the
$500,000 loan actually borrowed
Purpose ◦ If the other $500,000 balance is
• To regulate the inflow and outflow of drawn down subsequently, a second
foreign currency registration for such amount is
• To ensure the stability of the Philippine necessary
Peso and its convertibility • BSRD – Banko Sentral Registration
• To control foreign exchange supply Document
◦ Reflects the amount registered AND
Foreign Loans and Creditors the amount of foreign currency that
• In order for the debtor to access the is allowed to be sold to the debtor
Philippine Banking system: by the local bank
◦ Central bank must approve the • If there are guarantors of domestic
foreign loan first debtors, the guaranty must be
◦ Without prior approval, the local approved as well
banks cannot sell the debtor any
foreign currency Foreign Investors
◦ Thus the foreign loan cannot be • Instead of lending funds, a foreign
paid by the debtor using dollars entity may make an investment in the
from Philippine Banks domestic enterprise
◦ Only choice for debtor is to acquire • 2 ways to invest:
foreign currency form outside the ◦ Portfolio Investment – through the
Philippine Banking System stock market
◦ If a FOREX (foreign exchange) ◦ Equity Investment – direct infusion
company is a subsidiary of a local of capital into the equity of the
bank, the same restrictions apply domestic company
◦ But if debtor can pay the obligation • Only requires registration with the BSP
or loan using its own currency • No approval is necessary
reserves or resources (paying in its • Every time an investment is made,
own capacity), then no BSP registration is required
approval is necessary • Investor is issued a corresponding
BSRD for the investment
STEP 1 – Approval of BSP
• Prior Approval – there must be an
approval first before entering into a
loan agreement
Sources:

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ATENEO LAW SCHOOL FOREIGN INVESTMENTS LAW

ELECTIVE [ATTY. HOFILENA]

FOREIGN INVESTMENTS LAW the foreign business entity

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natural persons and residents of the ◦ Provide quality control of the

Separate YES YES NO NO ◦ 1990 – SEC – Control Test

to vote + receive dividends competition and trade practices

Filipino First Policy National Resources

such entities must be Filipinos

◦ Enterprise which uses a formula,

developed areas have been waived had these items

• Does the investor have the right to the incentive

Economic Zones John Hay People's Coalition v Lim

Tax Exemptions Coconut Oil Refiners v Torres

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