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
The Philippines...........................................................................................1 Quisumbing Torres .....................................................................................2
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
Post-Registration Requirements ..............................................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
Local and Real Property Taxes .............................................. 11
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
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
Enterprises Registered With the Philippine Economic Zone Authority (“PEZA”).................................................................... 15
2.1 Tax and Other Incentives ...................................................... 16
....................................................1 SBF Enterprises ........................ 19 ENVIRONMENTAL REGULATION .............. 24 Termination of Employment.... 25 Contract of Employment ...... 17 3........2 1.....................................
LEASE OF PRIVATE LAND....................................................................3.....2 Special Investor’s Resident Visa (“SIRV”) ...... 21 LABOR LAW....................... 27 2... 18
V...... 29 Financing Companies . 27
Labor Standards ................................. 29 Securitization Act of 2004 ........................... 28
XII......... 26 Special Non-Immigrant or 47(a)(2) Visa......................... 27 Treaty Trader’s or Investor’s Visa ....................................................................................1 1 ....................... 3............... 30
XIV... 21 TECHNOLOGY TRANSFER ARRANGEMENTS ....................................... ARBITRATION IN THE PHILIPPINES............. 29
Banking............................ 24 Welfare Legislation ...3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments ........................................................ 19 INTELLECTUAL PROPERTY PROTECTION..............................3 1................... 26 Pre-Arranged Employment or 9(g) Visa ..........
Special Resident Visas ............................ 4....4 Subic Bay Freeport Residency Visas for Retirees ........
Enterprises Located in the Clark Special Economic Zone .... 27
2............................................................5 Multiple Entry Special Visa.. X.............................................. 26
1......................................... VII... 27 Subic Bay Freeport Work Visa............................ 27 2....................................................................1 Special Resident Retiree’s Visa (“SRRV”) ............... 5...... INSURANCE-RELATED REGULATIONS...................
Special Visa for Employment Generation (“SVEG”) .... 22 Wages.............................................. 23 Rule on Non-Diminution of Employment Benefits .
IMMIGRATION................ 20 BORDER CONTROL MEASURES ....................................................................................................... IX....4 1.........................................
1.......................................................................................................................................................................... 23 Other Compulsory Benefits ................ 26
Work / Employment Requirements ........... 6.....................3 1...
XI.................................................. 4.......... 17
4....................4 Work Hours ....... 3.......... VI............... 22
1.............. 30 Special Purpose Vehicle Act of 2002 ...............1 1...................... 31
... 24 Classification of Employment.... 28 2.....................2 SBF Residents ................................... 30
Entry of Foreign Insurance Companies .......................................................
Labor Relations............... VIII.................................... 2................. 23
Specific Areas of Regulation ..................................................... 20
Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) .....................
FINANCE-RELATED REGULATIONS ......... 28
3..... 5................................................. 33 International Arbitration ....................2 1.....1 1........................................ 8.......................... 876 on Domestic Arbitration ........................... 32 Confidentiality.............
Advantages of arbitration compared with court litigation ................... 38 Proceedings for Solvent Debtors (Individuals or Corporations) 38
1................ 41 3....1 Voluntary Insolvency................................................................ 31 Choice of arbitrators........................... 2.6 Speed ... 38
Overview and Introduction to the Jurisdiction / Applicable Legislation .................................... 32 Disputes that may be referred to arbitration ................................ 39
...............5 1........................ 32
Insolvency Proceedings (Individuals or Corporations)....................
10.....2 Involuntary Insolvency..................1........... 9.4 1....
INSOLVENCY IN THE PHILIPPINES...................................................... 38 2...... 32 Arbitration as contract ...........................................................1 Suspension of Payments ................. 6.................... 3............................ 36 Construction Industry Arbitration Commission ........ 32 Definition of international arbitration and domestic arbitration 32 Republic Act No . 32 Disputes that are not arbitrable ............................ 31 Finality of the award ............................................................... 7........................... 34 The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) ......................3 Provisions applicable to both voluntary or involuntary insolvency proceedings ....3 1..... 31
1 ..............................2 Corporate Rehabilitation .................................. 31 Flexibility of the rules ................................................................................................................................ 32 Arbitrators as experts ........... 4.......................................................................................
Definition of arbitration ......... 41 3.................................
A competitive consumer market serves as an arena for showcasing the latest trends in the retail goods sector.
Sources: Information was retrieved on October 27-31. towns.gov. and other agricultural or fishery products Alternative power generation using environment-friendly technologies Infrastructure. Hardworking.ph/ Official Website of the Republic of the Philippines . coupled with a modern network of highways.http://www.boi. An open economy welcomes 100 percent foreign ownership in many sectors. airports. and retirement villages. Affordable wages and utilities contribute to business cost savings. highly trainable English-speaking Filipino workforce is refreshed with over 400. organic fertilizers. and ports. support the unencumbered flow of goods within and between cities.gov. ethics-bound. feeds.ph/ 1
. Remarkable lifestyle amenities replicate the expatriate’s home environment.ph/default. A young. fun-loving Filipinos from multicultural backgrounds play host to a rewarding economic and sociocultural investment. Special economic zones offer preferential tax incentives. and islands.gov. 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. Diverse transportation choices. fairs. resorts. Investment opportunities abound in these priority areas: Production and processing of biofuels. and the production of healthcare and wellness products to promote medical tourism Mining.000 graduates annually.http://www. Expanded telecommunication infrastructure facilitates smooth global business operations. and seminars. 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.http://www.Doing Business in the Philippines 2009
The Philippines stands firm as a strong prospect for conducting business in the Southeast Asia region.asp Philippine Board of Investments . First-rate convention facilities host major local and international exhibits.census. provinces. 2008 from National Statistics Office .
Singapore. and the United States. The firm adopted its present name when Rafael E. New York. Indonesia. Taiwan. and was later named Collas and Guerrero. Evangelista retired. when the firm merged with the law office of Norberto J. the United Kingdom. and the United States. including Australia. Quisumbing Torres in Manila provides a convenient coordination point for regional and global work. oil and gas.C. Singapore. mining. Our client base currently consists of Philippine. Brunei. India. clean air.Quisumbing. Jr. American. In 1974. Japan. social.Thailand. It became Quisumbing Torres & Evangelista on 1 July 1988. Hong Kong. Japan. hazardous waste. and political issues. the Middle East. Collas. France. and Asia Pacific entities. Malaysia. 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. legal. media and communications. Korea. and tax. and Washington D. A number of our lawyers havepracticed or have had legal exposure in Australia. It was established in 1963 by Juan G. Canada.Quisumbing Torres
Your partner every step of the way. such as the States ofCalifornia. Hong Kong. Virginia. Switzerland. European. and the Americas. Our lawyers are knowledgeable in the relevant business. Germany. China. Quisumbing Torres is the Philippine-based member firm of Baker & McKenzie International.
. Europe. its name was changed to Guerrero & Torres. . Many of our lawyers are also admitted to practice in other jurisdictions. Some have helped draft significant business laws and regulations. the United Kingdom. intellectual property. Quisumbing Torres has helped foreign and domestic companies succeed in the Philippines. Quisumbing Torres has over 50 lawyers who provide clients with a full range of legal services. including those dealing with labor. Indonesia. Together with the other member firms of Baker & McKenzie in Asia. The firm represents clients doing business abroad and clients from other countries doingbusiness in the Philippines.
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. The Negative List has two component lists: List A and List B. A domestic market enterprise is an enterprise which produces goods for sale or renders service or otherwise engages in any business in the Philippines. or protection of local small and medium-sized enterprises. provided that the following conditions are complied with: a. The maximum amount of foreign equity that is allowed in a company depends on the type of activity that the company is engaged in. promote. The country or state of the applicant must also allow Filipino citizens and corporations to do business therein. 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. the President of the Philippines may amend the Negative List. List B contains areas of investment where foreign ownership is limited for reasons of security. amendments to List B may not be made more often than once every two years. as amended. remittance of earnings. partnerships.
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.Doing Business in the Philippines 2009
1. Foreigners may hold interests in corporations. Except with respect to activities where restrictions on foreign equity are imposed under the Philippine Constitution or statutes. processor. otherwise known as the Foreign Investments Ac t of 1991 (“FIA”). corporations. A new Negative List is prospective in application and willnot affect foreign investment that already exists on the date of its publication. 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. and other entities in the Philippines. 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. To encourage foreign investments. or a trader that purchases products domestically and exports 60 percent or more of such purchases. and freedom from expropriation (except for public use or in the interest of national welfare or defense and upon paym ent of just compensation). partnerships.000
b. risk to health and moral s. defense. 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 . including the rights to repatriation of investments. provided that such corporations.
