Foreign investment policies, requirements and incentives
Source:
"How to Invest in the Philippines" by PricewaterhouseCoopers Philippines (printed with permission from author)

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:

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

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

List A areas reserved to Filipinos 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 investments? Is this 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 rules have been liberalized to facilitate entry of foreign investments. 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 of Investments pursuant to the 1987 Omnibus Investments 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 generally four

years for non-pioneer firms. If a non-pioneer firm is located in a less developed area, it shall generally be entitled to 6 years ITH. Firms locating within Metro Manila shall not be granted ITH unless they are:

• within 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 works (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 investments 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 enterprises under Presidential Decree No. 66 or Book VI of EO 226. In addition 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 inputs 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 of 5% of their gross income earned as final tax. Information Technology (IT) companies are entitled to similar incentives if they are registered locators in an IT ecozone.

Other Incentives

Two other special economic zones 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 these ecozones are similar to the incentives granted to PEZA ecozone enterprises.

Enterprises 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 Investors.

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 transferred subject to certain conditions.

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