Philippine Law on Joint Ventures.doc

February 11, 2018 | Author: KeemeeDasCuballes | Category: Joint Venture, Partnership, Corporations, Law Of Agency, Legal Personality
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PHILIPPINE LAW GOVERNING JOINT VENTURES1

Introduction Formation Agreement: Nature of Joint Ventures in Philippine Setting Alternative Legal Forms in Structuring a Joint Venture Aspects which Influence Choice of Legal Form Governing Laws and Language Freedom to Contract, In General Formal or Extrinsic Validity of Agreements Capacity of Contract Parties Intrinsic Validity Language of Joint Venture Agreements Defining Joint Ventures Scope of Business Activity Foreign Investment Act of 1991 Establishing a Corporate Vehicle Procedure in Establishing a Corporate Vehicle Doing Business in the Philippines Governing Law What Constitutes Doing Business Qualifications to Do Business in the Philippines Registration under FIA ‘91 SEC Registration Additional Requirements Effects of Non-Compliance with FIA ’91 Requirements SEC License for Foreign Corporations Doing Business SEC Requirements Issuance of License Requirements Upon Issuance of SEC License Effects of Failure to Secure SEC License to Do Business by Foreign Corporation Incentives Available to Foreign Joint Venture Partners Preferred Areas of Investments (BOI Registered and with Incentives) Non-Preferred Area Investor(Investment Without Incentives) Incentives of Export Processing Zone Enterprises Restrictions on Activities of Foreign Joint Venture Partners Financing Joint Ventures Schemes Recognized under the Act Equity Limitations for Operators of Public Franchises Reasonable Rate of Return on Investments and Operating and Maintenance Cost Period Covered Financing Allowed Priority Projects Preference to Filipino Contractors Repayment Schemes Land Reclamation or Industrial Estates Registration with BOI Antitrust and Competition Law Preparation of Ancillary Documents Technology Transfer Agreement Parties to Agreements Restrictive Business Clauses Governing Law Duration of Contract Warranty/Guaranty Provisions Royalty Incentives Dispute Resolutions Arbitration Law Persons and Matters Subject to Arbitration Form of Arbitration Agreement Appointment of Arbitrators Facilities for Commercial Arbitration New York Convention Impact of Changes in Law Subsequent to Formation Double Taxation Agreements and Impact on Joint Venture Protection of Foreign Investors

—— Introduction Joint venture arrangements are fairly common media of doing business or undertaking projects in the Philippines, both covering local transactions, such a large infra-structure undertakings involving the resources of big corporations, or structuring partnership arrangements between foreign investors and their local partners in the pursuit of local projects in the Philippines. In particular, the Government encourages the pursuit of construction projects and petroleum operations under joint venture arrangements. Under the National Internal Revenue Code of 1997 of the Philippines (NIRC), joint ventures formed for the purpose of engaging in petroleum operations pursuant to operating agreements under a service contract with the Government, or those formed for the purpose of undertaking construction projects, are exempt from corporate income tax. 1

The original paper was submitted by the author to the CENTER FOR INTERNATIONAL LEGAL STUDIES based in Salzburg, Austria, as part of its international publication.

2 Joint venture arrangements have particularly been the more popular medium when foreign participation is involved in local projects since the contractual nature of the arrangement allows the parties flexibility to adopt special rules and procedures covering their situation, which would otherwise be inapplicable in a straight corporate vehicle because of the restrictive rules of the Philippine Corporation Code and jurisprudence on Philippine Corporate Law. FORMATION AGREEMENT: NATURE OF JOINT VENTURES IN PHILIPPINE SETTING There is no statutory provision that recognizes or governs directly joint ventures, although they have been recognized in jurisprudence and commonplace in commercial ventures. Consequently, joint venture arrangements fall generally within the realm of the Law on Contracts, and particularly within the applicable provisions of the Law on Partnership, both of which are governed under the Civil Code of the Philippines. Since the prevailing contract rule in the Philippines is that parties to a contract may establish such stipulations, clauses, terms and conditions, as they may deem convenient, provided they are not contrary to laws, morals, good customs, public order, or public policy, 1 no model joint venture agreements have been published by the Securities and Exchange Commission (SEC), Board of Investments (BOI), or any other authority. The prevailing school of thought in the Philippines is that a joint venture is a species of partnership. By specific statutory provision when "two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves," then a partnership is created by definition of law.2 The main distinction between an ordinary partnership and a joint venture is that the ordinary partnership is organized for general business venture and does not have a definite term of existence; whereas a joint venture is organized for a specific project or undertaking. The Philippine Supreme Court has adopted Black's definition of a joint venture, thus: "Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise—generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy connected therewith, and duty, which may be altered by agreement to share both in profit and losses."3 The foregoing definition of a joint venture essentially falls within the statutory definition of what constitutes a partnership. Other reasons on why a joint venture must be considered a species of partnership is that the Law on Partnership provides that "A partnership may be constituted in any form, except where immovable property or real rights are contributed, thereto, in which case a public instrument shall be necessary."4 That means that no special form, even one seeking to establish a joint venture arrangement, is necessary to give rise to a partnership. In addition, the Law on Partnership recognizes that in the Philippines a partnership may either be universal or particular.5 A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership.6 A particular partnership has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a professional or vocation. 7 Clearly, therefore, a joint venture, as an undertaking of two or more persons who contribute money or property to a common fund, with intention of dividing the profits from a particular project or particular undertaking is defined by law as a particular partnership. Finally, the position that a joint venture is a species of partnership has been upheld in Aurbach v. Sanitary Wares Manufacturing Corp.,8 where the Supreme Court held that: . . . The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. . . This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. 9 It would seem 1

