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How to invest in the Philippines*

A business guide

Joaquin Cunanan & Co.A member firm of

pwc

Our offices

Address 29th Floor Philamlife Tower8767 Paseo de Roxas 1226, Makati City

Telephone +63 (2) 845-2728Facsimile +63 (2) 845-2806Mail address P.O. Box 2288 ManilaE-mail address [email protected]

Address St. Francis Building, Suite GLizares Avenue, Bacolod City

Telephone +63 (34) 432-1692; 433-1651Facsimile +63 (34) 433-2740E-mail address [email protected]

Address Keppel Center, Unit 306Samar Loop corner Cardinal Rosales AvenueCebu Business Park6000 Cebu City

Telephone +63 (32) 231-6464; 233-5020; 233-5022Facsimile +63 (32) 233-9615E-mail address [email protected]

Tammy Lipana +63 (2) [email protected]

George Lavadia +63 (2) [email protected]

Myrna Fernando +63 (2) [email protected]

Mary Assumption +63 (2) 459-2004Bautista-Villareal [email protected]

Alex Cabrera +63 (2) [email protected]

29th Floor Philamlife Tower8767 Paseo de Roxas 1226, Makati City

www.pwc.com/ph

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BranchesBacolod City

Cebu City

For questionsplease contact

How to invest in the Philippines*A business guide

*connectedthinking


pwc

Our 82 years of service in the Philippines have given us the advantage of knowing the pulse ofthe economy. We have clients in various industry sectors that enable us to gain exposure andbuild our expertise: from financial services to telecommunications, information technology,entertainment and media, manufacturing, retail, and services. We put emphasis on creating valuefor clients as a continuing and dynamic process.

We support the government in instilling confidence of foreign investment and promoting a goodbusiness environment. We understand its mandate on governance and reform as one that isclearly directed at protecting stakeholders.

Today, we see a strong resolve of serious investors who have brought in large capital to stay inthe Philippines and take advantage of the opportunities the country can offer. They are convincedthat the Philippines is a good investment destination.

Joaquin Cunanan & Co./PricewaterhouseCoopers Philippines is a leading professional servicesfirm committed to helping businesses develop and prosper. To this end, we continue to updatethis publication, How to Invest in the Philippines to provide business executives and prospectiveinvestors with a handy reference on the Philippines' economic investment policies andprocedures.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisoryservices for public and private clients. More than 120,000 people in 139 countries connect theirthinking, experience and solutions to build public trust and enhance value for clients and theirstakeholders.

"PricewaterhouseCoopers" refers to the Philippine firm of Joaquin Cunanan & Co. or, as thecontext requires, the network of member firms of PricewaterhouseCoopers International Limited,each of which is a separate and independent legal entity.

We are proud of our reputation for providing professional business services of the highestquality.

We trust that investors will find this Guide relevant and useful for their existing and futurebusiness ventures in the country.

Jerry S. IslaChairman and Senior Partner

Message from the Chairman

Foreword

This guide has been prepared by Joaquin Cunanan & Co., a member firm ofPricewaterhouseCoopers, to answer questions posed by prospective investors in the Philippines.The information furnished herein includes amendments to existing investment rules andregulations as of June 2004. A summary of major reforms introduced under the Tax Reform Actof 1997 (Republic Act No. 8424), as amended, which took effect on January 1, 1998 is alsoprovided.

Changes in economic and business policies, tax laws and government regulations have beenmade to spur economic growth and to encourage increased foreign and local equity investmentsin the Philippines. The present administration has committed to expand economic opportunitiesspecially for the poor and the marginalized. It believes in undertaking dynamic and focusedmeasures to revive the economy as it confronts the reality of global economic slowdown. Thesemeasures include building more infrastructures and low-cost housing; management of fiscaldeficits; lower interest rates to stimulate private sector activity; and pursuit of further reformsconcerning power restructuring, retail trade, capital market, and trade liberalization.

Message from the Chairman

Foreword

The Philippines - a profile .............................................................................................................. 1

General

1 What requirements must be complied with before a foreign corporation can engage in business in the Philippines? ................................................. 12

2 Is a foreign investor allowed to own 100% of a business entity? ..................................... 13

3 What is the general policy of the government regarding foreign investments?Is this policy likely to change in the near future? .............................................................. 14

4 What are the major incentives available to a registered enterprise? .................................. 14

5 Are investment incentives transferable? ........................................................................... 15

Board of Investments/Philippine Economic Zone Authority

1 Does our proposed project qualify for registration with the BOI/PEZA? .......................... 16

2 How does one file an application with the BOI/PEZA? ..................................................... 17

3 What possible obstacles would our application meet? ..................................................... 17

4 How long will it take to obtain BOI/PEZA approval once allrequirements are complied with? ...................................................................................... 17

5 Assuming approval is obtained, what restrictions are ordinarily attached? ...................... 17

6 How much time is an investor allowed to start his project? .............................................. 17

Securities and Exchange Commission

1 Why is it necessary to register with the SEC? ................................................................... 18

2 Can the application for registration with the BOI/PEZA and the SEC be filedsimultaneously, or must one wait for BOI/PEZA approval before going to the SEC? ....... 18

3 How long after the submission of the application and all the required documentswill approval be obtained? ................................................................................................ 18

Table of contents

5 Is a domestic corporation subject to a minimum subscription andpayment on such subscription? ........................................................................................ 18

Bangko Sentral ng Pilipinas

1 Can foreign investment funds be inwardly remitted outside of thebanking system? ............................................................................................................... 19

2 Is registration of foreign investment with the BSP required? ........................................... 19

3 Is inward remittance of foreign investment required to be converted immediatelyto Philippine Pesos? ......................................................................................................... 19

4 What are the current regulations regarding profit remittances and repatriationof capital? ......................................................................................................................... 19

Royalties, technical service agreements, etc.

1 Can we charge royalties and similar fees? ........................................................................ 20

2 Are these taxable in the Philippines? ................................................................................ 20

3 What rules govern the reimbursement of costs incurred abroad? .................................... 20

4 What constitutes “technology transfer arrangements”? ................................................... 20

5 How long does it take to obtain government approval? ................................................... 21

6 Do we have to get the Bangko Sentral approval to remit the royalty or agreed feesto the foreign company? What documentary support is required? .................................. 21

Taxes

1 What are the income tax rates in the Philippines? ............................................................ 22

2 What business taxes are we subject to? ........................................................................... 24

3 What are the advantages and disadvantages of a branch vis-a-vis a domestic subsidiary? . 25

4 What effect will a tax treaty with my country have on the tax rates? ................................. 26

Regional or Area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs)

1 What is a RHQ and what are the activities it can engage in? ............................................ 27

2 What is a ROHQ and what are the activities it can engage in? .......................................... 27

3 What are the funding requirements for a RHQ and a ROHQ? ........................................... 28

4 What are the taxes applicable and incentives available to a RHQ/ROHQ? ........................ 28

Joint ventures

1 If we enter into a joint venture with Philippine investors, will the SECallow us to hold 51% or more of its equity? ..................................................................... 30

2 If we are restricted to a 40% equity holding, how can we obtaincontrol of the operations? ................................................................................................. 30

3 Are there any requirements that directors and other officers must be Filipinocitizens and/or residents? ................................................................................................. 30

4 How are joint ventures taxed? ........................................................................................... 30

Retail trade

1 Can foreign investors engage in retail trade in the Philippines? ....................................... 31

2 How is “Retail Trade” defined? .......................................................................................... 31

3 To what extent is foreign ownership of retail enterprises in the country permitted? ........ 31

4 What are the criteria to qualify as foreign retailers in the Philippines? ............................. 31

5 Can foreign investors acquire shares in an existing Philippine retail company? .............. 32

6 What are the duties of a foreign participant with respect to its capital investment? ......... 32

7 Once it has complied with the requirements for prequalification and registration,what other restrictions must a foreign retailer observe? ................................................... 32

Rules on Borrowings

1 Can we finance our project through foreign borrowings? ................................................ 33

2 Are we subject to certain debt-to-equity ratio requirements? ........................................... 33

3 Can a foreign company borrow from a private individual or private non-financialinstitution? ........................................................................................................................ 33

Others

1 Could you give some guidelines as to prevailing-

a) Salary rates for office/administrative staff? ................................................................... 34b) Rentals for office space in Makati? ............................................................................... 34c) Rentals for housing of expatriate executives? ............................................................... 34d) Cost of acquiring and maintaining automobiles? ......................................................... 35e) Tuition and school fees for children and high school students? .................................. 35

2 How easily can work permits be obtained for expatriate executives? ............................. 35

3 How easily can expatriate executives obtain clearances for travel abroad? ...................... 36

4 May expatriate executives receive their compensation in foreign currencies? .................. 36

5 Will the expatriates be allowed to convert into foreign currency any excesspesos that they may have upon termination of their assignment? ................................... 36

6 Is there any public offering of stocks or corporate shares in the Philippines? ................. 36

APPENDICES

l GNP/GDP by Industrial Origin and Sectoral Growth Rates .............................................. 39

ll Fifth Regular Foreign Investment Negative List (E.O. 139) ............................................... 40

lll Income Tax Rates for Special Corporations ...................................................................... 44

lV Philippine Tax Treaties in Force as of June 2004 .............................................................. 46

How to invest in the Philippines 1

The Philippines – a profile

Strategic location, skilled and highly trainable humanresources, a stable democratic government and vibrant freeenterprise economy make the Philippines an attractiveinvestment destination

The Philippines, with its strategic location, is a gateway to the hugeAsian market. Its considerable attractions as an investment destinationinclude:

• A pool of English-speaking people who are highly trainable. Theircapabilities and merits as blue-collar workers, technicians,professionals and managers have been confirmed in postings withforeign firms operating in the Philippines and abroad.

• A large potential market for consumer goods on account of its fast-growing population. Its ASEAN affiliation provides furtheropportunities for access to the large ASEAN Free Trade Area (AFTA).

• The foreign-investor friendly posture of government. It hasmanifested its commitment to create conditions that attract foreigninvestments. Liberalized policies and regulations on foreigninvestments continue to be put in place.

• Availability and accessibility of special economic zones and freeports in various parts of the country where infrastructure supportsare adequately provided and locators are granted fiscal and non-fiscal incentives.

• A competitive edge in information and communications technology(ICT), including call centers.

• A highly developed legal system.

The Philippines is an archipelago of approximately 7,100 islands,located in Southeast Asia. It is surrounded in the north by Japan,Hongkong, Taiwan and South Korea; in the south by Singapore,Malaysia and Indonesia; and in the west by Thailand. To the east is thevast expanse of the Pacific Ocean, which earned for the country thetitle, “gateway of the west to Asia”.

