Doing Business in the Philippines

Quisumbing Torres Member Firm of Baker & McKenzie
12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City Taguig City, Philippines 1634 Tel: +63 2 819 4700 (trunkline) Fax: +63 2 816 0080; +63 2 728 7777 For more information and inquiries, please email QTLaw@bakernet.com or log on to www.bakernet.com.

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The material in this publication has been prepared by Quisumbing Torres to provide general information only. It is not offered as advice on any particular matter, whether it be legal, procedural, commercial or otherwise, and should not be taken as such. For this reason, the information contained in this publication should not form the basis of any decision as to a particular course of action; neither should it be relied upon as legal advice nor regarded as a substitute for detailed advice in individual cases. The authors expressly disclaim all liability to any person in respect of consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this publication. This publication is copyrighted. No part of this publication may be reproduced or transmitted by any process or means without the prior permission of Quisumbing Torres. The law is stated as at January 2009.

Table of Contents
INTRODUCTION ..................................................................1
The Philippines...........................................................................................1 Quisumbing Torres .....................................................................................2

I.
1. 2. 3. 4. 5.

FOREIGN INVESTMENTS IN THE PHILIPPINES........3
Extent of Foreign Equity.............................................................3 Anti-Dummy Law .........................................................................5 Forms of Investment Vehicle ......................................................5 Domestic Corporation v. Branch.................................................6 Other Types of Corporate Vehicle ...............................................6
5.1 5.2 5.3 5.4 5.5 Representative Office ...............................................................6 Regional or Area Headquarters .................................................6 Regional Operating Headquarters (“ROHQ”) ...................................7 Regional Warehouses....................................................................7 Offshore Banking Unit (“OBU”) ....................................................8

6.

Post-Registration Requirements ..............................................8

II.
1. 2.

TAXATION....................................................................8
Tax Treaties .................................................................................8 National Taxes ............................................................................8
2.1 2.2 2.3 2.4 2.5 2.6 Corporate Income Tax ..............................................................8 Individual Income Tax ..................................................................9 Withholding of Taxes....................................................................9 Fringe Benefits Tax..................................................................... 10 Business Taxes .......................................................................... 10 Other Imposts of the National Government ............................. 11

3.

Local and Real Property Taxes .............................................. 11

III.
1. 2. 3.

FOREIGN EXCHANGE REGULATIONS............... 12
Purchase and Sale of Foreign Exchange ................................ 12 Foreign Trade Transactions ..................................................... 12 Non-Trade Transactions .......................................................... 12
3.1 3.2 3.3 3.4 Foreign Inward Investments ...................................................... 13 Outward Investments................................................................ 13 Foreign Loans and Guarantees................................................. 13 Other Financing Schemes/Arrangements ................................ 13

IV.
1.

INCENTIVES UNDER SPECIAL REGISTRATIONS .. 13
Enterprises Registered Under the Omnibus Investments Code (“OIC”) ............................................................................. 13
1.1 Tax Incentives ............................................................................ 14 1.2 Non-tax Incentives ..................................................................... 15 1.3 Additional Incentives ................................................................. 15

2.

Enterprises Registered With the Philippine Economic Zone Authority (“PEZA”).................................................................... 15
2.1 Tax and Other Incentives ...................................................... 16

................. VII...................2 Special Investor’s Resident Visa (“SIRV”) .................................. ARBITRATION IN THE PHILIPPINES.................. 1................ INSURANCE-RELATED REGULATIONS.... 27 2............................... Special Resident Visas ......... 24 Termination of Employment............ X................... 23 Rule on Non-Diminution of Employment Benefits ................ 2.................................................................... IX............ 26 Special Non-Immigrant or 47(a)(2) Visa... 24 Classification of Employment...................... 30 Entry of Foreign Insurance Companies ....... 27 2........................................... 21 LABOR LAW... 23 Other Compulsory Benefits .......................................... 27 Subic Bay Freeport Work Visa.. 17 3................................................. Enterprises Located in the Clark Special Economic Zone .... 3.............. 30 Special Purpose Vehicle Act of 2002 ............... 3....... 22 1...................................................................2 1............... 20 BORDER CONTROL MEASURES ..............1 1 .............................4 1................ 4.......... 5........ 26 1. 27 Treaty Trader’s or Investor’s Visa .... 29 Banking...............................4 Work Hours ............................................... 28 XII...................... LEASE OF PRIVATE LAND................................ 19 INTELLECTUAL PROPERTY PROTECTION........ IMMIGRATION........................... 19 ENVIRONMENTAL REGULATION ........... 20 2.....1 Special Resident Retiree’s Visa (“SRRV”) .................. 6.................................... 24 Welfare Legislation .......................................................... VI... FINANCE-RELATED REGULATIONS .......................... 29 Financing Companies ...... 25 Contract of Employment ............... 23 Specific Areas of Regulation ....3 1.............. 1... 1........................................... Labor Relations.................................... 17 4....................................................4 Subic Bay Freeport Residency Visas for Retirees .................. 4........3..... VIII............................................................................2 SBF Residents .......................... 28 2.................................................. 22 Wages............. 26 Pre-Arranged Employment or 9(g) Visa ............... 18 V............... 27 2............ 25 XI........................... 30 XIV...................................................... 22 Labor Standards .................. 30 XIII.....................................2 1....................... 26 Work / Employment Requirements .. 27 2.......... 28 3................................................ Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) .......... 29 Securitization Act of 2004 .5 Multiple Entry Special Visa........................................ Special Visa for Employment Generation (“SVEG”) .........1 1..3 1...............................................1 SBF Enterprises .................................................................................................................................................... 31 ................................................................3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments ............................ 17 3....... 21 TECHNOLOGY TRANSFER ARRANGEMENTS ....................

....... 33 International Arbitration .................1 Suspension of Payments ...... 2.......................................... 32 Definition of international arbitration and domestic arbitration 32 Republic Act No . 41 ............................................................................. 5......................................................5 1.................... Insolvency Proceedings (Individuals or Corporations)........................2 Involuntary Insolvency...................................................................3 Provisions applicable to both voluntary or involuntary insolvency proceedings .............4 1...................................... 876 on Domestic Arbitration ............. 41 3............................ 31 Finality of the award ..............................................2 Corporate Rehabilitation ............. 36 Construction Industry Arbitration Commission ......... 32 Arbitration as contract ........................ 7....... 32 2....... 32 Disputes that may be referred to arbitration ....................... 40 3............................... 3.. 38 Proceedings for Solvent Debtors (Individuals or Corporations) 38 2............................................................... Advantages of arbitration compared with court litigation ...................................... 10................. 38 Overview and Introduction to the Jurisdiction / Applicable Legislation ................................................................. 31 Flexibility of the rules ................................................ 34 The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) ...............................1.............. 6... 4....................2 1................. Definition of arbitration ....................3 1.................................................. 8........................................ 1...........................1 Voluntary Insolvency..................................6 Speed ..... 31 Choice of arbitrators. 39 3........ 32 Arbitrators as experts ..................... INSOLVENCY IN THE PHILIPPINES. 32 Disputes that are not arbitrable .................... 32 Confidentiality.......................................................... 31 1 .............. 9.................. 37 XV...................1 1......... 38 2.... 41 3...

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and islands. First-rate convention facilities host major local and international exhibits. organic fertilizers. provinces.gov. Special economic zones offer preferential tax incentives. coupled with a modern network of highways. specifically mass rail transport and oil and gas pipeline projects Build-Operate-Transfer (BOT) projects and contractual joint ventures with the government Development of hotels.asp Philippine Board of Investments . A young.gov. and seminars. Diverse transportation choices.census. Expanded telecommunication infrastructure facilitates smooth global business operations.ph/ 1 . Investment opportunities abound in these priority areas:           Production and processing of biofuels. 2008 from National Statistics Office . and the production of healthcare and wellness products to promote medical tourism Mining.http://www. Hardworking. fairs.000 graduates annually. and ports. quarrying and exploration and development of mineral resources Waste treatment and recycling facilities Nontraditional export-oriented business IT-enabled business process outsourcing industry Office and residential property development and public infrastructure construction Abundant country resources support these investments:       A vibrant democracy advocates liberalization and deregulation of industries. Affordable wages and utilities contribute to business cost savings. resorts.http://www. Remarkable lifestyle amenities replicate the expatriate’s home environment. airports.gov. An open economy welcomes 100 percent foreign ownership in many sectors. fun-loving Filipinos from multicultural backgrounds play host to a rewarding economic and sociocultural investment.Doing Business in the Philippines 2009 INTRODUCTION The Philippines The Philippines stands firm as a strong prospect for conducting business in the Southeast Asia region. ethics-bound.http://www. and other agricultural or fishery products Alternative power generation using environment-friendly technologies Infrastructure.ph/ Official Website of the Republic of the Philippines .      Sources: Information was retrieved on October 27-31. highly trainable English-speaking Filipino workforce is refreshed with over 400. and retirement villages. feeds. towns. support the unencumbered flow of goods within and between cities.boi. A competitive consumer market serves as an arena for showcasing the latest trends in the retail goods sector.ph/default.

Indonesia. and tax. Collas. its name was changed to Guerrero & Torres. Quisumbing Torres is a full service law firm with the following areas of practice:        Banking & Finance Corporate and Commercial Immigration Intellectual Property Labor & Employment Litigation Tax For more than 45 years. Canada. the Middle East. The firm represents clients doing business abroad and clients from other countries doingbusiness in the Philippines. Switzerland.Quisumbing Torres Quisumbing Torres Your partner every step of the way.C. Quisumbing Torres is the Philippine-based member firm of Baker & McKenzie International. oil and gas. mining. Taiwan. media and communications. intellectual property. Singapore.Quisumbing. Many of our lawyers are also admitted to practice in other jurisdictions. Jr.Thailand. It was established in 1963 by Juan G. Quisumbing Torres has helped foreign and domestic companies succeed in the Philippines. Japan. Singapore. Hong Kong. social. and the United States. Japan. Together with the other member firms of Baker & McKenzie in Asia. such as the States ofCalifornia. Quisumbing Torres has over 50 lawyers who provide clients with a full range of legal services. legal. China. A number of our lawyers havepracticed or have had legal exposure in Australia. Evangelista retired. Quisumbing Torres in Manila provides a convenient coordination point for regional and global work. It became Quisumbing Torres & Evangelista on 1 July 1988. 2 . and political issues. Malaysia. and Asia Pacific entities. France. Hong Kong. the United Kingdom. and the United States. Brunei. Germany. when the firm merged with the law office of Norberto J. Some have helped draft significant business laws and regulations. and the Americas. including those dealing with labor. The firm adopted its present name when Rafael E. Virginia. the United Kingdom. European. Europe. clean air. Korea. including Australia. In 1974. hazardous waste. and Washington D. . Our lawyers are knowledgeable in the relevant business. India. Indonesia. American. New York. and was later named Collas and Guerrero. Our client base currently consists of Philippine.