Art. 1306, Civil Code. Art. 1767, Civil Code. 3 Kilosbayan, Inc. v. Guingona, 232 SCRA 110, 143-144, 41 SCAD 671 (1994), citing BLACK'S LAW DICTIONARY. 4 Art. 1771, Civil Code. 5 Art. 1776, Civil Code. 6 Art. 1780, Civil Code. 7 Art. 1783, Civil Code. 8 180 SCRA 130 (1989). 9 Art. 1783, Civil Code. 2

3 therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership.10 Since a joint venture is a species or a special type of partnership, it would have the following characteristics of partnership: (a) It would have a juridical personality separate and distinct from that of each of the joint-venturers. Article 1768, Civil Code provides specifically that the partnership has a juridical personality separate and distinct from that of each of the partners even in case of failure to comply with the registration requirements of law. Therefore, a joint venture as a firm can enter into contract and own properties in the firm's name;11 (b) Each of the co-venturers would be liable with their private property to the creditors of the joint venture beyond their contributions to the joint venture; (c) Even if a co-venturer transfers his interest to another, the transferee does not become a co-venturer to the others in the joint venture unless all the other coventurers consent. This is in consonance with the delectus personarium principle applicable to partnerships; (d) Generally, the co-venturers acting on behalf of the joint venture are agents thereof as to bind the joint venture; and (e) Death, retirement, insolvency, civil interdiction or dissolution of a co-venturer dissolves the joint venture. Jurisprudence, however, has tended to give joint ventures special treatment not accorded to ordinary partnerships. Philippine jurisprudence has adopted the prevailing rule in the United States that a corporation cannot ordinarily enter into partnerships with other corporations or with individuals. The basis for such prohibition on corporations is that in entering into a partnership, the identity of the corporation is lost or merged with that of another and the direction of the affairs is placed in other hands than those provided by law of its creation. The doctrine is grounded on the theory that the stockholders of a corporation are entitled, in the absence of any notice to the contrary in the articles of incorporation, to assume that their directors will conduct the corporate business without sharing that duty and responsibility with others.12 Tuason v. Bolaños,13 recognized in Philippine jurisdiction the doctrine in Anglo-American jurisprudence that "a corporation has no power to enter into a partnership." Nevertheless, Tuason recognized that a corporation may validly enter into a joint venture agreement, "where the nature of that venture is in line with the business authorized by its charter." 14 Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement, it would seem that the policy behind the prohibition on why a corporation cannot be made a partner does not apply in a joint venture arrangement. Being for a particular project or undertaking, when the board of directors of a corporation evaluate the risks and responsibilities involved, they can more or less exercise their own business judgment is determining the extent by which the corporation would be involved in the project and the likely liabilities to be incurred. The situation therefore in a joint venture arrangement, unlike in an ordinarily partnership arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and anticipated by the board, allows the board to fully bind the corporation to matters essentially within the boards business appreciation and anticipation. The previous ruling of the SEC on the matter is that a corporation cannot enter into a contract of partnership with an individual or another corporation on the premise that if a corporation enters into a partnership agreement, it would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers, which is entirely inconsistent with the policy of the law that the corporation shall mange its own affairs separately and exclusively.15 Later, the SEC provided for a clear exception to the foregoing ruling, and allowed corporations to enter into partnership arrangement, provided the following conditions are met:16 10

Ibid; emphasis supplied. cf Art. 1774, Civil Code. 12 BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1978 Ed., at p. 9. 13 95 Phil. 106 (1954). 14 Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher Cyc. of Corp., 1082). 15 SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 FLETCHER CYC. CORP., Perm. Ed. Rev. Repl. 1950, Sec. 2520. 16 SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September 1984. Under Sec. 192 of the NATIONAL INTERNAL REVENUE CODE, documentary stamps of P15.00 must be affixed on each proxy. 11

4 (a) The authority to enter into a partnership relation is expressly conferred by the charter or the articles of incorporation of the corporation, and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation; (b) The agreement on the articles of partnership must provide that all the partners shall manage the partnership, and the articles of partnership must stipulate that all the partners shall be jointly and severally liable for all the obligations of the partnership; (c) If it is a foreign corporation, it must obtain a license to transact business in the country in accordance with the Corporation Code of the Philippines. In one opinion, the SEC clarified that the conditions imposed meant that since the partners in a partnership of corporations are required to stipulate that all of them shall manage the partnership and they shall be jointly and severally liable for all the obligations of the partnership, it necessarily followed that a partnership of corporations should be organized as a “general partnership”. 17 Lately, the SEC, realizing that the second condition actually prevented a corporation from entering into a limited partnership, which if allowed to do so would then be more congruent with the policy that the corporation would then not be held liable for its venture beyond the investments made and determined by its board of directors, and would therefore not be held liable (beyond its investment) for debts arising from the acts of the general partners, reconsidered its position and ruled that a corporation may become a limited partner in a limited partnership, since “there is no existing Philippine law that expressly prohibits a corporation from becoming a limited partner in a partnership.” In effect, the SEC dropped the second condition imposed previously.18 In the field of Taxation, both a partnership and a joint venture are treated as corporate taxpayers, and both are subject to corporate income tax, except that under the National Internal Revenue Code of 1997, "a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government," shall not be taxed separately as a corporate taxpayer.19 ALTERNATIVE LEGAL FORMS IN STRUCTURING A JOING VENTURE Parties have a varied choice of legal forms in planning a joint venture arrangement, and they can pursue the same through a joint venture corporation, or by straight equity joint venture, by partnership arrangement, or contractual joint venture. The SEC has ruled that generally, a joint venture agreement of two corporations need not be registered with the SEC, provided it will not result in the formation of a new partnership or corporation. However, should there be an intention to acquire a separate Tax Identification Number (TIN) from the Bureau of Internal Revenue for the business venture, the same requires registration with the SEC in order to have a separate legal personality to obtain a separate TIN. 20 Co-venturers may pursue the joint venture arrangement by a private contract between them, and they choose not to represent a separate firm undertaking the project to third parties. In such an arrangement, the relationship of the venturers, their rights and liabilities, are governed by the joint venture contract executed between them. Equity joint ventures are also available in Philippine setting which may cover the formation of a new joint venture company, with each co-venturer being allocated proportionate shareholdings in the outstanding capital stock of the joint venture corporation. Equity joint venture may also be pursued where a co-venturer is allocated the agreed shares of stock in an existing corporation, either from new issuances of the capital stock of the existing corporation, or sold shares from those already issued in the names of the other co-venturers. In equity joint ventures, the rights and obligations of the parties among themselves is covered not only in a separate joint venture agreement, but also implemented by certain provisions of the articles of incorporation and by-laws of the joint venture corporation. A third type of joint venture arrangement is to formally operate the joint venture set-up as a partnership, with a separate and distinct juridical personality. The SEC has ruled that two or more corporations may enter into a joint venture through a contract or agreement (contractual joint venture) if the nature of the venture is authorized by their charters, which contract need not be registered with the SEC; provided, however that the joint venture will not result in the formation of a new partnership or corporation.21 17