The total land area of the country is approximately 300,000 squarekilometers, about the size of Italy or the state of Arizona in the UnitedStates. The country has a tropical climate and two seasons: rainy, fromJune to November, and dry, between December and May. It is rich in

Investorconsiderations

Geography andclimate

How to invest in the Philippines2

natural resources such as vast arable lands, fishing grounds, forestsand extensive mineral reserves.

From north to south, it is divided into the three major island groupingsof Luzon, Visayas and Mindanao and for administrative purposes, into16 regions: 7 in Luzon, 3 in the Visayas and 6 in Mindanao.

The Philippines was colonized by Spain for almost 400 years and thenby the United States of America for the next 50 years. It proclaimed itsindependence from Spain on June 12, 1898. As an American ally, it wasoccupied for 4 years by the Japanese Imperial Army during World War II.It gained its independence from American forces in 1946 and enjoyed26 years of democratic rule until Martial Law was established in 1972.The 14-year Martial Law rule was toppled by a peaceful “people power”march in 1986 and a democratic government was installed, with Ms.Corazon Aquino as president. Peaceful elections held in May 1992 andin May 1998 ushered in the governments of Presidents Fidel V. Ramosand Joseph E. Estrada, respectively. In January 2001, another peaceful“people power” march successfully pressured Mr. Joseph Estrada tostep down from office. This was due to the failed impeachment trial oncharges of plunder, graft and corruption hurled against him.Consequently, Gloria Macapagal-Arroyo was sworn in as the 14thpresident of the Republic. President Arroyo was given a fresh mandateto stay in office until 2010 after being proclaimed winner of the May 10,2004 elections.

The Philippines is a democratic republican state whose system ofgovernment is the presidential form patterned after the Americanmodel. There are 21 departments in the executive branch, more than200 congressmen and 24 senators in the legislative branch, and 15justices in the Supreme Court (judicial branch).

A shift to a parliamentary-federal form of government is beingconsidered by the government.

Philippine law is a consolidation of Anglo-American, Roman andSpanish laws and the indigenous customs and traditions of Filipinos.The 1987 Constitution is the fundamental law of the land. Othersources of Philippine law are the Civil Code, Penal Code, NationalInternal Revenue Code, Labor Code and Code of Commerce. Judicialdecisions and pronouncements, letters of instructions, administrativerules and regulations as well as orders issued by the three branches ofthe government constitute part of the law of the land.

For the past several years, the government has been continuouslyundertaking stabilization efforts. It has been working towards theattainment of an impressive economic growth to uplift the economicwell-being of the greater mass of its constituents through a modified

History andleadership

The political systemand administrativestructure

Government’sthrusts andprograms


social market environment and through a policy of self-determinationby the regions.

The national government veered away from undue intervention in themarket place and its historic centric posturing through the privatizationof some government owned and controlled corporations. It promotedan environment conducive to greater private sector participation andresponsibility in the economic and social development of the country.Likewise, it devolved government powers to the local units andpursued the dispersal of economic activities to the countryside.

People empowerment has been pursued through the continuedimplementation of policies such as: (1) the Comprehensive AgrarianReform Program (CARP) which gives farmers ownership over the landthey till; (2) the policy to encourage labor-intensive and export-orientedindustries; and (3) the take-over by non-government organizations(NGOs) of market intervention activities to protect the interests of thegeneral public.

The government has also embarked on infrastructure development,using the build-operate-and-transfer (BOT), and its variant schemes.Current priorities include telecommunication facilities for high speedproductivity at low cost, roads to target tourist destination,infrastructure for the modernization of agriculture, mass transportinfrastructure for Metro Manila and commuter and transport systems todisperse communities toward Subic, Clark and Calabarzon and theexpansion of the North Expressway. The development of Subic andClark into the best international service and logistic center in the regionis among the 10-point agenda that will be pursued vigorously byPresident Arroyo.

Bottlenecks of productivity such as the high cost of power, deterrenceto investments and agriculture by confrontational labor managementrelations and corruption and red tape at the national and localgovernment levels have been minimized.

Among the important legislative measures recently enacted into laware: E-procurement, tax exemption of offshore banking units andforeign currency deposit units, and Special Purpose Vehicle Act. AnAnti-Money Laundering Act is also currently being implemented.

On capital market reform, the Securitization Act was recently enactedinto law. President Arroyo is also pushing for the passage oflegislations that would clarify and simplify the Investment CompanyAct and the Securities Regulation Code. The system of incentives isconstantly placed under review to make it simple and clear.


Fast growing industries where high value jobs are most plentiful havebeen promoted such as the information and communicationtechnology or ICT. This has resulted in the proliferation of call centersin the country. The Philippines is one of the two countries in Asia asfavored destinations for contact centers and data management in thisdecade.

To prepare the youth to be the next generation of knowledge workers,math and science teaching in basic education have been upgraded.Aside from ICT, the Philippines has also the competitive edge intourism with the natural wonders of the country and the natural warmthof the people.

On fostering peace efforts, the government has been hitting hard onterrorism as the Senate ratified several U.N. Conventions againstterrorism. It has also made advances towards a negotiated peace ontwo fronts: the Moro Islamic Liberation Front (MILF) and the NationalDemocratic Front (NDF).

While searching for a political solution to the conflicts with the MILF,the government also looks to the help of US in the rehabilitation ofconflict areas and the eradication of the roots of war in some parts ofMindanao.

By virtue of ratification by the Senate of the Visiting Forces Agreementon May 26, 1999, the US troops have been allowed to visit the countryto conduct joint military exercises with their Filipino counterparts. Theexercises are expected to strengthen the bilateral partnership betweenthe US and Philippines and also to improve and foster economic andpolitical stability in the region.

Based on the 2004 interim population estimates, there areapproximately 84.2 million Filipinos, most of which are of Indo-Malay,Chinese and Spanish background. The population grows at an annualrate of 2.36%. About 63% of the population consist of ages 15 yearsand above. The highest concentration of people is in the NationalCapital Region or Metro Manila, Region IV - Southern Tagalog, RegionIII - Central Luzon and Region VI - Western Visayas.

About 43% of the total population are of working age of which 89.9%are employed. Approximately 500,000 persons enter the labor forceevery year. Filipino labor is highly trainable and is preferred for itsEnglish-speaking ability. A natural attribute of Filipinos is their artistic

Peace initiatives

Thesocioculturalenvironment

Population

Labor force


Language

and creative bent, which is the reason why they have been successfulin design and related enterprises.

Most Filipinos are bi-lingual, speaking English and Filipino which arethe official languages. There are 168 dialects or native languages likeIlocano or Cebuano. A small percentage of the population speaksChinese or Spanish.

The Philippines is the only predominantly Christian country in Asia.About 83% are Roman Catholic, 12% are Protestant or members ofother Christian denominations and 5% are Muslims. The latter aremainly concentrated in Mindanao.

The Filipinos value education highly as they look at it as a vehicle for abetter future. The government provides free education at the primaryand secondary levels bringing about a high basic literacy rate of 94%.The Philippines reportedly has one of the highest numbers of Mastersin Business Administration (MBA) graduates in the world. There are 130MBA schools in the country, among which is the Asian Institute ofManagement (AIM).

The average life expectancy of the Filipino male is 67.2 years while thatof the Filipino female is 72.5 years.

There are 387 national and local newspapers, at least 225 TV stations,1,373 CATV stations and 952 radio stations all over the country, asituation which is reflective of the extent of press freedom in thePhilippines.

The Philippines adheres to the principle of free enterprise andrecognizes the indispensable role of the private sector in the economicdevelopment of the country. Among the structural reforms initiated areliberalization of imports, deregulation of vital industries, relaxation ofinvestment rules, privatization of government owned or controlledcorporations, etc.. The resurgence of democratic sentiments and therealization that the economy needs to be more competitive andoutward looking in order to survive the onslaught of marketglobalization, have triggered the opening up of the economy.

The Philippines’ membership in the World Trade Organization (WTO)and participation in the Asian Free Trade Agreement (AFTA) and theGeneral Agreement on Tariff and Trade (GATT) are furthermanifestations of the government’s commitment to open trade.

Religion

Education

Health

The press

The economicenvironment

General marketstructure


Despite numerous threats to growth in 2003, Gross Domestic Product(GDP) adjusted for inflation rose 4.5%, falling within the government’sofficial forecast of 4.2-5.2%. Growth in 2003 was also marginallyhigher than in 2002. Gross National Product (GNP) rose 5.5%, pushedfurther by robust growth in net factor income from abroad comprisingmostly of income of overseas Filipino blue-collar workers andprofessionals.

The main agricultural products of the country are rice, corn, coconut,sugar, bananas, mangoes and pineapple. The Philippines is one of thelargest exporters of coconut oil and sugar but this comparativeadvantage has declined over the years due to the development ofsubstitutes and the increase in number of other exporter-countries. Thecombined agriculture, fishery and forestry sector registered a slightlyfaster growth rate at 3.9% compared to its 3.3% expansion during theprevious year. (See Appendix 1 for details)

The Philippines is rich in mineral resources. For this reason, miningcontinues to be among the most promising potentials of the country(particularly gold and copper). The Mining Act of 1995 liberalized theindustry, paving the way for the entry of foreign mining firms with apackage of incentives, among which are net operating loss carry-overand accelerated depreciation.

Based on the Philippine Energy Plan for 2000 to 2009, the primaryenergy demand is projected to increase at an annual average rate of6.3% from 256 million barrels of fuel oil equivalent in 2000 to 445 in2009.

Energy self-sufficiency level increased from 42% in 2000 to 49% in2004 due principally to the start of commercial production from theMalampaya offshore field.

The government is promoting accelerated use and development of themore environment-friendly new and renewable energy sources.

Within the Plan period, electricity demand is expected to grow at anannual rate of 8.9% and will be supplied mainly by cheaper non-oilalternatives. The share of oil to total power generation is expected todecrease from 10% in 2000 to 5% in 2009.

