Ateneo De Manila University Ateneo Law School Rockwell Center, Makati, Philippines COURSE OUTLINE Investment and Incentives

Law 1st Semester, SY 2011 12 Lecturer : Credit Schedule : Course Requisite : Course Overview The course is a study of the legal and regulatory framework that governs investments and the grant of incentives to local and foreign investors. Specifically, it examines the Omnibus Investment Code of 1987, the Foreign Investments Act of 1991, the BOT Law, Special Economic Zones Act and other laws and regulations that operationalize the constitutional (a) recognition of the important role of the private sector in economic development and (b) mandate to grant incentives to the private sector to encourage investments. Objectives of the Course The course is intended to provide the student with the knowledge of the various investment vehicles available to prospective investors, the type of possible incentives that they can avail of and other considerations that they must taken into account when investing or giving legal counsel to prospective clients. It also seeks to challenge the students to critically analyze the important role of investments in economic development, as well as the notion that incentives are necessary to attract foreign investors to the country. Grading System/Assessment You will be graded according to the following criteria: Mid Term Exam Recitation/Class Participation Final Exam Group Exercises 20% 20% 20% 40% Atty. George V. Carmona, PhD : 2 units Fridays, 4:00 pm 6:00 pm None.

TOTAL

100%

Course Requirements You are expected to read and have a good grasp of the basic constitutional provisions, laws and issuances listed below. The first part of the course will be a discussion of the constitutional provisions and relevant laws. To give context to these statutes, you must also read the cases and articles listed below. You must read items listed under Reading for each session. Items listed under Additional Readings are for those of you who wish to read further. As much as practicable, these readings will be available in the library, where you can photocopy them. Most of them can be downloaded from the class egroup. Sessions will generally follow a lecture-seminar format and we will strive to be creative in tackling the various topics identified in this outline. In this regard, the class will be divided into groups for our class and practical exercises. Active involvement during class discussion is obliged. Considering that recitation and class participation constitutes 20% of your final grade, you must exert extra effort to have your participation noticed and appreciated. Submission of assigned papers, reports or pleadings, as may be needed, will form part of your recitation grade. You are required to have an email address and the class will form an egroup. Interaction and discussion in this e-group will be taken into account in the determination of your final grade. Relevance and civility are required in the e-group discussion. Final and/or mid-term examination will be given during the examination week. Presence during this exam is obligatory, as I do not give make up exams, save for highly exceptional reasons. Depending on your performance in class exercises, I may opt to have either a midterm or final exam or both. We may have a take home Final Examination, in lieu of the usual sit-in exam. Consultation The best way to contact me is through any of the following email address: george_carmona@carmona.com. You may also call me at 0908-8861672.

PART ONE. GOVERNMENT POLICY ON INVESTMENT Objective: The Philippine investment policy is largely embodied in the investment incentive system, which has sought to influence investment activity through the granting of fiscal incentives to selected activities, which is mainly administered by the Board of Investments. Thus, this session will look into the policy of the state as embodied in the constitution, basic laws, executive issuances and Supreme Court decisions implementing these policies. I. Governments Trade And Investment Policy Regimes from import substitution approach to industrialization to liberalization and globalization II. Viewpoints on investment incentives incentives are a relatively minor determinant as investors are influenced in their decisions by strong economic fundamentals of the host economies. Incentives are significant determinants of foreign direct investment flows. III. Constitutional and statutory provisions A. 1987 Constitution indispensable role of private sector provision of incentives development of a self-reliant independent economy effectively controlled by Filipinos regulation of certain economic activities specified goals of the national economy promotion of industrialization and full employment protection of Filipino enterprise against unfair foreign competition and trade practices state ownership of al lands of public domain states full control and supervision in the exploration, development and utilization of natural resources preferential treatment given to Filipinos in the grant of rights, privileges and concessions on national economy and patrimony. B. Declaration of State Policy Executive Order No. 226 (Omnibus Investment Code) Republic Act No. 7042, as amended (Foreign Investments Act)

BOT Law (Republic Act No. 6957 as amended by RA No. 7718) Republic Act No. 7227 (Bases Conversion and Development Act of 1992) Republic Act No. 7916 (The Special Economic Zone Act of 1995) Executive Order No. 313