SEC Opinion, 23 February 1994, XXVIII SEC QUARTERLY BULLETIN 18 (No. 3, Sept.

1994). 18

SEC Opinion, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8 (No. 1, June 1996). Sec. 22(B), NIRC of 1997. 20 SEC Opinion, 30 March 1995, XXIX SEC QUARTERLY BULLETIN 32 (No. 3, Sept. 1995). 21 SEC Opinion, 29 April 1985, SEC ANNUAL OPINIONS 1985, at p. 89. 19

5 In situations where a corporate vehicle is formed in pursuance of the joint venture arrangements, ideally the joint ventures should be able to fit into the various terms and clauses of the articles of incorporation and by-laws (the charter) of the joint venture company the salient features of their joint venture agreements. In situations where joint venture agreements contain provisions not covered by the charter of the joint venture corporation or vice-versa, the resolutions of issues arising therefrom shall be as follows: (a) In case of conflicts between the provisions of the joint venture agreement and the charter of the joint venture corporation, the provisions of the latter shall prevail; (b) In case there are provisions or clauses in the joint venture agreement not found in the charter of the joint venture corporation, such provisions and clauses remain binding contracts among the joint venture parties signatory to the agreement, but do not bind the joint venture corporation or other parties not signatories thereto. The foregoing rules of resolution are based on the well-established doctrine under Philippine Corporate Law that the articles of incorporation is a basic contract document defining the charter of the corporation. The articles of incorporation is characterized as a contract between and among three parties: (a) between the State and the corporation; (b) between the stockholders and the State; and (c) between the corporation and its stockholders.22 In addition, although the joint venture agreement may contain rules on management and control of the joint venture corporation, it does not authorize the joint-venturers, as equity owners, to override the business management of the corporate affairs of the joint venture corporation by its board of directors. Any stipulation therefore in the joint venture agreement that seeks to arrogate unto the stockholders thereof the management prerogatives of its board of directors would be null and void. ASPECTS WHICH INFLUENCE CHOICE OF LEGAL FORM The most important aspects in choosing the form to pursue joint venture arrangement would be the issues of limited liability, tax consequences, and limitation of foreign equity is specified areas of investments or activities. The contractual joint venture has the advantage of limiting the extent of the arrangement between and among the joint-venturers, as in undertakings that require privacy. In addition, since formal joint ventures are taxed as corporate taxpayer, the contractual joint venture lessens the need to have to register the project as a separate corporate taxpayer, since the private arrangements should allow the joint-venturers to continue reporting separately their participation in the project in their own tax returns. On the other hand, the choice of pursuing a joint venture arrangement for undertaking constructions projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating agreement under a service contract with the Government is usually made because the joint venture itself would not be subject to corporate income tax liabilities under the NIRC. The use of the corporate entity to pursue the joint venture arrangement allows the joint-venturers to take full advantage of the limited liability features of the corporate vehicle especially in projects and undertakings which embody certain risks. The corporate entity route also allows the joint-venturers to take advantage of zero rate taxability of dividends declared by corporations. In the Philippines, the corporation has traditionally been subjected to heavier taxation than other forms of business organization; dividends distributed are subject to another tax when received by the stockholders. With the trust of Government to encourage both local and foreign investments in the country, and to entice the use of the corporation as the vehicle for such investment, many of the previous tax laws that tended to make corporate vehicles expensive have been abolished. Except for dividends declared by domestic corporation in favor of foreign corporation, 23 dividends received by individuals from corporation,24 as well as inter-corporate dividends between domestic corporations, 25 are subject to zero rate of income taxation. There has also been an abolition of the personal holding companies tax and tax on unreasonably accumulated surplus of corporations.26 Lately, however, under the reforms embodied in the NIRC of 1997, a final tax of 10% has been reimposed on dividends received by residents and citizens declared from corporate earnings after 1 January 1998;27 a final tax of 20% on dividends received by a nonresident alien individual has been re-imposed

22

Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 (1929). Sec. 25(a) and (b), NIRC of 1977. 24 Sec. 21, NIRC of 1977. 25 Sec. 24, NIRC of 1977. 26 Executive Order No. 37 (1986). 27 Sec. 24(B)(2), NIRC of 1997. 23