In 2003, manufacturing contributed the most to the whole economy, asits output accelerated to a growth of 4.2 percent from the 3.5 percentregistered a year ago. The growth of manufacturing was fueled mainlyby the steady increase of food manufactures, which increased by 7.1percent from 7.2 percent in 2002, and the recovery of four of its sub-sectors, namely: basic metal industries, up by 115.0 percent fromnegative 1.2 percent; products of petroleum and coal, up by 7.4 percent

Mining

Energy demand andresources

Utilities

Manufacturing

Agriculture

Major economicindicators


from negative 12.3 percent; chemical and chemical products up by 9.6percent from negative 2.4 percent; and machinery except electrical, upby 20.6 percent, from negative 18.4 percent. (Source: NSCB)

Unlike in the past where the growth of the industry was usuallygovernment-led, the private sector is now seen as a major mover.Private investors continue to show interest in infrastructure projectsunder the expanded BOT programs. At the same time, the governmentis also pursuing completion of several key infrastructure projects in linewith its economic growth program.

However, construction contracted further in 2003 at negative 5.9percent from negative 3.3 percent in 2002. This was due to the muchbigger drop in public construction as the government drasticallyreduced expenditures on capital outlays to contain the budget deficit.While investments in private construction managed to grow during theyear, it was not enough to offset the slack in public construction.(Source: NSCB)

Services, which accounts for 46.4 percent of total GDP, contributed themost to GDP growth with 2.7 percentage points. All of its sub-sectorsposted growth in 2003. Top contributors to growth were Trade,Transportation, Communication and Storage, and Private Services.

Transportation, Communication and Storage continued to grow by 8.6percent in 2003. However, this is slightly lower than the 8.9 percentrecorded in 2002 as the first two quarters of the year posted slowergrowths. (Source: NSCB). The enormous rise in the number ofsubscribers and increasing accessibility of internet and cable servicescontributed much to the remarkable performance of communicationservices.

The banking system consists of 42 head offices of commercial banks(of which 13 are full branches and 3 are subsidiaries of foreign banks),92 thrift banks and 765 rural and cooperative banks. In terms ofassets, the banking sector grew by 5.3% in 2003, further boosting theoverall growth of the finance sector during the same period. Interestrates remain stable after suffering from the 1997 Asian financial crisis.

The export of consultancy services is one area where the Philippines isconsidered to have a competitive advantage. Specific areas are (a)information technology (IT); (b) computer software services (customizedsoftware consultancy, contract programming, training anddocumentation services, systems integration and data entry/dataprocessing services); (c) consultancy engineering (infrastructure andindustrial development projects in the following sectors: power,transportation, telecommunications, water supply, oil, gas, andpetrochemicals, industrial estates and processing plants); and (d)

Construction

Transportation,communicationsand storage

Banking and finance

Services, in general


contracting services. Significant opportunities were created forcontractors by the government’s policy on privatization and theenactment of the BOT law.

The minimum wage of Filipino labor is equivalent to PhP300.00(inclusive of P50.00 cost of living allowance) per 8-hour workday in theNational Capital Region (NCR). The wage rate outside NCR is slightlylower and is considered one of the most competitive in the region.

The average inflation rate for 2003 was 3.1% (1994 based) and highestrate at 3.4% in June 2003. Interest rates on treasury bills have beenaveraging 6.7% for all maturity periods in 2003. Reeling from theimpact of global economic slowdown, the value of the peso for year2003 was pushed down to a cumulative average of PhP54.20 to a US$.

The Philippines’ major exports are industrial manufactures likeelectronics, machineries/transport equipment / apparatus and parts;consumer manufactures like garments; processed foods; and resource-based products like coconut oil. Its major imports are capital goods andintermediate goods like petroleum products and textile yarns.

While the Philippines is a net importing country, exports remain a majorstimulus of its economic growth. In addition to physical goods, theexport of non-factor services has largely contributed to the expansionof exports over the years.

Trade has been liberalized through, among others, the removal ofquantitative restrictions, the simplification of the tariff table, and theremoval of other trade barriers. The ASEAN Free Trade Area (AFTA),which has been implemented since January 1, 1993, further reducedtariffs on intra-ASEAN trade to not more than 5% in 2002. Moreover,Most Favored Nations (MFN) rates on most imported articles fell under0%, 3%, 5%, 7%, or 10% in 2003. The thrust of the government,though, was to reduce the duty rates on imported articles to a range of0-5% in 2004. As a protective measure, however, sensitive agriculturalproducts continued to have high tariff rates within a certain period oftime if imported outside of the quota or minimum access volume (MAV)scheme.

Major foreign investors recognize the Philippines as an attractiveinvestment site in the region. The government continues to dismantleinvestment restrictions to allow participation of foreign investors inmost business activities subject to certain conditions. For instance,domestic market enterprises (DMEs) to be fully owned by foreigners arerequired to have a paid-up capital of US$200,000. However, if theDMEs are engaged in activities involving advanced technology ordirectly employing at least 50 employees the minimum paid-up capital

Foreign investments

Foreign trade

Inflation andforeign exchangerates

Wage rate


is US$100,000. Retailing has also been opened to foreign retailcompanies subject to certain conditions.

However, statistics showed that investors were still adopting a wait andsee posture as total approved direct investments was down from its2002 level of PhP99.2B to PhP63.8B in 2003. Most of theseinvestments were registered with the Philippine Economic ZoneAuthority (PEZA), valued at PhP31.3B, and at BOI, at PhP28.3B,together representing 93% of the total investment pledges for theperiod. The reduction can be attributed largely to the significant drop inthe value of prospective investments going through Clark DevelopmentCorporation (CDC), Subic Bay Metropolitan Authority (SBMA) and thePhilippine Economic Zone Authority (PEZA), and the “plateau”experienced by the Board of Investments (BOI) during the period.(Source: NSCB)

The urban centers of Metro Manila, Metro Cebu and Davao City, as wellas the government-owned and private special economic zones, aremagnets of economic activities. The Philippine Assistance Program ishelping in the acceleration of regional development by sponsoringprojects in Calabarzon (Cavite, Laguna, Batangas, Rizal and QuezonProvinces), Iloilo, Samar, the Iligan-Cagayan de Oro corridor andGeneral Santos. The Calabarzon Project has resulted in theproliferation of privately owned industrial estates to address the needsof foreign investors.

The Subic Naval Base in Olongapo City, the Clark Air Base in AngelesCity, and other former US military bases with excellent infrastructurewere converted into special economic zones. The Bases ConversionDevelopment Authority did marvelously in taking over theseinstallations and implementing its master plans for these areas. As aresult, the bustling Subic Bay Freeport and Clark Economic Zone areliving proofs to the ongoing development in the area.

Investors’ interest in these areas has been tremendous and is perceivedto be sustainable over the next 5 to 10 years. The main factors forincreased investors’ interest in these areas include fiscal incentives, fulladministration support for the development of these areas, strategiclocation and excellent infrastructure, particularly the presence of anexcellent harbor (Subic) and international airports that meetinternational standards in both Subic and Clark.

Recently, the government has taken significant strides in promoting thecountry as an attractive information technology (IT) destination. Atpresent, there are nine (9) IT Parks and ten (10) IT Buildings which havebeen proclaimed as IT Ecozones by the President of the Philippinesand are now registered with PEZA.

Growth centers


A valid passport and visa are required of visitors entering thePhilippines. However, non-restricted foreign nationals may be allowedentry to the country “visa-free” and stay for a period of 21 daysprovided they have passports valid for at least 6 months from the dateof their arrival and a plane ticket for return journey to their country oforigin or to the next country of destination. Non-restricted foreignnationals may also secure a 9(a) visitor’s visa valid for 59 days from thePhilippine Embassy/Consulate located in the country of origin orresidence.

Visiting restricted foreign nationals (generally referring to nationals ofArab countries, communist states and India) are not allowed entry tothe Philippines without a valid 9(a) visitor’s visa issued by thePhilippine Embassy/Consulate located in their country of origin orresidence.

Holders of visitor’s visa are allowed to stay in the Philippines for 59days. Generally, their stay can be extended (on a monthly basis forrestricted foreign nationals, every 2 months for non-restricted) providedthat their total authorized period of stay will not exceed one (1) year.

Generally, visitors are not allowed to work in the country withoutsecuring the necessary Alien Employment Permit and Working Visa.

The Philippine peso (PhP) is the unit of currency. It is divided intocentavos. Currency denominations are: PhP1,000, PhP500, PhP200,PhP100, PhP50, PhP20 and PhP10 for notes and PhP10, PhP5, PhP1and PhP0.25 for coins. With the deregulation of foreign exchangetransactions, moneychangers and authorized agent banks (AABs) areallowed to sell and purchase foreign exchange without prior approval ofthe BSP, save for some exceptions. There is no restriction on theamount of foreign exchange that can be imported. Moreover, foreigncurrency may be freely bought and sold outside the banking system.However, the import/export of Philippine currency is limited toPhP10,000. Any amount exceeding this will require the authorization ofthe BSP.

The Philippine time is eight hours ahead of Greenwich Mean Time(GMT) and thirteen hours ahead of U.S. Eastern Standard Time (EST).

Government and private offices are generally open from 8 a.m. to 5p.m., Mondays to Fridays, with lunch break from noon to 1 p.m.However, government agencies engaged in the delivery of criticalfrontline services and public transactions are encouraged to operate asix-day work week from 7 a.m. to 7 p.m., Mondays to Saturdays,

Business hours

International time

Currency, exchangeand banks

Hints for thebusiness visitor

Visitor’s Visa


Statutory holidays

Weights andmeasures

Clothing

Hotel and travel

Communications

continuously without a lunch break. Some private offices are also openon Saturdays. Generally, commercial banks transact business from 9a.m. to 3 p.m. and savings banks from 9 a.m. to 5 p.m. Mondays toFridays.

Statutory holidays are January 1 (New Year’s Day), April 9 (Araw ngKagitingan), May 1 (Labor Day), June 12 (Independence Day), lastSunday of August (National Heroes’ Day), November 1 (All Saints’ Day),End of Ramadhan, movable date usually held in November (Eid ul-Fitr),November 30 (Andres Bonifacio Day), December 25 (Christmas Day),December 30 (Rizal Day) and December 31 (last day of the year).Maundy Thursday and Good Friday are also regular holidays. Alsoincluded in the list of nationwide special non-working days are thefollowing: February 25 (Anniversary of EDSA People PowerRevolution); Black Saturday (moveable date); and August 21(Martyrdom of Benigno Aquino).

The Philippines is on the metric system and uses the InternationalSystem unit as the sole standard of weights and measures.

For official meetings, business attire usually consists of a blouse andskirt or dress with a blazer for women, and a business suit and tie or“barong” (Filipino shirt) for men. Otherwise, it is acceptable to be incasual attire owing to the hot and humid weather.

In Metro Manila and most large provinces, a wide selection of de luxe,standard, first-class and economy-type accommodations is available.As of 2003, there are 7,708 hotel rooms in Metro Manila, and 29,698Department of Tourism (DOT)-licensed hotel rooms throughout thecountry. Per sample survey of the DOT, these are mainly composed ofde luxe hotel rooms.

