Cruz Marcelo & Tenefrancia looks at the latest developments in Philippine legislation
The Philippines remains one of the fastest growing economies in the world with 6.8% growth in its GDP in 2012 and 7.2% in 2013 due to fiscal discipline and sound economic policies. With a positive economic environment, the Philippines has been described as a “Rising Star” and a “Breakout Nation” and has received recent sovereign credit upgrades and positive ratings outlook towards investment grade from all major credit ratings agencies. For the first quarter of 2014, the Philippines grew 5.7% despite experiencing major disasters, thus ranking as the third fastest growing economy in Asia, after China (7.4%) and Malaysia (6.2%). With this, the country has registered nine consecutive quarters of above 5.5% GDP growth.
The Philippines has likewise moved up 26 places in the World Economic Forum’s competitiveness rankings, from 85th to 59th. The government’s economic policies have moreover translated to significant improvements in the country’s standing in the World Bank and the International Finance Corporation’s Ease of Doing Business Report, where it improved by 36 spots, and in the Heritage Foundation’s Index of Economic Freedom, where it improved by 20 spots. This makes the country a most strategic and attractive location to do business in the Asia-Pacific Region.
Based on data from the Bangko Sentral ng Pilipinas (Central Bank of the Philippines), the services sector, which accounted for 56.8% of the country’s total GDP, rose by 7.1% in 2013, contributing 4.1 percentage points to the 2013 GDP growth, making it the top growth contributor. Significantly, according to the same data, the business process outsourcing (BPO) industry supports the demand for real properties and business activities. On the other hand, the industry sector accounted for 32.7% of the country’s total GDP, posted a 9.5% growth, contributing 2.3 percentage points to the 2013 GDP growth.
Addressing corruption as a challenge for economic growth and affirming good governance as a model for socio-economic development, the Philippines continues to improve on its standing in the Corruption Perceptions Index of Transparency International. For 2013, the Philippines ranked 94th out of 177 countries surveyed with a score of 36/100, moving up 11 places from 105th rank in 2012 and a previous 129th ranking in 2011. Comparatively, Singapore, which ranked first in Southeast Asia, placed 5th. Brunei Darussalam (38th) and Malaysia (53rd) were second and third, respectively. The Philippines is fourth in the region, ranking higher than Thailand (102th), Indonesia (114th), Vietnam (116th) and Laos (140th).
Recognising the role of the private sector as essential for sustained economic development, public-private partnerships (PPP) have been adopted as a cornerstone strategy for national development. Accordingly, the Public-Private Partnership Center (PPP Center) has been mandated to facilitate and optimise PPPs for the delivery of public infrastructure and other development services. Under this framework, the government will provide incentives to stimulate private resources for the purpose of financing the construction, operation and maintenance of infrastructure and development projects normally undertaken by the Government. Consistent with the principles of transparency and open competition, interested investors are ensured a level playing field with reasonable returns and appropriate risk-sharing without compromising the protection of public interests.
In terms of doing business in the Philippines, as a general rule, foreign individuals, corporations or other entities are allowed to engage in business in the Philippines. However, under the Philippine Constitution and special laws, the extent of equity held by foreigners in some business activities is restricted or limited as enumerated in the Negative List issued pursuant to Republic Act No. 7042 (Foreign Investments Act). Therefore, the maximum amount of equity allowed to be held by a foreigner in a corporation would depend on the type of activity that the corporation engages in.
Foreign entities allowed to engage in business activity in the Philippines may establish: (a) a representative office/liaison office; (b) regional or area headquarters; (c) regional operating headquarters; (d) branch office; or (e) a local subsidiary (domestic corporation). The permissible activities, taxation, extent of liability of the head office/parent company, exercise of management power and administrative costs would vary depending on the investment vehicle chosen.
If a corporation is engaged in a partially-nationalised business activity, foreigners may become members of the board of directors only in proportion to their allowable participation or share in the capital of such entities. Further, foreigners may only be employed by wholly or partially nationalised companies in technical positions, provided that their employment is authorised by the Secretary of Justice. They cannot assume any management position or managerial function in such nationalised corporation.
Entities engaged in business in the Philippines may avail of certain fiscal and non-fiscal incentives depending on the nature of the business, the location where the business is conducted, and the government agency with which the business would be registered.
Businesses may be located within any of the established economic or freeport zones in various parts of the Philippines, and incentives may be availed of upon registration and compliance with the requirements prescribed by the Philippine Economic Zone Authority under Republic Act No. 7916 (Special Economic Zone Act) or by the Subic Bay Metropolitan Authority under Republic Act No. 7227 (Bases Conversion and Development Act). Businesses located outside an established economic or freeport zone may avail of fiscal and non-fiscal incentives if they qualify and register as a pioneer or non-pioneer enterprise with the Board of Investments.