. including their political subdivisions. According to the FIA. or service (including tourism) enterprise that exports 60 percent or more of its output. c. However. It must have a paid-in capital of at least the peso equivalent of US $200. Philippine laws expressly reco gnize various rights of foreign investors in the Philippines. and welcome productive investments from foreign individuals. it is the policy of the State to attract. 7042. List A contains areas of investment where foreign ownership is limited by the mandate of the Philippine Constitution or by specific laws. and governments.
establishment. including. goods.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). agenciesor municipal corporations Culture.5 million Private security agencies Small-scale mining
Up to 25 percent Foreign Equity Private recruitment companies. 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. processing. production. companies. and agriculture
Retail trade enterprises with a paid-up capital of less than US $2. 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
. The capitalization requirements of a domestic market enterprise may be reduced to the peso equivalent of US $100. or (ii) if it employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment. engineering. 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. customs brokerage. architecture. except recording Except in cases prescribed by law. geology. and administration of educational institutions Contracts for the supply of materials. and utilization of natural resources Ownership of private lands Operation and management of public utilities Ownership.000 (i) if its activity involves advanced technology as determined and certified by the Department of Science and Technology. medicine. and commodities to government-owned or controlled corporations. the practice of all professions. but not limited to. development. accountancy. trading (except retailing). milling.
A branch and a representative office are mere extensions of their head offices. franchise.
Forms of Investment Vehicle
There are three general forms of business organizations in the Philippines: so le proprietorship. and corporation. having in his name or under his control a right. Subject to nationality requirements pertaining to the intended activity. with or without remuneration (except technical personnel whose employment may be specifically authorized by the Secretary of Justice). Under the Anti-Dummy Law.
3. property or bus iness. privilege. and a representative office. is prohibited from (a) permitting or allowing the use. Under the rules of the PCAB. franchise. whether as an officer.
The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on persons violating foreign equity limitations. exploitation or enjoyment of such right. A sole proprietorship is a business owned and operated by a single natural person.e.Doing Business in the Philippines 2009
Domestic market enterprises (i. Philippine law allows foreign investors to establish and register a domestic corporation. employee. property or business by a person. and there is no distinct and separate personality of the business enterprise from that of the owner. property or business. The foregoing is a non-exhaustive enumeration of the sectors/activities that are subject to foreign equity limitations. operation. a person who. or laborer. privilege. 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. corporation or as sociation not possessing the qualifications prescribed by law. However.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”).. The liability of the sole proprietor is unlimited . a branch. A foreign investor may also invest as a limited or generalpartner in a partnership. or (b) in any manner permitting or allowing any person not so qualified to intervene in the management. partnership. 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. entities that do not export 60 percentor more of their output) with a paid-in equity capital of less than theequivalent of US $200.
2. A domestic corporation may be a joint venture or a wholly owned subsidiary. 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. administration or control of such right.
and the administrative costs of maintaining the same. its head office or parent company must initially remit into the Philippines at least US $50. or coordination center for its subsidiaries. the extent of liability of the parent company/head office. a foreign investor will have to set up a domestic corporation with a Philippine national as a joint venture partner. Branch
Assuming that the proposed activity is not subj ect to any foreign equity limitation.2 Regional or Area Headquarters
A multinational company may establish a regional or area headquarters in the Philippines to serve as supervision. the corporation is generally the most preferred vehicle for investments in the Philippines among the various forms of business organizations . 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. If the proposed activity is subject to foreign equity limitations.Quisumbing Torres
For reasons relating to the exercise of management powers and the extent of liability. whether on behalf of its parent company or its branches. The regional or area headquarters may not earn or derive income in the Philippines.000. or affiliates in the Asia Pacific region. Generally.
Domestic Corporation v. Its expenses must be financed by the head office or parent company from external sources in an acceptable foreign currency. The paid-in capital requirement is reduced to US $100. or any other company.a foreign investor may be set up as a domestic corporation or a branch of a foreign corporation in the Philippines. information dissemination and promotion of the company’s products as well as quality control.000 to fund its operations. A representative office must have an initial inward remittance of US $30. including.1
Other Types of Corporate Vehicle
A representative office may be established to deal directly with the clients of its parent company in the Philippines and to undertake activities . affiliates. 5. in managing any subsidiary or branch office it may have in the Philippines. subsidiaries. These two types of corporate vehicle have their relative advantages and disadvantages relating to.000 and thereafter US $50. It may not participate.
5. taxation.000 for domestic market enterprises whose activities involve advanced technology or which employ at least 50 direct employees. A representative office may not derive income in the Philippines and is fully subsidized by its head office. 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. but not limited to. among others. communications.000 annually. in any manner.
5. neither may it solicit or market goods or services. amo ng others.
4. To fund its operations in the Philippines. branches.
. 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.
promote any sale. 5. and serving as a storage or warehouse of goods purchased locally by the head office of the multinational for export abroad. It enjoys tax. and raw materials to its distributors or markets in the Asia Pacific region and other foreign areas. may also establish a regional warehouse in the Philippines. 5. covering. and safekeeping of spare parts. marking. deposit.
The regional warehouse may not engage in trade or directly solicit business. b. labeling and cutting or altering the goods to the customer’s specifications. 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. fees. and all local licenses. serving as a supply depot for the storage. in the Asia Pacific region. c. and raw materials. semi-finished products. and charges. including packing.and duty-free importation of equipment and materialsnecessary for training and conferences. It may not derive income from Philippine sources. value -added tax. components. The activities of the regional warehouse are limited to: a. components. except real property tax on land improvements and equipment. filling up transactions and sales made by its head office or parent company. k. A ROHQ is allowed to derive income in the Philippines by performing any of the following qualifying services: a.3 Regional Operating Headquarters (“ROHQ”)
A multinational company may establish a ROHQ in the Philippines to service its own affiliates.
b. putting up. i. f. and which has established or will simultaneously establish a regional or area headquarters and/or ROHQ in the Philippines. or branches in the Philippines. and other foreign markets. or enter into any contract for the sale or disposition of goods in the Philippines.Doing Business in the Philippines 2009
The regional headquarters is not subject to income tax.000. and mounting and/or packing these into kits or marketable lots thereof.4 Regional Warehouses
A multinational company which is engaged in international trade and supplies spare parts. j. h.
. e. semi-finished products. g. d. subsidiaries. c.
In addition to the basic post-registration requirements.1
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. These post-registration requirements include obtaining from certain government agencies and local government offices tax. and commencement-of-operations permits. The OBU may be a branch.
Upon incorporation/registration with the SEC.
Philippine taxes are imposed by both the national government and the local government units. certain businesses in highly regulated industries may be subject to special licensing or registration requirements with the government agency having jurisdiction over such industry.
. employee welfare-related.Quisumbing Torres
Offshore Banking Unit (“OBU”)
A foreign bank may operate an OBU in the Philippines.
1. the newly incorporated/r egistered entity must comply with certain basic registration and licensing requirements with different government agencies. such as a branch.
Australia Austria Bahrain
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. A resident foreign corporation. and registrations. licenses.
2. is taxed only on its net income from Philippine sources at the same rate as a d omestic corporation. subsidiary. or affiliate of a foreign banking corporation authorized by the Bangko Sentral ng Pilipinas (“BSP”) to conduct business with funds from external sources.
withheld at source. 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.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.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. The salary and certain other income receipts of residents.
. are also subject to withholding tax. 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 2.3 Withholding of Taxes
Taxes due on the income of a non-resident alien and a non-resident foreign corporation are withheld at source. 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 30 percent corporate income tax rate was 35 percent prior to 1 January 2009. 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. 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. 2.
are called specific taxes.Quisumbing Torres
2. Fringe benefits tax is not imposed if the fringe benefit is required by the nature of. whether in their original state or as ingredients or parts of any manufactured goods or products. which are imposed and based on the selling price or other specified value of the goods. are credited or refunded upon submission of proof of actual exportation and receipt of the corresponding foreign exchange payment. Business Taxes Value-Added Tax (“VAT”) VAT is a tax on consumption levied on the sale. Percentage taxes are normally imposed on gross receipts. fermented liquor Non-essential goods Tobacco products. A person becomes subject to the 12 percent VAT when his gross sales or receipts for the past 12 months exceed Ph P1. and to things imported. or when the fringe benefit is for the convenience or advantage of the employer. cigars (such as jewelry. ba rter. 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. are referred to as ad valorem taxes. Excise taxes. wines. or profession of the employer. Excise Taxes In addition to VAT. or necessary to.5 mil lion. excise taxes apply to goods produced in the Philippines for domestic sale or consumption or for any other d isposition. 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.5 a. The following are subject to excise taxes: Automobiles Distilled spirits. Excise taxes. and on the importation of goods into the Philippines. or lease of goods or properties and services in the Philippines. which are based on the weight or volume capacity or any other physical unit of measurement of the goods . c. 2. subject to certain limitations. business. Percentage Taxes Certain persons are subject to percentage taxes at rates ranging from 1 percent to 30 percent. b. A VAT taxpayer is allowed input VAT credits against his output VAT liability.
instruments. telewriterexchange. unless they elect to pay the 12 percent VAT. and other communication equipment services Banks and non-bank financial intermediaries Persons or entities subject to percentage taxes are exempt from VAT. and barangays . The Tariff and Customs Code provides for the imposition of anti-dumping duty. messages. cities. Furthermore.
. d.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.