Communication links within Metro Manila and key business areas areadequate. Apart from the hotel business centers which service theneeds of foreign businessmen, private companies also offer similarservices in all urban centers. Cellular phones and paging systems havesubstantially augmented existing landlines.

The number of cellular mobile telephone service subscribers hadincreased by more than 1,053% since 1996 with around 15 millionsubscribers accounted for at the end of 2002. There were 6.9 millionlandlines installed as of the same period. Based on a 150% annualaverage growth rate, the total number of subscribers is estimated toreach 22.5 million by 2003.


Government agency

Board of Investments(BOI)www.boi.gov.ph

Philippine Economic ZoneAuthority (PEZA)www.peza.gov.ph

Subic Bay MetropolitanAuthority (SBMA)www.sbma.com

Clark DevelopmentCorporationwww.clark.com.ph

General

Foreign investment policies, requirements and incentives

What requirements must be complied with before a foreign corporation canengage in business in the Philippines?

Before a foreign corporation can engage in business in the Philippines, it must firstsecure the necessary licenses or registration certificates from the appropriategovernment agencies. Generally, the registration process starts with the Securities andExchange Commission (SEC).

If the proposed project or activity qualifies for incentives, the foreign investor may fileits application with the appropriate government agency depending on the project’slocation, as follows:

Office address

Industry and Investments Bldg.,385 Sen. Gil Puyat Ave., Makati CityTel. 897-6682, 895-3640 to 41Project Location:Outside of special economic zones

Roxas Boulevard cor. San Luis St.,Pasay CityTel. 551-3454 to 55Project Location: Any Special Economic Zone underPEZA

Building 229, Waterfront Road,Subic Bay Freeport, Olongapo CityTel. (63-47) 252-4242Project Location: Subic Bay Freepoort

Building 2127 E.L. Quirino Ave. cor. CP Garcia Ave.,Clark Special Economic Zone,Clark Field, PampangaTel. (045) 599-2092, 599-9000Project Location:Clark Special Economic Zone

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John Hay Poro PointDevelopment Corporation

Cagayan Economic ZoneAuthoritywww.cagayanfreeport.com

Zamboanga EconomicZone Authoritywww.zambofreeport.com

Club John HayLoakan Road, Baguio CityTel. (074) 442-7902 to 08Project Location:John Hay Special Economic Zone, Poro PointFreeport and Special Economic Zone

7th Floor Westar Building,611 Shaw Blvd., 1630 Pasig CityTel. 636-2779 to 82Project Location:Cagayan Special Economic Zone

San Ramon, Zamboanga CityTel. (062) 992-2012Project Location:Zamboanga City Special Economic Zone

Is a foreign investor allowed to own 100% of a business entity?

With the liberalization of the foreign investments law, 100% foreign equity may beallowed in all areas of investment except financial institutions and those included inthe fifth regular Foreign Investment Negative List which took effect on November 9,2002. This list includes:

List AAreas reserved to Filipinos by mandate of the Constitution and special laws such asbut not limited to:

a. mass media except recording, practice of licensed profession, retail trade withpaid-up capital of less than US$2.5 million, cooperative and small scale mining,etc. where foreign ownership is prohibited;

b. advertising, private radio communications network, private recruitment, ownershipof land, operation and management of public utilities, etc. where only minorityforeign ownership is allowed

List BAreas that are security and defense related; those with adverse effects on publichealth and morals; and for the protection of small-and medium-scale enterprises, i.e.,domestic market enterprises with paid-in capital of less than the equivalent ofUS$200,000; and domestic market enterprises which involve advanced technology oremploy at least 50 direct employees, with paid-in capital of less than the equivalent ofUS$100,000 only.

Please refer to Appendix II for the list.

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What is the general policy of the government regarding foreign investments? Isthis policy likely to change in the near future?

The government encourages foreign investments which will provide significantemployment opportunities relative to the amount of the capital being invested;improve productivity of resources; increase volume and value of exports; and provide afoundation for the future development of the economy.

Investment-related rules have been liberalized to facilitate entry of foreign investments.This thrust is expected to continue.

What are the major incentives available to a registered enterprise?

a. BOI Incentives

An enterprise registered with the Board of Investments pursuant to the 1987 OmnibusInvestments Code (Executive Order or EO 226) is entitled to, among others, thefollowing incentives subject to certain terms and conditions:

Fiscal incentives

i) Income tax holiday (ITH) for six years for pioneer firms and generally four years fornon-pioneer firms. If a non-pioneer firm is located in a less developed area, it shallgenerally be entitled to 6 years ITH. Firms locating within Metro Manila shall not begranted ITH unless they are:

• within a government industrial estate• service-type projects with no manufacturing facilities• power generating plants• exporters with expansion projects.

ii) Tax credit on raw materials, supplies, and semi-manufactured products.

iii) Additional deduction from taxable income for labor expense (cannot besimultaneously enjoyed with the ITH incentive).

iv) Additional deduction from taxable income for necessary and major infrastructureworks (cannot be simultaneously enjoyed with the ITH incentive).

Non-fiscal Incentives

Certain non-fiscal incentives are also available to registered enterprises, among whichare: employment of foreign nationals; guaranteed repatriation of foreign investmentsand earnings thereon; and importation of consigned equipment for an unlimited periodsubject to posting of a re-export bond.

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b. PEZA Incentives

The Special Economic Zone Act of 1995 as amended, mandates the PEZA to operate,administer, manage and develop Special Economic Zones or Ecozones.

Business enterprises operating within Ecozones shall be entitled to the incentivesgranted to registered enterprises under Presidential Decree No. 66 or Book VI of EO226. In addition to the incentives mentioned above for BOI-registered enterprises,PEZA-registered exporters enjoy tax and duty exemption on importations of capitalequipment, raw materials and other merchandise directly needed in their registeredoperations. Moreover, in lieu of paying all local and national taxes, businessenterprises within the Ecozone whose PD 66 or EO 226 incentives have lapsed, shallremit to the government a preferential rate of 5% of their gross income earned as finaltax. Information Technology (IT) companies are entitled to similar incentives if they areregistered locators in an IT ecozone.

c. Other Incentives

Two other special economic zones were created under two separate special laws.These are the Cagayan Special Economic Zone and the Zamboanga City SpecialEconomic Zone. The incentives granted to those that will locate in these ecozones aresimilar to the incentives granted to PEZA ecozone enterprises.

Enterprises allowed to operate within the Subic Bay Freeport (SBF) shall, in lieu ofpaying all other taxes, pay a final tax of 5% of gross income provided their incomefrom local (non-export) sales shall not exceed 30% of their income from all sources.

Enterprises locating within the Clark Special Economic Zone (former American Airbaseat Clark Field) and Poro Point Special Economic and Freeport Zone (former Wallace AirStation and its adjoining areas) are granted incentives similar to those given to SBFenterprises.

Are investment incentives transferable?

In general, investment incentives are not transferable. Tax credit certificates may,however, be transferred subject to certain conditions.

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Board of Investments/Philippine Economic Zone Authority

Registration requirements, application procedures and approval

Does our proposed project qualify for registration with the BOI/PEZA?

To qualify for registration with the BOI for incentive purposes, the proposed foreigninvestment must be made in any of the following:

a. Preferred areas of investment listed in the current Investment Priorities Plan (IPP).A preferred area may be declared pioneer if it:

i) involves the manufacturing or processing (not merely assembly or packaging)of goods or raw materials that have not been produced in the Philippines on acommercial scale;

ii) uses a design, formula, scheme, method, process or system of production ortransformation of any element or raw material into another raw material orfinished good which is new and untried;

iii) engages in agricultural activities/services essential to the achievement of thecountry’s self-sufficiency program; and

iv) produces non-conventional fuels or manufactures equipment which utilizenon-conventional sources of energy; provided that the final product in any ofthe foregoing instances involves substantial use and processing of domesticraw materials;

b. enterprises engaged in preferred non-pioneer areas and exporting at least 70% oftheir output; and

c. projects in less-developed areas provided that the activities in all of the abovecases are not reserved for Philippine nationals.

On the other hand, the projects that may qualify for registration with PEZA arethose that involve manufacturing for export and the domestic market, free trade,tourism, information technology, utilities, facilities enterprises, logistics serviceenterprises providing warehousing and trading operations in the ecozones, anddevelopment and operation of ecozones.

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How does one file an application with the BOI/PEZA?

An application shall be made in the form prescribed by the BOI / PEZA in two (2)copies and properly sworn to before a notary public. A project feasibility study is oneof the required supporting documents.

What possible obstacles would our application meet?

The obstacles normally encountered in the filing of applications include non-compliance with the criteria set by the BOI, misinterpretation of the coverage ofactivities listed in the IPP, failure to submit the required project feasibility study andother supporting documents and possible opposition from sectors or enterpriseswhich might be adversely affected by the proposed project. The BOI requirespublication of the notice of application and conducts hearings if objections to theapplication are received.

For PEZA applicants, the usual problem consists of non-compliance with some of thecriteria set by PEZA and failure to submit required documents and information.

How long will it take to obtain BOI/PEZA approval once all requirements arecomplied with?

Under the 1987 Omnibus Investments Code, applications filed with the BOI shall beconsidered automatically approved if not acted upon by the Board within twenty (20)working days from official acceptance thereof, subject to the usual terms andconditions.

In the case of PEZA, the processing and evaluation by the appropriate departmentusually takes about two weeks. The decision on the project is made during the bi-monthly meetings of the PEZA Board.

Assuming approval is obtained, what restrictions are ordinarily attached?

A list of general and specific terms and conditions is normally attached to the approvalletter issued by the BOI/PEZA upon approval of the application for registration. Thegeneral conditions include certain management, financial, operational and marketingrestrictions which must be properly complied with so as to avoid grounds forcancellation of registration. The specific terms and conditions which may includenationality, operational and reporting requirements vary depending upon the nature ofthe business enterprise.

How much time is an investor allowed to start his project?

The amount of time allowed for starting a registered project depends on the type ofthe proposed project and the period set by the proponent in the feasibility study withthe approval of the BOI/PEZA.

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Securities and ExchangeCommission

Registration requirements and approval

Why is it necessary to register with the SEC?

The SEC is the government agency responsible for the registration, licensing,regulation and supervision of all corporations and partnerships organized in thePhilippines, including foreign corporations licensed to engage in business or toestablish branch offices in the Philippines.