IV. Cases 1. National Economic Protectionism Association, et al. vs. Ongpin, et al. G.R. No. 67752 April 10, 1989. 2. Garcia vs. BOI, et al., G.R. No. 88637 September 7, 1989. 3. Garcia vs. Executive Secretary, et al., G.R. No. 100883 December 2, 1991 4. Garcia vs. BOI, et al., G.R. No. 92024 November 9, 1990 5. Coconut Oil Refiners Association, Inc., et al. vs. Torres, et al. G.R. No. 132527. July 29, 2005 6. La Bugal-B'laan Tribal Association, Inc., et al. vs. Ramos, et al., (Original Decision) G.R. No. 127882. January 27, 2004 7. La Bugal-B'laan Tribal Association, Inc., et al. vs. Ramos, et al., (Motion for Reconsideration) G.R. No. 127882. December 1, 2004. V. Articles State of Trade and Investments in the Philippines by Jenny D. Balboa and Erlinda M. Medalla FDI Investment Incentive System and FDI Inflows: The Philippine Experience by Rafaelita M. Aldaba A Study on the Trade and Investment Policies of Developing Countries: The Case of the Philippines by Myrna S. Austria and Erlinda M. Medalla VI. Handouts Modes of Investment A Brief History: Evolution of the Incentives Laws PART TWO. LEGAL AND REGULATORY FRAMEWORK GOVERNING INVESTMENTS WITH INCENTIVES Objective: This part of the course will examine the different laws that govern investments and the grant of incentives. Specifically, it will look into Book One (as amended) of the Omnibus Investments Code and the Build Operate Transfer (BOT) Law, as amended. Through class discussion and group exercises, the students are expected to identify the different modes of investment that an investor can use, the

incentives available to him and the procedures that have to be undertaken both by the government and the investor to avail them. The students are expected to read and understand the provisions of the law, relevant decisions of the Supreme Court, rules promulgated by the BOI, including the IPP, and the requirements of other government agencies like the SEC, BIR, DTI, BSP, etc. I. Basic Laws on Investments and Grant of Incentives A. Book 1 of Executive Order No. 226 - Omnibus Investments Code B. Republic Act No. 7042 - Foreign Investments Act of 1991 (as amended by R. A. No. 8179) C. Republic Act No. 8756 Regional Administrative/Operating Headquarters D. Book V of E. O. No. 226 Special Investors Resident Visa E. Republic Act No. 6957 or the Build Operate Transfer Law F. Republic Act No. 7916 - Special Economic Zones Act of 1995 (as amended by R. A. No. 8478) A. The Omnibus Investments Code The Omnibus Investments Code is the basic law that governs the grant of incentives to investments, although several laws have been recently enacted to regulate other forms of investments, especially in the grant of incentives. This part of the course examines the provisions of the Code, which lay down the legal framework for doing business in the Philippines and the grant of incentives. 1. Basic Rights and Guarantees Given to Foreign Investors Consistent with the policy of the government to encourage foreign investments, foreign investors, in addition to the grant of incentives, are guaranteed certain rights relative to their investments in the country. These are: Right To Repatriation Of Investments Right To Remittance Of Earnings Right To Freedom From Expropriation Right To Non-Requisition Of Investment 2. Different Types of Incentives a. Fiscal Incentives 1. Income Tax Holiday 2. Exemption From Taxes And Duties On Imported Spare Parts 3. Exemption From Wharfage Dues And Export Tax, Duty, Impost And Fees

4. Tax Exemption On Breeding Stocks And Genetic Materials 5. Tax Credits 6. Additional Deductions from Taxable Income b. Non-Fiscal Incentives 1. Employment Of Foreign Nationals 2. Simplification of customs procedures 3. Importation of consigned equipment 4. The privilege to operate a bonded manufacturing/trading warehouse c. Additional Incentives for Locating Project in Less Developed Areas Employment Of Foreign Nationals Simplification of customs procedures Importation of consigned equipment The privilege to operate a bonded manufacturing/trading warehouse 3. Types of Investment a. Pioneer Areas of Investments Investments that are required to attain Filipino status (60% Filipino) within thirty (30) years or such longer period as the BOI may determine except enterprises whose production is 100% geared for exports. b. Non-Pioneer Areas of Investments Foreign investments are allowed up to forty percent (40%) of the outstanding voting capital stock; may be higher if it exports at least 70% of its total production. 4. Investment Priority Plan

1. 2. 3. 4.