Local and Real Property Taxes
Local government units. real property tax applied solely to the lands. buildings. Business establishments whose gross annual sales or receipts do not exceed Ph P1. air. Documentary Stamp Taxes Documentary stamp taxes must be affixed to certain documents. wireless. and papers evidencing business transactions. may levy taxes and impose local license fees pursuant to the Local Government Code.5 million are exempt from VAT but are subject to percentage tax of 3 percent.Doing Business in the Philippines 2009
Among those subject to percentage taxes are the following: Keepers of garages and common carriers by land. countervailing duty. marking duty. or water for the transport of passengers Entities engaged in the life insurance business Overseas dispatches. importations are generally subject to customs duties. municipalities. 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.
3. or conversations transmittedfrom the Philippines by telephone. such as provinces. telegraph. and discriminating duty under special circumstances. and other improvements thereon is levied on the assessed value of the real property.
However. non-bank BSP-supervised entities. As a rule. the BSP Regulated Entity selling the for eign exchange mustrequire the purchaser to present the documentary requirements prescribed by the BSP. The BSP.
FOREIGN EXCHANGE REGULATIONS
Purchase and Sale of Foreign Exchange
Non-trade transactions refer to all other foreign exchange transactions that are not import or export trade transactions. documents against payment. These include foreign inward and outward investments and foreign currency denominated loans and guarantees. or its equivalent in other foreign currency. and the development and rationalization of local industry. open account arrangement. Without prior BSP approval.
1. but subject to reporting requirements and other conditions.However. Generally. intercompany open account offset arrangements with the parent company or affiliates abroad. Authorized agent banks may sell foreign exchange to importers up to US $100. may exercise its general emergency powers and temporarily suspend or restrict the purchase and sale of foreign exchange. national security. foreign exchange may be freely bought and sold in the Philippines. if the sale of foreign exchange exceeds US $30. and direct remittance. These requirements may include documents showing that the purchaser has obtained prior BSP approval or registration of the transaction. Applications for purchasing foreign exchange in excess of US $100. subject to the submission by importers to the selling bank of prescribed documents. By way of exception. or its equivalent. open account arrangements. such as letters of credit.
.000. universal and commercial banks may sell foreign exchange to service payments for imports under the arrangements p rescribed by the BSP. The requirements include letters of credit. a wide variety of merchandise may be imported into and exported from the Philippines. without prior BSP approval for partial or full advance payment of imports. documents against acceptance.000 or its equivalent. and independent foreign exchange dealers and moneychangers (collectively .
Foreign Trade Transactions
Foreign trade includes import and export trade transactions. the Bangko Sentral ng Pilipinas regulates the purchase and sale of foreign exchange by authorized agent banks. with the approval of the President of the Philippines. documents against payment/cash against documents. Payments for exports may be made without prior BSP approval under the arrangements prescribed by the BSP. “BSP Regulated Entities”). documents against acceptance. their subsidiary/affiliate foreign exchange corporations.000 . all BSP Regulated Entities may sell foreign exchange to Philippine residents to fund payments of non-trade transactions even without prior BSP approval. consignment and export advances. international commitments. the importation or exportation of certain commodities is regulated or prohibited for reasons of public health and safety. to service advance payment of imports must be filed directly with the BSP for approval.
collective/pooled funds. must be registered with the BSP to be eligible for servicing using foreign exchange that will be purchased from BSP Regulated Entities.000 per investor per year will be sourced from BSP Regulated Entities.2 Outward Investments
Prior BSP approval and registration is required for outward investments if foreign exchange exceeding US $30.
Enterprises Registered Under the Omnibus Investments Code (“OIC”)
The OIC. 3. If a foreign investment is not registered with the BSP. Qualified Investors are currently limited to the following: insurance and pre-need companies. such as mutual funds. 3.3 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. encourages investm ents in preferred areas of economic activity specified by the BOI in the Investment Priorities Plan (“IPP”).
IV.Doing Business in the Philippines 2009
3.000.4 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. in certain instances. 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. 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. 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. Camp John Hay in Baguio City. Investment opportunities in the Philippines have also been created by the Philippine Government’s conversion plan covering Clark Air Base. If a foreign loan or guarantee is not registered with the BSP. unit investment trust funds and variable insurance. 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. as in the case of a Build -Operate-Transfer arrangement. 3. a BSP Regulated Entity may not sell foreign exchange to fund payments of such foreign loan or guarantee. Subic Naval Base.1
Foreign Inward Investments
Foreign investments must be registered with the BSP or. through tax exemption and other benefits. with a custodian bank.
. and other former US military reservations and their extensions into special economic zones. Qualified Investors may apply to the BSP for a higher annual outward investment limit. and such other entities and funds as the BSP may determine as Qualified Investors.
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. public or private pension or retirement or provident funds.
b. An enterprise registered with the BOI enjoys the following tax and non -tax special incentives: 1. The income tax holiday may not be extended for more than eight years. Expanding firms are entitled to an exemption from income taxes proportionate to their expansion for a period of three years from commercial operations.
c. This incentive may be extended in certain instances and upon approval by the BOI. For registered enterprises with bonded manufacturing warehouses.Quisumbing Torres
A pioneer enterprise either manufactures goods that have not been produced in the Philippines on a commercial scale. Exemption from taxes and duties on machinery. Tax credit for taxes and duties on raw materials. whenever possible. spare parts.1 Tax Incentives a. and other proprietary rights. Income tax holiday consisting of income tax exemption for six years from the start of commercial operations for pioneer firms. process. A foreign investor is guaranteed repatriation of investments. When the BOI waives the nationality requirement. g. d. remittance of profits. The final product or process should involve substantial use of domestic raw materials. or the manufacturing of equipment which utilizes non-conventional sources of energy are similarly classified as pioneer projects. and four years for non-pioneer firms. and semi. 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. the production of non-conventional fuels.
e. protection of patents. exemption from taxes and duties on the importation of supplies and spare parts for imported equipment and consigned equipment. freedom from expropriation and requisition of investm ent.
f. equipment. an additional deduction from taxable income of 50 percent of the wages of additional skilled and unskilled workers in the direct labor force. For the first five years from registration. 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. and accessories imported by new and expanding registered enterprises . or employs a formula. Howev er. However.manufactured products used for the manufacture of export products and forming part thereof. or production scheme which has not yet been tried in the Philippines. a registered enterprise exporting 100 percent of its production need not comply with this divestment requirement. This incentive is granted only if the registered enterprise meets a prescribed capital to labor ratio . supplies.
. 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. Agricultural activities or services (especially food processing) contributing to national self-sufficiency. they are not entitled to additional deductions for incremental labor expenses during the period that they avail themselves of this incentive.
and the export of processed products . 1. b.
2. forestry. Exemption from local taxes for six years from date of registration for pioneer enterprises. and processing of minerals and forest products) located in less developed areas : a. or advisory positions for five years from registration. b. The privilege to operate bonded manufacturing/trading warehouses. spare parts. subject to customs rules and regulations. projects locating in governmental industrial estates. 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
. i. service-type projects and trading projects with no manufacturing facilities. except in the case of: a. 1.2 Non-tax Incentives a. and four years from registration for non-pioneer enterprises. raw materials and supplies. general manager. technical. d. Employment of foreign nationals in supervisory. and treasurer (or their equivalent) of foreign-owned registered firms are not subject to the foregoing limitations . extendible for limited periods.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. resettlement areas.Doing Business in the Philippines 2009
h. Simplified customs procedures for the importation o f equipment. Exemption from wharfage duties and any export tax. the government has established several special economic zones (Ecozones). and b. im post. or National Housing Authority sites. c. The BOI may completely or partially deny incentives to enterprises dealing in traditional export products. The president. duty. Deduction of the cost of necessary and major infrastructure works constructed.
Enterprises Registered With the Philippine Economic Zone Authority (“PEZA”)
To disperse industry and generate employment in non -urban areas.
Applications covering new and expansion projects that will locate in Metro Manila are no longer entitled to income tax holiday.3 Additional Incentives
The following additional incentives are available to projects (excluding mining. Deduction from taxable income of 50 percent of the wa ges corresponding to the increment in the number of direct labor is doubled .
specialized office equipmentand furniture.
. f. An IT Enterprise is also consi dered an export enterprise. e. and supplies of equipment and machineries. unless a lower percentage of its production for export is prescribed by the PEZA. 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. construction materials. and advisory positions.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. technical. or fee Additional deduction for training expenses Tax credit on domestic capital equipment. and genetic materials Additional deduction for labor expense Unrestricted use of consigned equipment Employment of foreign nationals in executive. or processing activity and exporting 100 percent of its production. This is in lieu of all national and local taxes. supervisory. Zero-rated VAT on sales Exemption from duties and taxes on importation of merchandise. 2. Expanding firms may be entitled to an income tax holiday of three years from the start of commercial operation of the expansion. an Ecozone Enterprise is subject to a preferential rate of 5 percent of gross incom e. d. which may have a duration of four years for new registered non -pioneer firms or six years for new registered pioneer firms. Upon the expiry of the income tax holiday. an Ecozone Enterprise is entitled to the income tax holiday. breeding stocks. impost. export tax. i. raw materials. An Ecozone IT Enterprise is a company operating or offering IT services. assembling. and household effects Tax credit for import substitution Exemption from wharfage dues.1 Tax and Other Incentives
As a general rule. which are defined as activities involving the use of any information technology software or system for value addition. b. including importation of capital equipment. specialized vehicles and other transportation equipment. h. Ecozone Export and Free Trade Enterprises are further entitled to the following incentives: a. g.professional instruments.
registration as a SBF Resident is available to: a. right to lease out real property it owns or has leased within the SBF. Registration as a SBF Enterprise is open to any business enterprise in any area of economic activity. and investment center in the Philippines. and the immediate members of his family. The incentives offered to a SBF Enterprise include: a. subject to certain laws and regulations. subject to evidence of unavailability of comparably skilled Filipinos within the Philippines. subject only to limitations under the Philippine Constitution. in lieu of which a fina l taxof 5 percent of gross income must be paid. any Filipino actually residing within the SBF who is an employee or ownerof a SBF Enterprise. has acqui red. subject to certain guidelines. and right to make improvements in buildings and other facilities.