Can the application for registration with the BOI/PEZA and the SEC be filedsimultaneously, or must one wait for the BOI/PEZA approval before going tothe SEC?

Registration with the BOI/PEZA is required only for purposes of availing investmentincentives. It is preferable to first seek approval from the BOI/PEZA before filing anapplication with the SEC.

How long after the submission of the application and all the requireddocuments will approval be obtained?

The processing and approval of the papers take around fifteen (15) working days fromofficial acceptance of the application.

Is there any requirement that directors be residents?

A majority of the directors must be residents of the Philippines. The number ofdirectors must be at least five (5) but not more than fifteen (15). Hence, if there are 5directors, at least 3 must be residents.

Is a domestic corporation subject to a minimum subscription and payment onsuch subscription?

At least 25% of the authorized capital stock of a domestic corporation must besubscribed and at least 25% of the subscription must be paid. However, subscriptionsby alien individuals or foreign entities must generally be fully paid. Partial payments ofsubscriptions by aliens may be allowed subject to certain conditions.

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Bangko Sentral ng Pilipinas

Inward Remittance and Registration of Foreign Investments,Repatriation of Capital, Remittance of Dividends

Can foreign investment funds be inwardly remitted outside of the bankingsystem?

Yes. However, said funds cannot be registered as foreign equity investment with theSEC and the BSP.

Is registration of foreign investment with the BSP required?

BSP registration is necessary only if the investor wants to make sure that therepatriation of capital and the remittance of dividends, profits and earnings can bemade using foreign exchange sourced from the banking system. Otherwise, BSPregistration is not necessary.

Is inward remittance of foreign investment required to be convertedimmediately to Philippine Pesos?

An investor is required to convert his inward remittance of foreign investment toPhilippine pesos for purposes of registration with the SEC and the BSP.

What are the current regulations regarding profit remittances and repatriation ofcapital?

Dividend and profit remittances as well as capital repatriation of foreign investmentsare not regulated. Foreign investors are free to remit dividends and profits from theirown foreign exchange sourced from outside the domestic banking system. However, ifthe foreign exchange will be sourced from the local banking system, there is a need forthe foreign investments to have prior registration with the BSP (refer also to item 3above).

Authorized Agent Banks (AABs) are authorized to sell and to remit the equivalentforeign exchange at the exchange rate prevailing at the time of actual remittance(representing sales/divestment proceeds or dividends/profit of duly registered foreigninvestment) upon presentation of the Bangko Sentral Registration Document andother applicable documentary requirements.

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Royalties, Technical ServiceAgreements, Etc.

IPO Registration of Technology Transfer Agreements, Taxation ofRoyalties and Service Fees

Can we charge royalties and similar fees?

Royalties and similar fees can be charged to operations provided payments for saidfees are covered by a technology transfer agreement (TTA) certified by theDocumentation, Information and Technology Transfer Bureau (DITTB) of theIntellectual Property Office (IPO) that said technology transfer agreement conformswith the provisions of the Intellectual Property Code (IPC).

The IPC provides certain restrictions in the terms and conditions of the TTAparticularly those that will adversely affect free competition and trade. It alsoprescribes certain mandatory provisions that should be included in the TTA. Non-conformity with any of these provisions of the IPC shall render the TTA unenforceable,subject to some exceptions. For instance, if the agreement contains one or two of therestrictive clauses, the licensing contract must be approved by and registered with theDITTB.

Are these taxable in the Philippines?

Royalties and similar fees are generally subject to 32% gross income tax and 10%value added tax when payable to a non-resident foreign corporation. However, the taxrates for the royalties payable to residents of foreign countries with which thePhilippines has a tax treaty vary according to the terms of the respective treaties.

What rules govern the reimbursement of costs incurred abroad?

Reimbursements of actual cost incurred abroad for operations such as maintainingoffices, advertising, commission, etc. are allowed provided they are duly supported bydocuments and that these costs are incurred in connection with the regular course oftrade or business of the local paying company.

What constitutes “technology transfer arrangements”?

“Technology transfer arrangements” refer to contracts or agreements involving thefollowing: transfer of systematic knowledge for the manufacture of a product or theapplication of a process, rendering of a service, including management contracts; andthe transfer, assignment or licensing of all forms of intellectual property rights,

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including licensing of computer software, except computer software developed formass market.

How long does it take to obtain government approval?

Within ten (10) days from the filing of the request for certification of compliance, theDITTB conducts a summary evaluation of the TTA. If the TTA conforms with theProhibited Clauses and Mandatory Provisions of the IPC, the DITTB issues aCertificate of Compliance. Otherwise, the DITTB notifies the parties of any violationand requires them to comply with the IPC if they wish to obtain a Certificate ofCompliance.

Do we have to get the Bangko Sentral approval to remit the royalty or agreedfees to the foreign company? What documentary support is required?

With the liberalization of foreign exchange rules, remittance of royalties, fees or similarpayments to a foreign company, net of the applicable taxes, may be made throughAABs without need of BSP approval.

The following documents may be required by the AABs to prove the legitimacy of thetransaction: (a) copy of contract/agreement; (b) statement/computation of the royalty/copyright/patent/licensing fee; and (c) proof of payment of withholding tax.


Taxes

Income and Business Taxes

What are the income tax rates in the Philippines?

The income tax rates depend upon the classification of the taxpayers.

a. Individual taxpayers

i) In general, taxable income derived from employment, business, trade and exerciseof profession by resident citizens from all sources within and without thePhilippines are subject to the graduated tax rates of 5% to 32%. The top rate of32% applies to taxable income in excess of PhP500,000.

Resident foreign individuals (aliens) and non-resident citizens are subject to thesame graduated tax rates but only for income derived from all sources within thePhilippines.

ii) Non-resident aliens are taxed at 25% of gross income from sources within thePhilippines if their stay within the country does not exceed 180 days in a calendaryear. Otherwise, they are taxed on the basis of graduated rates as in (1) above.

iii) Aliens who are employed by regional or area or regional operating headquarters ofmultinational corporations, offshore banking units, and petroleum servicecontractors and subcontractors are subject to income tax at 15% of their grossincome from such employers (e.g. salaries, annuities, honoraria and allowances).

iv) Net capital gains realized during each taxable year from the sales of shares ofdomestic stocks not traded in the Philippine Stock Exchange (PSE) are taxed at therate of 5% on the first PhP100,000 gains and 10% on the excess overPhP100,000. For domestic shares listed and traded in the PSE, the tax is 1/2 of1% of the gross selling price or gross value in money of the shares of stock sold.

Likewise, there is a tax on shares of stock sold, exchanged or otherwise disposedthrough initial public offering at the rates of 1%, 2% and 4%, depending on theproportion of the shares sold, exchanged or otherwise disposed to the totaloutstanding shares after listing of the shares of closely held corporations.

Capital gains on sale of real property are taxed at 6% of gross selling price or fairmarket value, whichever is higher.

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v) Passive income items like interest, dividends, royalties, prizes and other winningsare also taxed at different rates. For instance, dividends received by citizens andresidents from a domestic corporation and the share of an individual partner in ataxable partnership are taxed at 10%. If the dividends are paid to non-residents,the tax is 20% for those engaged in trade or business and 25% for non-residentsnot engaged in trade or business.

b. Corporate taxpayers

i) Domestic corporations (those established under the laws of the Philippines andinclude foreign-owned corporations, otherwise known as subsidiaries) are taxed at32% of net taxable income from worldwide sources.

ii) A foreign corporation, whether engaged or not in trade or business in thePhilippines, is taxable on Philippine-sourced income at the same rates as domesticcorporations. A foreign corporation engaged in trade or business in the Philippines(also called resident foreign corporation) is taxed based on net income . On theother hand, a foreign corporation not engaged in trade or business in thePhilippines (also known as a nonresident foreign corporation) is taxed based ongross income received.

iii) Profits remitted by a branch of a foreign corporation to its home office are taxed atthe rate of 15%. However, this tax does not apply to a Philippine branch registeredwith PEZA. Dividends declared by a domestic corporation to its foreign parent aregenerally taxed at 32%. However, if the home country of the recipient corporationallows an additional credit of 17% as tax deemed paid in the Philippines, the tax isreduced to 15%. Dividends remitted to countries that do not impose a tax onoffshore dividends qualify for this rate.

Most of the tax treaties concluded by the Philippines with other countries allowpreferential rates of 10% on branch profit remittances and on dividends. Such rateusually applies if the payor-subsidiary is registered with the BOI or if the beneficialowner of the dividends is a company which holds a certain percentage of thecapital of the payor subsidiary. Otherwise, the tax on dividends is 15%.

iv) All corporations, whether domestic or foreign, are subject to capital gains tax onthe sale of shares of stock, as well as sale of real properties classified as capitalassets, in the same manner as individual taxpayers. Other income items such asinterest and royalties are taxed at various rates. Dividends received by a domesticor resident foreign corporation from a domestic corporation are not taxable.

v) A minimum corporate income tax of 2% of the gross income as of the end of thetaxable year is imposed on a corporation which is subject to normal income tax of32% beginning on the fourth taxable year immediately following the year in whichsuch corporation was registered with the Bureau of Internal Revenue, when theminimum income tax is greater than the normal income tax for the taxable year.


Any excess of the minimum corporate income tax over the normal income tax ascomputed shall be carried forward and credited against the normal income tax forthe three immediately succeeding taxable years.

vi) Every corporation formed or availed for the purpose of avoiding the income taxwith respect to its shareholders or the shareholders of any other corporation bypermitting earnings and profits to accumulate instead of being divided ordistributed, is taxed at the rate of 10% for each taxable year on the improperlyaccumulated taxable income.

vii) In general, an employer (individual or corporation) shall pay a final tax of 32% onthe grossed-up monetary value of fringe benefit furnished or granted to theemployee (except rank and file) unless the fringe benefit is required by the natureof, or necessary to the trade, business or profession of the employer.

viii) Small and medium enterprises termed as Barangay MicroBusiness Enterprises(BMBEs) with total assets not exceeding P3 Million are exempt from income taxand minimum wage requirements under the Labor Code per RA No. 9178.

ix) Special Purpose Asset Vehicles which refer to domestic corporations certified bythe SEC as qualified to issue Investment Unit Instruments (IUIs) are subject to awide array of tax exemptions ranging from their interest income to capital gains,among others, under Republic Act (RA) No. 9182.

What business taxes are we subject to?

Both the national government and the local government impose business taxes. Therates vary depending on the type of business.

a. National tax

Value added tax (VAT)

i) Ten percent (10%) VAT is imposed on importation of goods and sale, barter,exchange or lease of goods, properties and services in the Philippines, subject tocertain exceptions. Goods or properties mean all tangible and intangible objects,including real property, patents, trademarks and similar rights and movable andpersonal goods. Services cover performance of all kinds of services in thePhilippines for a fee.