6 from corporate earnings after 1 January 1998; 28 and the tax on improperly accumulated earnings has likewise been re-imposed.29 The pursuit of joint venture arrangements under a formal partnership arrangement has the disadvantage of inviting into the arrangement the features of unlimited liability for partnership debts to the joint-venturers, and also the inability to take advantage of the zero-rate of dividends for corporation, when the partnership declares and distributes profits. The aspect of double taxation looms largely in a partnership joint venture arrangement, since partnerships are subject to the 32% net income tax for corporations. Nevertheless, joint ventures formed for the purpose of undertaking construction projects 30 and those formed to engage in petroleum operations pursuant to an operating agreement under a service contract with the Government,31 are exempt from corporate taxation. GOVERNING LAW AND LANGUAGE Since joint venture arrangements are governed primarily by the Law on Contracts, the following rules would be relevant to joint ventures. 1. Freedom to Contract, In General The Philippine Constitution prohibits any law impairing the obligation of contracts. 32 The established rule is that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.33 Contracts generally are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. 34 Joint venture arrangements are therefore generally binding on the joint-venturers in whatever form they were constituted. 2. Formal or Extrinsic Validity of Agreements Philippine laws recognize the principle that the formal or extrinsic validity of contracts, including a joint venture arrangement, shall be governed by the laws of the country in which they are executed. 35 Therefore, joint venture arrangements, which are essentially partnership agreements, are valid in whatever form executed. 3. Capacity of Contract Parties The capacity of the parties to enter into a joint venture agreement is generally governed by their national law.36 However, in case of joint venture agreements covering the alienation or encumbrance of properties, both real and personal, located in the Philippines, the capacity of the parties is governed under Philippine laws.37 4. Intrinsic Validity The intrinsic validity of a joint venture agreement, as in all contracts in general executed in the Philippines, including consideration or cause thereof, the interpretation or constructions of its provisions, and the nature and amount of damages for breach thereof, are governed by the law voluntarily agreed upon by the parties. The parties to a joint venture arrangement can therefore validly stipulate which laws shall govern their arrangement. However, any stipulation in the joint venture agreement cannot operate to oust Philippine courts of their jurisdiction under the law, although the local courts would still apply the laws chosen by the parties to the agreement.38 Although the parties to a contract, including a joint venture arrangements, are granted liberty under Philippine laws to stipulate on governing laws, including the laws of another country, nevertheless, Philippine restrictive laws, on taxes and prohibition on foreign equity in some business areas or activities 28

Sec. 25(A)(1), NIRC of 1997 Sec. 29, NIRC of 1997. 30 Pres. Decree 929 (1976). 31 Pres. Decree 1682. 32 Sec. 10, Art. III. 33 Art. 1306, Civil Code. 34 Art. 1315, Civil Code. 35 Art. 17, Civil Code. 36 Art. 15, Civil Code. 37 Art. 16, Civil Code. 38 Molina v. De la Riva, 6 Phil. 12 (1906); Companie de Commerce v. Hamburg-Amerika, 36 Phil. 590 (1917). 29

7 are likely to be imposed as mandatory if suit is brought before a local forum seeking any remedy under the joint venture arrangement. 5. Language of Joint Venture Agreements There are likewise no restrictions on the language in which a document or contract may be executed, since the language does not go into the validity or enforceability of the agreement. Nevertheless, it would be prudent for the parties to draw the documents in an official language, since any future suit on a document must always be accompanied by an official transaction in the official language. Under Section 33, Rule 132 of the Philippine Rules of Court, documents written in an unofficial language shall not be admitted as evidence, unless accompanies with a translation into English or Filipino. Under the 1987 Constitution of the Philippines, the official languages are Filipino and, until otherwise provided by law, English.39 Most, if not practically all, contracts and agreements in Philippine setting are drawn-up and executed in English, since it is the official and dominant language of commerce and the judiciary. DEFINING JOINT VENTURES SCOPE OF BUSINESS ACTIVITY The principal consideration in defining the scope of business to be undertaken by joint venture in the Philippines basically devolve on the issue, when it involves foreign investment, of restrictions on foreign equity and foreign management and control on certain restricted areas or activities. 1. Foreign Investment Act of 1991 Republic Act 7042, known as the "Foreign Investment Act of 1991" or "FIA '91", was enacted to promote foreign investments, and prescribes the procedures for registering enterprises doing business in the Philippines. It is the basic law that provides the conditions, activities, and procedures where foreign enterprises may invest and do business in the Philippines. It applies to joint venture arrangements in the Philippines. By the negative list scheme, the Act simply established the restricted areas, and declared all other areas as open to unlimited foreign equity participation. Essentially, the FIA ’91 provides for foreign investment negative list which spells out the activities reserved for Philippine national. Export enterprises may enter all activities not restricted by Lists A and B of the negative list, and domestic enterprises, with foreign equity, may enter all activities not restricted by Lists A, B, and C of the negative list. The salient points of FIA '91 are the following: (a) Under the concept of a negative list, more areas are open to foreign investments, and investment policy is made transparent and stable; (b) The law redefined "export enterprise" to mean at least 60% export (from the former 70% export level). (c) It opened the domestic economy to 100% foreign investments except for those in the negative lists. (d) One layer of bureaucracy is reduced because there is no need for Board of Investments (BOI) approval if the investor is not seeking incentives. The criteria for the negative list are the following: List A covers area of investment in which foreign ownership is limited by the Constitution and nationalization laws, as follows: NO FOREIGN EQUITY ALLOWED: (a) Mass media ownership and management;40 (b) Licensed professions, like lawyers, accountants, and engineers; 41 (c) Retail trade;42 (d) Fisheries; and (e) Rice and corn farming.43