and other entities are not engaged in an activity that is reserved by law only to Philippine citizens or to entities that are wholly owned by Philippine citizens. provided that the following conditions are complied with: a. it is the policy of the State to attract. Philippine laws expressly reco gnize various rights of foreign investors in the Philippines. 3 . partnerships. However. c. including their political subdivisions. defense. To encourage foreign investments. and freedom from expropriation (except for public use or in the interest of national welfare or defense and upon paym ent of just compensation). An export enterprise is a manufacturer. It is investing in a domestic market enterprise in areas outside the Negative List or it is investing in an export enterprise whose products and services do not fall within Lists A and B of the Negative List. The country or state of the applicant must also allow Filipino citizens and corporations to do business therein. or protection of local small and medium-sized enterprises. According to the FIA. including the rights to repatriation of investments.000 b. 1. the President of the Philippines may amend the Negative List. It must have a paid-in capital of at least the peso equivalent of US $200. and welcome productive investments from foreign individuals. risk to health and moral s. FOREIGN INVESTMENTS IN THE PHILIPPINES The law that governs the participation of foreign entities in economic and commercial activities in the Philippines is Republic Act No. and other entities in the Philippines. or a trader that purchases products domestically and exports 60 percent or more of such purchases. amendments to List B may not be made more often than once every two years. corporations. in activities whic h significantly contribute to national industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. A domestic market enterprise is an enterprise which produces goods for sale or renders service or otherwise engages in any business in the Philippines. The Negative List has two component lists: List A and List B. A new Negative List is prospective in application and willnot affect foreign investment that already exists on the date of its publication. Extent of Foreign Equity The FIA provides for the formulation of a Foreign Investment Negative List (“Negative List”) – a list of economic activities where foreign equity is either prohibited or limited to a certain percentage. partnerships. Foreigners may hold interests in corporations. and governments. otherwise known as the Foreign Investments Ac t of 1991 (“FIA”). partnerships. Except with respect to activities where restrictions on foreign equity are imposed under the Philippine Constitution or statutes. or service (including tourism) enterprise that exports 60 percent or more of its output. as amended.Doing Business in the Philippines 2009 I. processor. remittance of earnings. promote. The maximum amount of foreign equity that is allowed in a company depends on the type of activity that the company is engaged in. List B contains areas of investment where foreign ownership is limited for reasons of security. A non-Philippine national may do business or invest in a domestic enterprise in the Philippines to the extent of 100 percent of its capital . provided that such corporations. 7042. List A contains areas of investment where foreign ownership is limited by the mandate of the Philippine Constitution or by specific laws.

and administration of educational institutions Contracts for the supply of materials. trading (except retailing). processing. except recording Except in cases prescribed by law. engineering. but not limited to. whether for local or overseas employment Contracts for the construction and repair of locally funded public works except infrastructure/development projects covered by RA 7718 and projects that are foreign-funded or assisted and required to undergointernational competitive bidding Contracts for the construction of defense-related structures Advertising Exploration. accountancy. companies. and agriculture  Retail trade enterprises with a paid-up capital of less than US $2.Quisumbing Torres if it will engage in business as a domestic mar ket enterprise (an export enterprise is not required to comply with this minimum capitalization requirement). including. The capitalization requirements of a domestic market enterprise may be reduced to the peso equivalent of US $100. agenciesor municipal corporations Culture. and acquisition of rice and corn and the byproducts thereof Acting as project proponent and facility operator of a build -operatetransfer project requiring a public utilities franchise Ownership of condominium units where the common areas of the condominium project are co-owned by owners of the separate units or owned by a corporation All forms of gambling        Up to 30 percent Foreign Equity Up to 40 percent Foreign Equity     4 . architecture. milling. goods. or (ii) if it employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment. customs brokerage. geology.000 (i) if its activity involves advanced technology as determined and certified by the Department of Science and Technology. establishment. the practice of all professions. and utilization of natural resources Ownership of private lands Operation and management of public utilities Ownership. medicine. and commodities to government-owned or controlled corporations. production. Some of the activities that are included in the Seventh Negative List (which took effect on 6 January 2007) are as follows: No Foreign Equity   Mass media.5 million     Private security agencies Small-scale mining Up to 25 percent Foreign Equity Private recruitment companies. development.

entities that do not export 60 percentor more of their output) with a paid-in equity capital of less than theequivalent of US $200. Under the rules of the PCAB. However. operation. or laborer. franchise. Subject to nationality requirements pertaining to the intended activity. and corporation. is prohibited from (a) permitting or allowing the use. 5 . employee. A foreign investor may also invest as a limited or generalpartner in a partnership. whether as an officer. and there is no distinct and separate personality of the business enterprise from that of the owner. a branch. or (b) in any manner permitting or allowing any person not so qualified to intervene in the management. franchise. having in his name or under his control a right. A branch and a representative office are mere extensions of their head offices.. and a representative office. Anti-Dummy Law The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on persons violating foreign equity limitations. Under the Anti-Dummy Law. Forms of Investment Vehicle There are three general forms of business organizations in the Philippines: so le proprietorship. partnership. with or without remuneration (except technical personnel whose employment may be specifically authorized by the Secretary of Justice). 2.000 Up to 60 percent Foreign Equity   Financing of companies regulated by the Philippine Securities and Exchange Commission (“SEC”) Investment houses regulated by the SEC  Persons that will engage in construction activities in the Philippines are also required to obtain a license from the Philippine Contractors Accreditation Board (“PCAB”). A sole proprietorship is a business owned and operated by a single natural person. franchise. administration or control of such right. The foregoing is a non-exhaustive enumeration of the sectors/activities that are subject to foreign equity limitations. privilege. privilege. property or business. Philippine law allows foreign investors to establish and register a domestic corporation. The liability of the sole proprietor is unlimited . corporation or as sociation not possessing the qualifications prescribed by law. A domestic corporation may be a joint venture or a wholly owned subsidiary. a person who. 3.e. exploitation or enjoyment of such right. property or bus iness. the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporatio ns or associations where at least 60 percent of the capital is owned by such citizens. privilege. foreign nationals may serve as members of the board or gover ning body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company. property or business by a person.Doing Business in the Philippines 2009 Domestic market enterprises (i. the license is reserved for and issued only to Filipino sole proprietorships or partnerships/corporations with at least 60 percent Filipino equity participation and duly organized and existing under and by virtue of the laws of the Philippines.

a foreign investor will have to set up a domestic corporation with a Philippine national as a joint venture partner. These two types of corporate vehicle have their relative advantages and disadvantages relating to.1 Other Types of Corporate Vehicle Representative Office A representative office may be established to deal directly with the clients of its parent company in the Philippines and to undertake activities . but not limited to.000 and thereafter US $50. 5. amo ng others. corporations that are more than 40 percent foreign-owned as well as branches of foreign corporations that are considered domestic market enterprises must have a paid-in capital of at least US $200. Domestic Corporation v. communications. Branch Assuming that the proposed activity is not subj ect to any foreign equity limitation. whether on behalf of its parent company or its branches. or coordination center for its subsidiaries. Generally. It may not participate. information dissemination and promotion of the company’s products as well as quality control. subsidiaries. taxation. Foreign investorsthat wish to engage in a business that is not subject to nationality restrictions generally choose between establishing a Philippine subsidiary and establishing a Philippine branch office. in managing any subsidiary or branch office it may have in the Philippines. among others. the corporation is generally the most preferred vehicle for investments in the Philippines among the various forms of business organizations . To fund its operations in the Philippines. 4. The paid-in capital requirement is reduced to US $100.000 annually.2 Regional or Area Headquarters A multinational company may establish a regional or area headquarters in the Philippines to serve as supervision.a foreign investor may be set up as a domestic corporation or a branch of a foreign corporation in the Philippines. or affiliates in the Asia Pacific region. or any other company. neither may it solicit or market goods or services. 5. the extent of liability of the parent company/head office.000. A representative office must have an initial inward remittance of US $30. branches.000 to fund its operations. affiliates. If the proposed activity is subject to foreign equity limitations. A representative office may not derive income in the Philippines and is fully subsidized by its head office. Its expenses must be financed by the head office or parent company from external sources in an acceptable foreign currency. 5. The regional or area headquarters may not earn or derive income in the Philippines. and the administrative costs of maintaining the same.Quisumbing Torres For reasons relating to the exercise of management powers and the extent of liability. its head office or parent company must initially remit into the Philippines at least US $50. Entities that qualify as export enterprises (enterprises that export 60 percent or more of their output) are not subject to any minimum paid -in capital requirement. including. 6 .000 for domestic market enterprises whose activities involve advanced technology or which employ at least 50 direct employees. in any manner.

in the Asia Pacific region. and other foreign markets.4 Regional Warehouses A multinational company which is engaged in international trade and supplies spare parts. 5. subsidiaries. g. components. covering. The activities of the regional warehouse are limited to: a. and charges. h. putting up. components. labeling and cutting or altering the goods to the customer’s specifications. 5. may also establish a regional warehouse in the Philippines.000. f. filling up transactions and sales made by its head office or parent company. and raw materials to its distributors or markets in the Asia Pacific region and other foreign areas. and safekeeping of spare parts.and duty-free importation of equipment and materialsnecessary for training and conferences. The regional warehouse may not engage in trade or directly solicit business. and all local licenses. and which has established or will simultaneously establish a regional or area headquarters and/or ROHQ in the Philippines. j. including packing. or branches in the Philippines. c. A ROHQ is allowed to derive income in the Philippines by performing any of the following qualifying services: a. marking. semi-finished products. 7 . semi-finished products. and mounting and/or packing these into kits or marketable lots thereof. It enjoys tax. c. fees. General administration and planning Business planning and coordination Sourcing/procurement of raw materials and components Corporate finance advisory services Marketing control and sales promotion Training and personnel management Logistics services Research and development services and product development Technical support and maintenance Data processing and communication Business development A ROHQ must initially remit into the Philippines at least US $200. b. k. It may not derive income from Philippine sources. value -added tax. d. and raw materials. and serving as a storage or warehouse of goods purchased locally by the head office of the multinational for export abroad. except real property tax on land improvements and equipment. b. or enter into any contract for the sale or disposition of goods in the Philippines. deposit. e. i. promote any sale.Doing Business in the Philippines 2009 The regional headquarters is not subject to income tax.3 Regional Operating Headquarters (“ROHQ”) A multinational company may establish a ROHQ in the Philippines to service its own affiliates. serving as a supply depot for the storage.

5 Offshore Banking Unit (“OBU”) A foreign bank may operate an OBU in the Philippines. These post-registration requirements include obtaining from certain government agencies and local government offices tax. 1. such as a branch.1 National Taxes Corporate Income Tax A domestic corporation is taxed on its net income (gross income less allowable deductions) from all sources at the rate of 30 percent. The OBU may be a branch. licenses. and commencement-of-operations permits. subsidiary. In addition to the basic post-registration requirements. 8 . employee welfare-related. certain businesses in highly regulated industries may be subject to special licensing or registration requirements with the government agency having jurisdiction over such industry. is taxed only on its net income from Philippine sources at the same rate as a d omestic corporation. or affiliate of a foreign banking corporation authorized by the Bangko Sentral ng Pilipinas (“BSP”) to conduct business with funds from external sources. Post-Registration Requirements Upon incorporation/registration with the SEC. and registrations.Quisumbing Torres 5. the newly incorporated/r egistered entity must comply with certain basic registration and licensing requirements with different government agencies. 2. A resident foreign corporation. Australia Austria Bahrain Tax Treaties Germany Hungary India Indonesia Israel Italy Japan Korea Malaysia Netherlands New Zealand Norway Pakistan Poland Romania Russia Singapore Spain Sweden Switzerland Thailand United Kingdom United States Vietnam The Philippines has tax treaties with the following countries: Bangladesh Belgium Brazil Canada China Czech Republic Denmark Finland France 2. II. TAXATION Philippine taxes are imposed by both the national government and the local government units. 6.

Doing Business in the Philippines 2009 A non-resident foreign corporation is subject to final withholding tax on its gross income (without the benefit of deductions) from Philippine sources at the rate of 30 percent. are also subject to withholding tax. A non -resident alien is deemed engaged in trade or business if he stays in the Philippines for an ag gregate period of more than 180 days during any calendar year. A non-resident alien engaged in trade or business in t he Philippines is generally subject to tax on net income from Philippine sources at the same progressive tax rates imposed on resident aliens and citizens. 9 .2 Non-Resident Owner of Chartered Vessel Foreign Currency Transactions of OBUs Minimum Corporate Income Tax Tax on Improperly Accumulated Earnings Individual Income Tax A resident citizen is taxed on income from all sources at progressive rates ranging from 5 percent to 32 percent of net taxable income. 2. withheld at source. The 30 percent corporate income tax rate was 35 percent prior to 1 January 2009.3 Withholding of Taxes Taxes due on the income of a non-resident alien and a non-resident foreign corporation are withheld at source. Income Subject to Different Tax Treatment       Interest and Royalties Interest Divide nds Branch Profits Gains from Sale of Real Property Capital Gains from Sale or Exchange of Stock Tax on Initial Public Offer of Shares of Stock Income Taxation for Specific Industries   Foreign International Carrier Non-Resident Cinematographic Film Owner/Lessor/Distributor  Non-Resident Lessor of Aircraft or Machinery and Other Equipment     2. A non-resident alien not engaged in trade or business in the Philippines is taxed on gross income from Philippine sources at the rate of 25 percent. A foreign corporation is considered a resident when it is engaged in trade or business in the Philippines and is licensed by the SEC to engage in trade or business in the Philippines. such as interest and rent income. The salary and certain other income receipts of residents.