B. Republic Act No. 7042 or the Foreign Investments Act of 1991 This law governs investments made by foreign-owned companies not availing of incentives. It repealed Book II of E.O. No. 226 and was further amended by R. A. No. 8179. 1. Objectives of the law Seeks to open up more areas of the Philippine economy to foreign investment, although maintaining constitutional and statutory restrictions in certain nationalized enterprises

 as much as 100 % foreign equity is allowed in areas of activity not otherwise found in the Foreign Investments Act Negative List 2. Negative Lists enumerates the areas of economic activities reserved, whether partially or totally, for Philippine nationals. List A enumerates the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws mass media, retail trade, advertising and public utilities, which are reserved for Philippine nationals by the mandate of the Constitution and specific laws. List B contains the areas of activities and enterprises reserved to Philippine nationals pursuant to law. includes those areas which are either defense-related, requiring prior clearance and authorization from the Department of National Defense, or with implications on public health and morals. List C contains the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments . 3. What Constitutes Doing Business; effect of doing business without license 4. Type of Investments that Can be Made a. Foreign Investments in Export Enterprises Can be up to 100% if products and services do not fall within Lists A and B of the Foreign Investment Negative List. b. Foreign Investments in Domestic Market Enterprises Non-Philippine nationals may own up to 100% of domestic market enterprises unless prohibited or limited by existing law or the Foreign Investment Negative List domestic market enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60%) or more of its output.

5. Modes of Investment a. Domestic Subsidiary b. Branch

c. d. e. f. g. h. i.

Representative Office Regional or Area Headquarters Regional Operating Office Joint Venture Merger or Consolidation Technology Transfer Arrangement Management Contract

C. Republic Act No. 8756 (Law Governing Regional Area/Operating Headquarters) This law governs the establishment of regional or area headquarters in the Philippines by multinational companies. It amends Books III and IV of E. O. No. 226. 1. Incentives Granted to RHQ and ROHQ a. Corporate Income Tax and VAT b. Exemption from all kinds of local taxes, fees and charges, except for real property tax on land improvements and equipment; c. Tax and duty free importation of training materials and equipment; and d. Importation of new motor vehicles subject to the payment of corresponding taxes and duties. D. Book V of E. O. No. 226 This Book governs the grant of Special Investors Resident Visa to foreign investors wanting to do business in the country. 1. Incentives Granted to Ex-Pats a. Multiple entry visa, including those of spouse and unmarried children below age 21; b. Withholding tax of 15% on compensation income applicable to both alien and Filipino executives holding managerial and technical positions; c. Travel tax exemption issued by the Philippine Tourism Authority (PTA) upon recommendation of the Board of Investments (BOI) during the expatriates assignment in the country; and d. Tax and duty free importation of personal and household effects. E. Republic Act No. 6957, as amended Build Operate Transfer Law

1. Statutory Policy Highlights indispensable role of the private sector as the main engine for national growth and development Provides incentives to mobilize private resources Mandates minimum government regulations and procedures Guarantees specific government undertakings in support of the private sector 2. Type of Projects Build-Operate-And-Transfer Build And Transfer Build-Own-And-Operate Build-Lease-Transfer Build-Transfer-And-Operate Contract-Add-And-Operate Develop-Operate-And-Transfer Rehabilitate-Operate-And-Transfer Rehabilitate-Own-And-Operate 3. Type of Projects a. Priority Projects Requires the inclusion in development programs of priority projects that may be financed, constructed, operated and maintained by the private sector Submission for approval of Project costing up to i. P 300,000,000.00 - ICC of the NEDA ii. More than P 300,000,000.00 NEDA Board b. Unsolicited proposals may be accepted by any government agency or local government unit on a negotiated basis if: i. projects involve a new concept or technology and/or are not part of the list of priority projects; ii. no direct government guarantee, subsidy or equity is required; iii. publication, for three [3] consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals and no other proposal is received for a period of sixty [60] working days:

c.

Direct Negotiation of Contracts To be resorted to when there is only one complying bidder: i. after advertisement, only one contractor applied for prequalification and meets the prequalification requirements, and is subsequently found to be compliant. ii. after advertisement, more than one contractor applied for prequalification but only one meets the prequalification requirements, is subsequently found to be compliant. iii. after prequalification of more than one contractor, only one bid is found is to be compliant. iv. after prequalification, more than one contractor submit bids but only one is found to be compliant.