With respect to the banking industry, Republic Act No. 10641 (An Act Allowing the Full Entry of Foreign Banks in the Philippines) was enacted into law, allowing greater foreign participation in the country’s banking industry. The law authorized the Monetary Board (the highest policy-making body of the Central Bank of the Philippines) to permit reputable and financially-sound foreign banks to operate within the Philippine banking system by acquiring, purchasing or owning up to 100% of voting stock of an existing bank or by investing in up to 100% of the voting stock of a new banking subsidiary incorporated under Philippine laws, or by establishing branches with full banking authority. Prior to the current law, foreign banks may only own or invest in 60% of voting stock in Philippine finance institutions. Furthermore, foreign banks are now allowed to bid and to take part in foreclosure sales of real property mortgaged to them, as well as to avail of enforcement and other proceedings, and even to take possession of the mortgaged property for a period not exceeding five years, provided that their rights are transferred to a qualified Philippine national.
In a parallel measure approved in 2013, Republic Act No. 10574 (An Act Allowing the Infusion of Foreign Equity in the Capital of Rural Banks) now allows foreign entities to own, acquire or purchase up to 60% of voting stock in Philippine rural banks. Further, foreign citizens may become members of the Board of Directors of a rural bank but their participation therein is limited to their proportionate share in the equity of the rural bank.
Managing partner
Cruz Marcelo & Tenefrancia
Manila
About the author
Mr. Tenefrancia is the Managing Partner and head of the Information & Communications Technology practice group. He is a litigator by training and remains a member of the Litigation & Dispute Resolution Department and Mining & Natural Resources Department. In February 2001, he was appointed Assistant Secretary for Legal Affairs under the Office of the President of the Republic of the Philippines. He was Chief Presidential Legal Counsel from January 2004 to August 2004. Thereafter, he was appointed Senior Deputy Executive Secretary for Legal Affairs, Office of the Executive Secretary (with the rank of Cabinet Secretary) under the Office of the President from September 2004 to December 2005. He has extensive experience in litigation practice and in government service, which lead to the resolution of complex and multi-faceted legal issues. Mr. Tenefrancia obtained his Bachelor of Laws degree from the University of the Philippines as class Salutatorian in 1990.
Senior partner
Cruz Marcelo & Tenefrancia
Manila
About the author
Mr. Manaligod is the head of the Corporate & Commercial Law Department, overseeing various practice groups under this broad field of law. He is an authority on transactions involving infrastructure projects, including those that make use of build-operate-and-transfer (BOT) schemes and its variants. He has broad experience dealing with contracts between the private sector and government, and is an expert in project finance, commercial law, and administrative law. His fields of practice also include information & communications technology, water, and power & energy. Mr. Manaligod previously held a senior position in the Office of the Chief Presidential Legal Counsel during the Ramos Administration. He earned his Bachelor of Laws degree from the University of the Philippines College of Law in 1991 and Master of Laws degree from the London School of Economics and Political Science in 1997, where he graduated with merit.
Senior Partner
Cruz Marcelo & Tenefrancia
Manila
About the author
Ms. Rivera is a Senior Partner of the Corporate and Commercial Law Group and heads the Retainer, Corporate Governance & Regulation and Gaming practice groups. She has extensive experience in government relations due primarily to the various positions she has held in the Philippine Government: Assistant Secretary for Legal (Department of National Defense) from January 2005 to November 2006; Undersecretary (Office of the Chief Presidential Legal Counsel and Office of the Executive Secretary) in the Office of the President of the Philippines from December 2003 to January 2005; and Assistant Secretary for Legal Affairs (Presidential Management Staff) in the Office of the President from September 2001 to December 2003. She obtained her Bachelor of Laws degree from the University of the Philippines in 1995, ranking sixth in her class and graduating with a Dean’s Medal for Academic Excellence. She was admitted to the Philippine Bar in 1996.
Partner
Cruz Marcelo & Tenefrancia
Manila
About the author
Ms. Bagtas is a Partner in the Corporate & Commercial Law Department and heads the Property Development and Immigration Practice Groups. She has extensive practice in Philippine commercial law, taxation, infrastructure development, immigration, foreign investments and trade. She has acted as counsel in a number of M & A deals, whether share sale or a share purchase, asset acquisition or disposition, merger, joint venture or spin-off, involving companies in a variety of industries. She earned her Juris Doctor degree, second honors, from the Ateneo de Manila University School of Law in 1998. She received her Bachelor of Science degree, Major in Legal Management, from the Ateneo de Manila University where she graduated Cum Laude in 1994.
Partner
Cruz Marcelo & Tenefrancia
Manila
About the author
Mr. Umali is a Partner in the Corporate & Commercial Law Department and Mining & Natural Resources practice groups. He regularly advises on investment structures and protection, nationality restrictions, compliance and governance, government procurement, tax, conveyancing, property development, citizenship, immigration, employment and outsourcing. As a member of the Firm’s Mining & Natural Resources Department, he routinely assists clients particularly on land and environmental issues, indigenous peoples, social and development management, community relations, security, and local governments. His recent undertakings include rendering an expert report on Philippine nationality laws in a matter pending before the Australian Federal Magistrates Court. He holds a degree in Bachelor of Arts major in Philosophy from the University of the Philippines, where he graduated cum laude. He obtained his Bachelor of Laws degree from the same university where he graduated as a member of the UP Law Honors' Society, the Order of the Purple Feather.