10 . Percentage Taxes Certain persons are subject to percentage taxes at rates ranging from 1 percent to 30 percent. and to things imported. or lease of goods or properties and services in the Philippines. b. c. Business Taxes Value-Added Tax (“VAT”) VAT is a tax on consumption levied on the sale. Excise taxes. excise taxes apply to goods produced in the Philippines for domestic sale or consumption or for any other d isposition. whether in their original state or as ingredients or parts of any manufactured goods or products. or profession of the employer. wines. Percentage taxes are normally imposed on gross receipts. are referred to as ad valorem taxes. Fringe benefits tax is not imposed if the fringe benefit is required by the nature of. cigars (such as jewelry. exchange. or when the fringe benefit is for the convenience or advantage of the employer. Excise Taxes In addition to VAT.5 mil lion.5 a. are credited or refunded upon submission of proof of actual exportation and receipt of the corresponding foreign exchange payment.Quisumbing Torres 2. A VAT taxpayer is allowed input VAT credits against his output VAT liability. perfumes and cigarettes and toilet water)  Manufactured oils and otherfuels  Fireworks  Cinematographic films  Saccharine  Yachts and other vesselsintended for pleasure or sports  Mineral products and quarry resources Excise taxes paid on locally produced goods which are export ed without return to the Philippines. are called specific taxes. 2. and on the importation of goods into the Philippines. ba rter. fermented liquor  Non-essential goods  Tobacco products. the trade.4 Fringe Benefits Tax A final tax of 32 percent is imposed on the grossed -up monetary value of fringe benefits furnished or granted to an employee (except rank-and-file) by the employer. which are imposed and based on the selling price or other specified value of the goods. subject to certain limitations. or necessary to. A person becomes subject to the 12 percent VAT when his gross sales or receipts for the past 12 months exceed Ph P1. The following are subject to excise taxes:  Automobiles  Distilled spirits. which are based on the weight or volume capacity or any other physical unit of measurement of the goods . business. Excise taxes.

unless they elect to pay the 12 percent VAT. 3. or conversations transmittedfrom the Philippines by telephone. and other communication equipment services  Banks and non-bank financial intermediaries Persons or entities subject to percentage taxes are exempt from VAT. instruments. municipalities. countervailing duty. and barangays .5 million are exempt from VAT but are subject to percentage tax of 3 percent. messages. Furthermore. The Tariff and Customs Code provides for the imposition of anti-dumping duty. and papers evidencing business transactions. d. marking duty. Business establishments whose gross annual sales or receipts do not exceed Ph P1. air. telegraph.Doing Business in the Philippines 2009 Among those subject to percentage taxes are the following:  Keepers of garages and common carriers by land.6 Other Imposts of the National Government  Annuity policies  Indemnity bonds  Certificates issued by certain officers  Warehousing receipts  Jai-alai and horse racetickets  Bills of lading  P roxie s  Powers of attorney  Leases of real property  Mortgages  Pledges  Deeds of sale of real property and charter parties In addition to the 12 percent VAT and any applicable excise tax. and discriminating duty under special circumstances. buildings. and other improvements thereon is levied on the assessed value of the real property. cities. such as:  Bonds  Debentures  Certificates of indebtedness  Certificates of stock  Certificates of profits or of interests in property or accumulations  Bank checks  Drafts  Certificates of deposit  Promissory notes  Bills of exchange  Letters of credit  Insurance policies  Fidelity bonds 2. or water for the transport of passengers  Entities engaged in the life insurance business  Overseas dispatches. 11 . Documentary Stamp Taxes Documentary stamp taxes must be affixed to certain documents. real property tax applied solely to the lands. Local and Real Property Taxes Local government units. may levy taxes and impose local license fees pursuant to the Local Government Code. such as provinces. telewriterexchange. wireless. importations are generally subject to customs duties.

documents against payment/cash against documents. foreign exchange may be freely bought and sold in the Philippines. 2. and direct remittance. intercompany open account offset arrangements with the parent company or affiliates abroad. or its equivalent. international commitments.000.However. open account arrangement. The BSP. non-bank BSP-supervised entities. By way of exception. As a rule. Authorized agent banks may sell foreign exchange to importers up to US $100.000 . “BSP Regulated Entities”). Non-Trade Transactions Non-trade transactions refer to all other foreign exchange transactions that are not import or export trade transactions. FOREIGN EXCHANGE REGULATIONS Purchase and Sale of Foreign Exchange Generally. open account arrangements. documents against acceptance. 1. Applications for purchasing foreign exchange in excess of US $100. the Bangko Sentral ng Pilipinas regulates the purchase and sale of foreign exchange by authorized agent banks. The requirements include letters of credit. Foreign Trade Transactions Foreign trade includes import and export trade transactions.Quisumbing Torres III. without prior BSP approval for partial or full advance payment of imports. These include foreign inward and outward investments and foreign currency denominated loans and guarantees. 12 . universal and commercial banks may sell foreign exchange to service payments for imports under the arrangements p rescribed by the BSP. and independent foreign exchange dealers and moneychangers (collectively . a wide variety of merchandise may be imported into and exported from the Philippines. with the approval of the President of the Philippines. Payments for exports may be made without prior BSP approval under the arrangements prescribed by the BSP. These requirements may include documents showing that the purchaser has obtained prior BSP approval or registration of the transaction. may exercise its general emergency powers and temporarily suspend or restrict the purchase and sale of foreign exchange. documents against payment. all BSP Regulated Entities may sell foreign exchange to Philippine residents to fund payments of non-trade transactions even without prior BSP approval. documents against acceptance. and the development and rationalization of local industry. or its equivalent in other foreign currency. but subject to reporting requirements and other conditions. Without prior BSP approval. national security. consignment and export advances. However. their subsidiary/affiliate foreign exchange corporations. subject to the submission by importers to the selling bank of prescribed documents. Generally. 3. such as letters of credit. the BSP Regulated Entity selling the for eign exchange mustrequire the purchaser to present the documentary requirements prescribed by the BSP. the importation or exportation of certain commodities is regulated or prohibited for reasons of public health and safety. if the sale of foreign exchange exceeds US $30.000 or its equivalent. to service advance payment of imports must be filed directly with the BSP for approval.

1 Foreign Inward Investments Foreign investments must be registered with the BSP or.3 Foreign Loans and Guarantees Foreign currency denominated loans and guarantees must be registered with the B SP so that foreign exchange may be purchased from a BSP Regulated Entity to service payments. 1. Investment opportunities in the Philippines have also been created by the Philippine Government’s conversion plan covering Clark Air Base.4 Other Financing Schemes/Arrangements Financing schemes or arrangements which involve an option to purchase or a transfer of ownership after a certain period of time. collective/pooled funds. a BSP Regulated Entity may not sell foreign exchange to fund payments of such foreign loan or guarantee. 3. Qualified Investors may apply to the BSP for a higher annual outward investment limit. Enterprises Registered Under the Omnibus Investments Code (“OIC”) The OIC.000 per investor per year will be sourced from BSP Regulated Entities. so that foreign exchange may be sourced from a BSP Regulated Entity to fund the repatriation of the inv estment and the remittance of profits and dividends. in certain instances. unit investment trust funds and variable insurance. Qualified Investors are currently limited to the following: insurance and pre-need companies.Doing Business in the Philippines 2009 3. 13 . INCENTIVES UNDER SPECIAL REGISTRATIONS Qualified enterprises may register with the Board of Investments (“BOI”) under the Omnibus Investments Code (“OIC”) or with the Philippine Economic Zone Authority (“PEZA”)to avail themselves of incentives. Camp John Hay in Baguio City. public or private pension or retirement or provident funds. Although the incentives under the OIC are generally available only to citizens of the Philippines or to domestic corporations owned and controlled by Philippine nationals. 3. and other former US military reservations and their extensions into special economic zones. through tax exemption and other benefits. 3.000. a BSP Regulated Entity is not allowed to sell foreign exchange to fund the repatriation of such investment and the remittance of profits and divide nds relating to such investment. as in the case of a Build -Operate-Transfer arrangement. IV. such as mutual funds. Subic Naval Base.2 Outward Investments Prior BSP approval and registration is required for outward investments if foreign exchange exceeding US $30. and such other entities and funds as the BSP may determine as Qualified Investors. encourages investm ents in preferred areas of economic activity specified by the BOI in the Investment Priorities Plan (“IPP”). with a custodian bank. If a foreign loan or guarantee is not registered with the BSP. the nationality requirement is waived if the applicant will either export at least 70 percent of its total production or engage in a pioneer project. If a foreign investment is not registered with the BSP. must be registered with the BSP to be eligible for servicing using foreign exchange that will be purchased from BSP Regulated Entities.

Exemptions from taxes and duties on the importation of breeding stocks and genetic materials within 10 years from the date of registration or commercial operation.Quisumbing Torres A pioneer enterprise either manufactures goods that have not been produced in the Philippines on a commercial scale. When the BOI waives the nationality requirement. Expanding firms are entitled to an exemption from income taxes proportionate to their expansion for a period of three years from commercial operations. Exemption from taxes and duties on machinery. Exemption from taxes and duties on spare parts and consumable supplies imported by a registered enterprise with a cu stoms bonded manufacturingwarehouse and exporting at least 70 percent of their production. supplies. A foreign investor is guaranteed repatriation of investments. or employs a formula. 14 . Income tax holiday consisting of income tax exemption for six years from the start of commercial operations for pioneer firms. This incentive may be extended in certain instances and upon approval by the BOI. f. exemption from taxes and duties on the importation of supplies and spare parts for imported equipment and consigned equipment.1 Tax Incentives a. whenever possible. or production scheme which has not yet been tried in the Philippines. The final product or process should involve substantial use of domestic raw materials. and other proprietary rights. freedom from expropriation and requisition of investm ent. e. An enterprise registered with the BOI enjoys the following tax and non -tax special incentives: 1. Tax credit for taxes and duties on raw materials. However. and accessories imported by new and expanding registered enterprises . remittance of profits. the applicant should attain the status of a Philippine national within 30 years from the date of its registration or such longer periods as may be determined by the BOI. This incentive is granted only if the registered enterprise meets a prescribed capital to labor ratio . an additional deduction from taxable income of 50 percent of the wages of additional skilled and unskilled workers in the direct labor force. and semi.manufactured products used for the manufacture of export products and forming part thereof. and four years for non-pioneer firms. process. they are not entitled to additional deductions for incremental labor expenses during the period that they avail themselves of this incentive. For registered enterprises with bonded manufacturing warehouses. c. Agricultural activities or services (especially food processing) contributing to national self-sufficiency. b. or the manufacturing of equipment which utilizes non-conventional sources of energy are similarly classified as pioneer projects. spare parts. Howev er. the production of non-conventional fuels. a registered enterprise exporting 100 percent of its production need not comply with this divestment requirement. protection of patents. g. d. equipment. The income tax holiday may not be extended for more than eight years. For the first five years from registration.