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. or anyFilipino who has leased or has secured living premises in the SBF. subject to ce rtain guidelines. the former US Naval Base at Subic Bay and its extensions located in the municipalities of Hermosa and Morong in Bataan Province. right to manage facilities on real property it owns. including: a. financial.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. trade. commercial. manufacturing. right to freely engage in any business. or service activity.
b. 3. SBF Residents
3. or grant contracts or concessions to other private or public parties for the construction or provision of any of the said facilities.
. c. and develop infrastructure necessary to enhance the SBF ’s efficient operation. and to acquire and lease land and sell or lease out facilities to SBF Enterprises. and exemption from all national and local taxes. financial. with the SBMA.2
Generally. and to import and export freely all types of goods into and out of the SBF. right to employ foreign nationals. b. and a natural person as a SBF Resident.Doing Business in the Philippines 2009
3. A business enterprise may register as a SBF Enterprise. The territory of the SBF includes the City of Olongapo and the Municipality of Subic. or hasleased within the SBF.
A SBF Enterprise which operates facilities or services within the SBF (SBF Facilities Operator) is entitled to additional incentives.
and a foreign national without prior permanent residency status in the Philippines. with the Clark Development Corporation as its implementing arm.
Enterprises Located in the Clark Special Economic Zone
The Clark Special Economic Zone covers certain areas in Angeles City. with the Clark Development Corporation as its implementing arm. The agency in charge of the development.Quisumbing Torres
b. The Clark Freeport Zone is operated and managed as a separate customs territory. The government agency that registers enterprises and grants and administers incentives to those enterprises is the Bases Conversion and Development Authority . in lieu of national and local taxes. and right to purchase. management and mainten ance of the infrastructure. or otherwise acquire articles from other SBF Residents or Enterprises. PEZA Ecozones may be created within the Clark Special Economic Zone. right to import directly. 9400 (“RA 9400”) converted a portion of the CSEZ into a freeport zone called the Clark Freeport Zone. Province of Tarlac. In 2007. and the Municipalities of Capas and Bamban. Under the Rules and Regulations to Implement Republic Act 9400 (“RA 9400 Rules”). c. subject to certain regulations.and duty-free importation of raw materials and capital equipment. foreign articles in non-commercial quantities. Province of Pampanga. 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. b. Republic Act No.
a foreign national who is a permanent resident of the Philippines and who is employed or has invested in the SBF. and (ii) tax . or otherwise consume such goods within the SBF free of national internal revenue taxes and customs duties. utilize. facilities and utilities in those PEZA Ecozones is the Bases Conversion and Development Authority.
The incentives offered to SBF Residents include: a. 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.
. subject to certain immigration regulations. with the following incentives available to registered business enterprises located therein: (i) tax rate of 5% on gross income earned. free of customs duties and control. the Municipalities of Mabalacat and Porac. lease.
renewable for another 25 years. renewable once for a period of 25 years. Measures to eliminate or minimize these impacts are incorporated into project design and operations.
The Philippines adheres to a policy of protecting and advancing the right of its people to a balanced and healthful ecology. Therefore. executive decrees. The long-term lease will be subject to the following conditions. The ECC contains specific measures and conditions that the project proponent has t o undertake. 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. The lease must be registered with the Philippine Board of Investments under the I nvestors’ Lease Act. (b) the leased premises shall comprise such area as may reasonably be required for the purpose of the investment. the environmental law applicable to a particular business concern depends largely on the activities of that business concern. 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. and administrative regulations. 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. subject however to the Comprehensive Agrarian Reform Law and the Local Government Code. each addressing a specific area of concern relating to the environment. Presidential Decree No.
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. With respect to land that the foreign investor will not use exclusively for the purpose of the investment. or land for tourism projects with investme nts of less than US $5 million. The DENR is assisted in the formulation and implementation of environmental policies by the Environmental Management Bureau (“EMB”). and other governmental agencies and departments. 1586 (“PD 1586”) established the Philippine Environment al Impact Statement (“EIS”) System. among others: (a) the leased area shall be used solely for the purpose of the investment upon the mutual agreement of the parties. the lease contract may be for a maximum period of 25 years. the proposed project or undertaking will not cause significant negative environmental impact. local government units. The Department of Environment and Natural Resources (“DENR”) is the lead agency in environmental protection and administration.Doing Business in the Philippines 2009
V. and (c) the lease agreement must incorporate certain mandatory conditions.
VI. Philippine environmental law consists of a series of legislative enactments. The ECC is a document certifying that based on the representations of the proponent. Foreigners investing at least US $5 million in tourism projects may lease private lands for the project for the same period.
the Berne Convention for the Protection of Literary and Artistic Works. and service marks owned by persons. RA 8749 or the Philippine Clean Air Act of 1999 provides the framework to prevent. and trade names. and the World Trade Organization and. developed. manufacture. An ECP is a project or program that has high potential for significant negative environmental impact. or implemented in it.
INTELLECTUAL PROPERTY PROTECTION
The Philippines is a member of the Paris Convention for the Protection of Industrial Property. otherwise known as the National Pollution Control Decree of 1976.
. together with the EIA Review Committee. However. 9003. and disposal of solid waste in the country. The Intellectual Property Office (“IPO”) processes applications for patents. The EMB of the DENR. partnerships. use. processing. 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. 984. Trademarks. transfer. and reverse air pollution from city to countryside. processing.
Specific Areas of Regulation
Presidential Decree No. or the Ecological Solid Waste Management Act of 2000. service marks. An applicant should file a declaration of use within three years from the date of application. it primarily applies to the abatement and control of pollution from land based sources. treatment. Rights to a mark are acquired by registration. corporations. is the government agency that implements the EIS System. Trademark registration is valid for 10 years.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. 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. The Clean Water Act applies to water quality management in all water bodies. calls for the institutionalization of a national program that will manage the control. trademarks. The registration is renewable at the end of each 10th year from registration so long as the mark is still in commercial use. Republic Act (RA) No. has adhered to the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”). 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. and issues the corresponding certific ates of registration. by such membership. There is a single procedure for both foreign and local applicants for the registration of marks. transport.
VII. control. is the general legislation on pollution prevention and control that is being enforced by the government. distribution. manage. and disposal of toxic substances and hazardous and nuclear wastes. transport. or associations domiciled in the Philippines or in any foreign country may be registered with the IPO. trade names. Priority is given to whoever first applies for registration.
IX. 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. Copyrights endure for the lifetime of the creator and for 50 years after his death. However. A BOC recordal is valid for two years from the date of recordal. and other similarly protected IP rights with the BOC. except computer software developed for the mass market. Literary. Copyright protection extends to computer programs. thus simplifying the determination of who is entitled to own the patent. the application of a process. trademarks. scholarly. utility models. scientific. copyrights. there are except ional cases where exemptions from the prohibitory and/or mandatory clauses may be allowed. Intellectual Property (“IP”) owners may record their produc ts covered by patents. assign. multimedia works. and artistic works. or arrangement of their contents. 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. the IPO has a quasi-judicial jurisdiction to settle disputes regarding technology transfer payments. and industrial designs may be patented. TTAs should not contain certain prohibited clauses and should contain certain mandatory provisions. or license all of forms of intellectual property rights. coordination. including the fixing of the appropriate a mount or rate of royalty. A patent is granted to the inventor who filed his patent application earlier than others. may be copyrighted. and data bases that are original by reason of the selection. The recordal will be the basis of the BOC to monitor suspected imports to determine whether they are liable to seizure and forfeiture. The parties are free to negotiate the amount or the rate of royalties to be paid under the TTA. A TTA also refers to an agreement to transfer. 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.
VIII. However.Doing Business in the Philippines 2009
Inventions. including the licensing of computer software. 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”).
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. A patent registration for an invention is valid for 20 years from the date of filing the application. or the rendering of a service including management contracts. Nonconformity with the prohibited and mandatory clauses will automatically render the TTA unenforceable. whether published or unpublished. There are no restrictions regarding the amount or rate of royalty that may be charged.
1. the DITTB ruling may be used as evidence of the enforceability of the Agreement. holiday. Under the IP Code. conditions.