Exports are generally subject to 0% VAT. VAT exempt goods include such items asbooks, fertilizers, livestock and poultry feeds and agricultural and marine foodproducts in their original state.

ii) Percentage tax on certain businesses:

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Bank and other non-bank financialintermediaries

Life insurance companies

Common carriers, radio and televisionfranchisees

Electric, gas and water utilities

Others

iii) Excise tax on alcohol, tobacco, petroleum and mineral products, cinematographicfilms, automobiles, jewelry, etc. at varying rates.

iv) Other national taxes include overseas communication tax and stamp tax on certaindocuments, instruments and related transactions such as issuance of shares ofstock, evidence of indebtedness, transfer of real property, lease contracts,insurance policies, etc..

b. Local tax on certain businesses

i) Manufacturers, wholesalers, distributors, dealers and contractors are subject tograduated taxes on certain amounts of gross sales/gross receipts and percentagetaxes at maximum rates not exceeding 1% on the amounts not subject tograduated taxes depending on the place where business is conducted. Foressential commodities, the rates are 50% lower. Retailers are subject to 2% tax iftheir gross receipts are PhP400,000 or less and to 1% tax if in excess ofPhP400,000.

ii) Banks and other financial institutions – percentage tax at maximum rates notexceeding .5% of their gross receipts depending on the locality of the business.

iii) Others - varying rates

Aside from the above business taxes, there are other taxes levied in the Philippinessuch as:

• Real estate tax

• Community tax

What are the advantages and disadvantages of a branch vis-à-vis a domesticsubsidiary?

The advantages and disadvantages from legal and tax viewpoints of a branchcompared to a domestic subsidiary are as follows:

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a. Branch offices are taxed only on their net income from sources in the Philippineswhile subsidiaries are taxed on their worldwide income. In both cases, however, arelief from double taxation may be granted subject to the provisions of applicabletax treaties. (Refer to the questions on taxes applicable to corporate taxpayers.)

b. There are generally fewer formalities involved in opening a branch thanincorporating a subsidiary.

c. In terms of staffing, a subsidiary normally requires a complete set of corporateofficers whereas a branch is able to operate with only a resident agent, who mayalso be the general manager, as its officer.

d. Since a subsidiary has a separate juridical personality, a foreign parent company isprotected from contractual and other liabilities incurred by its Philippinesubsidiary; the liabilities of the branch office extend to that of its home office.

e. A branch is allowed to claim, as deduction for income tax purposes, allocated headoffice expenses subject to certain requirements, while a subsidiary is not allowedto claim the same.

f. Profit remittance by a branch registered with the PEZA is exempt from branchprofit remittance tax while dividend remittance by a subsidiary is taxable.

What effect will a tax treaty with my country have on the tax rates?

A tax treaty is designed primarily to eliminate double taxation on foreign investors whootherwise have to pay taxes in the Philippines and in their home countries on the sameincome.

Please refer to Appendix IV for the list of tax treaties.

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Regional or Area Headquarters(RHQs) and Regional OperatingHeadquarters (ROHQs)

Scope of Activities, Remittance and Funding Requirements,Taxes, Incentives

What is a RHQ and what are the activities it can engage in?

RHQ is an office whose purpose is to act as an administrative branch of a multinationalcompany engaged in international trade which principally serves as a supervision,communications and coordination center for its subsidiaries, branches or affiliates inthe Asia-Pacific Region and other foreign markets and which does not earn or deriveincome in the Philippines.

The activities of the RHQ are limited to acting as a supervisory, communications andcoordinating center for its subsidiaries, affiliates and branches in the region.

It is neither allowed to derive any income from sources within the Philippines and toparticipate in any manner in the management of any subsidiary or branch office itmight have in the Philippines nor to solicit or market goods and services whether onbehalf of its mother company or its branches, affiliates, subsidiaries or any othercompany.

What is a ROHQ and what are the activities it can engage in?

ROHQ is a foreign business entity which is allowed to derive income in the Philippinesby performing qualifying services to its affiliates, subsidiaries or branches in thePhilippines, in the Asia-Pacific Region and in other foreign markets as follows:

a. General administration and planning;b. Business planning and coordination;c. Sourcing / procurement of raw materials and components;d. Corporate finance advisory services;e. Marketing control and sales promotion;f. Training and personnel management;g. Logistics services;h. Research and development services and product development;i. Technical support and maintenance;j. Data processing and communication;k. Business development

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A ROHQ is prohibited from offering qualifying services to entities other than itsaffiliates, branches or subsidiaries as declared in its registration with the Securitiesand Exchange Commission (SEC). Neither is it allowed to directly and indirectly solicitor market goods and services whether on behalf of their mother company, branches,affiliates, subsidiaries or any other company.

What are the funding requirements for a RHQ and a ROHQ?

The initial funding requirement for a RHQ of a multinational corporation is US$50,000or its equivalent in other foreign currencies annually. Within 30 days from receipt ofthe SEC certificate of registration, the multinational corporation must submit acertificate of inward remittance from a local bank showing that it had remittedUS$50,000 and converted the same to Philippine currency. It must also annually remitat least US$50,000 or its equivalent in other foreign currency within 30 days fromanniversary date of its registration to cover its operations in the Philippines.

A ROHQ is required to initially remit the amount of US$200,000 or its equivalent inother foreign currencies. Within 30 days from receipt of its certificate of registration,the multinational corporation must submit to the SEC a certificate of inwardremittance from a local bank showing that it had remitted US$200,000.

What are the taxes applicable and incentives available to a RHQ/ROHQ?

RHQs are exempt from income tax and VAT while their purchases of goods andservices and lease or sale of goods and property are VAT-zero rated. On the other hand,ROHQs are subject to 10% preferential rate on taxable income and are subject to 10%VAT.

RHQs and ROHQs are granted the following incentives:

a. Exemption from all kinds of local taxes, fees and charges except for real propertytax on land improvements and equipment;

b. Tax and duty free importation of training materials and equipment; and

c. Importation of new motor vehicles subject to the payment of corresponding taxesand duties.

Expatriates of RHQs and ROHQs are entitled to the following incentives:

a. Multiple entry special visa, including those of spouses and unmarried childrenbelow age 21;

b. Withholding tax of 15% on salaries, wages, annuities, and other emoluments ofexpatriates;

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c. Travel tax exemption; and

d. Tax and duty free importation of personal and household effects.

Filipinos employed and occupying the same positions as aliens employed by RHQsand ROHQs of multinational companies shall have the option to be taxed either at15% of gross income or at the regular tax rate of 32% of their taxable income.


Joint Ventures

Foreign Equity, Control, Officers and Directors, ApplicableTax Policies

If we enter into a joint venture with Philippine investors, will the SEC allow us to hold

51% or more of its equity?

The SEC will allow foreign equity in excess of 50% provided the area of activityinvolved is not covered by the fifth regular foreign investments negative list. (Pleaserefer to Appendix II).

If we are restricted to a 40% equity holding, how can we obtain control of theoperations?

In general, control of an enterprise goes to the group which has the power todetermine its policies and the manner in which the enterprise is to be run, and suchassurance of control is obtained through majority ownership of the voting capitalstock of the corporation. There are, however, certain arrangements that could provide aminority group with working control, such as diffusion of majority ownership andlicensing agreements.

Are there any requirements that directors and other officers must be Filipinocitizens and/or residents?

The majority of the directors must be residents of the Philippines and the secretarymust be a resident Filipino citizen. Although not required by law, the SEC, as a matterof policy, also requires the treasurer to be a resident. However, in the case of banks anddomestic air carriers, at least two-thirds of the members of the board of directors mustbe citizens of the Philippines. For a firm engaged in a nationalized or partiallynationalized activity, the maximum number of foreign directors must not exceed theproportion of actual foreign equity in the firm, and all of its executive and managingofficers must be Filipino citizens.

How are joint ventures taxed?

An unincorporated joint venture is taxed like a corporation. The shares of the jointventure partners will no longer be taxable to them because they partake of dividends, ifpaid to a domestic or resident corporation. However, an unincorporated joint ventureformed for the purpose of undertaking a construction project or engaging in petroleumoperations is not subject to the corporate income tax. Only the joint venture partnerswill be taxed on their respective shares.

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Retail Trade

Definitions, prequalification criteria, capitalizationrequirements, restrictions

Can foreign investors engage in retail trade in the Philippines?

Yes. The Retail Trade Liberalization Act (RA No. 8762) which took effect on March 26,2000 paved the way for the entry of foreign participants who meet the capitalization,net worth, and other requirements under the Act.

How is “Retail Trade” defined?

“Retail Trade” means any act, occupation or calling of habitually selling direct togeneral public merchandise, commodities or goods for consumption subject to certainexceptions.

To what extent is foreign ownership of retail enterprises in the countrypermitted?

Foreign ownership of Philippine retail enterprises depends on the amount of theenterprise’s capitalization. Retail ventures with paid-up capital less than the pesoequivalent of US$2.5 Million (Category A) is limited to Filipinos. Full foreignownership is allowed in retail enterprises with paid-up capital of US$2.5 Million andabove (Category B).

Enterprises with a paid-up capital of US$250,000 per store (Category D) are fully opento foreign investors. The investment for opening a store in Categories B should not bebelow the peso equivalent of US$830,000.

What are the criteria to qualify as foreign retailers in the Philippines?

Foreign entity that will engage in the retail business or invest in a retail store in thePhilippines must meet the following criteria:

a. Net worth of at least US$200 million of the parent corporation, for those that wantto establish Category B enterprises, and net worth of at least US$50 million forCategory D;

b. Ownership of at least 5 retail stores or franchises anywhere in the world or at leastone branch with capitalization of US$25 million or more;

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c. Five-year track record in retailing; and

d. The foreign retailer’s home country offers reciprocity rights to Filipino retailers.

Can foreign investors acquire shares in an existing Philippine retail company?

Yes, as long as the paid-up capital of the existing local store is in excess of the pesoequivalent of US$2.5 million.

What are the duties of the foreign participant with respect to its capitalinvestment?

The foreign retailer must secure from the Bangko Sentral ng Pilipinas (BSP) and theDepartment of Trade and Industry (DTI) a certification confirming the inward remittanceof its minimum capital investment. The Securities and Exchange Commission (SEC)will monitor the use of these funds in actual Philippine operations. The foreigninvestor is required to maintain this minimum capital amount unless it has notified theSEC and DTI that it intends to repatriate its capital and cease Philippine operations.