39

Sec. 7, Art. XIV. Sec. 11, Art. XVI, Constitution. 41 Sec. 14, Art. XIV, Constitution. 42 Rep. Act No. 1180. Retail Trade has been liberalized under Rep. Act No. 8762, otherwise known as the Retail Trade Liberalization Act of 2000. 43 Rep. Act No. 3018; Pres. Decree 194. 40

8 25% FOREIGN EQUITY ALLOWED: (a) Recruitment agencies;44 and (b) Locally funded public works project.45 30% FOREIGN EQUITY ALLOWED: (a) Advertising.46 40% FOREIGN EQUITY ALLOWED: (a) Exploitation of natural resources and utilization of land ownership;47 (b) Public utilities;48 (c) Educational institutions;49 (d) Financing companies;50 (e) Construction.51 (f) Cooperatives;52 (g) Private security agencies;53 and (h) Small-scale mining.54 Under the Retail Trade Liberalization Act of 2000,55 the retail trade industry has been liberalized to accommodate foreign investments and foreign direct participation. Currently, foreigners are excluded only in retail enterprises with paid-up capita of less than US$2,500,000.00 (Category A) which is resecured exclusively for Filipino citizens and corporations wholly-owned by Filipino citizens. List B covers defense-related materials which by law are licensed and regulated by the Department of National Defense, unless specifically authorized, with substantial export, by the Secretary of National Defense. For example, 40% foreign equity is allowed manufacture, repair storage and/or distribution of explosives, munitions, and armaments.56 List B also includes activities regulated by law because of risks they may pose to public health and morals. For example, dangerous drugs, gambling, nightclubs, bars, and message clinics are not open for foreign investments.57 A third area under the negative List B refers to domestic market enterprises with less than US$200,000 paid in equity capital, unless determined by the Department of Science and Technology as involving advanced technology. Finally, the negative List B also includes export enterprises using raw materials from depleting natural resources and with less than US$200,000 paid in equity capital. The following therefore are covered under List B and would be open to 100% foreign equity investments: (a) Manufacture and repair of firearms and similar defense-related material with substantial export component and with specific authorization from the Secretary of National Defense. (b) Domestic market enterprises certified by the DOST as involving advanced technology even if the paid-in equity capital is less than US$200,000. (c) Export enterprises that use raw materials from depleting natural resources but with paid-in capital of at least US$200,000. List C enumerates "adequately-served areas." The criteria to determine "adequately served "areas of economic activity are the following: 44

Art. 27, Labor Code. Comm. Act No. 541; Pres. Decree 1594; LOI 630. 46 Sec. 11, Art. XVI, Constitution. 47 Sec. 2, Art. XII, Constitution. 48 Sec. 11, Art. XII, Constitution. 49 Sec. 4, Art. XIV, Constitution; Batas Pambansa Blg. 232. 50 Rep. Acts Nos. 4566 and 5980. 51 Rep. Act No. 5183. 52 Rep. Act No. 6938. 53 Rep. Act No. 5487. 54 Rep. Act No. 7076. 55 Rep. Act No. 8762 (March, 2000). 56 Rep. Act No. 7042. 57 Rep. Act No. 7042. 45

9 (a) The industry is controlled by firms owned at least 60% by Filipinos; (b) Industry capacity is ample to meet domestic demand; (c) Sufficient competition exists within the industry; (d) Industry products comply with Philippine standards of health and safety or, in the absence of such, with international standards, and are reasonably competitive quality with similar products in the same price range imported into the country; (e) Quantitative restrictions are not applied on imports of directly competing products; (f) Industry leaders comply with environmental rules; and (g) The prices of industry products are reasonable. The transitory Negative List C has already been scrapped under Executive Order No. 182 which established the regular Foreign Investment Negative List, and took effect last October, 1994. There is in effect no longer Negative List C. Establishing a Corporate Vehicle Mere investment by foreign entities into a joint venture company would be covered by the rules on foreign equity allowance under FIA '91. The registration of the joint venture company itself would be similar to the normal registration requirements of the SEC on the organization, formation and registration of a domestic corporation. In addition, if aside from equity investment in the local company, the foreign partners would participate in the affairs or projects of the domestic joint venture company, it would be considered doing business in the Philippines and would have to obtain a license to do business from the SEC. 1. Procedure in Establishing a Corporate Vehicle Aside from the FIA '91, the are Corporation Code provisions and SEC rules and regulations that must be complied with in setting-up the joint venture company. Section 10 of our Corporation Code requires the incorporators of a corporation to be not less than five (5) natural persons, majority of whom must be residents of the Philippines. This requirement is mandatory even to 100% foreign-owned corporations. Since the Code provides that only natural persons must be incorporators, a corporation cannot be considered an incorporator of the corporation to be put up although said corporation may be among the subscribers to the corporation's capital stock. The Code sets the limit to the number of directors to not less than five (5) nor more than fifteen (15). Section 23 of the Code, moreover, requires every director to own at least one (1) share of the capital stock of the capital stock of the corporation. Said section of the Code also requires majority of the directors to be residents of the Philippines. However, the SEC does not insist on majority residency requirements for directors when the domestic corporation is 100% foreign-owned. Alien incorporators and subscribers who are residents must furnish provide any of the following: their immigration certificate of residence, special investor's resident visa and any kind of visa valid for at least one (1) year. Under SEC regulations, an alien may be appointed/elected as treasurer only if he is a resident of the Philippines. When a joint venture company is to be registered with foreign equity, the following requirements are imposed by the SEC: (a) All subscriptions of foreign incorporators to be fully paid. If they will not be fully paid, the Filipino incorporators must execute an undertaking to pay for the unpaid subscription; (b) Alien subscribers must submit proof of remittance or affidavit stating the source of payment of their subscriptions; (c) Alien subscribers who wish to register their investments with the Central Bank so that they can remit their earnings and capital abroad, must necessarily remit their respective subscription payments through the banking system and submit the prescribed bank certificate of inward remittance as proof of the remittance to the SEC. Note that the SEC may allow the remittance to be maintained in a foreign currency account (not converted into pesos) so long as a letter-explanation is given to the SEC on the non-conversion (e.g., the foreign currency will be immediately used to buy capital equipment abroad).