the government has established several special economic zones (Ecozones). service-type projects and trading projects with no manufacturing facilities. Exemption from local taxes for six years from date of registration for pioneer enterprises. spare parts. except in the case of: a. Simplified customs procedures for the importation o f equipment. b. 1. Deduction from taxable income of 50 percent of the wa ges corresponding to the increment in the number of direct labor is doubled . i. The BOI may completely or partially deny incentives to enterprises dealing in traditional export products. or National Housing Authority sites. projects locating in governmental industrial estates. Deduction of the cost of necessary and major infrastructure works constructed.3 Additional Incentives The following additional incentives are available to projects (excluding mining. resettlement areas. subject to customs rules and regulations. and treasurer (or their equivalent) of foreign-owned registered firms are not subject to the foregoing limitations . and b. b. Exemption from wharfage duties and any export tax. technical. 1. and the export of processed products . c. Applications covering new and expansion projects that will locate in Metro Manila are no longer entitled to income tax holiday. duty. Employment of foreign nationals in supervisory. general manager.and fees on exports by a registered enterprise of its nontraditional export products. No restriction on the use of consigned equipment but re-export bond is required. The privilege to operate bonded manufacturing/trading warehouses. d. raw materials and supplies. or advisory positions for five years from registration. extendible for limited periods. Enterprises may establish their businesses within an Ecozone and register with the PEZA as any of the following enterprises:      Export enterprise Tourism enterprise Customs brokerage enterprise Utility enterprise Trucking enterprise 15 . Enterprises Registered With the Philippine Economic Zone Authority (“PEZA”) To disperse industry and generate employment in non -urban areas. The president. and processing of minerals and forest products) located in less developed areas : a. forestry.2 Non-tax Incentives a.Doing Business in the Philippines 2009 h. im post. and four years from registration for non-pioneer enterprises. 2.

an Ecozone Enterprise is subject to a preferential rate of 5 percent of gross incom e. breeding stocks. and genetic materials Additional deduction for labor expense Unrestricted use of consigned equipment Employment of foreign nationals in executive. 2. g. i. assembling. f. and household effects Tax credit for import substitution Exemption from wharfage dues. This is in lieu of all national and local taxes. unless a lower percentage of its production for export is prescribed by the PEZA.Quisumbing Torres        Security agency Information technology enterprise Service enterprise Freight forwarder Warehousing Logistic service enterprise Facilities enterprise An Ecozone Export Enterprise is an entity engaged in a manufacturing. Upon the expiry of the income tax holiday. supervisory. export tax. an Ecozone Enterprise is entitled to the income tax holiday. and advisory positions. specialized office equipmentand furniture. provided that the total number of foreign nationals employed by an Ecozone Enterprise does not at any time exceed 5 percent of its work force c. which are defined as activities involving the use of any information technology software or system for value addition. Expanding firms may be entitled to an income tax holiday of three years from the start of commercial operation of the expansion.professional instruments. and supplies of equipment and machineries. technical. impost. Zero-rated VAT on sales Exemption from duties and taxes on importation of merchandise. raw materials. e. b. or fee Additional deduction for training expenses Tax credit on domestic capital equipment. which may have a duration of four years for new registered non -pioneer firms or six years for new registered pioneer firms. An IT Enterprise is also consi dered an export enterprise.1 Tax and Other Incentives As a general rule. An Ecozone IT Enterprise is a company operating or offering IT services. h. or processing activity and exporting 100 percent of its production. construction materials. 16 . d. including importation of capital equipment. specialized vehicles and other transportation equipment. Ecozone Export and Free Trade Enterprises are further entitled to the following incentives: a.

including: a. subject to evidence of unavailability of comparably skilled Filipinos within the Philippines. manufacturing. with the SBMA. in lieu of which a fina l taxof 5 percent of gross income must be paid. registration as a SBF Resident is available to: a. financial. and right to make improvements in buildings and other facilities. and to import and export freely all types of goods into and out of the SBF. and exemption from all national and local taxes. subject to certain laws and regulations. right to freely engage in any business.2 Generally. A business enterprise may register as a SBF Enterprise. SBF Residents c. right to lease out real property it owns or has leased within the SBF. Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) The Subic Special Economic and Free Port Zone (“Subic Bay Freeport” or “SBF”) was established by the Philippine Government with t he aim of developing the area into a self-sustaining industrial. the former US Naval Base at Subic Bay and its extensions located in the municipalities of Hermosa and Morong in Bataan Province. Registration as a SBF Enterprise is open to any business enterprise in any area of economic activity.Doing Business in the Philippines 2009 3. or grant contracts or concessions to other private or public parties for the construction or provision of any of the said facilities. The territory of the SBF includes the City of Olongapo and the Municipality of Subic. b. and a natural person as a SBF Resident. subject only to limitations under the Philippine Constitution. 17 . financial. subject to ce rtain guidelines. and investment center in the Philippines. and develop infrastructure necessary to enhance the SBF ’s efficient operation. The incentives offered to a SBF Enterprise include: a. or service activity. any Filipino actually residing within the SBF who is an employee or ownerof a SBF Enterprise. b. or anyFilipino who has leased or has secured living premises in the SBF. 3. right to manage facilities on real property it owns. and the immediate members of his family. 3. trade. and to acquire and lease land and sell or lease out facilities to SBF Enterprises. c. right to employ foreign nationals. commercial. subject to certain guidelines. or hasleased within the SBF. has acqui red. A SBF Enterprise which operates facilities or services within the SBF (SBF Facilities Operator) is entitled to additional incentives.1 SBF Enterprises A SBF Enterprise is any business entity or concern within the SBF that is duly registered with and/or licensed by the SBMA to operate any lawful economic activity withinthe SBF.

Under the Rules and Regulations to Implement Republic Act 9400 (“RA 9400 Rules”). In 2007. and the Municipalities of Capas and Bamban. and right to purchase. 9400 (“RA 9400”) converted a portion of the CSEZ into a freeport zone called the Clark Freeport Zone. The government agency that registers enterprises and grants and administers incentives to those enterprises is the Bases Conversion and Development Authority . management and mainten ance of the infrastructure. lease. and (ii) tax . operation. with the Clark Development Corporation as its implementing arm. in lieu of national and local taxes. subject to certain regulations. b. The government agency that registers enterprises and grants and administers incentives to those enterprises located in PEZA Ecozones within the Clark Special Economic Zone is the PEZA. or otherwise acquire articles from other SBF Residents or Enterprises. Province of Tarlac. The incentives offered to SBF Residents include: a.and duty-free importation of raw materials and capital equipment. Province of Pampanga. free of customs duties and control. c. 4. the Municipalities of Mabalacat and Porac. The agency in charge of the development. and a foreign national without prior permanent residency status in the Philippines. facilities and utilities in those PEZA Ecozones is the Bases Conversion and Development Authority. 18 . Enterprises Located in the Clark Special Economic Zone The Clark Special Economic Zone covers certain areas in Angeles City. subject to certain immigration regulations. The Clark Freeport Zone is operated and managed as a separate customs territory. or otherwise consume such goods within the SBF free of national internal revenue taxes and customs duties. Republic Act No. utilize. with the Clark Development Corporation as its implementing arm. PEZA-registered enterprises located in PEZA Ecozones within the Clark Special Economic Zone are entitled to the same tax and duty incentives available to PEZA registered enterprises located in other PEZA Ecozones. and maintain. PEZA Ecozones may be created within the Clark Special Economic Zone. with the following incentives available to registered business enterprises located therein: (i) tax rate of 5% on gross income earned. a foreign national who is a permanent resident of the Philippines and who is employed or has invested in the SBF.Quisumbing Torres b. foreign articles in non-commercial quantities. right to import directly.

the lease contract may be for a maximum period of 25 years. The lease must be registered with the Philippine Board of Investments under the I nvestors’ Lease Act. The Department of Environment and Natural Resources (“DENR”) is the lead agency in environmental protection and administration. renewable once for a period of 25 years. or land for tourism projects with investme nts of less than US $5 million. LEASE OF PRIVATE LAND Foreign investors may lease private lands which will be used exclusively for investments for a period of up to 50 years. the proposed project or undertaking will not cause significant negative environmental impact. The DENR is assisted in the formulation and implementation of environmental policies by the Environmental Management Bureau (“EMB”). With respect to land that the foreign investor will not use exclusively for the purpose of the investment. the environmental law applicable to a particular business concern depends largely on the activities of that business concern. Measures to eliminate or minimize these impacts are incorporated into project design and operations. Presidential Decree No. ENVIRONMENTAL REGULATION The Philippines adheres to a policy of protecting and advancing the right of its people to a balanced and healthful ecology. executive decrees. Environmental impact assessment (“EIA”) is part of project planning and is conducted to identify and evaluate important environmental consequences including social factors that may occur if a project will be undertaken. 1586 (“PD 1586”) established the Philippine Environment al Impact Statement (“EIS”) System. and (c) the lease agreement must incorporate certain mandatory conditions. Philippine environmental law consists of a series of legislative enactments. The ECC contains specific measures and conditions that the project proponent has t o undertake. and other governmental agencies and departments. local government units. (b) the leased premises shall comprise such area as may reasonably be required for the purpose of the investment. each addressing a specific area of concern relating to the environment. renewable for another 25 years. and administrative regulations. The long-term lease will be subject to the following conditions. The ECC is a document certifying that based on the representations of the proponent. The ECC also certifies that the proponent has complied with all the requirements of the EIS System and has committed to implement its approved Environmental Management Plan. VI. Foreigners investing at least US $5 million in tourism projects may lease private lands for the project for the same period. Therefore.Doing Business in the Philippines 2009 V. among others: (a) the leased area shall be used solely for the purpose of the investment upon the mutual agreement of the parties. subject however to the Comprehensive Agrarian Reform Law and the Local Government Code. 19 . PD 1586 requires proponents of environmentally critical projects (“ECP”) and projects within environmentally critical areas (“ECA”) to obtain an environmen tal compliance certificate (“ECC”) prior to the commencement of the project.

otherwise known as the National Pollution Control Decree of 1976. has adhered to the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”). and service marks owned by persons. The registration is renewable at the end of each 10th year from registration so long as the mark is still in commercial use. provided the registrant files with the IPO a declaration of use/justifiable non-use within one year following the fifth anniversary of the date of the registration or renewal. VII. or the Ecological Solid Waste Management Act of 2000. service marks. The Clean Water Act applies to water quality management in all water bodies. Republic Act (RA) No. Rights to a mark are acquired by registration. together with the EIA Review Committee. 9003. The Philippine Clean Water Act of 2004 requires the DENR to implement a comprehensive water quality management program to guarantee effective water utilization and conservation. RA 6969 or the Toxic Substances and Hazardous and Nuclear Wastes Control Act provides the legal framework for the country’s program to control and manage the importation. is the general legislation on pollution prevention and control that is being enforced by the government. There is a single procedure for both foreign and local applicants for the registration of marks. Specific Areas of Regulation Presidential Decree No. manufacture. corporations. by such membership. and trade names. transport. it primarily applies to the abatement and control of pollution from land based sources. trademarks. or implemented in it. and issues the corresponding certific ates of registration. calls for the institutionalization of a national program that will manage the control. transfer. An applicant should file a declaration of use within three years from the date of application. Trademarks. An ECP is a project or program that has high potential for significant negative environmental impact. distribution. treatment.Quisumbing Torres An ECA is an area delineated as environmentally sensitive such that significant environmental impacts are expected if certain types of proposed projects or programs are located. Trademark registration is valid for 10 years. processing. use. developed. 984. RA 8749 or the Philippine Clean Air Act of 1999 provides the framework to prevent. and the World Trade Organization and. partnerships. control. the Berne Convention for the Protection of Literary and Artistic Works. processing. and disposal of toxic substances and hazardous and nuclear wastes. The EMB of the DENR. and reverse air pollution from city to countryside. The Intellectual Property Office (“IPO”) processes applications for patents. transport. INTELLECTUAL PROPERTY PROTECTION The Philippines is a member of the Paris Convention for the Protection of Industrial Property. Priority is given to whoever first applies for registration. manage. is the government agency that implements the EIS System. and disposal of solid waste in the country. 20 . However. or associations domiciled in the Philippines or in any foreign country may be registered with the IPO. trade names.

