SECTION 1: Market outlook
1.1 How would you summarise your jurisdiction’s attitude towards the influence of Japanese corporate culture in its industries?
Over the years, the Philippines has proven to Japan its ability to be an effective platform for opportunities in trade and investments for Japanese companies. Japan has been the Philippines’ most generous donor of official development assistance for the past 23 years. Because of this symbiotic relationship, Japanese corporate culture is not only seen as desirable but is also perceived as vital to the mutual development of both Asian countries.
1.2 What is the outlook for Japanese investment into your jurisdiction over the next 12 months?
In October 2016, Philippine President Duterte secured investments and loans, primarily from private Japanese firms, amounting to $19 billion during his official visit to Japan. In January 2017, Prime Minister Shinzo Abe pitched for more Japanese firms to invest in the Philippines and capped off his official visit to Manila with a ¥1 trillion ($8.9 billion) pledge of aid and investments over the next five years. These trends show that Japanese investments will be met with more growth and optimism for the next couple of years. Current trends with previous investments support this conclusion as well: Japanese convenience store chains like Lawson and Family Mart have already experienced expansion. The Bank of Tokyo-Mitsubishi UFJ took a 20% stake in Philippine’s Security Bank, a leading local bank. The NTT group and Mitsubishi are strategic shareholders of PLDT and Ayala Corp, among the largest Philippine conglomerates. DMCI Holdings, a leading construction firm in the Philippines, has partnered with Marubeni on several infrastructure projects. These recent developments show that there is a consistently increasing trend of Japanese corporations realising significant gains in the Philippines.
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and approval timetable.
Generally, foreign investments do not need prior approval separate from the approval required for establishing a presence in the Philippines.
However, in the event that a foreign investor purchases or subscribes to shares in an existing domestic corporation with the result that the domestic corporation has a foreign equity of more than 40% or, where the domestic corporation already has 40% foreign equity, further increases the foreign equity percentage, then an application must be filed with the Philippine Securities and Exchange Commission (SEC). It usually takes two to three weeks for the approval of the SEC.
Additionally, there are special laws which require foreign investors to obtain approval from the relevant regulators prior to investment in regulated corporations, for example insurance companies, banks and public utilities, among others.
2.2 Are there any investment restrictions in specially regulated sectors and is the government entitled to any special rights in these sectors?
The Philippine government releases a Foreign Investment Negative List every two years which enumerates the areas of activities wholly reserved to Philippine nationals and those that are partially-nationalised and subject to limited participation by foreign investors.
The Negative List contains two lists: List A, which enumerates areas of investment where foreign ownership is limited pursuant to the Philippine Constitution and/or by specific laws; and List B, which enumerates areas of investment where foreign ownership is limited for reasons of security, defence, risk to health and morals and protection of local small and medium scale enterprises.
As an example, mass media and retail trade with paid-up capital of less than $2.5 million are reserved for Philippine nationals or corporations 100% owned by Philippine nationals. On the other hand, ownership of private lands, mining, and operation and management of public utilities are reserved for Philippine nationals or corporations at least 60% owned by Philippine nationals.
2.3 Which authority oversees competition clearance? Please give a brief overview of the merger clearance process.
The Philippine Competition Commission holds original and primary jurisdiction to enforce the Philippine Competition Law.
To enable the Commission adequate opportunity to assess whether a transaction is prohibited, the law requires parties to a transaction to notify the Commission where the value of the merger or acquisition transaction exceeds PHP1 billion ($20 million).
The implementing rules and regulations for the Competition Law expand the criteria for transactions requiring prior notification by including total revenues of the target and the level of ownership in the company to be acquired. If the Commission does not act on the transaction within a period of 30 days from notification, the transaction may proceed. However, the 30-day period may be extended for a period not exceeding 60 days by a request for additional information by the Commission.
Notification allows the Commission to determine whether or not the transaction comes within the purview of the prohibited mergers and acquisitions. If after evaluation, the Commission concludes that the transaction is anathema to competition, the Commission is empowered to take measures necessary to ensure compliance with the law, such as outright prohibition of the transaction or the recommendation and imposition of modifications to the transaction. The requirement to notify the Commission is in addition to any approvals already required by laws or regulations that must be obtained from the relevant regulatory authority (such as the central monetary authority for transactions involving banks). The law therefore adds a crucial closing condition for acquisition and financing transactions.
2.4 Are there further approval requirements that foreign investors should be aware of?
In the event that a foreign investor will be purchasing shares in an existing corporation, the investor will need to obtain confirmation from the Bureau of Internal Revenue to confirm that proper taxes have been paid for the purchase of shares before the investor is reflected as the owner of record of the shares in the books of the corporation.
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for Japanese investment in your jurisdiction?
The most common legal entities used for Japanese investment in the Philippines are: a representative or liaison office; a branch office; or a local subsidiary (domestic corporation). The permissible activities, taxation, extent of liability of the head office/parent company, exercise of management powers and administrative costs will vary depending on the investment vehicle chosen.
3.2 What are the key requirements for establishment and operation of these legal entities?
A representative office acts merely as a liaison office between its head office and the latter’s Philippine-based clients or customers. The activities it may engage in are limited to information dissemination, promotion and quality control of the foreign company’s products and the like. A representative office in the Philippines is not allowed to conclude sales contracts on behalf of its head office. It is not allowed to derive income from the Philippines. Its expenses are fully subsidised by its head office. Capital requirements: at least $30,000 or its equivalent in other acceptable foreign currency must be remitted into the Philippines for use by the representative office.