X. 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. The Labor Code enumerates the specific instances when an employee may be required to render overtime work and the corresponding overtime pay rate. However. Overtime Pay. Philippine courts generally lend great weight to findings of administrative agencies like the Documentation Information and Technology Transfer Bureau (“DITTB”). Registration will allow the Licensee to source currency for royalty payments from the Philippine banking system.Quisumbing Torres
A TTA that conforms to the prohibited and mandatory clauses need not be registered with the IPO. These overtime pay rates may vary depending on whether the overtime work is rendered on a regular work day.
The Labor Code of the Philippines (the “Labor Code”) lays down the minimum terms. The normal hours of work should not exceed eight hours in a work day. Employees are entitled to at least 60 mi nutes time off from work for their regular meals. 1. 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. and If the agreement involves the licensing of a trademark. without legitimate reason. 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. If the Licensor intends to avail of tax treaty relief with respect to royalty income derived under the agreements.
. 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. These are: The registration will serve as evidence that the agreements are compliant with the IP Code and are enforceable in this respect. Thus. there are practical benefits to registe ring a compliant TTA. and benefits of employment that employers must provide or comply with and to which the employees are entitled as a matter of right. a trademark license agreement that is not recorded will have no effect against third parties. or rest day. particularly for license agreements. The IP Code specifically provides that a trademark registration may be cancelled any time if the registered owner of the mark. Thus. Any work done in excess of eight hours in a work day must be paid an overtime rate based on the applicable basic rate.1 Work Hours Normal Hours of Work. the registration will facilitate the recordal of the agreement against the Philippine trademark applications or registrations for the licensed marks. In the event of litigation over the Agreement. 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.
Philippine labor law recognizes the rights of both workers and management.
the Labor Code requires the employer to pay a certain amount as additional compensation based on the regular wage of the employee. despite the absence of a legal or contractual requirement to grant the said benefit. An employee must be paid a night shift differential equivalent to a certain rate of his regular wage for work done between 10 p. All employees are generally entitled to a rest period of not less than 24 consecutive hours for every six consecutive normal working days. The act was done deliberately. The following criteria may be used to ascertain the existence of a binding and enforceable employer practice or policy under Philippine law: a.
1. and cons istently. b. among others. c. 2
Under the minimum wage law in the Philippines. and 6 a. The rules on work hours are not applicable to managerial employees. The minimum wage rate in each region of the countr y varies and is prescribed by the Regional Tripartite Wages and Productivity Boards. Wages are generally paid in cash at least twice a month (usually on the 15th and the last day of every month). Premium Pay for Rest Day or Holiday Work.3 1.Doing Business in the Philippines 2009
Night Shift Differential.m. and The act was not a product of erroneous interpretation or construction of a doubtful or difficult question of law.m.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. For work done on rest days and special holidays. knowingly. 1.
. minimum wages vary according to the location of the business. the benefit becomes part of the terms and conditions of employment and cannot be unilaterally withdrawn or discontinued by the employer. The act of the employer was done for a long period of time or was consistently repeated.
Employees. employees may also form and join workers’ associations and other mutual aid and benefit associations for legitimate purposes. disability. Employees. employees have the right to form and join unions and to engage in concerted activities for their collective protection.
As a general rule.
. project. PhilHealth administers the NHIA). This provides housing loans to employees in the private sector.
3. PhilHealth. and Pag -IBIG Fund. however.
a. This provides for the benefits for non-work related illness. b. the SSS also administers the ECSIF). and Pag-IBIG Fund. the Philippine Health Insurance Corporation (“PhilHealth”. probationary. This provides employees in the private sector a more comprehensive benefits program which includes sickness.Quisumbing Torres
2. may negotiate and enter into collective bargaining agreements (“CBA”) with their employers. Certain classes of employees. Social Security Law. c. The contributions are based on the salary of the employee. Corollarily. The employer and the employee both contribute to the common fund from which the benefits are sourced. It may register as an independent labor union or as a charter of a federation or national union. 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. retirement and funeral benefits. seasonal. such as managerial and confidential employees. 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. Contributions for the ECSIF are shouldered by the employer alone.
Classification of Employment
The Labor Code and jurisprudence classify employment status into regular. together with the employer’s contribution. The employer is required to deduct the employee’s contribution and remit the same to the SSS. 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.
d. Employee’s Compensation and State Insurance Fund (“ECSIF”).
4. have the right to strike in accordance with law. Aside from labor unions. National Health Insurance Act (“NHIA”). may not form or become members of labor unions. This provides for the benefits in case of work -related illness or injury. the employer is required to register itself and its employees with the Social Security System (“SSS”. and fixed-term. the employer. other than collective bargaining. under specified circumstances.
Under the foregoing welfare legislations. casual. through their union representatives. The employees negotiate the terms and conditions of their employment in CBAs. under specified circumstances. and the Pag-IBIG Fund. also has the right to lock-out employees.
it is best to put the employment contract b etween the employer and the employee in writing. the amount of which is subject to the discretion of the court. Otherwise. particularly the gravity of the employer’s failure to follow due process requ irements. 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.
Even if there may have been a just or authorized cause for termination. For instance. In the Philippines. the court will take into consideration the relevant circumstances of each case.
. 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. an employee who is dismissed without procedural due process is entitled to nominal damages. reinstatement without loss of seniority rights and other privileges. and discipline employees is the employees’ right to security of tenure. he shall be deemed a regular employee from the start of his employment. It is also advisable for the employer to have an employment handbook which contains the rules and regulations that will govern the employment relation. a dismissed employee has the right to question the validity of his dismissal. payment of full back wages. a probationary employee must be provided with written standards for regular employment at the time he is first engaged.
5. Once questioned before the proper labor authorities. computed from the time his compensation was withheld from him up to the time of his actual reinstatement.Doing Business in the Philippines 2009
An employment is presumed to be regular or permanent in nature. including allowances and other benefits or their monetary equivalent. the causes for terminating an employer-employee relationship would depend upon the classification of the employee. For this purpose.
Contract of Employment
Although not required. terminate.
Termination of Employment
Corollary to the employer’s right to hire. unless the legal requirements for the other types of employment are strictly observed. 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. An employee who is unjustly dismissed from work without a legally defined cause is entitled to the following: a. This will protect the employer in the event of a future disagreement as to the terms and conditions of employment. The classification of an employee is important because under Philippine law. b.
less than six months) for positions that are temporary in nature (i. primarily. if accompanying or joining him/her after his/her admission into the country as a non-immigrant. This visa is generally valid for an initial period of one year and is renewable from year to year. technical or advisory positions in Export Processing Zone Enterprises.
Work / Employment Requirements
A foreigner who comes to the Philippines to work must obtain a work visa from the relevant government agency.. the Bureau o f Immigration (“BI”). and Special Government Projects (e.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. Skyway).e. In cases of short-term employment (i. may be issued multiple entry special visas valid for one year. An application will be filed for the conversion of the tourist or 9(a) visa into the appropriate work visa.
1. and foreign personnel of regional or area headquarters of multinational companies which are officially recognized by the Philippine Government. and unmarried minor children un der 21 years of age. Upon entry. a foreigner will only be requi red to apply for a special work permit with the BI. 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..g.e. 1. The foreigner may commence work in the local petitioning company upon the filing of his/her application for an AEP with the DOLE. Board of Investments registered enterprises. The visa and AEP applications must be filed by a local petitioning company on behalf of the foreigner. provided that he has an outbound ticket with him. he will be provided either a 21 -day or 7-day visa. consultancy). The President. Except for certain restricted nationals. a foreigner may enter the country without a pre-approved tourist or 9(a) visa. subject to such conditions as he may prescribe. which may be extended from year to year upon legal and meritorious grounds. has exercised this authority by allowing the entry of foreign personnel employed in supervisory.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. 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. MRT. acting through the appropriate government agencies. depending on his nationality.
The expatriate.Quisumbing Torres
XI. his spouse. Generally.
Doing Business in the Philippines 2009
1. The holder may also invest in or establish a business in the Philippines. willing and able to invest at least US $75. The local petitioning company must be majority -owned by US. Germany or Japan. 1. The holder of an SRRV may stay in the Philippines ind efinitely or visit the country at any time. technical.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. The visa is generally valid for a one -year period subject to extension upon application.
Special Resident Visas
In addition to work visas.1 Special Resident Retiree’s Visa (“SRRV”)
The SRRV program is available to foreigners and former Filipinos at least 35 years of age. usually based on the duration of the election or appointment of the foreigner. whether for wage or salary or for other forms of compensation. which no Filipino citizen within the Subic Bay Freeport possesses. These visas allow a foreigner to work in the Philippines. The nationality of the foreigner and the majority of the shareholders of the employer company must be the same. When granted. who deposit the minimum amount required by law with a bank accredited by the Philippine Leisure and Retirement Authority.000 in the Philippines. managerial. subject to other requirements or limitations imposed by law. countries with which the Philippines has concluded a reciprocal agreement for the admission of treaty traders or investors.3
Pre-Arranged Employment or 9(g) Visa
This visa is available to a foreigner who will be occupying an executive. the visa may be extended to the foreigner’s spouse and unmarried children below 21 years of age. The foreigner must be employed in a supervisory or executive capacity. German or Japanese interests. a foreigner may also apply for spec ial resident visas. 1. at least 21 years of age. which in turn. However. 2. may apply for this visa with the Subic Bay Metropolitan Authority. is granted for a period discretionary to the DOLE.2 Special Investor’s Resident Visa (“SIRV”)
Any foreigner. as certified by the DOLE. or highly confidential position in a local company and who is proceeding to the Philippines to engage in any lawful occupation.5 Subic Bay Freeport Work Visa
A foreign national who possesses executive or highly technic al skills.