10 2. Doing Business in the Philippines: a. Governing Law Aside from direct investment participation discussed above, foreigners may "do business" in the Philippines. This mode of investment is not available for incentives and is, therefore, governed by FIA '91. b. What Constitutes Doing Business Under FIA '91 "doing business" in the Philippines is deemed to include the following acts: (a) Soliciting orders, service contracts, opening offices, whether liaisons offices or branches; (b) Appointing representatives or distributors operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more; (c) Participating in the management, supervision or control of any domestic business, firm entity or corporation in the Philippines; and (d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts and works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose or object of the business organization. c. Qualifications to Do Business in the Philippines Any non-Philippine national or entity may do business in the Philippines up to 100% of its capital provided: (a) It is doing business as a domestic market enterprise outside the Negative List; (b) It is doing business as an export enterprise whose products or services do not fall within Lists A and B (except for defense-related activities which may be approved or authorized) of the Negative Lists. d. Registration under FIA ‘91 Previously, foreign nationals or foreign entities seeking to do business in the Philippines even without incentives must secure a certificate of authority from the BOI aside from a license from the SEC. The passage of FIA '91, however, did away with this need for a prior BOI certificate of authority. Under the FIA, what is only required is registration with the SEC. The requirements of the FIA '91 from the foreign nationals who are direct foreign investors and for those merely seeking to do business in the Philippines under the foregoing definition are the same. FIA '91 does not make a distinction between direct foreign investors or those merely seeking to do business in the Philippines in its requirements for registration. e. SEC Registration However, the Corporation Code requires certain registration compliance. For foreign corporation or partnerships seeking to do business in the Philippines, the following would be required: (a) Certified copy of the board resolution authorizing the establishment of an office in the Philippines; designating the resident agent to whom summons and other legal processes may be served in behalf of the foreign corporation; and stipulating that in the absence of such agent or upon cessation of its business in the Philippines, the SEC shall receive any summons and legal processes as if the same is made upon the corporation at its home office; (b) Financial statements for the immediately preceding year at the time of the filing of the application, certified by an independent Certified Public Accountant of the SEC; (c) Certified copies of Articles of Incorporation/Partnership with an English translation thereof in a foreign language; (d) Foreign Company Information Sheet All documents executed abroad should be authenticated by the Philippine embassy or consular office. f. Additional Requirements

11 The following would be required for specially defined activities: (a) For enterprises wishing to engage in defense-related activities, clearance from the Department of National Defense or Philippine National Police; (b) For small and medium sized domestic enterprises with paid-in equity capital less than the equivalent of US$200,000.00, a certificate from the Department of Science and Technology that the investment involves advanced technology. g. Effects of Non-Compliance with FIA ’91 Requirements Administrative sanctions, which would include the impositions of fines and the forfeitures of benefits.58 3. SEC License for Foreign Corporations Doing Business Aside from the registration requirements of the FIA '91 with the SEC, Section 125 of the Corporation Code requires foreign corporations wishing to do business in the Philippines to secure a license from the SEC allowing the foreign corporation to do business in the Philippines. a. SEC Requirements The following documentary requirements would have to be filed with the SEC: (a) Application for a license; (b) Certified true copies of articles of incorporation and by-laws; (c) Certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and Filipino corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached hereto; (d) Statement under oath by the president or any other person authorized by the corporation, showing to the satisfaction of the SEC and other government agency in proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. b. Issuance of License Where the SEC is satisfied that the applicant has complied with all the requirements of this Code, and other special laws, rules and regulations, the SEC shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon the issuance of the license, such foreign corporation may transact its business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or of its state of incorporation, unless such license is soonest surrendered, suspended or annulled in accordance with this Code or other special laws. c. Requirements Upon Issuance of SEC License (i) Posting of Securities Within sixty (60) days after the issuance of a license to transact business in the Philippines, the licensee shall deposit with the SEC for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the SEC, consisting of bonds or other evidences of indebtedness of the Government of the Republic of the Philippines, its political subdivisions and instrumentalities, or of government owned or controlled corporations and entities, shares of stock in registered enterprises as this term is defined in Rep. Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or any combinations of these kinds of securities, in the actual value of P100,000.00 (ii) Yearly Requirement of Posting of Additional Securities Within 6 months after each fiscal year, the SEC shall require the licensee to deposit additional securities equivalent in actual market value to two percent (2%) of the amount by which the licensee's gross income for that fiscal year exceeds P5,000,000.00. The SEC shall also require deposit of additional

58

Section 14, FIA ’91.

12 securities if the actual market value of the deposit has decreased by ten percent (10%) of their actual market value at the time they were deposited. The SEC may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the securities on deposit has increased by more than 10% of the actual market value of the securities when they were deposited. The SEC may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. (iii) Appointment of Resident Agent The appointment of a resident agent is an indispensable requirement to the issuance of an SEC license. Should the foreign corporation be sued, someone must by duly authorized to receive summons and other legal processes, so that the Philippine courts may acquire jurisdiction over such corporation. d. Effects of Failure to Secure SEC License to Do Business by Foreign Corporation The following are the legal effects of a foreign corporation doing business in the Philippines for failing to obtain the SEC license: (i) Criminal liability - Fine or imprisonment;59 (ii) The foreign corporation cannot sue in Philippine courts;60 and (iii) The foreign corporation can be sued in Philippine courts.61