Once it has complied with the requirements for prequalification andregistration, what other restrictions must a foreign retailer observe?

a. Philippine-made products must constitute at least 30% of the aggregate inventorycost of foreign retailers classified under Category B. The requirement for CategoryD stores is 10%. This is applicable until March 26, 2010, or the tenth year of theeffectivity of the Retail Trade Liberalization Act.

b. Foreign retailers are prohibited from engaging in trade outside its accreditedstores. Specifically, the use of mobile carts, door-to-door selling, restaurants andsari-sari stores, and other retailing activities similar to these are prohibited.

c. Within eight years after the start of operations, Category B retail establishments inwhich foreign-ownership exceeds 80% of equity are required to offer 30% of itsshares to the public.

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Rules on Borrowings

Foreign and Domestic Credit

Can we finance our project through foreign borrowings?

The government prefers foreign equity investments to foreign borrowings. In general,foreign borrowings require prior approval of and/or registration with the BangkoSentral ng Pilipinas in order that repayment of principal and remittance of interest maybe serviced using foreign exchange purchased from the Philippine banking system.

Under present rules, loans that may qualify for prior Bangko Sentral approval/registration are those intended to finance the following types of projects:

a. Export oriented projects;

b. BOI-registered projects;

c. Projects listed in the Investments Priorities Plan;

d. Projects listed in the Medium-Term Public Investment Program; and other projectsthat may be declared priority under the country’s socio-economic developmentplan by the National Economic Development Authority or by Congress.

All the above loans, regardless of maturity, shall exclusively finance foreign exchangerequirements of eligible projects, provided that loans of direct and indirect exportersand public sector borrowers may finance both foreign exchange costs and up to 50%of the total peso costs component of their respective projects. Foreign companies mayalso resort to peso borrowings only upon prior certification by the BSP Inter-AgencyCommittee that they meet the guidelines prescribed by the Monetary Board. Foreignloans which may have been sourced without prior BSP approval shall be reported justthe same to the BSP otherwise, appropriate sanctions may be meted out.

Are we subject to certain debt-to-equity ratio requirements?

All enterprises registered with the BOI, PEZA and the other economic zone authoritiesare required to maintain a debt-to-equity ratio of at least 75:25 during the entireduration of their registration with the concerned government agency.

Can a foreign company borrow from a private individual or private non-financial institution?

Yes. A foreign company can borrow from a private individual or private non-financialinstitution.

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Others

Could you give some guidelines as to prevailing-

a. Salary rates for office/administrative staff?

Secretary – PhP8,000 to PhP30,000 per monthAccountant – PhP14,000 to PhP35,000 per monthMessenger – PhP7,000 to PhP10,000 per monthDriver – PhP7,000 to PhP12,000 per month

Mail service - Post office box facilities are available at a PhP3 storagefee per day with PhP70 key charge and PhP75 postal I.D.fee. Door to door mail delivery service is also available atvariable rates.

Telegraph, telex, telecopier, telefax, telephone services (via landline, mobile, orInternet) – Many message-transmitting companies operate in the Philippines.Monthly billing for landline telephone vary from a low of about US$12 (residential)to a high of US$24 (business) plus 10% VAT for both lines. Internet subscriptionrates vary from PhP250 to PhP100,000 depending on the type of plans – monthly/quarterly, semi-annual / annual and the number of hours to be used by thecompany.

b. Rentals for office space in Makati?

Based on the 2nd quarter estimates for 2004, the rental of office spaces in Makatiranges from PhP300 to PhP600 per square meter per month.

c. Rentals for housing of expatriate executives?

i) Lodging Houses/Pension Housesand Motels – US$5 to US$25 per day

ii) Hotels – US$40 to US$250 per day

iii) Apartments – Monthly rental for a one-bedroom furnishedapartment specially in the Makati area varies fromPhP26,000 to PhP75,000 per month while a two/three/four bedroom apartment/house will costabout PhP50,000 to PhP500,000 per month.

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iv) Houses in villages – The main residential areas in Metro Manila whereforeigners may look for houses are: in Makati -Forbes Park, San Lorenzo, Urdaneta, Bel-air, SanMiguel, Dasmariñas; in Ortigas - Greenhills, ValleVerde, Corinthian; and in Ayala Alabang.

The monthly rentals for the houses in the above villages range from PhP50,000to PhP250,000. Modern houses with spacious lawns and swimming pools willfall under the higher rental range. A deposit is generally required and may rangefrom the equivalent of six months to two years rental.

d. Cost of acquiring and maintaining automobiles?

Cost of new automobiles ranges from a low of about PhP450,000 (for subcompactcars) to a high of PhP4,000,000 for luxury cars.

The Philippines has recently deregulated the oil industry such that gasolinestations may set their own prices. The prices of gasoline vary on a daily basis butcurrent indicative prices (as of June 2004) are approximately PhP25 to PhP26 forpremium gasoline and unleaded gasoline and PhP19.70 for diesel.

e. Tuition and school fees for children and high school students?

The annual school fees for an equivalent US standard school start fromUS$4,000.00 approximately for 3-year old nursery program.

Other schools offering high standards of education but charging lower tuition feesof around PhP50,000 annually are also available.

How easily can work permits be obtained for expatriate executives?

Work permits can be easily obtained provided the requirements are complied with.Applications for Alien Employment Permits are filed with the Department of Labor andEmployment (DOLE), while applications for visas are filed with the Bureau ofImmigration (BI). The Alien Employment Permit is required before aliens are grantedworking visas by the BI. Some of the documents required are:

a. Curriculum vitaeb. Contract of employmentc. Affidavit of Support of the expatriated. Certification by the Philippine sponsor company as to the total number of its

expatriatese. Articles of Incorporation and By-Law, General Information Sheet and latest income

tax return of the Philippine sponsor company,

The Alien Employment Permit and working visas are usually co-terminous with theperiod of the expatriates’ assignment in the Philippines as indicated in their

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employment contract. In the absence of a definite period of assignment, saiddocuments shall be valid for one year counted from the date of employment contract.They may be renewed depending upon the terms of the contract between the employerand the employee.

The address and phone numbers of the aforementioned two agencies are as follows:

DOLE: DOLE National Capital RegionSan Marcelino Street corner Malvar Street,Intramuros, Manila 1002Tel. No.: 63 (2) 525 9487 to 95

BI: Magallanes DriveIntramuros, Manila 1002Tel. No.: 63 (2) 527 3314/3265

How easily can expatriate executives obtain clearances for travel abroad?

Aliens with working visas need not secure clearances from the BI every time they travelabroad. However, an alien may obtain a multiple exit and re-entry permit from the BIDwhich will allow the alien to travel abroad without going to the BID every time hetravels.

May expatriate executives receive their compensation in foreign currencies?

Yes. They may receive their compensation in foreign currencies. However, thiscompensation will still be included in their taxable income.

Will the expatriates be allowed to convert into foreign currency any excesspesos that they may have upon termination of their assignment?

Yes. They will be allowed to convert any excess pesos upon termination of theirassignment in the Philippines subject to compliance with certain requirements.

Is there any public offering of stocks or corporate shares in the Philippines?

Yes, stock trading is held in the Philippine Stock Exchange from Mondays to Fridays.Trading is limited to securities approved and registered with the SEC.

Please refer to Section A.4 of “Income and Business Taxes” for tax treatment of tradedstocks.

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Appendices



Appendix I

GNP/ GDP by Industrial Origin and Sectoral Growth Rates(in Million Pesos, at constant 1985 prices)

Industry

1. Agriculture, Fishery &Forestry

2. Industrial Sector

A. Mining and QuarryingB. ManufacturingC. ConstructionD. Electricity, Gas and

Water

3. Services

A. Transportation,Communication andStorage

B. TradeC. FinanceD. Occupied dwellings

and Real EstateE. Private ServicesF. Government Services

Gross Domestic Product(GDP)

Gross National Product(GNP)

2002

0206,198

0361,167

0015,285

0252,5530059,1570034,172

0478,718

080,805

170,789048,921

48,947

78,03251,224

1,046,083

1,121,037

Growth (%)2001-02

03.3

03.7

51.0

03.503.504.3

05.4

08.9

05.803.401.7

05.604.7

04.4

04.5

2003

214,327

372,048

17,966

263,24555,67935,158

506,942

87,748

180,76852,31250,804

82,16153,149

1,093,317

1,182,432

Growth (%)2002-03

03.9

03.0

17.5

04.205.902.8

05.9

08.6

05.806.903.8

05.303.8

04.5

05.5

Growth Rates(%)(4th Quarter)2002 2003

06.0 5.5

04.8 1.2

64.1 9.2

04.0 3.200.5 9.804.5 2.4

06.4 6.5

08.9 9.4

06.4 6.805.6 6.702.8 3.9

06.3 5.707.2 3.7

05.8 4.5

07.8 4.5

Source: National Accounts, Fourth Quarter 2003; National Statistics Office

- - - -


Appendix IIFifth Regular Foreign Investment Negative List(E.O. No. 139)

List A: Foreign ownership is limited by mandate of the constitution and specific laws

No Foreign Equity

1. Mass media, except recording (Article XVI, Section II of the Constitution; PresidentialMemorandum dated May 4, 1994)

2. Services involving the practice of licensed professions save in cases prescribed by law.[Article XIV Section 14 of the Constitution; Section 1 of Republic Act (RA) 5181]

3. Retail trade enterprises with paid-up capital of less than US$2.5 million (Sec. 5 of RA8762) (1)

4. Cooperatives (Chapter III, Article 26 of RA 6938)

5. Private security agencies (Section 4 of RA 5487)

6. Small-scale mining (Section 3 of RA 7076)

7. Utilization of marine resources in archipelagic waters, territorial sea and exclusive economiczone (Article XII, Section 2 of the Constitution)

8. Ownership, operation and management of cockpits [Section 5 of Presidential Decree (PD)449]

9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons. (Article II, Section 8of the Constitution) (2)

10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiologicalweapons and anti-personnel mines (Various treaties to which the Philippines is a signatoryand conventions supported by the Philippines) (2)

11. Manufacture of firecrackers and other pyrotechnic devices (Section 5 of RA 7183)

Up to Twenty Percent (20%) Foreign Equity

12. Private radio communications network (RA 3846)


Up to Twenty-Five Percent (25%) Foreign Equity

13. Private recruitment, whether for local or overseas employment (Article 27 ofPD 442)

14. Contracts for the construction and repair of locally funded public works (Commonwealth Act(CA) 541 as amended by PD 1594; Letter of Instruction No. 630) except:

a. infrastructure/development projects covered in RA 7718 or theexpanded BOT Law; and

b. projects which are foreign funded or assisted and required toundergo international competitive bidding [Section 2(a) of RA 718].