If a foreign corporation desires to carry out the business activities of its parent company in the Philippines and to derive income from the Philippines, then it may establish a branch office.
A branch office is treated as the same juridical entity as its parent foreign corporation. No independent juridical entity is created by its establishment. Thus, any judgment or claim for liability against the branch office in the Philippines will be directed against the parent company. Furthermore, a branch is considered a foreign entity. For this reason, if the business activity is subject to foreign equity restrictions or limitations, the foreign investor may not be allowed to establish a branch office.
Capital requirements: generally, at least $200,000 or its equivalent in other acceptable foreign currency must be remitted into the Philippines for the branch office.
Domestic Corporation/Local Subsidiary
A foreign investor may also choose to establish a domestic corporation or local subsidiary in the Philippines. A domestic corporation or local subsidiary is a juridical person separate and distinct from that of its shareholders. Thus, a local subsidiary of a foreign corporation is deemed, both in law and in fact, separate and distinct from its parent company. The local subsidiary is a legally independent unit.
Capital requirements: generally, a domestic corporation with foreign equity participation of more than 40% must have a minimum paidup capital equivalent to at least $200,000.
SECTION 4: Dispute resolution
4.1. How effective are local courts’ enforcement and dispute resolution proceedings, and what should Japanese investors be particularly aware of?
A policy in favour of alternative methods of dispute resolution (such as domestic, construction and international commercial arbitration, as well as conciliation and mediation) was expressly adopted through Republic Act No 9285. In the case of international commercial arbitration, the ADR Act particularly adopted the 1985 UNCITRAL Model Law on International Commercial Arbitration.
4.2. Does your jurisdiction have a bilateral investment protection treaty with Japan and is that commonly used by investors?
The Philippines and Japan entered into a bilateral investment protection treaty called the Philippine-Japan Economic Partnership Agreement, which aims to increase and protect investment opportunities between the two countries. At present, the Philippines provides preferential rates, particularly modified and reduced tariff on certain goods imported from Japan, such as motor vehicles.
4.3. Do local courts respect foreign judgments and are international arbitration awards enforceable?
Foreign judgments and foreign arbitral awards are enforceable and respected in the Philippines.
Foreign judgments upon specific things are conclusive upon the titles to the thing, while foreign judgments against a person are mere presumptive evidence of a right between the parties and their successors-in-interest. In both cases, the foreign judgment may be repelled by evidence of want of jurisdiction, want of notice to the party, collusion, fraud, clear mistake of law or fact. Recognition and enforcement of foreign arbitral awards are governed by the 1958 New York Convention. The Philippines, however, may recognise and enforce foreign arbitral awards rendered in countries not covered by the New York Convention if the said country extends comity and reciprocity to awards rendered in the Philippines. Otherwise, it shall be enforced in the same manner as foreign judgments and orders. Notably, a merits review of foreign arbitral awards is not available, since these are presumed to have been rendered in due course and subject to enforcement by Philippine courts. Philippine courts, nevertheless, may refuse foreign arbitral awards recognition and enforcement based on limited grounds under Article V of the New York Convention. Although Philippine courts are inclined to recognise and enforce foreign arbitral awards, uncertainty exists whether interim measures of protection that can be invoked pending arbitration are still available post-award.
SECTION 5: Forex controls and local operations
5.1 What foreign currency or exchange restrictions should foreign investors be aware of?
The registration of foreign/non-resident investments with the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), is not mandatory. The registration of foreign investments with the BSP is only required if the foreign exchange needed to service the repatriation of capital and the remittance of dividends, profits and earnings which accrue thereon shall be sourced from the Philippine banking system. Foreign exchange needed for capital repatriation and remittance of dividends, profits and earnings of unregistered foreign investment may be sourced outside of the banking system.
SECTION 6: Tax implications
6.1 Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for Japanese investors into the country?
Generally, Japanese investors should seek to avail of the tax incentives available to enterprises engaged in activities entitled to such incentives. Further, Japanese investors should take full advantage of the PhilippineJapan Tax Treaty.
6.2 What are the applicable rates of corporate tax and withholding tax on dividends?
The corporate income tax in the Philippines is 30% of the net taxable income of the corporation or branch office. Generally, dividend tax to nonresident corporate stockholders is a final tax of 30%. However, a non-resident Japanese corporation may avail of the Philippine-Japan Tax Treaty to enjoy a lower dividend tax rate.
6.3 Does the government have any tax incentive schemes in place?
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 will 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 available upon registration and compliance with the requirements prescribed by the respective laws establishing such zones. 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 under the Philippines Omnibus Investments Code. An enterprise may register as a pioneer or nonpioneer enterprise with the Board of Investments (BOI) if its activity is listed in the current Investments Priorities Plan. BOI-registered enterprises are entitled to an income tax holiday of six years for pioneer enterprises and four years for non-pioneer enterprises. These enterprises may also be entitled to zero percent duty on importation of capital equipment, spare parts and accessories and exemption from taxes and duties on imported supplies and spare parts, among others.
6.4 Are there any reciprocal tax arrangements between your jurisdiction and Japan? If so, how can they aid investors?
There is an existing Philippine-Japan Tax Treaty for the avoidance of double taxation of income tax. Among others, the tax treaty provides a preferential rate for dividend tax for residents of Japan. Generally, dividends paid to a Japan resident are a ten percent of the gross amount of the dividends if such resident directly owns at least ten percent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; or 15% of the gross amount of the dividends in all other cases.