Overview Atty. George V. Carmona, PhD

1. OverviewAtty. George V. Carmona, PhD INVESTMENT AND INCENTIVES LAW

2. Historical Perspective • Industrialization has been a major development goal for the Philippines since its independence. • Its pace has been slow by comparison with the our neighboring countries, particularly the ASEAN. • country has undergone several trade and investment policy regimes in its pursuit for industrialization.

3. Historical Perspective Government’s Trade And Investment Policy Regimes 1950s and 1960s • the country was a classic case of the 'import substitution syndrome' • based on the expansion of consumer goods production for the domestic market behind high protective walls. • gave rise to import-dependent, inward-looking and capital intensive industries and an oligopolistic industrial structure characterized by unrealized scale economies.

4. Historical Perspective Government’s Trade And Investment Policy Regimes 1970s and 1980s • When the goal of industrialization was not achieved attempts towards the promotion of exports were made. • Reforms were made but the underlying weaknesses of the economy were not resolved. • Inability to keep pace with the fast growing economies in the region, pressures were mounting, both from internal and external sources, for the country to undergo industrial restructuring.

5. Historical Perspective Government’s Trade And Investment Policy Regimes 1980s to 1990s • the country finally opted to adopt policies to shift to an outward orientation by unilaterally liberalizing trade, foreign investment and the exchange rate.

6. Historical Perspective • trend in the 1990s and beyond is to go global as a result of the more liberalized trade and investment environment prompted by the formation of the GATT/WTO and the regional trading blocs like EU, APEC, AFTA and NAFTA.

7. Historical Perspective • Trade and economic relations between and among member economies of these trading blocs are governed by agreed guiding principles and objectives. • APEC advocates free and open trade and investment as one of its trade and investment policy priorities

8. Historical Perspective • recent developments in the regional and international arena pose several challenges for the Philippine government. • Philippines is challenged to affirm its commitment to liberalization and deregulation in order to take advantage of the opportunities that lie ahead as a result of the movements towards the globalization of the trade and investment environments.

9. Current Policy • In the last two decades, developing countries liberalized their policies to attract foreign direct investment (FDI) inflows. • FDI as a potential source of employment and exports along with spillover benefits from the knowledge and technology that FDI inflows bring.

10. Current Policy • governments have competed in offering various investment incentives to influence the investors’ location decisions. • incentives include fiscal measures such as reduced tax rates on profits, tax holidays, import duty exemptions and accounting rules allowing accelerated depreciation and loss carry forwards for tax purposes.

11. Current Policy 2 VIEWPOINTS ON INVESTMENT INCENTIVES 1. early literature on the determinants of FDI viewed investment incentives as a relatively minor determinant. • investors are influenced in their decisions by strong economic fundamentals of the host economies. • market and political factors like market size and level of real income, worker skill levels, availability of infrastructure and other resources that facilitate efficient specialization of production, trade policies, and political and macroeconomic stability.

12. Current Policy 2 VIEWPOINTS ON INVESTMENT INCENTIVES 2. With increasing globalization and the liberalization of trade and capital flows, the view on the limited effect of incentives on FDI has changed. • Econometric studies now suggest that incentives have become more significant determinants of FDI flows • FDI is lower in regions with higher corporate taxes

14. Constitutional Policy 1987 Constitution Declaration of State Policy Section 20. The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments. Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

15. Constitutional Policy Article XII. National Economy and Patrimony Section 1. The goal of the national economy: • more equitable distribution of opportunities, income, and wealth; • sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and • expanding productivity as the key to raising the quality of life for all, especially the underprivileged.

16. Constitutional Policy Article XII. National Economy and Patrimony Section 1.promotion of industrialization and full employment based on: • sound agricultural development and agrarian reform • through industries that make full and efficient use of human and natural resources, which are competitive in both domestic and foreign markets

17. Constitutional Policy Article XII. National Economy and Patrimony Section 1.Protection of Filipino enterprises against unfair foreign competition and trade practices. • Mandates the optimum development of all sectors of the economy and all regions of the country. • Private enterprises, including corporations, cooperatives, and similar collective organizations are to be encouraged to broaden the base of their ownership.

18. Constitutional Policy Article XII. National Economy and Patrimony Section 2.state ownership of all lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources. • except agricultural lands, all other natural resources shall not be alienated. • State has to have full control and supervision in the exploration, development, and utilization of natural resources.

19. Constitutional Policy Article XII. National Economy and Patrimony Section 2.State has to have full control and supervision in the exploration, development, and utilization of natural resources. • Can directly undertake or enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or 60-40 corporations or associations for a period not exceeding 25 years, renewable for not more than 25 years.