4. Repayment Schemes 5. Other Public-Private-Partnerships Arrangement F. Republic Act No. 7916 or the Special Economic Zones Act of 1995 as amended by R. A. No. 8478 This law governs the establishment of economic zones, including the grant of incentives to investors that would locate their business therein. 1. Types of Ecozones a. Public Economic Zones - considered as separate customs territories from the rest of the Philippines. b. Private Economic Zones - owned and established by private entities Foreign citizens and companies owned by nonFilipinos in whatever proportion may set up enterprises in the ECOZONE, either by themselves or in joint venture with Filipinos in any sector of industry, international trade and commerce within the ECOZONE 2. Incentives a. For Ecozone Developers/Operators Income Tax Holiday 10

Incentives under the Build-Operate-Transfer Law, which includes government support for accessing Official Development Assistance and other sources of financing; Provision of vital off-site infrastructure facilities; Option to pay a special 5% Gross Income Tax, in lieu of all national and local taxes; Permanent resident status for foreign investors and immediate family members; Employment of foreign nationals; Assistance in the promotion of economic zones to local and foreign locator enterprises.

b. For Ecozone and IT Locators Foreign ownership of up to 100%, provided all of its production are for export unless allowed by PEZA to sell to local market 30% thereof. Can avail benefits granted by the Omnibus Investments Code or PD No. 66 (law creating Ecozones), at locators discretion. Income tax holiday (ITH) or exemption from corporate income tax for four years, extendable to a maximum of eight years; after the ITH period, option to pay a special 5% tax on gross income, in lieu of all national and local taxes; Exemption from duties and taxes on imported capital equipment, spare parts, supplies, raw materials, breeding stocks and/or genetic materials or the equivalent tax credit on these items, when sourced locally; Domestic sales allowance equivalent to 30% of total sales; Exemption from wharfage dues and export taxes, imposts and fees; Permanent resident status for foreign investors and immediate family members, if investment is not less than US$150,000.00; Employment of foreign nationals in executive (president, vice president, general manager and treasurer), supervisory, technical or advisory positions for 5 years from registration; Simplified import and export procedures. II. OTHER INVESTMENT RELATED LAWS A. Republic Act No. 8762 Retail Trade Liberalization Act of 2000 B. Republic Act No. 8293 Intellectual Property Code of the Philippines

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C. Republic Act No. 7844- The Export Development Act of 1994 (provides for incentives to business enterprises in the export industry) D. Republic Act No. 7652 - Investor's Lease Act (grants to foreign investors the privilege of leasing private lands for a period of fifty (50) years [initial] which may be renewed for another twenty-five (25) years) E. Republic Act No. 7721 Foreign Bank Liberalization (liberalized the entry and operations of foreign banks and financial institutions in the Philippines) Republic Act No. 7888 - grants authority to the President of the Philippines to suspend the nationality requirement under the Omnibus investments Code [Executive Order No. 226] in the case of equity investments by multilateral financial institutions like the Asian Development Bank [ADB] or the International Finance Corporation [IFC]. F. Relevant provisions of the National Internal Revenue Code and related tax laws III. Cases 1. Garcia vs. BOI, et al., G.R. No. 88637 September 7, 1989. 2. Agan vs. PIATCO (G.R. No. 155001. May 5, 2003) 3. Coconut Oil Refiners Association, Inc., et al. vs. Torres, et al. (G.R. No. 132527. July 29, 2005) 4. La Bugal-B'laan Tribal Association, Inc., et al. vs. Ramos, et al., (G.R. No. 127882. December 1, 2004) 5. MIAA-NAIA Association of Service Operators vs. Ombudsman, (G.R. No. 154190, October 17, 2004) 6. MMDA vs. JANCOM (GR 147465, 10 April 2002) 7. Chavez vs. NHA (G.R. No. 164527, 15 August 2007) 8. Chavez vs. PEA, G.R. No. 133250. May 6, 2003 9. GV Diversified International, Incorporated vs. Court of Appeals, et al. (G.R. No. 159245. August 31, 2006) 10. IT Foundation vs. COMELEC and MegaPacific ([G.R. No. 159139. January 13, 2004) 11. RP vs. Gingoyon and PIATCO (G.R. No. 166429. December 19, 2005) 12. MMDA vs. Trackworks Rail Transit Advertising, Vending and Promotions, Inc. 13. MIAA-NAIA Association of Service Operators VS. Ombudsman 14. Tatad vs. Garcia, G.R. No. 114222. April 6, 1995.]

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