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Cross Border Law Reforms Change in Investment Climate

The Philippines has had a head start in providing for a regulatory framework for foreign direct investments.  Much of the economic policy vehicles enacted into statutes of various jurisdictions in Asia in the last twenty-five years were already in existence in the Philippines almost half a century ago,   As early as 1967, the Philippines already had an Investment Incentives Act which recognized the right of foreign investors:

  1. to repatriate the entire proceeds of the liquidation of the investment in the currency in which the investment was originally made and at the exchange rate prevailing at the time of repatriation
  2. to remit earnings from the investment in the currency in which the investment was originally made and at the exchange rate prevailing at the time of remittance
  3. to remit at the exchange rate prevailing at the time of remittance such sums as may be necessary to meet the payments of interest and principal on foreign loans and foreign obligations arising from technological assistance contracts.

The law also guaranteed foreign investors the freedom from expropriation and requisition and the protection of intellectual property rights and some limited capital gains tax benefits. A year later or in 1968 a Foreign Investment Regulations Act urther emphasized the role of foreign investments in national development.  In 1969, the concept of an export manufacturing zone in the establishment of a “foreign trade zone” in one harbor town in a province outside Manila with the avowed purpose of stimulating foreign trade. In 1972, the law was expanded to allow for the establishment of what was then called “export processing zones” in other parts of the country. In 1973, in a bid “to make of the Philippines the business and financial capital of Southeast Asia” a law was enacted to allow for regional headquarters to be organized and registered in the Philippines.  All these laws, however, were enacted under a milieu of protectionism.  The by-word of economic policy then was substitution, that is, to maximize the substitution of all foreign manufactured goods with locally manufactured goods, with emphasis on consumer goods. The result was the restriction of foreign goods entering the domestic market and encouragement of local manufacturing industries.  Access to foreign exchange and import permits were carefully regulated.  Foreign investment initiatives then were focused on channeling these investments to manufacturing for the export markets and the accumulation of foreign exchange.  The domestic market was on the whole limited to companies where foreign equity was limited to 40% or less.  In the retail trade, foreign ownership was absolutely prohibited by a 1950’s  law.. Attitudes resulting from the reaction against colonialism were behind such laws, and a law enacted in 1936 which criminalized the circumvention of statutory limitations on foreign ownership  are still in our books today in an amended form.

Since the 1986 people power revolution, the Philippines saw the steady liberalization of its economy, after more than a decade of isolation under a dictatorship that zealously protected crony capitalism.  A far more liberal regime for foreign investments was introduced in 1987 by the Omnibus Investments Code and its subsequent amendments by providing such incentives as an income tax holiday, a simplified 5% gross income taxation system in lieu of the income tax holiday, exemption from all local government fees and taxes.  The focus of the Omnibus Investments Code, however, is on the export market. In 1991, a law was passed allowing entry into the domestic market by enterprises where foreign equity can be as much as 100%, provided that the minimum paid in capital of the enterprise is US$500,000. This figure was later brought down to US$200,000 in 1996. The Tax Reform Code of 1997 likewise recognized the special tax treatment of direct foreign investment in such areas as a zero rate for value added taxes, and the exemption from branch profit remittance tax of export zone enterprises.

The Uniform Currency Law enacted in 1950 requiring that all transactions be pegged in the Philippine peso was repealed in 1996. There are also a host of monetary reforms such as, among others, the Foreign Banks Liberalization Act which liberalized the entry and operations of foreign banks and financial institutions in the Philippines, the General Banking Law of 2000 which allowed for limited entry of foreign investment in domestic banks of up to 40% and the Financing Company Act which increased the allowed foreign equity to 60% from 40%.

In retail trade, where foreign ownership was a sensitive issue in the 1950’s, the change in attitude was even more pronounced when even this area was opened to foreign investment with the enactment of the Retail Trade Liberalization Act  of 2000.  However, while allowing foreign ownership of what was then considered sacred ground, that is, the Philippine retail industry, the entry level for investments was set at a high level of capitalization.  Thus, the statute can still be percieved as less than liberal.

In the service industry, investments in the Business Process Outsourcing (BPO) sector has progressed in recent years, generating the growth of other sectors such as real estate, telecommunications, food and retail among others. With its cost-efficient services and competent human resource pool, the Philippines is among the top BPO destinations in the Asia-Pacific region.

In mining, the Philippines has approached the matter with caution and with a clear view of the issues on environment and indigenous peoples’ rights. In fact, the exploration, development, and utilization of natural resources is constitutionally declared to be under the full control and supervision of the State. In this regard, the Philippine government has created legislation that strictly delineates investment areas and opportunities in the field of mining for nationals and foreigners and establishes stringent limitations and requirements for the approval of mining activities in the country.

The Philippine Mining Act of 1995 provides that foreign investors may participate in large-scale mining as grantees of exploration permits, mineral processing permits or financial or technical assistance agreements. Though the Philippines welcomes foreign investment in mining, the People’s Small Scale Mining Act continues to protect the rights of Filipino nationals who pursue mining activities on a small scale by providing for the declaration of specific areas exclusively reserved to the latter as well as for organizational, financial and marketing assistance from appropriate government agencies.