. where a bona fide employer -employee relationship exists. the officers of the BI have the discretion to shorten the validity period of the approved 9(g) visa to one year.
2. The following are the different types of special resident visas: 2. may apply for this visa. The pre-arranged employment visa is granted for a period co -terminus with the AEP.
or have the authority to hire. or industry. directly.
The SVEG may be revoked by the Bureau of Immigration: If the SVEG holder fails to maintain compliance with any of the above conditions.3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments
A foreigner who invests the amount of at least US $50.000 per year. no longer employed or not self-employed. accompanying the applicant. and dismiss employees.Quisumbing Torres
The applicant’s spouse and unmarried children who are less than 21 years of age. He/she evinces a genuine intention to indefinitely remain in the Philippines. 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.
. Unlike the SRRV. The SVEG program will be operational as soon as the implementing rules and regulations are issued.
Special Visa for Employment Generation (“SVEG”)
On 20 October 2008. otherwise known as the SVEG. If the SVEG was obtained through fraud or willful misrepresentation of material facts.4 Subic Bay Freeport Residency Visas for Retirees
This visa requires the applicant to be over 60 years old. there is no limit to the number of unmarried children that can be included in the application. shall be entitled to an SIRV. Upon conviction of the foreign national for a crime or offense in the Philippines. 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. or exclusively engage in a viable and sustainable commercial investment/enterprise in the Philippines.000 in a qualified tourist . trade. The privileges of the SVEG may extend to the foreign national’s spouse and dependent unmarried children below 18 years of age. and receiving a pension or passive income which is payable in the Subic Bay Freeport in an amount exceeding US $50. as determined by a governmental committee. Qualified foreigners who are granted the SVEG shall be considered special non-immigrants with multiple entry privileges and co nditional extended stay. of good moral character. exercise/perform management acts. 2.related project or tourism establishment. promote. President Gloria Macapagal-Arroyo enacted executive Order No. He/she is not a risk to national security. 758 which prescribes guidelines for the issuance of a special visa to non -immigrants for employment generation. may be included in the visa application. 2.
3. Foreign nationals who wish to avail of the SVEG must comply with the following conditions: He/she must actually. or Upon a final determination by competent authority that the foreign national poses a risk to national security. with no previous conviction of a crime involving moral turpitude.
The term “financing companies” excludes banks. commercial. subject to the prior approval of the Monetary Board of the BSP. At present. A financing company must have a paid-up capital ranging from at least Ph P2. by owning up to 60 percent of the voting stock of an existing domestic bank. benefits.Doing Business in the Philippines 2009
XII. purchasers. 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. and privileges that are granted to other non-bank financial institutions providing similar credit. importation. In addition. powers. by investing in up to 60 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines. or other transaction are entitled to the same incentives. or otherevidence of indebtedness. cooperatives. a foreign bank may also operate in the Philippines. If the moratorium is lifted. Financing companies providing financial leases in connection with any purchase.
. investment houses.
A foreign bank may operate in the Philippines. A financing company must be organized as a stock corporation.5 million to Ph P 10 million depending on where the fi nancing company will set up its office in the Philippines. discounting or factoring commercial papers or accounts receivables. benefits. or privileges that are available to lenders. or financial leasing of movable as well as immovable property. or agricultural enterprises by: direct lending. insurance companies.
2. exemptions. financing companies that provide medium and long-term credit to small and medium enterprises are entitled to the same rights. or other eligible person in such transactions. subject to the prior approval of the Monetary Board of the BSP. 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. buying and selling contracts. a foreign bank cannot invest in the voting stock of a ne w banking subsidiary. acquisition.
Financing companies are corporations that are pri marily organized for the purpose of extending credit facilities to consumers and to industrial. savings and loan associations. chattel mortgages. the only mode for foreign banks to enter the Philippine banking industry is to invest in existing domestic banks. at least 40 percent of the voting stock of which is owned by citizens of the Philippines. and other financial institutions organized or operating under other special laws. leases.
1. Thus. Until such moratorium is lifted. importers.
if the original obligee of the Assets is a bank.
. This period expired on 18 September 2004. 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 SPV Act prescribed a period within which the application to organize and register an SPV must be filed with the SEC.
Subject to certain conditions.
Securitization Act of 2004
The Securitization Act took effect on 10 April 2004. There appears to be a growing clamor from the banking sectors to allow additional time within which interested parties may register an SPV. which seeks to allow registration of SPVs for another five years. INSURANCE-RELATED REGULATIONS
Entry of Foreign Insurance Companies
Subject to the approval of the Insurance Commission. by a seller to a special purpose entity. from an SPV to a third party. The Act establishes the legal and regulatory framework for asset securitization and grants tax exemptions and other incentives in favor of securitization transactions. 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. thus paving the way for the filing of Senate Bill 1830. subject to certain conditions.
4. The bill is currently pending in the Philippine Senate. In order to promote the development of the Philippine capital market. or if the SPE is constituted in the form of a special purpose trust. on a “without recourse” basis. or similar financial assets with an expected cash payment stream (“Assets”) are sold. ownership of the voting stock of an existing domestic insurance company. or any other entity subject to the supervision of the BSP. or is controlled by such bank or entity. Prior endorsement of the BSP must be obtained in the following cases: a. loans.
XIII. 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. a foreign insurance company may be allowed to do business in the Philippines under any one of the following modes of entry: a. The issuance of the ABS must be in accordance with the securitization plan approved by the SEC. In securitization.Quisumbing Torres
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”). The SPE then issues to investors asset-backed securities (“ABS”) that depend for their payment on the cash flow from the Assets. receivables. the Securitization Act grants various tax and fiscal incentives. particularly for residential mortgage-backed securities and other housing-related financial instruments. b.
the foreign insurance company must be among: a. the parties need notbe bound by the strict rules of evidence.3 Choice of arbitrators
The parties are free to choose the arbitrators. b. 1
Advantages of arbitration compared with court litigation
Despite the efforts of the Supreme Court to streamline the judiciary. may be more attractive than court litigation for several reasons. Arbitration. arbitrators do not have to contend with heavy caseloads.the parties have more faith in the integrity of the process. The pa rties can choose arbitrators whose schedules can accommodate the long hours necessary to hear and decide a case. or the top 10 in their country of origin.Doing Business in the Philippines 2009
b. Arbitration allows the parties to choose or craft the rules that will govern the arbitration proceedings.
1. which is steadily growing in popularity as an alternative mode of dispute settlement.”
.2 Flexibility of the rules
Foreign investors who are not familiar with local court procedures may prefer a more neutral process. Since the procedure is mutually agreed upon. the applicant must be: a. disputes submitted to arbitration are more speedily resolved. an applicant foreign insurance corporation must comply with certain capitalization requirements pertaining to minimum paid -up capital and contributed surplus fund. Also.
c. or majority-owned by the government of the country of origin. widely owned and/or publicly listed in its country of origin. 1. c. 1. and has been doing business for the last 10 years as of the date of the application. b.
To be allowed entry.
To qualify as a branch or a new company incorporated in the Philippines. Consequent ly.
investment in a new insurance company incorporated in the Philippines (i. or establishment of a branch. 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. the top 200 foreign insurance corporations globally. Unlike judges.
Depending on the extent of foreign equity.
XIV.e. The parties are expected to appoint arbitrators whom they regard as honest and competent. ARBITRATION IN THE PHILIPPINES
Parties have the option of resorting to arbitration to resolve their disputes in the Philippines. it usually takes several years for the trial courts to hear and resolve the cases filed with them.
1. the dockets of Philippine courts remain clogged.. In contrast. a subsidiary). Since the parties are given a free handin choosing their arbitrator(s). the outcome becomes more “acceptable.
(e) the jurisdiction of courts.
Disputes that are not arbitrable
The following disputes cannot be submitted to arbitration: (a) labor disputes covered by Presidential Decree No. otherwise known as the Labor Code of the Philippines.Quisumbing Torres
On the part of the arbitrators.
Arbitration as contract
Arbitration is a creature of contract. (g) criminal liability. the higher will be the demand for their services.”
Arbitration is considered international if:
. arbitration proceedings are confidential. The parties may agree to submit a dispute to arbitration either before or after a dispute arises. An aggrieved party cannot compel the other party to arbitrate. (d) any ground for legal separation (of married persons). they have an added incentive to build and nurture a reputation for competence and integrity.