INCENTIVES AVAILABLE TO FOREIGN JOINT VENTURE PARTNERS Except for joint ventures formed for the purpose of undertaking construction projects 62 and those for formed for engaging in petroleum operations pursuant to an operating agreement under a service contract with the Government,63 which are exempt from corporate taxation, the incentives available to joint venture partners is directly linked with the activities to be undertaken. Investment incentives are mainly provided for under the Omnibus Investment Code of 1987.64 1. Preferred Areas of Investments (BOI Registered and with Incentives): Generally, a foreign investor can avail of incentives if he invests in what are designated as preferred areas of investment as designated in the Investment Priorities Plan (IPP), a yearly pamphlet issued by the Board of Investments (BOI). Book I of the Code classifies the preferred areas of investments into two: the preferred pioneer and the preferred non-pioneer. The yearly IPP then lists down which economic activities are considered preferred pioneer and which are preferred non-pioneer. Foreigners may invest up to the extent of 100% in the economic activities listed down as preferred pioneer subject only to constitutional or statutory limitations and only up to 40% in economic activities declared as preferred non-pioneer. If an enterprise is not listed in the Investment Priorities Plan and foreign equity shall not exceed 40% it must, to be entitled to the incentives given, export 50% of its production. If an enterprise is not listed in the Investment Priorities Plan and foreign equity shall exceed 40% it must export 70% of its production to be entitled to the incentives given. A location restriction, however is imposed on the enterprise in order to avail of certain incentives. Thus, projects locating in Metro Manila are not entitled to income tax holiday and capital equipment incentives. Among the incentives granted by the Code are: (a) Guarantee of investment repatriation in the currency in which the investment was originally made and at the exchange rate prevailing at the time of repatriation;

59

Art. 144, Corporation Code; Sec. 14, Rep. Act 337. Sec. 133, Corporation Code. 61 Ibid. 62 Pres. Decree 929 (1976). 63 Pres. Decree 1682. 64 Executive Order No. 226, the Omnibus Investment Code. 60

13 (b) Guarantee of remittance of earnings in the currency in which the investment was originally made and at the exchange rate prevailing at the time of remittance; (c) Freedom from expropriation; (d) No requisition of investment; (e) Income tax holiday for 6 years from the commercial operation for pioneer firms and 4 years for non-pioneer firms; (f) Additional deduction for labor expense for the first 5 years from the registration of 50% of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers; (g) Tax and duty exemption on imported capital equipment; (h) Tax credit on domestic capital equipment; (i) Exemption from contractor's tax; (f) Simplification of customs procedure; (g) Unrestricted use of consigned equipment; (h) Employment of foreign nationals; (i) Tax credit for taxes and duties on raw materials; (j) Exemption from taxes and duties on imported spare parts; and (k) Exemption from wharfage dues and any export tax, duty, impost and fee. 2. Non-Preferred Area Investor (Investment Without Incentives): Previously, before the enactment of FIA '91, because foreign equity in the enterprise will not exceed 40%, the enterprise is denominated as a permitted investment under the Omnibus Investment Code. Under the Code, the enterprise may immediately incorporate directly with the SEC without need of prior BOI authority. Now the requirements of FIA '91 should be complied with. 3. Incentives of Export Processing Zone Enterprise: If the joint venture is to be established within an export processing zone area, under the Code, it shall have the following incentives: (a) Facility in employment of foreign nationals; (b) Favorable tax treatment of merchandise within the zone; (c) Enjoy the same incentives as a BOI-registered pioneer enterprise; and (d) Exemption from local taxes and licenses. In addition, under Pres. Decree No. 66, the following incentives are expressly granted to locators within the export processing zone areas are: (a) Exemption from customs duties and internal revenue taxes raw materials, supplies and equipment imported within such areas; (b) Allowing net-operating loss carry-over for the first 5 years of operations; (c) Allowing accelerated depreciation of fixed assets to not more than twice the normal rate of depreciation; (d) Exemption from export tax; (e) Exemption from local taxes and licenses; (f) Deduction of labor-training expenses incurred of 1/2 the value of such expenses; (g) Deduction for organizational and pre-operating expenses over a period of 10 years; (h) Grant of tax credit equivalent to the sales, compensating and specific taxes and duties paid on supplies, raw materials and other products purchased.

14 RESTRICTIONS ON ACTIVITIES OF FOREIGN JOINT VENTURE PARTNERS Most of the restrictions placed on joint venture partners are basically on the types of business which may be undertaken, and the extent of equity participation allowed in each type of activity or business, which are drawn-up and detailed under the Foreign Investments Negative Lists. There has been a thorough liberalization of foreign exchange regulations in the Philippines with the issuance by the Central Bank of the Philippines 65 Circular No. 5 in September, 1993. Foreign exchange may be freely sold and purchased outside the banking system. Foreign exchange receipts, acquisitions, or earnings may be sold for pesos within or outside the banking system, or retained or deposited in foreign currency accounts, or may be used for any other purpose, whether in the Philippines or abroad. There are therefore no limits on the repatriation of profits, nor on the duration for which a joint venture may be formed. FINANCING JOINT VENTURES Joint ventures projects in Philippine jurisdiction are financed through a combination of equity infusion and commercial or special loans. What has become a very popular scheme of financing joint ventures covering infrastructure projects is the Build-Operate-Transfer (B-O-T) schemes under Rep. Act No. 6957. The Act implements the declared policy of the Philippine Government to recognize the indispensable role of the private sector as the main engine for national growth and development and provide the most appropriate favorable incentives to mobilize private resources for the purpose. Subsequently, Rep. Act 7718 extended the coverage and applicability of the B-O-T Law not merely to "government infrastructure projects" but also to government "development projects." 1. Schemes Recognized under the Act The schemes now recognized under the Act are as follows: (a) Build-Operate-and-Transfer (BOT) - A contractual arrangement whereby the contractor undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The BOT scheme includes a supply-and-operate situation which is a contractual arrangement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals. (b) Build-and-Transfer Scheme (BT) - The contractor undertakes the construction, including financing, of a given infrastructure facility, and its turnover after completion to the government agency or local government unit concerned which shall pay the contractor its total investment expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure project including critical facilities which, for security or strategic reasons, must be operated directly by the Government. (c) Build-Own-Operate (BOO) - A project proponent is authorized to finance, construct, own, operate and maintain an infrastructure or development facility from which the proponent as allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals and other charges from facility users. Under this scheme, the proponent which owns the assets of the facility may assign its operation and maintenance to a facility operator. A "facility operator" is defined as a company registered with the SEC which may or may not be the project proponent, and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users. In case the facility requires a public utility franchise, the facility operator shall be Filipino or at 60% owned by Filipinos. (d) Build-Lease-Transfer (BLT) - A project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is 65