TECHNOLOGY TRANSFER ARRANGEMENTS A technology transfer arrangement (“TTA”) refers to a contract or agreement involving the transfer of systematic knowledge for the manufacture of a product. Copyrights endure for the lifetime of the creator and for 50 years after his death. VIII. scholarly. including the licensing of computer software. However. The term of registration of an industrial design is five years from the date of filing and may be renewed for two consecutive periods of five years each. whether published or unpublished. there are except ional cases where exemptions from the prohibitory and/or mandatory clauses may be allowed. the application of a process. A patent is granted to the inventor who filed his patent application earlier than others. including the fixing of the appropriate a mount or rate of royalty. A patent for a utility model is valid for sev en years from the date of filing the application and automatically expires at the end of the period. or arrangement of their contents. and industrial designs may be patented. A BOC recordal is valid for two years from the date of recordal. copyrights. or the rendering of a service including management contracts. thus simplifying the determination of who is entitled to own the patent. The recordal will be the basis of the BOC to monitor suspected imports to determine whether they are liable to seizure and forfeiture. and data bases that are original by reason of the selection. and artistic works. and other similarly protected IP rights with the BOC. assign. scientific. coordination. multimedia works. Nonconformity with the prohibited and mandatory clauses will automatically render the TTA unenforceable.Doing Business in the Philippines 2009 Inventions. A TTA also refers to an agreement to transfer. BORDER CONTROL MEASURES The rules of the Bureau of Customs (“BOC”) on border control measures prevent the entry into the Philippines of infringi ng merchandise and ensure expedited procedures for the handling and disposition of goods suspected to be imported in violation of the Intellectual Property Code of the Philippines (the “IP Code”). However. may be copyrighted. except computer software developed for the mass market. or license all of forms of intellectual property rights. The application for recordal serves as the consent of the IP owner for the BOC to conduct physical inspection of imports suspected to be infringing. trademarks. Literary. The parties are free to negotiate the amount or the rate of royalties to be paid under the TTA. 21 . A patent registration for an invention is valid for 20 years from the date of filing the application. Copyright protection extends to computer programs. utility models. IX. Intellectual Property (“IP”) owners may record their produc ts covered by patents. TTAs should not contain certain prohibited clauses and should contain certain mandatory provisions. There are no restrictions regarding the amount or rate of royalty that may be charged. the IPO has a quasi-judicial jurisdiction to settle disputes regarding technology transfer payments.

The Labor Code enumerates the specific instances when an employee may be required to render overtime work and the corresponding overtime pay rate. the DITTB ruling may be used as evidence of the enforceability of the Agreement. a DITTB registration or certificate of compliance must be submitted to the Philippine Bureau of Internal Revenue in support of an application for tax treaty relief. and If the agreement involves the licensing of a trademark. Overtime Pay. The normal hours of work should not exceed eight hours in a work day. Any work done in excess of eight hours in a work day must be paid an overtime rate based on the applicable basic rate. Labor Standards The Labor Code of the Philippines (the “Labor Code”) lays down the minimum terms. conditions. These overtime pay rates may vary depending on whether the overtime work is rendered on a regular work day. In the event of litigation over the Agreement. If the Licensor intends to avail of tax treaty relief with respect to royalty income derived under the agreements. Philippine Central Bank regulations provide that banks and foreign exchange companies must require purchasers of foreign currencies that will be used for royalty payme nts to submit the relevant certificate of registration issued by the DITTB. a trademark license agreement that is not recorded will have no effect against third parties. These are:  The registration will serve as evidence that the agreements are compliant with the IP Code and are enforceable in this respect. labor law recognizes the workers’ right to a just share in the fruits of production and management’s right to a reasonable return on investments. holiday. 1. particularly for license agreements. fails to use the mark in the Philippines or cause it to be used in the Philippines under license during an uninterrupted period of three years or longer. there are practical benefits to registe ring a compliant TTA.Quisumbing Torres A TTA that conforms to the prohibited and mandatory clauses need not be registered with the IPO. the non -recordation of a trademark license may render the registration of the mark(s) covered by the license vulnerable to cancellation actions by third parties due to non -use. the registration will facilitate the recordal of the agreement against the Philippine trademark applications or registrations for the licensed marks. Registration will allow the Licensee to source currency for royalty payments from the Philippine banking system. without legitimate reason. or rest day. Thus. 1. Employees are entitled to at least 60 mi nutes time off from work for their regular meals.  22 . The IP Code specifically provides that a trademark registration may be cancelled any time if the registered owner of the mark. and benefits of employment that employers must provide or comply with and to which the employees are entitled as a matter of right. LABOR LAW Philippine labor law recognizes the rights of both workers and management.1 Work Hours  Normal Hours of Work. Philippine courts generally lend great weight to findings of administrative agencies like the Documentation Information and Technology Transfer Bureau (“DITTB”). Under the IP Code.    X. However. Thus.

2 Wages Under the minimum wage law in the Philippines. For work done on rest days and special holidays. 23 . 1. the benefit becomes part of the terms and conditions of employment and cannot be unilaterally withdrawn or discontinued by the employer. despite the absence of a legal or contractual requirement to grant the said benefit.  1. An employee must be paid a night shift differential equivalent to a certain rate of his regular wage for work done between 10 p. Wages are generally paid in cash at least twice a month (usually on the 15th and the last day of every month).3      1. and cons istently.4 Other Compulsory Benefits Holiday Pay Service Incentive Leave Thirteenth Month Pay Retirement Benefits Military Training Leave     Maternity Leave Paternity Leave Parental Leave Leave Due to Violence Rule on Non-Diminution of Employment Benefits If an employee benefit has been granted by reason of employer practice o r policy. All employees are generally entitled to a rest period of not less than 24 consecutive hours for every six consecutive normal working days. The following criteria may be used to ascertain the existence of a binding and enforceable employer practice or policy under Philippine law: a.Doing Business in the Philippines 2009  Night Shift Differential. Premium Pay for Rest Day or Holiday Work. and The act was not a product of erroneous interpretation or construction of a doubtful or difficult question of law. b. among others. knowingly. and 6 a.m. minimum wages vary according to the location of the business. The minimum wage rate in each region of the countr y varies and is prescribed by the Regional Tripartite Wages and Productivity Boards. The rules on work hours are not applicable to managerial employees. the Labor Code requires the employer to pay a certain amount as additional compensation based on the regular wage of the employee.m. The act was done deliberately. The act of the employer was done for a long period of time or was consistently repeated. c.

through their union representatives. the Philippine Health Insurance Corporation (“PhilHealth”. PhilHealth administers the NHIA). and Pag-IBIG Fund. and fixed-term. Classification of Employment The Labor Code and jurisprudence classify employment status into regular. Corollarily. project. The employment status of an employee is not determined by the specific designation given to it in the employment contract but by the nature of the work being performed by the employee. The employees negotiate the terms and conditions of their employment in CBAs. retirement and funeral benefits. c. 4. There are other special laws in the Philippines that govern specific sectors of Philippine labor such as the Migrant Workers’ and Overseas Filipinos Act of 1995. may negotiate and enter into collective bargaining agreements (“CBA”) with their employers. Employees. Employees. Labor Relations As a general rule. It may register as an independent labor union or as a charter of a federation or national union. together with the employer’s contribution. probationary. b. Employee’s Compensation and State Insurance Fund (“ECSIF”). employees have the right to form and join unions and to engage in concerted activities for their collective protection. employees may also form and join workers’ associations and other mutual aid and benefit associations for legitimate purposes. Social Security Law. however. Welfare Legislation a. such as managerial and confidential employees. and Pag -IBIG Fund. d. 24 . A labor union has to be registered with the Department of labor and Employment for it to enjoy all the rights granted by law to labor unions. under specified circumstances. PhilHealth. the employer. Certain classes of employees. casual. under specified circumstances. This provides for the benefits in case of work -related illness or injury. This provides for the benefits for non-work related illness. also has the right to lock-out employees. This provides housing loans to employees in the private sector. disability. have the right to strike in accordance with law. may not form or become members of labor unions. Contributions for the ECSIF are shouldered by the employer alone. The employer and the employee both contribute to the common fund from which the benefits are sourced. Under the foregoing welfare legislations. National Health Insurance Act (“NHIA”). seasonal. Aside from labor unions. the SSS also administers the ECSIF). the employer is required to register itself and its employees with the Social Security System (“SSS”. and the Pag-IBIG Fund.Quisumbing Torres 2. The employer is required to deduct the employee’s contribution and remit the same to the SSS. The contributions are based on the salary of the employee. other than collective bargaining. This provides employees in the private sector a more comprehensive benefits program which includes sickness. 3.

The nominal damages serve as a penalty on the employer for its failure to comply with the requirements of procedural due process for terminating employment.Doing Business in the Philippines 2009 An employment is presumed to be regular or permanent in nature. unless the legal requirements for the other types of employment are strictly observed. and discipline employees is the employees’ right to security of tenure. a dismissed employee has the right to question the validity of his dismissal. It is also advisable for the employer to have an employment handbook which contains the rules and regulations that will govern the employment relation. the court will take into consideration the relevant circumstances of each case. the amount of which is subject to the discretion of the court. including allowances and other benefits or their monetary equivalent. reinstatement without loss of seniority rights and other privileges. payment of full back wages. b. Termination of Employment Corollary to the employer’s right to hire. computed from the time his compensation was withheld from him up to the time of his actual reinstatement. For instance. Once questioned before the proper labor authorities. a probationary employee must be provided with written standards for regular employment at the time he is first engaged. the causes for terminating an employer-employee relationship would depend upon the classification of the employee. Otherwise. the employer must establish the validity of the dismissal by proving that the termination was due to a just and/or authorized cause and that the termination was done after complying with due process. An employee who is unjustly dismissed from work without a legally defined cause is entitled to the following: a. it is best to put the employment contract b etween the employer and the employee in writing. 5. The classification of an employee is important because under Philippine law. For this purpose. Even if there may have been a just or authorized cause for termination. particularly the gravity of the employer’s failure to follow due process requ irements. Contract of Employment Although not required. he shall be deemed a regular employee from the start of his employment. 6. terminate. The employees’ right to security of tenure demands that they be removed only for any of the just or authorized causes defined under the Labor Code (called “substantive due process”) and only after the employer observes procedural due process. In the Philippines. This will protect the employer in the event of a future disagreement as to the terms and conditions of employment. an employee who is dismissed without procedural due process is entitled to nominal damages. 25 .

Board of Investments registered enterprises. This visa is generally valid for an initial period of one year and is renewable from year to year. In cases of short-term employment (i. which may be extended from year to year upon legal and meritorious grounds. the work visa and AEP applications are filed after the foreigner has arrived in the country and has been admitted on a tourist or 9(a) visa. IMMIGRATION Work / Employment Requirements A foreigner who comes to the Philippines to work must obtain a work visa from the relevant government agency. less than six months) for positions that are temporary in nature (i. Generally.1 Multiple Entry Special Visa This visa is available to:   foreign personnel of offshore banking units of foreign banks duly licensed by the Central Bank of the Philippines to operate as such. Skyway). and unmarried minor children un der 21 years of age. The foreigner may commence work in the local petitioning company upon the filing of his/her application for an AEP with the DOLE. The expatriate. the Bureau o f Immigration (“BI”).g. he will be provided either a 21 -day or 7-day visa. a foreigner may enter the country without a pre-approved tourist or 9(a) visa. 26 . subject to such conditions as he may prescribe. Except for certain restricted nationals. The President.. provided that he has an outbound ticket with him.2 Special Non-Immigrant or 47(a)(2) Visa This visa is granted under Section 47(a)(2) of the Philippine Immigration Act that allows the President to issue such visas when public interest so warrants. Upon entry. as well as an alien employment permit (“AEP”) from the Department of Labor and Employment (“DOLE”). The following are the more common types of work visas: 1. if accompanying or joining him/her after his/her admission into the country as a non-immigrant. and foreign personnel of regional or area headquarters of multinational companies which are officially recognized by the Philippine Government. consultancy).Quisumbing Torres XI. and Special Government Projects (e. 1. a foreigner will only be requi red to apply for a special work permit with the BI. acting through the appropriate government agencies. An application will be filed for the conversion of the tourist or 9(a) visa into the appropriate work visa. depending on his nationality.e. 1.. technical or advisory positions in Export Processing Zone Enterprises.e. The visa and AEP applications must be filed by a local petitioning company on behalf of the foreigner. has exercised this authority by allowing the entry of foreign personnel employed in supervisory. MRT. his spouse. may be issued multiple entry special visas valid for one year. primarily.