Disputes that may be referred to arbitration
All types of commercial disputes may be referred to arbitration. at the time of the conclusion of such agreement. The greater their reputation for competence and integrity. as amended. resolve a dispute by rendering an award.4 Finality of the award
Philippine law recognizes as valid a stipulation that an arbitral award shall be “final.” However. their places of business in different States (countries). or rules promulgated pursuant to law. The word “commercial” is broadly defined as “matters arising from all relationships of a commercial nature.
Definition of arbitration
“Arbitration” is formally defined as “a voluntary dispute resolution process in which one or more arbitrators.
4. whether contractual or not. “Final” means that an arbitral award cannot be modified or reversed except on limited grounds.
Definition of international arbitration and domestic arbitration
(a) the parties to an arbitration agreement have. 1. 1. the remedy of the aggrieved party is to file a case in court. 442. and (h) thosedisputes which by law cannot be compromised. If there is no agreement to submit a dispute to arbitration. There can be no arbitration unless the parties agree to submit their dispute to arbitration.
2. and its Implementing Rules and Regulations.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. (b) the civil status of persons. 1.6 Confidentiality
Whereas court proceedings are open to the public.”
3. appointed in accordance with the agreement of the parties. (f) future legitime.
6. (c) the validity of a marriage.
Neither should he have a financial. if the dispute is between parties who have their place of business in the Philippines. Domestic arbitration is governed by Republic Act No. although the civil action may continue as to those who are not bound by such arbitration agreement.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 law prohibits an arbitrator from “championing” or “advocating” the cause of either party. Despite the distinction between international and domestic arbitration. 876 on Domestic Arbitration
Form of arbitration agreement
The arbitration agreement must be in writing and subscribed by the party sought to be charged. c. or by his lawful agent. a Philippine law that was enacted in 1953. there are few vital distinctions between the two regimes. and their obligations are to be performed in the Philippines. (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. or pursuant to. 876. otherwise known as the Arbitration Law.
7. On the other hand. T h i r d pa r t i e s
Where a civil action is commenced in court by or against multiple parties. fiduciary.A. No.
Republic Act No . or other interest in the controversy. one or more of whom are parties to an arbitration agreement. which might prejudice the right of any party to a fair and impartial award. International arbitration is governed by the United Nations Commission on International Trade Law (UNCITRAL) Model Law. or (c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.
. Furthermore. the arbitration will be considered domestic. and must know how to read and write. 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. An agreement that incorporates by reference a document that contains an arbitration clause gives rise to a valid arbitration agreement. the court shall refer to arbitration those parties who are bound by the arbitration agreement. the arbitration agreement. domestic arbitration is simply defined as arbitration that is not international.
a. b. Thus. or any personal bias. 876. in full enjoyment of his civil rights. and there is no stipulation in their arbitration agreement that the su bject matter of the arbitration agreement relates to another country. 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. Qualifications of arbitrator
An arbitrator must possess the following qualifications: He must be of legal age.
8. the winning party has to file with the appropriate Regional Trial Court a petition for confirmation of the arbitral award. In order to convert the domestic arbitral award into an enforceable judgment. 876. 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. or (iv) The arbitrators exceeded their powers. 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. final. 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.
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. e. f. or other undue means. or in refusing to hear evidence pertinent and material to the controversy. Grounds for vacating/setting aside a domestic arbitral award (i) The award was procured by corruption. fraud. The one area where the two arbitration regimes may part ways is in the interpretation of the applicable laws. the court. and definite award upon the subject matter submitted to them was not made.
a. as a matter of course. The court should. A domestic arbitral award may also be appealed directly to the Court of Appeals on questions of fact and law. that a mutual. No. 876 (for domestic arbitration) and the Model Law (for international arbitration). or were guilty of any other misbehavior by which the rights of any party were materially prejudiced. R. in its discretion. Confirmation of domestic arbitral award
A domestic arbitral award is not self-executory. or one or more of the arbitrators were disqualified to act as such under Section 10 of R. or so imperfectly executed them. 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. grant the petition.A. or (iii) The arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown.Quisumbing Torres
d. A. and willfully refrained from disclosing such disqualifications. unless there are grounds to vacate the award. No.
Interpretation of the UNCITRAL Model Law (“Model Law”)
The provisions on domestic arbitration are more or less similar to the provisions on international arbitration.
The definition of “writing” under the Model Law is broader than the definition of “writing” under R. in interpreting the Model Law. 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 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. b. under the law of this State. 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. failing any indication thereon.” For example. 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. domestic arbitration and int ernational arbitration will most likely diverge with respect to the scope of judicial review. A. having regard for the international origin of the Model Law and to the need for uniformity in its interpretation. Philippine courts. Form
The arbitration agreement shall be in writing. only that part of the award which contains decisions on matters not submitted to arbitration may be set aside. or
.Doing Business in the Philippines 2009
The ADR Act of 2004 provides that. Interim measures
As with domestic arbitration. regard shall be had for its international origin and to the need for uniformity in its interpretation. 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. if the decisions on matters submitted to arbitration can be separated from those not so submitted. entitled “International Commercial Arbitration: Analytical Commentary on Draft Text identified by reference number a/CN. 9/264. 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. No. While domestic arbitration awards may be reviewed on appeal on both questions of fact and law. since other jurisdictions tend to interfere less with international arbitral awards. telex. or the said agreement is not valid under the law to which the parties have subjected it or. provided that. 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. or contain s decisions on matters beyond the scope of the submission to arbitration. or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration.” c. should limit the scope of its review to the grounds to set aside an arbitral award under the Model Law. telegrams or other means of telecommunication which provide a record of the agreement. d.
Recognition and enforcement of international arbitral award
An international arbitral award. irrespective of the country in which it was made. 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.
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”)
The Philippines acceded to the NewYork Convention. or it contains decisions on matters beyond the scope of the submission to arbitration. or
. provided that. 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). Section V of the NewYork Convention provides that the recognition or enforcement of an arbitral award. a landmark international instrument. was not in accordance with the Model Law.
9. irrespective of the country in which it was made. upon application in writing to the competent court. or
(ii) the award is in conflict with the public policy of this State. shall be recognized as binding and. failing such agreement. that part of the award which contains decisions on matters submitted to arbitr ation may be recognized and enforced. failing any indication thereon. in 1967. may be refused only on the following grounds: “(1) Recognition or enforcement of an arbitral award. shall be enforced unless there exists any of the grounds to set aside/vacate 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. may be refused only : (a) at the request of the party against whom it is invoked. e. irrespective of the country in which it was made. 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. The parties to this convention recognize the validity and binding effect of foreign arbitral awards.Quisumbing Torres
(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties. if the decisions on matters submitted to arbitration can be separated from those not so submitted. under the law of the country where the award was made. or the said agreement is not valid under the law to which the parties have subjected it or. or. or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. unless such agreement was in conflict with a provision of the Model Law from which the parties cannot derogate.
Construction Industry Arbitration Commission
Executive Order No. failing such agreement. and the CIAC shall assume jurisdiction over the dispute. or (ii) the recognition or enforcement of the award would be contrary to the public policy of this State.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. then the construction dispute between them shall be resolved by the courts. the Philippine Supreme Court recognized the enforcement of a provisional/interim foreign award. design professional. there are more than 140 signatories to the NewYork Convention. fabricator. if the parties to a construction contract designate Singapore arbitration as the venue of any dispute that may arise between them. which shall “include those between or among parties to.
10. their agreement will fall within the jurisdiction of the CIAC. or under the law of which. that award was made. such that. To date.
. there is no similar convention with respect to the recognition and enforcement of foreign court judgments. as opposed to a final foreign award. 1008 established the Construction Industry Arbitration Commission (“CIAC”). regardless of what forum they may choose. Notably. or who are otherwise bound by. an arbitration ag reement. 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. a testament to the near-universal recognition of the validity and binding nature of foreign arbitral awards. If the parties do not enter into an arbitration agreement.” In a recent case. project manager. the Philippine Supreme Court has held that “as long as the parties agree to submit their dispute to voluntary arbitration. directly or by reference whether such parties are project owner. 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. 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. bondsman or issuer of an insurance policy in a construction project. consultant. The CIAC has original and exclusive jurisdiction over construction disputes. 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. The CIAC is known for its efficiency. 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.” The CIAC is a hybrid of voluntary arbitration and compulsory arbitration. subcontractor. even if they specifically choose another forum. t he parties will not be precluded from electing to submit their dispute before the CIAC because this right has been vested by law. On the other hand. for example. was not in accordance with the law of the country where the arbitration took place. contractor. quantity surveyor.”Thus.
. may file a petition with a Philippine Regional Trial Court (the “Court”) to be declared in a state of suspension of payments. corporate rehabilitation. and the Rules of Procedure on Corporate Rehabilitation. suspension of payments. it may apply for insolvency and have its assets distributed accordingly among its various creditors. a. ii. to wit. If. and insolvency. iii.
The petition for suspension of payments must include a “Schedule of Creditors. the Insolvency Law. The type of proceeding that applies to a debtor depends on the particular relief sought.