15. Contracts for the construction of defense-related structure (Section 1 of CA 541)

Up to Thirty Percent (30%) Foreign Equity

16. Advertising (Article XVI, Section 11 of the Constitution)

Up to Forty Percent (40%) Foreign Equity

17. Exploration, development and utilization of natural resources

Note: Full foreign participation is allowed through financial or technical assistance agreement with thePresident (Article XII, Section 2 of the Constitution)

18. Ownership of private lands (Article XII, Section 7 of the Constitution, Chapter 5, Section 22of CA 141)

19. Operation and management of public utilities (Article XII, Section 11 of Constitution; Section16 of CA 146)

20. Ownership/establishment and administration of educational institutions (Article XIV, Section4 of the Constitution)

21. Culture, production, milling, processing, trading excepting retailing of rice and corn andacquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof (Sec.5 of PD 194; Sec. 15 of RA 8762) (3)

22. Contracts for the supply of materials, goods and commodities to government-owned orcontrolled corporation, company, agency or municipal corporation (Section 1 of RA 5183)

23. Project proponent and facility operator of a BOT project requiring a public utilities franchise[Article XII, Section 11 of the Constitution; Section 2(a) of RA 7718]

24. Operation of deep sea commercial fishing vessels (Section 27 of RA 8550)

25. Adjustment companies (Section 323 of PD 612 as amended by PD1814)


26. Ownership of condominium units where the common areas in the condominium project areco-owned by the owners of the separate units or owned by a corporation (Section 5 of RA4726)

Up to Sixty Percent (60%) Foreign Equity

27. Financing companies regulated by the SEC (Section 6 of RA 5980, as amended by RA8556) (4)

28. Investment houses regulated by the SEC (PD 129 as amended by RA 8366)

LIST B: Foreign ownership is limited for reasons of security, defense, risk to health and morals,and protection of small- and medium-scale enterprises

Up to Forty Percent (40%) Foreign Equity

1. Manufacture, repair, storage and/or distribution of products and ingredients used in themanufacture of firearms, gunpowder, dynamite, blasting supplies ingredients used in makingexplosives, telescopic sights and other similar devices requiring Philippine National Policeclearance. However, the manufacture or repair of these items maybe authorized by thechief of the PNP to non-Philippine nationals; Provided that a substantial output is exported;Provided further that the extent of foreign equity ownership allowed shall be specified in thesaid authority/clearance. (RA 7042, as amended by RA 8179)

2. Manufacture, repair, storage and/or distribution of products such as guns otherammunitions, military aircraft, vessels, equipment and training devices and parts andcomponents thereof, requiring Department of National Defense (DND) clearance, and othersas may be determined by the Secretary of the DND. (RA 7042, as amended by Republic Act8179)

3. Manufacture and distribution of dangerous drugs (RA 7042, as amended by RA 8179)

4. Sauna and steam bathhouses, massage clinics and other like activities regulated by lawbecause of risk they impose to public health and morals (RA 7042, as amended by RA 8179)

5. All forms of gambling, e.g., race track operation (RA 7042, as amended by RA 8179)

6. Domestic market enterprises with paid-in equity capital of less than the equivalent ofUS$200,000 (RA 7042, as amended by RA 8179)

7. Domestic market enterprises which involve advanced technology or employ at least 50direct employees, with paid-in-capital of less than the equivalent of US$100,000 (RA 7042,as amended by RA 8179)


Notes:(1) RA 1180 as amended by RA No. 8762; see pages 31 and 32 of this Guide for details on the

Retail Trade law.(2) For items 9 and 10, domestic investments are also prohibited (Article II, Section 8 of the

Constitution and Conventions / Treaties to which the Philippines is a signatory).(3) Full foreign participation is allowed provided that within the 30-year period from start of

operation, the foreign investor shall divest a minimum of 60% of their equity to Filipinocitizens (Sec. 5 of PD 194: NFA Council Resolution No. 193 s. 1998).

(4) No foreign national may be allowed to own stock in financing companies or investmenthouses unless the country of which he is a national accords the same reciprocal rights toFilipinos (Sec. 6 of RA 5980 as amended by RA 8556; PD 129 as amended by RA 8366).


Appendix IIIIncome Tax Rates for Special Corporations

Entity

International carriers

Nonresident foreigncorporation

Nonresident owner or lessorof aircraft, machinery andother equipment

Nonresident owner orlessor of vessels charteredby Philippine nationals asapproved by MARINA

Nonresidentcinematographic filmowners, lessors ordistributors

Offshore banking units(OBUs) and foreign currencydeposit units (FCDUs)authorized by the BSP

Subcontractors engaged inpetroleum operations

Regional operatingheadquarters

Rate

2.5%

32%

7.5%

4.5%

25%

Exempt

10%

32%

8% final tax

10%

Taxable Base

Gross Philippine Billings originatingfrom the Philippines

Gross income from Philippinesources

Gross rentals or fees

Gross rentals, lease or charter feeswithin the Philippines

Gross income from Philippinesources

Income from foreign currencytransactions with nonresidents,offshore banking units in thePhilippines, local commercial banksincluding branches of foreign banks.

Interest income from foreign currencyloans granted to residents other thanOBUs in the Philippines or otherFCDU depository banks.

Net income from other transactionsas may be specified by the Secretaryof Finance upon recommendation bythe Monetary Board.

Gross income from service contract

Taxable income from authorizedactivities


Note: Reinsurance premiums are exempt; interest on foreign loan contracted on or after August1, 1986 is taxed at 20%; capital gains on disposition of shares of stock of domesticcorporation are subject to 1/2% of 1% tax on gross selling price if traded through

the stock exchange, and 5% or 10% tax of net gain, as in the case of closely-heldcorporations.


Appendix IVPhilippine tax treaties in force as of June 2004

Country

1. Australia2. Austria3. Bahrain4. Bangladesh

5. Belgium (Protocol Amending the Agreement)6. Brazil7. Canada8. China9. Czech10. Denmark (Renegotiated)11. Finland12. France (Protocol Amending the Convention)13. Germany14. Hungary

15. India16. Indonesia17. Israel

18. Italy19. Japan

Effectivity

January 1, 1980January 1, 1983January 1, 2004January 1, 2004(for the Philippines)July 1,2004(for Bangladesh)January 1, 1981January 1, 2000

January 1, 1992January 1, 1977January 1, 2002January 1, 2004January 1, 1998

January 1, 1982January 1, 1978January 1, 1998

January 1, 1985January 1, 1998(for other taxes)April 8, 1998(for taxes withheld atsource)January 1, 1995January 1, 1983January 1, 1997(for taxes withheld atsource)July 26, 1997(for other taxes)January 1, 1990January 1, 1981

Country

20. Korea21. Malaysia22. Netherlands23. New Zealand24. Norway (Protocol Amending the Convention)25. Pakistan26. Romania27. Russia28. Singapore29. Spain30. Sweden

(Renegotiated)31. Switzerland32. Thailand

(Renegotiated –pending signature)

33. United Kingdom ofGreat Britain andNorthern Ireland

34. United States ofAmerica

35. Vietnam

Effectivity

January 1, 1987January 1, 1985January 1, 1992January 1, 1981January 1, 1998January 1, 1998

January 1, 1979January 1, 1998January 1, 1998January 1, 1977January 1, 1994January 1, 2004

January 1, 2002January 1, 1983

January 1, 1979

January 1, 1983

January 1, 2004


PricewaterhouseCoopersoffices worldwide

AngolaAntiguaArgentinaArubaAustraliaAustriaAzerbaijanBahamasBahrainBaltic StatesBangladeshBarbadosBelgiumBermudaBoliviaBosnia and HerzegovinaBotswanaBrazilBritish Virgin IslandsBruneiBulgariaBurindiCambodiaCameroon, Republic ofCanadaCape VerdeCayman IslandsCentral Africa,

Republic ofChadChannel IslandsChileChina, People’s

Republic ofColombiaCongo, Democratic

Republic ofCongo, Republic ofCosta RicaCote de lvoire

CroatiaCyprusCzech RepublicDenmarkDominican RepublicEcuadorEgyptEl SalvadorEstoniaFaroe IslandsFiji IslandsFinlandFranceGabon, Republic ofGermanyGhanaGibraltarGreeceGreenlandGrenadaGuatemalaGuineaGuyanaHondurasHong KongHungaryIcelandIndiaIndonesiaIranIrelandIsle of ManIsraelItalyJamaicaJapanJordanKazahkstan, Republic ofKenyaKorea

KuwaitLaosLatviaLebanonLibyaLeichtensteinLithuaniaLuxembourgMacauMacedonia, Republic of (Fyrom)MalawiMalaysiaMaldivesMaltaMauritiusMexicoMoldovaMonaco, Principality ofMoroccoMozambiqueNamibiaNepalNetherlands AntillesNetherlands, TheNew CaledoniaNew ZealandNicaraguaNigeriaNorwayOmanPakistanPanamaPapua New GuineaParaguayPeruPhilippinesPolandPortugalPuerto RicoQatar

RomaniaRussiaSaudi ArabiaSenegalSerbia & MontenegroSingaporeSlovak RepublicSloveniaSolomon IslandsSouth AfricaSpainSri LankaSt. LuciaSudanSurinamSwazilandSwedenSwitzerlandTahitiTaiwanTanzaniaThailandTrinidad & TobagoTunisiaTurkeyTurks & Caicos IslandsUgandaUkraineUnited Arab EmiratesUnited KingdomUnited States of AmericaUruguayUzbekistanVenezuelaVietnamWest Bank & GazaZambiaZimbabwe


Printed in the Philippines January 2002Reprinted September 2003Reprinted and updated July 2004

Philippine Copyright 2004by Joaquin Cunanan & Co.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisoryservices for public and private clients. More than 120,000 people in 139 countries connect theirthinking, experience and solutions to build public trust and enhance value for clients and theirstakeholders.

(“PricewaterhouseCoopers” refers to the Philippines firm of Joaquin Cunanan & Co. or, as thecontext requires, the network of member firms of PricewaterhouseCoopers International Limited,each of which is a separate and independent legal entity.)

© 2004 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to thenetwork of member firms of PricewaterhouseCoopers International Limited, each of which is aseparate and independent legal entity. *connectedthinking is a trademark ofPricewaterhouseCoopers.

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