20. Constitutional Policy Article XII. National Economy and Patrimony Section 2.Power of the president to enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of resources. • real contributions to the economic growth • general welfare of the country. • development and use of local scientific and technical resources. • Protection of the rights of indigenous cultural communities to their ancestral lands to ensure their economic, social, and cultural well-being (Section 5)

21. Constitutional Policy Limit of Foreign Equity Participation in Certain Areas of Investments

22. Constitutional Policy Section 10. Mandate to Congress with recommendation from NEDA to reserve to Filipinos when the national interest dictates certain areas of investments or to corporations or associations at least sixty per centum of whose capital is owned by such citizens and for it to enact measures to encourage formation and operation of fully owned enterprises.

23. Constitutional Policy Section 10. Preferential treatment to Filipinos in the grant of rights, privileges, and concessions covering the national economy and patrimony. • rule applies even if a foreigner is more qualified, as long the Filipino is qualified. (Garcia vs. Executive Secretary) Regulation and exercise of authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.

24. Constitutional Policy Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. Section 18. The State may, in the interest of national welfare or defense, establish and operate vital industries and, upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the Government.

25. Constitutional Policy Section 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. Section 22. Acts which circumvent or negate any of the provisions of this Article shall be considered inimical to the national interest and subject to criminal and civil sanctions, as may be provided by law.

26. Legal and Regulatory Environment Executive Order No. 226 (The Omnibus Investments Code of 1987) • Basic law governing investments in the Philippines. • sets forth the rules and parameters within which investments in the Philippines may be made, with emphasis on the grant of incentives to certain sectors.

27. Legal and Regulatory Environment The Omnibus Investments Code of 1987 Six Books Book I. Investments with Incentives Book II. Foreign Investments Without Incentives Book III. Incentives To Multinational Companies Establishes Regional Or Area Headquarters In The Philippines Book IV. Incentives To Multinational Companies Establishing Regional Warehouses To Supply Spare Parts Or Manufactured Components And Raw Materials To The Asia-pacific Region And Other Foreign Markets Book V. Special Investors Resident Visa Book VI. Incentives Of Export Processing Zone Enterprises

28. Legal and Regulatory Environment Book II. Foreign Investments Without Incentives • has been repealed by the Foreign Investments Act of 1991 (Republic Act No. 7042 , as amended by Republic Act No. 8179). • Foreign-owned companies not availing of incentives are covered by the provisions of this Act.

29. Legal and Regulatory Environment Books III and IV • Have been amended by Republic Act No. 8756 Book VI • Has been amended by Special Economic Zones Act of 1995 (Republic Act 7916, as amended by Republic Act 8748)

30. Legal and Regulatory Environment Basic Rights and Guarantees Given to Investors 1. REPATRIATION OF INVESTMENTS • entire proceeds of the liquidation of the investments in the currency in which the investment was originally made at the exchange rate prevailing at the time of repatriation. 2. REMITTANCE OF EARNINGS • at the exchange rate prevailing at the time thereof • to meet the payment of interest and the principal on foreign loans and foreign obligations arising from technological assistance contracts.

31. Legal and Regulatory Environment Basic Rights and Guarantees Given to Investors 3. FREEDOM FROM EXPROPRIATION • no expropriation by the government of the property represented by the investments or of the property of enterprises except • for public use or in the interest of national welfare and defense • upon payment of just compensation. • sums received as compensation for the expropriated property can be remitted in the currency in which the investment was originally made and at the exchange rate prevailing at the time of remittance. 4. NON-REQUISITION OF INVESTMENT • except in the event of war or national emergency and only for the duration.

32. Legal and Regulatory Environment Investments with Incentives (Book I) General Rule • Investments made in preferred areas of investments as defined by the current Investment Priorities Plan (IPP) may enjoy benefits and incentives. Exceptions (i.e. investment is not listed in IPP) • at least 50% of production is for exports, if Filipino-owned enterprise, • at least 70% of production is for exports, if majority foreign-owned enterprise (more than 40% foreign equity)

33. Investments with Incentives (Book I) Types of Incentives A. Fiscal Incentives B. Non-Fiscal (Concessions) • given to BOI-registered enterprises

34. Investments with Incentives (Book I) Types of Incentives A. Fiscal Incentives • Income Tax Holiday • Exemption From Taxes And Duties On Imported Spare Parts • Exemption From Wharfage Dues And Export Tax, Duty, Impost And Fees • Tax Exemption On Breeding Stocks And Genetic Materials • Tax Credits • Additional Deductions from Taxable Income

35. Investments with Incentives (Book I) Types of Incentives B. Non-Fiscal Incentives • Employment Of Foreign Nationals • Simplification of customs procedures • Importation of consigned equipment • The privilege to operate a bonded manufacturing/trading warehouse

36. Investments with Incentives (Book I) Types of Incentives C. Additional Incentives for Locating Project in Less Developed Areas • Employment Of Foreign Nationals • Simplification of customs procedures • Importation of consigned equipment • The privilege to operate a bonded manufacturing/trading warehouse

37. Investments with Incentives (Book I) Types of Investments A. Pioneer Areas of Investments • required to attain Filipino status (60% Filipino) within thirty (30) years or such longer period as the BOI may determine except enterprises whose production is 100% geared for exports. B. Non-Pioneer Areas of Investments • Foreign investments are allowed up to forty percent (40%) of the outstanding voting capital stock; may be higher if it exports at least 70% of its total production.