2. If what is sought is merely a little financial breathing space. and requires temporary protection against both secured and unsecured creditors. Court Proceedings
b. 902-A”). 902-A (“P. then the remedy is to seek corporate rehabilitation. and the debtor’s proposed agreement for the suspension of payments.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. except executions against properties specially mortgaged. If the required vote is achieved without any objection from the creditors. if the debtor company is no longer capable of or interested in maintaining its business. Presidential Decree No. Each of these remedies is discussed in more detail below. Suspends all pending executions against the debtor’s properties. on the other hand. and Prohibits the debtor from disposing of his property or making payments.
2. management.” a statement of the debtor’s assets and liabilities. which provides for the deferment of payments and temporary protection against actions/executions by unsecured creditors. 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. then the remedy is a suspension of payments. 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.Quisumbing Torres
XV. except in the ordinary course of the business in which the debtor is engaged.
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. the Court will issue an order that the proposed agreement be carried out. If the required vote is not achieved. 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. Bars ordinary creditors from instituting proceedings in any Philippine court against the debtor.D. The applicable laws are the Civil Code of the Philippines (“Civil Code”). Finally. Effects of a Petition for Suspension of Payments
The filing by a debtor of a petition for suspension of payments: i.
If the debtor fails wholly or in part to perform the Court-approved agreement. or disposing in any manner any of its properties except in the ordinary course of business. Objections to the debtor’s proposed agreement
The possible grounds for objecting to the proposed agreement are as follows: i. The petition for rehabilitation must be filed with the Court of the place where the debtor’s principal office is located. it will. a rehabilitation plan. among others. or any creditor or creditors holding at least 25 percent of such debtor’s total liabilities. The Stay Order applies to both secured and unsecured creditors. and directs all creditors and interested parties to file their verified comments on or oppositions to the petition before the said initial hearing. iii.
ii. partnership.the rights which the creditors had against the debtor before the agreement shall re-vest in them. The petition for rehabilitation must be accompanied by. 2. that foresees the impossibility of meeting its debts whe n they respectively fall due. the payment for such debts is delayed. If the objection is found to be meritorious. or association.
. its guarantors and sureties not solidarily liable with the debtor. The Stay Order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceeding. However. which is a corporation. against the debtor. issue a “Stay Order” which. whether for money or otherwise and whether such enforcement is by court action or otherwise.2 Corporate Rehabilitation
A debtor. and (g) sets an initial hearing on the petition. fraudulent conveyance of claims for the purpose of obtaining the required majority. (d) prohibits the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition. the Court will conduct a hearing on the objection. The amount of the debts of the debtor is not affected by a suspension of payments. and in the deliberations thereat. may petition the proper Court to have the debtor placed under rehabilitation. If the objection is found to be unmeritorious. (c) prohibits the debtor from selling. a. the proceeding will terminate. c. not later than five days from the filing of the petition. transferring. Effects of a Petition for Rehabilitation
If the Court finds the petition to be sufficient in form and substance.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. (b) stays the enforcement of all claims. defects in the call for the meeting of the creditors. If the required vote isachieved but there is an objection from any of the creditors. (f) directs the payment in full of all administrative expenses incurred after the issuance of the Stay Order. the Court will proceed as though no objection had been made. (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. in the holding thereof. among others: (a) appoints a Rehabilitation Receiver. fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement. which prejudice the rights of the creditors.
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 Supreme Court of the Philippines ruled that a Stay Order and an approved rehabilitation plan merely suspend the enforcement of the security. within 90 days from the approval of the rehabilitation plan. The Court may extend this period only if it appears by compelling evidence that the debtor may successfully be rehabilitated. the Court may revoke the approval thereof on the ground that the same was secured through fraud. In a recent decision involving a creditor’s security agreement with a debtor under rehabilitation. The Court may impose such terms. 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. Insolven cy proceedings may be voluntary or involuntary. after the initial hearing on the petition for rehabilit ation. the Court is satisfied that there is merit in the petition. sale. payment. the Court may decla re void any transfer of property or any other conveyance.
Insolvency Proceedings (Individuals or Corporations)
In insolvency proceedings. or agreement made in violation of the Court’s Stay Order or in violation of the Rules on Corporate Rehabilitation. 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. c. However.
3. the period for approving or disapproving a rehabilitation plan may not exceed 18 months from the date of filing of thepetition. it will give due course to the petition and refer the same to the Rehabilitation Receiver. in its judgment. Clawback provisions
Upon motion by a party or on its own. or restrictions as the effective implementation and monitoring of the rehabilitation plan may reasonably require. The Court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if. d. the basic premise is that the debtor does not have enough assets/properties to cover his obligations. On motion by a party or on its own. or for the protection and preservation of the interests of the creditors should the plan fail. 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.Quisumbing Torres
direct the filing of an additional bond when deemed necessary. or withdrawn by the petitioners. and effects not exempt from execution for the benefit of the creditors. The petition must also allege one or more acts of insolvency. 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. The Court may. estate. the court will issue an order declaring the debtor insolvent.1
A debtor owing debts exceeding Ph P1. or if the debtor is not declared insolvent. the petition may be filed by any officer of the corporation. The petition must be accompanied by a bond.
. upon motion. If the debtor is a corporation. duly authorized by the board of directors. Effect of Order of Insolvency
An Order of Insolvency generally suspends all civil proceedings pending against the debtor. and did not become creditors by assignment within 30 days prior to the filing of the petition. If the Court finds the petition meritorious. the debtor’s inability to pay all his/its debts in full.3 Provisions applicable to both voluntary or involuntary insolvency proceedings a. Upon the filing of the petition. in such sum as the Court will direct. his/its willingness to surrender all his/its property. and an inventory of all his/its assets.Doing Business in the Philippines 2009
3. and must be verified by at least three of the petitioners.000 (approx. The debtor must also include in the petition a schedule of debts and of creditors. The filing of the petition is deemed an act of insolvency.2 Involuntary Insolvency
Three or more creditors whose total credits exceed Ph P1. US $25) may seek a declaration of insolvency. among others. The creditors must be Philippine residents whose credits accrued in the Philippines. The Court will require the debtor to show cause why he/it should not be declared insolvent. and an application to be adjudged inso lvent. partnership or association) for six months preceding the filing of the petition. 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. 3.000 (approx. a. US $25) may seek a declaration of insolvency against a debtor. 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. 3. a. the Court will issue an order declaring the debtor insolvent. The petition m ust allege.
but will have to relinquish his security and surrender the properties subject of the security to the assignee-in-insolvency. in proportion to the amount of the respective credits. he may recover his credit by participating in the pro-rata distribution of the debtor’s estate.. 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. If the secured creditor opts for foreclosure. respectively.e..
. But the creditor may be admitted in the insolvency proceeding to recover the balance of the debt. Rights of secured creditors
A creditor whose credit is secured by a mortgage or pledge is allowed. No discharge is granted to a corporation that is declared insolvent. Preference of Credits
In an insolvency proceeding. such creditor canno t participate in the election of the assignee-in-insolvency. at its option. the instrument is notarized) or (ii) a final judgment.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. Among the Special Preferred Credits. after deducting the value of the property foreclosed. credits secured by a pledge or mortgage) do not enjoy priority among themselves. All the remaining classes of Special Preferred Credits with respect to specific movable or immovable property (e. Article 2244 provides for the preference of certain claims and credits which. By way of exception. appear in (i) a public instrument ( i. b. either (i) to foreclose the property subject of such security arrangement (notwithstanding the stay effected by the Order of Insolvency). but must be paid concurrently and pro rata. 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.e. by releasing or surrendering to the assignee -in-insolvency the properties subject of the pledge or mortgage..g. certain types of credits enjoy preference with respect to specific movable or immovable properties (“Special Prefer red Credits”). or (ii) to pursue his/its claim in the insolvency proceeding together with other creditors. If the creditor pursues his claim in the insolvency proceeding. c. taxes and assessments due upon the property to which the claims relate enjoy absolute preference. These credits have preference among themselves in the order of priority of the dates of the instruments and of the judgments. The creditor recovers the balance by participating in the pro-rata distribution of the debtor’s estate. without special privilege. i.
sequestration. sequestered. that fact is deemed as prima facie evidence of fraud. procures any of his property to be attached. within 30 days before the filing of a petition to be declared insolvent by or against him. mortgage. is considered void. except for a valuable pecuniary consideration made in good faith. or (iii) defeating the object of. or transfer of property made by the insolvent within one month before the filing of a petition in insolvency by or against him. Under the Insolvency Law. mortgage. assignment. assignment. sale. sale. if the debtor. or in any way hindering. transfer. assignment. sale. conveyance. or the value thereof. Furthermore. being insolvent. any pledge. or conveyance is considered void.
The assignee-in-insolvency may recover property given as security. pledge. mortgage. impeding.
. or if such seizure is made under a judgment which the debtor has confessed or offered to allow. or seized on execution. transfer.Doing Business in the Philippines 2009
d. mortgage. or (ii) preventing the property from being distributed ratably among his creditors. sale. seizure . or in contemplation of insolvency. if the pledge. the attachment. or transfer of the property is not made in the usual and ordinary course of business of the debtor. assignment. conveyance. In such a case. or makes any pledge. or conveyance thereof to anyone with a view to: (i) giving a preference to any creditor or person having a claim against him. or delaying the operation of the provisions of the Insolvency Law.
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