• What is the general policy of the government on 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 capital being invested; 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.
   

• What are the major incentives available to a registered enterprise ?
  
  An enterprise registered with the Board of Investments pursuant to the 1987 Omnibus Investments Code (EO 226) is entitled to the followed incentives, among others, subject to certain terms and conditions :
  
  a. Income tax liability 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 :
  i) Within a government industrial state
  ii) Service-type projects with no manufacturing facilities
  iii) Power generating plants
  iv) 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 incentive). 
  
  Certain non-fiscal incentives are also available to registered enterprises, among which are : employment of foreign nations, 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.
  
  The Special Economic Zone Act of 1995, 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 exemptions 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 266 incentives have lapsed, shall remit to the national government a preferential rate of 5% of their gross income as final tax.
  
  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.
  
  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.
   

• 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.

Joint Ventures

• If we enter into a joint venture with Philippine investors, will the SEC allow us to 51% or more of its equity ?
  
  The SEC will allow foreign equity in excess of 50% provided the area of activity involved is not covered by the third regular foreign investments negative list under EO No. 11.
   

• If we are restricted to a 40% equity holding, how can we assure ourselves of control of the operations ?
  
  In general, control of an enterprise goes to the group which has the power to determine its policies and the manner in which the enterprise is to be run, and such assurance of control is obtained through majority ownership of the voting capital stock of the corporation. There are, however, certain arrangements that could provide a minority group with working control. These arrangements include : (a) diffusion of majority ownership, (b) licensing agreements, and (c) voting trust arrangements among stockholders.
  
  It is also advisable that the SEC be consulted in any arrangement involving voting rights to ascertain that no condition of the permit to invest in the enterprise will be violated.
   

• Are there any requirements that directors and other officers must be Filipino citizens and/or residents ?
  
  The majority of the directors must be residents of the Philippines and the secretary must be a resident Filipino citizen. However, for banks and banking institutions and domestic air carriers, at least two-thirds of the members of the board must be citizens of the Philippines. For a firm engaged in a nationalized or partially nationalized activity, the maximum number of foreign directors must not exceed the proportion of actual foreign equity in the firm, and all of its executive and managing officers must be Filipino citizens.
   

• How are joint ventures taxed ?
  
  An unincorporated joint venture is taxed like a corporation. The share of the joint venture partners will no longer be taxable to them because they partake of dividends if paid to a domestic or resident corporation.
  
  However, an unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations is not subject to the corporate income tax. Only the joint venture partners will be taxed on their respective shares.

For more information, please contact :

Joaquin Cunanan & Co.
Member Firm of the Worldwide Pricewaterhouse Coopers Organization
14th Floor Multinational Bancorporation Centre
6805 Ayala Avenue, 1269 Makati City
Philippines
Telephone No. : (632) 8452728
Fax No. : (632) 8452806
http://www.pwcglobal.com