Philippines: The Philippines - An Ideal Investment Destination

(A General Profile of the Philippines and its Legal and Regulatory Environment)

Dubbed as the most improved economy among the developing economies in 1997¹, the Philippines has emerged almost unscathed by the Asian currency crisis that swept through most of the countries in the Asia-Pacific region, including Japan and South Korea. While most of its neighbors sank into recession, the Philippines was able to keep its course and registered a modest growth of 0.1% in its Gross National Product (GNP) in 1998. Last year, the country posted a 3.6% GNP growth, with inflation kept at a single-digit level of 6.7%.² Why the country was spared from the debilitating effects of the currency crisis is partly due to Philippine exports, which have been growing at an average annual rate of over 20% over the last 5 years. In fact, during the height of the crisis in 1998, the country’s exports grew by 17%. Last year, the export growth was 19%, indeed one of the fastest rates in the region.³

With infrastructures, utilities and abundant natural resources, and government policies and incentives that encourage active private participation in economic development, the Philippines generated P233.2 billion worth of investments as of September 1999, 77% higher than the figure obtained during the same period in 1998.⁴ With this trend expected to continue, the Philippines may soon turn into the next major hub of investment, growth and development in the region.

The Philippines is an archipelago composed of 7,100 islands and islets. It is strategically located off the southeast coast of the Asian mainland. It is bounded on the east by the Pacific Ocean, on the south by the Celebes Sea and on the west and north by the South China Sea.

With a total land area of 300,076 square kilometers⁵, the country is divided into three major geographical areas: Luzon (where its capital, Manila, is located), Visayas and Mindanao. It is blessed with abundant natural resources, including extensive mineral reserves, timber, rich fishing grounds and vast arable lands. The country has extensive mineral deposits of the following: iron, gold, cooper, nickel, chromite, molybdenum, mercury, lead, zinc and manganese. Copper and nickel constitute 89% of the country’s total metallic output. Among its non-metallic deposits are cement raw materials and limestone.

Its greatest asset, however, is its highly educated people who speak both English and Filipino, the national language. The Philippines’ literacy rate of 95% is considered one of the highest in the world. This is due in part to the culture-based desire to be educated and skilled to attain material security. The country’s 44,545 schools had a total student population of over 16 million in 1999.⁶ These schools have been churning out graduates who are recognized for their management capabilities, craftsmanship and computer skills. Surveys of executives in the Asian region have consistently ranked both skilled and unskilled Filipino workers high in terms of quality of work, communication capabilities and receptiveness to technology transfer. The labor force is now estimated to be 30.625 million⁷ with the unemployment rate down to 9.4 last year from a 1998 rate of 9.6. The country’s current population is 72,600,000.⁸

As provided in its 1987 Constitution, the Philippines is a democratic republican state.

The government is divided into three co-equal branches: the executive, legislative and the judiciary. The President, who controls all the executive departments, bureaus and offices, heads the executive branch. Directly elected by the people for a term of six years, he appoints all the members of his cabinet and exercises general supervision over the local governments. A Vice-President, who may also be a cabinet member, assists the President. The Vice-President assumes the presidency in the event the President dies, resigns, is removed from office or is otherwise unable to discharge his office. On account of the country’s presidential system of government, its political tradition has always reflected the critical, albeit sometimes controversial, role of the President.

The legislative branch is represented by the Philippine Congress. It is composed of two chambers, the Senate or the upper house and the House of Representatives, or the lower house. Twenty-four senators elected at large by the voters comprise the Senate. The lower house is in turn composed of not more than two hundred fifty members, who are elected from their legislative districts and through the party-list system. Legislation may originate from either house. No bill, however, becomes a law unless approved by a majority of both houses and signed into law by the President.

Judicial power is vested in the Supreme Court and in the lower courts. The primary function of all the courts is to interpret the laws, review the actions of the other branches of the Government to determine whether there has been abuse of discretion, and to settle actual controversies involving rights which are legally demandable. Aside from the Supreme Court, the judiciary is also composed of the Court of Appeals, the Sandiganbayan, Court of Tax Appeals, Regional Trial Courts, and the Municipal or Metropolitan Trial Courts.

The legal system of the Philippines reflects the historical influence of Spanish law, Roman law, French law and the Anglo-American law, as well as the local customs and traditions of the people. Its civil law is based on Spanish law and French law, while most commercial laws, such as the Corporation Code, the Tax Code, and the Securities Act, which is currently under revision, are modeled after American statutes and jurisprudence.

The functions of the three branches of the Government are essentially determined by their role in this legal system. Under a republican system of government, the laws are enacted by the Legislative branch, enforced by the Executive branch, and interpreted by the Judiciary in appropriate proceedings. Among the major laws currently enforced are the Penal Code, National Internal Revenue Code (revised in 1997), Tariff and Customs Code, Civil Code, Labor Code and the Corporation Code. Judicial decisions and pronouncements, together with administrative rulings, rules and regulations, also form part of the law of the land.

After years of protectionism, the Philippines has progressed towards a true market and deregulated economy. Consistent and market-based policies and decisions that are responsive to global challenges are now integral components the country’s economic strategies.

The Government encourages private sector initiatives in almost all aspects of the economy. To this end, the country has adopted a very liberal regulatory framework for foreign investments and trade. Except in certain areas deemed of national interests, foreigners may now invest or engage in a host of activities such as telecommunications, power, infrastructure, transportation, banking, insurance, exploration, development and utilization of natural resources, and recently, retail trade. The extent of foreign participation in these activities is primarily regulated by Republic Act No. 7042, otherwise known as the Foreign Investment Act of 1991. The general policy of the law is to allow foreigners to invest up to 100% of the equity in the companies engaged in almost all business activities. However, certain activities, like land ownership, are reserved to Filipino individuals or to corporations at least 60% of the capital stock is owned by Filipinos. The flow of foreign exchange has been liberalized.

The Government grants various fiscal and non-fiscal incentives to investment in priority projects or if the investment is located in economic zones. Among these incentives are income tax holidays, tax-and-duty-free importation of machineries, equipment, raw materials and supplies, exemption from wharfage dues and local taxes, exemption from export taxes, permanent resident status for foreign investors and their immediate families, employment of foreign nationals, and remittance of earnings abroad.

Aside from the Foreign Investment Act, other laws that will concern a prospective foreign investor in the Philippines include the Omnibus Investment Code of 1987 (Executive Order No. 226), Special Economic Zone Act of 1995 (Republic Act No. 7916), Export Development Act of 1994 (Republic Act No. 7844) and the Investor’s Lease Act of 1993 (Republic Act No. 7652).

Through clear policies, rules and regulations, these laws are implemented through the following administrative agencies: Securities and Exchange Commission, Department of Trade and Industry, Bangko Sentral ng Pilipinas, Philippine Economic Zone Authority and the National Economic Development Authority. An efficient work system among these agencies has been developed to promptly assist all requirements of foreign investors.

*Jesus M. Manalastas and Bob L. Guinto are lawyers at the Ponce Enrile Reyes & Manalastas Law Offices, located at the 3^rd Floor, Vernida IV Building, Leviste St., Salcedo Village, 1227 Makati City. They may be reached by e-mail at pecabar@pecabar.com or at telephone nos. (632) 815-9571 to 80 and fax nos. (632) 818-7355 and (632) 818-7391.

The information contained in this article is intended only to provide a general guide to the subject matter. Advise from specialists is still recommended for your specific requirements and particular circumstances.