As a further protection to land rights of nationals and, specifically, of indigenous peoples in the Philippines, in 1997 the Philippine Legislature, after years of discussion and debate, passed into law the Indigenous People’s Rights Act or the IPRA.  Through the IPRA, the rights of indigenous people over their ancestral domains and lands are preserved.  The IPRA also recognizes and respects indigenous peoples’ cultural integrity, their political structures and their autonomy.

Though there may be much legislation that favors nationals as regards the ownership of land and mining activities, the rights of foreign investors to participate in appropriate mining endeavors as provided by law have been upheld by the Philippine Supreme Court.

A series of reforms were also introduced to further level the playing field and encourage foreign investment.  In 4 April 2002, the Securities and Exchange Commission (SEC) passed the Code of Corporate Governance to actively promote corporate governance reforms aimed to raise investor confidence, develop capital market and help achieve high sustained growth.  On July 15, 2009, the SEC issued an updated version of the Revised Code of Corporate Governance, showing that this matter is given constant attention by the country’s regulators, Reforms were also implemented in the area of dispute resolution with the enactment of the Alternative Dispute Resolution Act of 2004, which expressly adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law as the law governing international commercial arbitration in the Philippines. In the same vein, the SEC adopted the new International Accounting Standards (IAS) in 2005, which envisioned to enhance the comparability, understandability and reliability of financial statements. Moreover, Rule 68 (Special accounting rules) of the Securities Regulation Code (SRC) has expanded its coverage, which was previously limited to listed corporations and public companies, to include all corporations that file financial statements with the SEC, except those whose paid-up capital is less than Php50,000.00. All these enactments, in effect, seek to increase the Philippines’ global competitiveness and to provide greater protection to the foreign investor by affording transparency, full disclosure and autonomy of investments.

On the issue of land ownership, while the Philippines still does not allow foreign ownership, foreigners may acquire condominium units and shares in condominium corporations up to forty percent (40%) of the total and outstanding capital stock of a Filipino-owned or controlled corporation. Moreover, foreign investors in the Philippines can lease private lands for a maximum period of seventy-five (75) years.  Based on the Investors’ Lease Act, lease agreements may be entered into for a period of fifty (50) years, renewable once for twenty-five (25) years for purposes of and in connection with the establishment of industrial estate, factories, assembly or processing plants, agro-industrial enterprises, land development for tourism, industrial or commercial use and/or other similar priority productive endeavors.

The interaction of the environmental, social and economic dimensions of development has been recognized as the foundation of sustainable development. The promotion of sustainable development in the Philippines is enshrined in the 1987 Constitution providing that it is the State’s policy to protect and advance the right of its people to a balanced and healthful ecology. The Philippines participated in the Earth Summit of 1992 and is a signatory to Agenda 21 where the concept of sustainable development was further discussed.  Here it was emphasized that the environment agenda should be discussed alongside the pursuit of social and economic goals. The Philippine Council for Sustainable Development (PCSD) was created as part of the Philippines’ commitment to provide a mechanism for attaining the principles of sustainable development and, thus, assure its integration in the Philippine national policies, plans and programs that will involve all sectors of the society. Further, Memorandum Order No. 399 was issued to direct the operationalization and monitoring of the Philippine Agenda 21.  Executive Order No. 62 was issued to further strengthen the PCSD mandate and its core composition through streamlining government representation and expanding non-government membership base.  The Philippines also became a signatory to the Kyoto Protocol in 1997, which encourages developing countries to pass and implement national measures that shall advance the international community’s agenda pertaining to environmental preservation through the reduction of greenhouse emissions (GHGs) in the atmosphere. Accordingly, the Philippines passed the Clean Air Act of 1999 and Solid Waste Management Act of 2000.

The Philippines actively encourages investments in renewable energy development and research as well as other fields exploring ways of conserving our natural resources by providing incentives to businesses with a view to preserving and protecting Mother Nature an example of which is the exemption of biofuels from the imposition of Value-Added Tax. Furthermore, being a country with many natural tourist spots, the Philippine government also promotes ecotourism and supports environmental awareness campaigns.

In recognition of the global need to have greater sustainability in food production, the Philippines is also looking to increase investment in agriculture, specifically, the utilization of the country’s vast land resources highly fit to produce a variety of crops and vegetables.  The Philippine Economic Zone Authority (PEZA), an entity which regulates export enterprises in the Philippines, is presently conducting initial talks on the potential of increasing investment opportunities for non-Filipinos in the agricultural industry. Under discussion is the inclusion of agricultural enterprises in the PEZA’s official list of what are registrable activities or what can be Ecozones and thus be granted both fiscal and non-fiscal incentives. It is hoped that by attracting foreign investment in developing the agricultural sector in the Philippines the country can tremendously increase the supply of agricultural produce for the local and export markets.

Many of the policies of the Philippines in recent years reflect the liberal sentiments of the country as regards foreign investment.  The Philippine government recognizes the importance of inviting and accommodating foreign participation in the local market for continued progress while still providing ample protection and support to its nationals.