27 . The holder may also invest in or establish a business in the Philippines. subject to other requirements or limitations imposed by law. a foreigner may also apply for spec ial resident visas.000 in the Philippines. or highly confidential position in a local company and who is proceeding to the Philippines to engage in any lawful occupation. technical. The pre-arranged employment visa is granted for a period co -terminus with the AEP. countries with which the Philippines has concluded a reciprocal agreement for the admission of treaty traders or investors. may apply for this visa.4 Treaty Trader’s or Investor’s Visa A foreigner is entitled to enter the Philippines as a treaty trader or investor only if he is a national of the US. is granted for a period discretionary to the DOLE. the visa may be extended to the foreigner’s spouse and unmarried children below 21 years of age. The holder of an SRRV may stay in the Philippines ind efinitely or visit the country at any time. whether for wage or salary or for other forms of compensation. where a bona fide employer -employee relationship exists. willing and able to invest at least US $75. who deposit the minimum amount required by law with a bank accredited by the Philippine Leisure and Retirement Authority. at least 21 years of age. Special Resident Visas In addition to work visas. The local petitioning company must be majority -owned by US. The visa is generally valid for a one -year period subject to extension upon application. 1.1 Special Resident Retiree’s Visa (“SRRV”) The SRRV program is available to foreigners and former Filipinos at least 35 years of age. which in turn. The nationality of the foreigner and the majority of the shareholders of the employer company must be the same. Germany or Japan. 2. The following are the different types of special resident visas: 2.2 Special Investor’s Resident Visa (“SIRV”) Any foreigner. managerial.Doing Business in the Philippines 2009 1. may apply for this visa with the Subic Bay Metropolitan Authority. German or Japanese interests. 1. When granted. which no Filipino citizen within the Subic Bay Freeport possesses. 2. the officers of the BI have the discretion to shorten the validity period of the approved 9(g) visa to one year. as certified by the DOLE. These visas allow a foreigner to work in the Philippines.3 Pre-Arranged Employment or 9(g) Visa This visa is available to a foreigner who will be occupying an executive. However.5 Subic Bay Freeport Work Visa A foreign national who possesses executive or highly technic al skills. usually based on the duration of the election or appointment of the foreigner. The foreigner must be employed in a supervisory or executive capacity.

Quisumbing Torres The applicant’s spouse and unmarried children who are less than 21 years of age.4 Subic Bay Freeport Residency Visas for Retirees This visa requires the applicant to be over 60 years old. and receiving a pension or passive income which is payable in the Subic Bay Freeport in an amount exceeding US $50.  If the SVEG was obtained through fraud or willful misrepresentation of material facts. The SVEG program will be operational as soon as the implementing rules and regulations are issued.000 per year.    The SVEG may be revoked by the Bureau of Immigration:  If the SVEG holder fails to maintain compliance with any of the above conditions. accompanying the applicant. with no previous conviction of a crime involving moral turpitude. or exclusively engage in a viable and sustainable commercial investment/enterprise in the Philippines. He/she is not a risk to national security. The SVEG is a special visa issued to a qualified no n-immigrant foreigner who shall actually employ at least 10 Filipinos in a lawful and sustainable enterprise. directly. no longer employed or not self-employed. trade. and dismiss employees. Special Visa for Employment Generation (“SVEG”) On 20 October 2008. Qualified foreigners who are granted the SVEG shall be considered special non-immigrants with multiple entry privileges and co nditional extended stay. may be included in the visa application. there is no limit to the number of unmarried children that can be included in the application. exercise/perform management acts. promote. or have the authority to hire.  Upon conviction of the foreign national for a crime or offense in the Philippines. as determined by a governmental committee. otherwise known as the SVEG. shall be entitled to an SIRV. 758 which prescribes guidelines for the issuance of a special visa to non -immigrants for employment generation. The privileges of the SVEG may extend to the foreign national’s spouse and dependent unmarried children below 18 years of age. of good moral character.related project or tourism establishment.3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments A foreigner who invests the amount of at least US $50. 3. or industry. 2. 28 . or  Upon a final determination by competent authority that the foreign national poses a risk to national security. and His/her commercial investment/enterprise must provide actual employment to at least 10 Filipinos in accordance with Philippine labor laws and other applicable special laws.000 in a qualified tourist . 2. Foreign nationals who wish to avail of the SVEG must comply with the following conditions:  He/she must actually. President Gloria Macapagal-Arroyo enacted executive Order No. He/she evinces a genuine intention to indefinitely remain in the Philippines. Unlike the SRRV.

exemptions. insurance companies. Thus. Financing Companies Financing companies are corporations that are pri marily organized for the purpose of extending credit facilities to consumers and to industrial. benefits. a foreign bank cannot invest in the voting stock of a ne w banking subsidiary. or agricultural enterprises by:     direct lending. by owning up to 60 percent of the voting stock of an existing domestic bank. benefits. importation. discounting or factoring commercial papers or accounts receivables. savings and loan associations. and other financial institutions organized or operating under other special laws. and privileges that are granted to other non-bank financial institutions providing similar credit. A foreign national may own stock in any financing company if the country of which he is a national accords the same reciprocal rights to Filipinos. 1. a foreign bank may also operate in the Philippines. or privileges that are available to lenders.Doing Business in the Philippines 2009 XII. 29 . Financing companies providing financial leases in connection with any purchase. subject to the prior approval of the Monetary Board of the BSP. chattel mortgages. buying and selling contracts.5 million to Ph P 10 million depending on where the fi nancing company will set up its office in the Philippines. subject to the prior approval of the Monetary Board of the BSP. purchasers. A financing company must have a paid-up capital ranging from at least Ph P2. or other eligible person in such transactions. commercial. or otherevidence of indebtedness. powers. financing companies that provide medium and long-term credit to small and medium enterprises are entitled to the same rights. or other transaction are entitled to the same incentives. 2. leases. The term “financing companies” excludes banks. cooperatives. Until such moratorium is lifted. by investing in up to 60 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines. acquisition. FINANCE-RELATED REGULATIONS Banking A foreign bank may operate in the Philippines. the only mode for foreign banks to enter the Philippine banking industry is to invest in existing domestic banks. investment houses. the BSP has imposed an indefinite moratorium on the establishment of new banks except in cities and municipalities where there are no existing banking offices. or financial leasing of movable as well as immovable property. at least 40 percent of the voting stock of which is owned by citizens of the Philippines. A financing company must be organized as a stock corporation. importers. If the moratorium is lifted. At present. In addition.

30 . The bill is currently pending in the Philippine Senate. the Securitization Act grants various tax and fiscal incentives. a foreign insurance company may be allowed to do business in the Philippines under any one of the following modes of entry: a. subject to certain conditions. In order to promote the development of the Philippine capital market. XIII. on a “without recourse” basis. or if the SPE is constituted in the form of a special purpose trust. Special Purpose Vehicle Act of 2002 The Special Purpose Vehicle Act of 2002 (“SPV Act”) provides the framework for the creation and regulation of Special Purpose Vehicles (“SPVs”) that acquire or invest in the non-performing assets (“NPA”) of financial institutions (“FI”).Quisumbing Torres 3. 4. The SPE then issues to investors asset-backed securities (“ABS”) that depend for their payment on the cash flow from the Assets. from an SPV to a third party. There appears to be a growing clamor from the banking sectors to allow additional time within which interested parties may register an SPV. Prior endorsement of the BSP must be obtained in the following cases: a. which seeks to allow registration of SPVs for another five years. if the original obligee of the Assets is a bank. or any other entity subject to the supervision of the BSP. Securitization Act of 2004 The Securitization Act took effect on 10 April 2004. particularly for residential mortgage-backed securities and other housing-related financial instruments. The Act also prescribes the rules for the creation and operation of Secondary Mortgage Institutions to develop a secondary market for the asset-backed securities. ownership of the voting stock of an existing domestic insurance company. receivables. The SPV Act granted tax and fiscal incentives and exemption privileges to transactions involving the transfer of NPAs from an FI to an SPV and. This period expired on 18 September 2004. The SPV Act prescribed a period within which the application to organize and register an SPV must be filed with the SEC. INSURANCE-RELATED REGULATIONS Entry of Foreign Insurance Companies Subject to the approval of the Insurance Commission. In securitization. loans. thus paving the way for the filing of Senate Bill 1830. or similar financial assets with an expected cash payment stream (“Assets”) are sold. The Act establishes the legal and regulatory framework for asset securitization and grants tax exemptions and other incentives in favor of securitization transactions. or is controlled by such bank or entity. by a seller to a special purpose entity. b. Subject to certain conditions. The issuance of the ABS must be in accordance with the securitization plan approved by the SEC. the Act seeks to create a favorable environment for the establishment of Special Purpose Entities (“SPE”) and the issuance by such entities of a wide range of asset-backed securities.

the dockets of Philippine courts remain clogged.. To be allowed entry. b. ARBITRATION IN THE PHILIPPINES Parties have the option of resorting to arbitration to resolve their disputes in the Philippines.e. To qualify as a branch or a new company incorporated in the Philippines. the outcome becomes more “acceptable. widely owned and/or publicly listed in its country of origin. c. Arbitration. 1 Advantages of arbitration compared with court litigation Speed Despite the efforts of the Supreme Court to streamline the judiciary. or the top 10 in their country of origin. and has been doing business for the last 10 years as of the date of the application. In contrast.2 Flexibility of the rules Foreign investors who are not familiar with local court procedures may prefer a more neutral process. 1. XIV. Consequent ly. or establishment of a branch. or majority-owned by the government of the country of origin. c.Doing Business in the Philippines 2009 b. Also. The pa rties can choose arbitrators whose schedules can accommodate the long hours necessary to hear and decide a case. 1. a subsidiary). Since the parties are given a free handin choosing their arbitrator(s). Since the procedure is mutually agreed upon. arbitrators do not have to contend with heavy caseloads. The parties are expected to appoint arbitrators whom they regard as honest and competent. disputes submitted to arbitration are more speedily resolved. Depending on the extent of foreign equity. the top 200 foreign insurance corporations globally. 1.the parties have more faith in the integrity of the process. The ability to choose the arbitrator is especially attractive to a foreign party who ma y harbor reservations about the neutrality of a “home court” judge. 1. may be more attractive than court litigation for several reasons. Unlike judges. the applicant must be: a. it usually takes several years for the trial courts to hear and resolve the cases filed with them.” 31 . investment in a new insurance company incorporated in the Philippines (i.3 Choice of arbitrators The parties are free to choose the arbitrators. which is steadily growing in popularity as an alternative mode of dispute settlement. the parties need notbe bound by the strict rules of evidence. the foreign insurance company must be among: a. Arbitration allows the parties to choose or craft the rules that will govern the arbitration proceedings. an applicant foreign insurance corporation must comply with certain capitalization requirements pertaining to minimum paid -up capital and contributed surplus fund. b.