38. Investments with Incentives (Book I) A. Pioneer Areas of Investments • engage in the manufacture, processing or production and not merely in the assembly or packaging of goods, products commodities or raw materials that have not been or are not being produced in the Philippines on a commercial scale. • use a design, formula, scheme, method, process or system of production or transformation of any element, substance or raw material into another raw material or finished goods which is new and untried in the Philippines;

39. Investments with Incentives (Book I) A. Pioneer Areas of Investments • engage in the pursuit of agricultural, forestry and mining activities and/or services including the industrial aspects of food processing whenever appropriate, predetermined by the Board, in consultation with the appropriate Department, to be feasible and highly essential to the attainment of the national goal, in relation to a declared specific national food and agricultural program for self-sufficiency and other social benefits of the project;

40. Investments with Incentives (Book I) A. Pioneer Areas of Investments • produce non-conventional fuels or manufacture equipment which utilizes non-conventional sources of energy; or use or convert to coal or other non-conventional fuels/sources of energy in their production, manufacturing or processing operations.

41. Foreign Investment Act (repealed Book II) • Seeks to open up more areas of the Philippine economy to foreign investment, although maintaining constitutional and statutory restrictions in certain nationalized enterprises • as much as 100 % foreign equity is allowed in areas of activity not otherwise found in what is now known as the Foreign Investments Act Negative List

42. Foreign Investment Act (repealed Book II) Foreign Investments Act Negative List • enumerates the areas of economic activities reserved, whether partially or totally, for Philippine nationals. • List A – enumerates the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws • mass media, retail trade, advertising and public utilities, which are reserved for Philippine nationals by the mandate of the Constitution and specific laws.

43. Foreign Investment Act (repealed Book II) Foreign Investments Act Negative List • List B – contains the areas of activities and enterprises reserved to Philippine nationalspursuant to law. • includes those areas which are either defense-related, requiring prior clearance and authorization from the Department of National Defense, or with implications on public health and morals.

44. Foreign Investment Act (repealed Book II) Foreign Investments Act Negative List • List C – contains the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments .

45. Investments with Restrictions List A • restricts foreign investment in the practice of licensed professions as well as in the following industries: mass media, small-scale mining, private security agencies, and the manufacture of firecrackers and pyrotechnic devices. • Foreign ownership ceilings are imposed on enterprises engaged in, among others, financing, advertising, domestic air transport, public utilities, pawnshop operations, education, employee recruitment, public works construction and repair (except Build-Operate-Transfer and foreign-funded or assisted projects), and commercial deep sea fishing.

46. Investments with Restrictions List A • The exploration and development of natural resources must be undertaken under production sharing or similar arrangements with the government. For small-scale projects, a company should be at least 60 percent Filipino-owned to qualify. High-cost and high-risk activities such as oil exploration and large-scale mining are open to 100 percent foreign ownership. In 1998, private domestic construction was deleted from List A, lifting the 40 percent foreign ownership ceiling previously imposed on such entities.

47. Investments with Restrictions List A • Rural banking remains completely closed to foreigners. In securities underwriting, the limit on foreign ownership was raised from 40 percent to 60 percent in 1997. The limit for financing companies was also raised to 60 percent in 1998. The insurance industry was opened up to majority foreign ownership in 1994 with minimum capital requirements increasing along with the degree of foreign ownership. • In retail trade, foreign equity remains banned in retail companies capitalized at less than $2.5 million.

48. Investments with Restrictions List B • foreign ownership in enterprises is generally restricted to 40% due to national security, defense, public health, and safety reasons. • protects domestic small- and medium-sized firms by restricting foreign ownership to no more than 40 percent in non-export firms capitalized at no less than US$200,000.

49. Foreign Investment Act (repealed Book II) Defines the term “Doing Business” to include 1. soliciting orders; 2. service contracts; 3. opening offices, whether called liaison offices or branches; 4. appointing representatives or distributors domiciled in the Philippines who in any calendar year stay in the country for a period of one hundred eighty (180) days or more;

50. Foreign Investment Act (repealed Book II) Defines the term “Doing Business” to include 5. participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and 6. any other act or acts that imply a continuity of commercial dealing or arrangements, and contemplate to that extent the acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain, or the purpose and object of the business organization.