arbitration proceedings are confidential. 1. (e) the jurisdiction of courts.4 Finality of the award Philippine law recognizes as valid a stipulation that an arbitral award shall be “final. “Final” means that an arbitral award cannot be modified or reversed except on limited grounds. and (h) thosedisputes which by law cannot be compromised. otherwise known as the Labor Code of the Philippines. appointed in accordance with the agreement of the parties. 1. 442. The greater their reputation for competence and integrity.Quisumbing Torres On the part of the arbitrators.6 Confidentiality Whereas court proceedings are open to the public. (d) any ground for legal separation (of married persons).” However.5 Arbitrators as experts Parties usually appoint arbitrators who are knowledgeable in the subject matter of the dispute. “final” does not mean that an arbitral award is beyond judicial review.” 3. Arbitration as contract Arbitration is a creature of contract. their places of business in different States (countries). The word “commercial” is broadly defined as “matters arising from all relationships of a commercial nature. resolve a dispute by rendering an award. whether contractual or not. 2. at the time of the conclusion of such agreement. the remedy of the aggrieved party is to file a case in court. (c) the validity of a marriage. The parties may agree to submit a dispute to arbitration either before or after a dispute arises. as amended. Definition of arbitration “Arbitration” is formally defined as “a voluntary dispute resolution process in which one or more arbitrators. they have an added incentive to build and nurture a reputation for competence and integrity. (b) the civil status of persons. If there is no agreement to submit a dispute to arbitration. the higher will be the demand for their services. 6. (g) criminal liability. Disputes that may be referred to arbitration All types of commercial disputes may be referred to arbitration. Definition of international arbitration and domestic arbitration (a) the parties to an arbitration agreement have. or rules promulgated pursuant to law. (f) future legitime.” 5. Disputes that are not arbitrable The following disputes cannot be submitted to arbitration: (a) labor disputes covered by Presidential Decree No. 1. or Arbitration is considered international if: 32 . An aggrieved party cannot compel the other party to arbitrate. 4. There can be no arbitration unless the parties agree to submit their dispute to arbitration. and its Implementing Rules and Regulations.

or other interest in the controversy. The reason for this is that the Alternative Dispute Resolution Act of 2004 (“ADR Act of 2004”) has grafted several of the UNCITRAL Model Law provisions onto R. Republic Act No . the arbitration agreement. Thus. which might prejudice the right of any party to a fair and impartial award. 33 . one or more of whom are parties to an arbitration agreement. in full enjoyment of his civil rights. or (c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country. The law prohibits an arbitrator from “championing” or “advocating” the cause of either party. On the other hand. if the dispute is between parties who have their place of business in the Philippines. or pursuant to. An agreement that incorporates by reference a document that contains an arbitration clause gives rise to a valid arbitration agreement.A. Domestic arbitration is governed by Republic Act No. 876. fiduciary. and there is no stipulation in their arbitration agreement that the su bject matter of the arbitration agreement relates to another country. a. 7. otherwise known as the Arbitration Law. or by his lawful agent. 876. there are few vital distinctions between the two regimes. Neither should he have a financial. Furthermore. or any personal bias. Qualifications of arbitrator An arbitrator must possess the following qualifications: He must be of legal age. although the civil action may continue as to those who are not bound by such arbitration agreement. (ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which th e subject matter of the dispute is most closely connected. 876 on Domestic Arbitration Form of arbitration agreement The arbitration agreement must be in writing and subscribed by the party sought to be charged. and must know how to read and write. T h i r d pa r t i e s Where a civil action is commenced in court by or against multiple parties. c.Doing Business in the Philippines 2009 (b) one of the following places is situated outside the State in which the parties have their places of business: (i) the place of arbitration if determined in. the court shall refer to arbitration those parties who are bound by the arbitration agreement. the arbitrator should not possess any of the following disqualifications: He should not be related by blood or marriage within the sixth degree to either party to the controversy. a Philippine law that was enacted in 1953. and their obligations are to be performed in the Philippines. International arbitration is governed by the United Nations Commission on International Trade Law (UNCITRAL) Model Law. domestic arbitration is simply defined as arbitration that is not international. Despite the distinction between international and domestic arbitration. the arbitration will be considered domestic. No. b.

in its discretion. or other undue means. fraud. or were guilty of any other misbehavior by which the rights of any party were materially prejudiced. and definite award upon the subject matter submitted to them was not made. grant the petition. The petition to vacate a domestic arbitral award must be filed with the appropriate Regional Trial Court within 30 days from receipt of the award. Where an award is vacated. the court. R. A domestic arbitral award may also be appealed directly to the Court of Appeals on questions of fact and law. or in refusing to hear evidence pertinent and material to the controversy. 8. In order to convert the domestic arbitral award into an enforceable judgment. f.Quisumbing Torres d. or one or more of the arbitrators were disqualified to act as such under Section 10 of R. e. A. Grounds for vacating/setting aside a domestic arbitral award (i) The award was procured by corruption. 34 . or so imperfectly executed them. No. 876. may direct a new hearing either before the same arbitrators or before a new arbitrator or arbitrators to be chosen in the manner provided in the submission or contract for the selection of the original arbitrator or arbitrators. Confirmation of domestic arbitral award A domestic arbitral award is not self-executory. No. or (iii) The arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown. the winning party has to file with the appropriate Regional Trial Court a petition for confirmation of the arbitral award. International Arbitration Interpretation of the UNCITRAL Model Law (“Model Law”) The provisions on domestic arbitration are more or less similar to the provisions on international arbitration. Interim measures A party may apply for provisional relief or interim measures with the courts prior to the constitution of the arbitral tribunal or even during the arbitration proceedings to the extent that the arbitral tribunal has no power to act or is unable to act ef fectively. 876 (for domestic arbitration) and the Model Law (for international arbitration). and any provision limiting the time in which the arbitrators may make a decision shall be deemed applicable to the new arbitration and to commence from the date of the court's order. that a mutual. a. final. or (iv) The arbitrators exceeded their powers. The one area where the two arbitration regimes may part ways is in the interpretation of the applicable laws.A. and willfully refrained from disclosing such disqualifications. as a matter of course. The court should. or A domestic arbitral award may be vacated on the following grounds: (ii) There was evident partiality or corruption in t he arbitrators or any of them. unless there are grounds to vacate the award.

under the law of this State. or 35 . telex. should limit the scope of its review to the grounds to set aside an arbitral award under the Model Law. provided that. telegrams or other means of telecommunication which provide a record of the agreement. or contain s decisions on matters beyond the scope of the submission to arbitration. regard shall be had for its international origin and to the need for uniformity in its interpretation. The definition of “writing” under the Model Law is broader than the definition of “writing” under R. Form The arbitration agreement shall be in writing. While domestic arbitration awards may be reviewed on appeal on both questions of fact and law. 9/264.” c. Interim measures As with domestic arbitration. since other jurisdictions tend to interfere less with international arbitral awards. or in an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and not denied by another. No. entitled “International Commercial Arbitration: Analytical Commentary on Draft Text identified by reference number a/CN. and resort may be made to the travaux preparatories and the report of the Secretary General of the United Nations Commission on International Trade Law dated 25 March 1985. having regard for the international origin of the Model Law and to the need for uniformity in its interpretation. b. domestic arbitration and int ernational arbitration will most likely diverge with respect to the scope of judicial review. Philippine courts.Doing Business in the Philippines 2009 The ADR Act of 2004 provides that. or (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case. d. only that part of the award which contains decisions on matters not submitted to arbitration may be set aside. 876. a party in an international arbitration may apply for provisional relief or interim measures with the courts prior to the constitution of the arbitral tribunal or even during the arbitration proceedings to the extent that the arbitral tribunal has no power to act or is unable to act effectively. if the decisions on matters submitted to arbitration can be separated from those not so submitted. in interpreting the Model Law. failing any indication thereon. Grounds for setting aside/vacating an international arbitral award An international arbitral award may be set aside by the courts only if the party making the application furnishes proof that: (i) a party to the arbitration agreement referred to in Article 7 of the Model Law was under some incapacity. A.” For example. or the said agreement is not valid under the law to which the parties have subjected it or. The Model Law considers an agreement to be in writing “if it is contained in a document signed by the parties or in an exchange of letters. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract. or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration.

upon application in writing to the competent court. irrespective of the country in which it was made. if the decisions on matters submitted to arbitration can be separated from those not so submitted. unless such agreement was in conflict with a provision of the Model Law from which the parties cannot derogate. irrespective of the country in which it was made. may be refused only : (a) at the request of the party against whom it is invoked. An application for setting aside an international arbitral award may not be made after three months have elapsed from the date on which the party making that application received the award. or (ii) the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case. or 36 . Recognition and enforcement of international arbitral award An international arbitral award. or. may be refused only on the following grounds: “(1) Recognition or enforcement of an arbitral award. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) The Philippines acceded to the NewYork Convention. or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. or (ii) the award is in conflict with the public policy of this State. 9. failing such agreement. provided that. or it contains decisions on matters beyond the scope of the submission to arbitration. was not in accordance with the Model Law. or An international arbitral award may also be set aside if the court finds that: (i) the subject matter of the dispute is not capable of s ettlement by arbitration under the law of this State (the Philippines). e. failing any indication thereon. that part of the award which contains decisions on matters submitted to arbitr ation may be recognized and enforced. Section V of the NewYork Convention provides that the recognition or enforcement of an arbitral award. if that party furnishes to the competent court where recognition or enforcement is sought proof that: (i) a party to the arbitration agreement referred to in article 7 was under some incapacity. under the law of the country where the award was made. a landmark international instrument. shall be enforced unless there exists any of the grounds to set aside/vacate the award. The parties to this convention recognize the validity and binding effect of foreign arbitral awards. shall be recognized as binding and. in 1967. or the said agreement is not valid under the law to which the parties have subjected it or. irrespective of the country in which it was made.Quisumbing Torres (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.

Construction Industry Arbitration Commission Executive Order No. even if they specifically choose another forum. or who are otherwise bound by. t he parties will not be precluded from electing to submit their dispute before the CIAC because this right has been vested by law. contractor. an arbitration ag reement. The CIAC has original and exclusive jurisdiction over construction disputes.Doing Business in the Philippines 2009 (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or.” The CIAC is a hybrid of voluntary arbitration and compulsory arbitration. quantity surveyor. subcontractor. as opposed to a final foreign award. or (ii) the recognition or enforcement of the award would be contrary to the public policy of this State. the Philippine Supreme Court recognized the enforcement of a provisional/interim foreign award. and the CIAC shall assume jurisdiction over the dispute.”Thus. either party may still elect to file a request for arbitration with the CIAC notwithstanding the agreement of the parties to submit their dispute to arbitration in Singapore. It takes the CIAC an average of around six months from the time of filing of the request for arbitration to hear the case and render an award. if the parties to a construction contract designate Singapore arbitration as the venue of any dispute that may arise between them. The NewYork Convention also seeks to put international arbitration on equal footing with domestic arbitration by providing that the parties t o the convention should not impose more onerous conditions on the enforcement of foreign arbitral awards than on the enforcement of domestic awards. or (b) if the court finds that: (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State. was not in accordance with the law of the country where the arbitration took place. On the other hand. for example. such that. To date. failing such agreement. project manager. then the construction dispute between them shall be resolved by the courts. The CIAC is known for its efficiency. which shall “include those between or among parties to. Notably. their agreement will fall within the jurisdiction of the CIAC. or under the law of which. or (v) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which. there are more than 140 signatories to the NewYork Convention. that award was made. directly or by reference whether such parties are project owner. 1008 established the Construction Industry Arbitration Commission (“CIAC”). 10. regardless of what forum they may choose. 37 . the Philippine Supreme Court has held that “as long as the parties agree to submit their dispute to voluntary arbitration. fabricator.” In a recent case. a testament to the near-universal recognition of the validity and binding nature of foreign arbitral awards. bondsman or issuer of an insurance policy in a construction project. If the parties do not enter into an arbitration agreement. there is no similar convention with respect to the recognition and enforcement of foreign court judgments. consultant. design professional.

Presidential Decree No. the Insolvency Law. 902-A”). it may apply for insolvency and have its assets distributed accordingly among its various creditors. and Prohibits the debtor from disposing of his property or making payments. a.” a statement of the debtor’s assets and liabilities. suspension of payments. If the required vote is achieved without any objection from the creditors. and such 38 . If what is sought is merely a little financial breathing space. Effects of a Petition for Suspension of Payments The filing by a debtor of a petition for suspension of payments: i. except executions against properties specially mortgaged. and/or strategy. the proceeding is terminated and the creditors may enforce their respective credits. the rehabilitation of a company entails more radical measures such as changes in organization. to wit. If. then the remedy is a suspension of payments.D. The applicable laws are the Civil Code of the Philippines (“Civil Code”). iii. management. The petition for suspension of payments must include a “Schedule of Creditors. then the remedy is to seek corporate rehabilitation. which provides for the deferment of payments and temporary protection against actions/executions by unsecured creditors. if the debtor company is no longer capable of or interested in maintaining its business. and requires temporary protection against both secured and unsecured creditors. Each of these remedies is discussed in more detail below. 902-A (“P. 2. and the Rules of Procedure on Corporate Rehabilitation. Suspends all pending executions against the debtor’s properties. The type of proceeding that applies to a debtor depends on the particular relief sought. 2. except in the ordinary course of the business in which the debtor is engaged.1 Proceedings for Solvent Debtors (Individuals or Corporations) Suspension of Payments An individual debtor who possesses sufficient property to cover all of his/its debts but foresees the impossibility of meeting them when they respectively fall due. The petition must be filed with the Court of the place where the debtor has his/its residence within six months prior to the filing of the petition. Finally. Bars ordinary creditors from instituting proceedings in any Philippine court against the debtor. corporate rehabilitation. Court Proceedings b. may file a petition with a Philippine Regional Trial Court (the “Court”) to be declared in a state of suspension of payments. and insolvency. If the required vote is not achieved. on the other hand. INSOLVENCY IN THE PHILIPPINES Overview and Introduction to the Jurisdiction / Applicable Legislation There are three types of remedies available to a financially distressed individual or juridical person. and the debtor’s proposed agreement for the suspension of payments. the Court will issue an order that the proposed agreement be carried out. 1. The proposed agreement must be approved by two thirds (2/3) of the creditors representing at least three fifths (3/5) of the debtor’s total liabilities.Quisumbing Torres XV. ii.

the proceeding will terminate. its guarantors and sureties not solidarily liable with the debtor. against the debtor. and directs all creditors and interested parties to file their verified comments on or oppositions to the petition before the said initial hearing. Effects of a Petition for Rehabilitation If the Court finds the petition to be sufficient in form and substance. (f) directs the payment in full of all administrative expenses incurred after the issuance of the Stay Order. may petition the proper Court to have the debtor placed under rehabilitation.the rights which the creditors had against the debtor before the agreement shall re-vest in them. c. that foresees the impossibility of meeting its debts whe n they respectively fall due. If the required vote isachieved but there is an objection from any of the creditors. The amount of the debts of the debtor is not affected by a suspension of payments. The petition for rehabilitation must be filed with the Court of the place where the debtor’s principal office is located. The petition for rehabilitation must be accompanied by. and (g) sets an initial hearing on the petition. However. (e) prohibits the debtor’s suppliers of goods or services from withholding supply of goods and servic es in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order. or disposing in any manner any of its properties except in the ordinary course of business. it will. whether for money or otherwise and whether such enforcement is by court action or otherwise. Objections to the debtor’s proposed agreement The possible grounds for objecting to the proposed agreement are as follows: i. which prejudice the rights of the creditors. If the objection is found to be meritorious. (b) stays the enforcement of all claims. fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement. encumbering. the payment for such debts is delayed. If the debtor fails wholly or in part to perform the Court-approved agreement. among others. 39 . the Court will conduct a hearing on the objection. If the objection is found to be unmeritorious. transferring. in the holding thereof. The Stay Order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceeding. issue a “Stay Order” which. (d) prohibits the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition. fraudulent conveyance of claims for the purpose of obtaining the required majority. among others: (a) appoints a Rehabilitation Receiver. partnership. defects in the call for the meeting of the creditors. or association. a rehabilitation plan. (c) prohibits the debtor from selling. iii.Doing Business in the Philippines 2009 agreement shall be binding on all creditors that have been properly summoned and included in the Schedule of Creditors.2 Corporate Rehabilitation A debtor. not later than five days from the filing of the petition. which is a corporation. The Stay Order applies to both secured and unsecured creditors. or any creditor or creditors holding at least 25 percent of such debtor’s total liabilities. ii. 2. and in the deliberations thereat. a. the Court will proceed as though no objection had been made.

the period for approving or disapproving a rehabilitation plan may not exceed 18 months from the date of filing of thepetition. Insolven cy proceedings may be voluntary or involuntary. d. conditions. The Rehabilitation Receiver will evaluate the rehabilitation plan and submit his recommendations t o the Court not later than 120 days from the date of the initial hearing. The Court may extend this period only if it appears by compelling evidence that the debtor may successfully be rehabilitated. the Supreme Court of the Philippines ruled that a Stay Order and an approved rehabilitation plan merely suspend the enforcement of the security. 3. Court proceedings If. the basic premise is that the debtor does not have enough assets/properties to cover his obligations. 40 . within 90 days from the approval of the rehabilitation plan. Effects of an approved rehabilitation plan on prior agreements betweenthe debtor and creditor(s) Contracts and other arrangements between the debtor and its creditors will continue to be effective to the extent that these contracts and other arrangements do not conflict with the approved rehabilitation plan. in its judgment. The Court may impose such terms. payment. sale. or restrictions as the effective implementation and monitoring of the rehabilitation plan may reasonably require. c. the Court may decla re void any transfer of property or any other conveyance.Quisumbing Torres b. and do not prejudice the status of the secured creditor vis-à-vis the unsecured creditors. the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. the Court may revoke the approval thereof on the ground that the same was secured through fraud. However. after the initial hearing on the petition for rehabilit ation. the Court is satisfied that there is merit in the petition. it will give due course to the petition and refer the same to the Rehabilitation Receiver. or agreement made in violation of the Court’s Stay Order or in violation of the Rules on Corporate Rehabilitation. The petition will be dismissed if no rehabilitation plan is approved by the Court upon the lapse of 180 days from the date of the initial hearing. The Court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if. Clawback provisions Upon motion by a party or on its own. In a recent decision involving a creditor’s security agreement with a debtor under rehabilitation. On motion by a party or on its own. Insolvency Proceedings (Individuals or Corporations) In insolvency proceedings. or for the protection and preservation of the interests of the creditors should the plan fail.

3. or withdrawn by the petitioners. The filing of the petition is deemed an act of insolvency. a. a. and effects not exempt from execution for the benefit of the creditors. and an application to be adjudged inso lvent. or if the debtor is not declared insolvent.Doing Business in the Philippines 2009 3. the Court will issue an order declaring the debtor insolvent. US $25) may seek a declaration of insolvency against a debtor. The debtor must also include in the petition a schedule of debts and of creditors. in such sum as the Court will direct. The petition must be accompanied by a bond. partnership or association) for six months preceding the filing of the petition. his/its willingness to surrender all his/its property. direct the filing of an additional bond when deemed necessary. conditioned upon the payment to the debtor of all costs and damages occasioned by the proceedings in insolvency if the petition is dismissed by the Court. US $25) may seek a declaration of insolvency. The Court may. Effect of Order of Insolvency An Order of Insolvency generally suspends all civil proceedings pending against the debtor. among others. Court Proceedings The petition for involuntary insolvency must be filed in the Court of the place where the debtor resides or has his/its principal place of business. estate.2 Involuntary Insolvency Three or more creditors whose total credits exceed Ph P1. 3. The petition must also allege one or more acts of insolvency. The Court will require the debtor to show cause why he/it should not be declared insolvent. The petition m ust allege. If the debtor is a corporation. If the Court finds the petition meritorious.000 (approx. upon motion. Court Proceedings The petition for voluntary insolvency must be filed in the Court of the place where the debtor has resided (in case of an individual) or has had its principal office (in case of a corporation.1 Voluntary Insolvency A debtor owing debts exceeding Ph P1. Upon the filing of the petition. and an inventory of all his/its assets. the court will issue an order declaring the debtor insolvent. The creditors must be Philippine residents whose credits accrued in the Philippines. and must be verified by at least three of the petitioners. the petition may be filed by any officer of the corporation. 41 . duly authorized by the board of directors. and did not become creditors by assignment within 30 days prior to the filing of the petition. the debtor’s inability to pay all his/its debts in full.3 Provisions applicable to both voluntary or involuntary insolvency proceedings a.000 (approx.

By way of exception. If the secured creditor opts for foreclosure. Article 2244 provides for the preference of certain claims and credits which. in proportion to the amount of the respective credits. certain types of credits enjoy preference with respect to specific movable or immovable properties (“Special Prefer red Credits”). No discharge is granted to a corporation that is declared insolvent.e. Among the Special Preferred Credits. either (i) to foreclose the property subject of such security arrangement (notwithstanding the stay effected by the Order of Insolvency). after deducting the value of the property foreclosed.. but will have to relinquish his security and surrender the properties subject of the security to the assignee-in-insolvency. But the creditor may be admitted in the insolvency proceeding to recover the balance of the debt. appear in (i) a public instrument ( i. the instrument is notarized) or (ii) a final judgment. All the remaining classes of Special Preferred Credits with respect to specific movable or immovable property (e. at its option. credits secured by a pledge or mortgage) do not enjoy priority among themselves. the debtor’s property that is subject of a pledge or mortgage is not included in the debtor’s assets that are assigned to the assignee -in-insolvency for the satisfaction of the debtor’s general creditors. but must be paid concurrently and pro rata.Quisumbing Torres All property of the insolvent not exempt by law from execution will be conveyed to an assignee-in-insolvency elected by the creditors.. he may recover his credit by participating in the pro-rata distribution of the debtor’s estate. i. The creditor recovers the balance by participating in the pro-rata distribution of the debtor’s estate. by releasing or surrendering to the assignee -in-insolvency the properties subject of the pledge or mortgage.g. If the creditor pursues his claim in the insolvency proceeding. taxes and assessments due upon the property to which the claims relate enjoy absolute preference. or (ii) to pursue his/its claim in the insolvency proceeding together with other creditors.. c. b. respectively. without special privilege.e. Credits that do not enjoy any preference with respect to sp ecific property are satisfied in the order established in Article 2244 of the Civil Code. These credits have preference among themselves in the order of priority of the dates of the instruments and of the judgments. Preference of Credits In an insolvency proceeding. 42 . such creditor canno t participate in the election of the assignee-in-insolvency. Rights of secured creditors A creditor whose credit is secured by a mortgage or pledge is allowed.

conveyance. if the debtor. or transfer of the property is not made in the usual and ordinary course of business of the debtor. or in contemplation of insolvency. transfer. or delaying the operation of the provisions of the Insolvency Law. or conveyance is considered void. or (iii) defeating the object of. within 30 days before the filing of a petition to be declared insolvent by or against him. sale. assignment. transfer. or makes any pledge. mortgage. the attachment. seizure . or the value thereof. is considered void. that fact is deemed as prima facie evidence of fraud. assignment. Clawback provisions The assignee-in-insolvency may recover property given as security. Furthermore. 43 . mortgage. conveyance. any pledge. In such a case. mortgage. being insolvent. assignment. impeding. or transfer of property made by the insolvent within one month before the filing of a petition in insolvency by or against him. sale. sequestered. Under the Insolvency Law. except for a valuable pecuniary consideration made in good faith. assignment. mortgage. or in any way hindering. sequestration. or seized on execution. or if such seizure is made under a judgment which the debtor has confessed or offered to allow. or (ii) preventing the property from being distributed ratably among his creditors.Doing Business in the Philippines 2009 d. sale. sale. procures any of his property to be attached. or conveyance thereof to anyone with a view to: (i) giving a preference to any creditor or person having a claim against him. if the pledge. pledge.

©2009 Quisumbing Torres All rights reserved.com Quisumbing Torres is a member firm of Baker & McKenzie International. reference to an “office means an office of any such law firm.Quisumbing Torres 12th Floor. or equivalent. 728 7777 QTLaw@bakernet. In accordance with the common terminology used in professional service organizations. reference to a “partner” means a person who is a partner. . Metro Manila Philippines 1634 Phone: +63 2 819 4700 Fax: +63 2 816 0080. in such a law firm. Bonifacio Global City Taguig. a Swiss Verein with member law firms around the world. Similarly. Net One Center 26th Street corner 3rd Avenue Crescent Park West.

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