Officially designated as Bangko Sentral ng Pilipinas under Rep. Act No. 7653.

15 automatically transferred to the government agency or local government unit concerned. (e) Build-Transfer-and-Operate (BTO) - The public sector contracts out the building of an infrastructure facility to a private entity such that the contractor builds the facility on a turn-key basis, assuming cost overrun, delay, and specified performance risks. Once the facility is commissioned satisfactorily, title is transferred to the implementing agency. The private entity however, operates the facility on behalf of the implement agency under an agreement. (f) Contract-Add-and-Operate (CAO) - The project proponent adds to an existing infrastructure facility which it is renting from the government. It operates the expanded project over an agreed franchise period. There may, or may not be, a transfer arrangement in regard to the facility. (g) Develop-Operate-and-Transfer (DOT) - The favorable conditions external to a new infrastructure project which is to be built by a private project proponent are integrated into the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy some of the benefits the investment creates such as higher property or rent values. (h) Rehabilitate-Operate-and-Transfer (ROT) - An existing facility is turned over to a private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is turned over to the government. The term is also used to described the purchase of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country. (i) Rehabilitate-Own-and-Operate (ROO) - An existing facility is turned over to the private sector to refurbish and operate with no time limitation imposed on ownership. As long as the operator is not in violation of its franchise, it can continue to operate the facility in perpetuity. 2. Equity Limitations for Operators of Public Franchises The ownership structure of the contractor of an infrastructure facility whose operation requires a public utility franchise must be in accordance with the Constitution, which requires at least 60% Filipino ownership. Originally under the B-O-T Law, in the case of corporate investors in the BOT corporation, the citizenship of each stockholder in the corporate investors shall be the basis for the computation of Filipino equity in the said corporation. Rep. Act 7718 has done away with the citizenship test applied to corporate investors in BOT corporations and its variations involving operation of public facilities (e.g., BOO, BTO, CAO, DOT and ROO). 3. Reasonable Rate of Return on Investments and Operating and Maintenance Cost The contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon. Republic Act 7718 defines "reasonable rate of return" as the rate of return that reflects the prevailing cost of capital in the domestic and international markets. 4. Period Covered The contractor transfers the facility to the government unit concerned at the end of the fixed term which shall not exceed 50 years. 5. Financing Allowed For the construction stage, the contractor may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino contractor. The financing of a foreign or foreign-controlled contractor from Philippine government financing institutions shall not exceed 20% of the total cost of the infrastructure facility or project. The financing from foreign sources shall not require a guarantee by the Government or by government-owned or controlled corporation. Projects which would have difficulty in sourcing funds may be financed partly from direct government appropriations and/or from Official Development Assistance (ODA) funds of foreign

16 governments or institutions not exceeding 50% of the project cost, and the balance to be provided by the project proponent. 6. Priority Projects The Philippine Congress passed Joint Resolution No. 03 enumerating the following national priority infrastructure projects: (a) Highways, including expressways, roads, bridges, inter-changes, tunnels and related facilities; (b) Rail-based projects packaged with commercial development opportunities, e.g., use of government facilities; (c) Non-rail based mass transit facilities, navigable inland waterways and related facilities; (d) Port infrastructure like piers, wharves, quays, storage, handling ferry services and related facilities; (e) Airports, air navigation and related facilities; (f) Power generation, distribution, electrification and related facilities; (g) Telecommunications, backbone networks, terrestrial and satellite facilities and related service facilities; (h) Dams, irrigation and related facilities; (i) Water supply, sewerage, drainage and related facilities; (j) Tourism, educational and health infra-structure; (k) Land reclamation, dredging and other related development facilities; (l) Industrial estates, regional industrial centers and export processing zones including steel mills, iron-making and petrochemical complexes and related infrastructure facilities and utilities; (m) Markets, slaughterhouses and related facilities; (n) Warehouses and postharvest facilities; (o) Public fishports and fishponds, including storage and processing facilities; (p) Environmental and solid waste management-related facilities such as collection equipment, composting plants, incinerators, landfill and tidal barriers, among others; and (q) Development of new townsites and communities and related facilities. 7. Preference to Filipino Contractors Republic Act 7718 raises the standards that must be met by Filipino contractors in order for them to be accorded preference over foreign contractors bidding for B/T and BLT contracts. In order to be accorded preference, a Filipino contractor is required to submit an equally advantageous bid with the same price and technical specifications as that of the foreign contractor. A Filipino contractor will not be accorded preference unless his bid is at par, on both price and technical aspects, with that of the foreign contractor. 8. Repayment Schemes For the financing, construction, operation and maintenance of any infrastructure project undertaken pursuant to the B-O-T Law, the contractor shall be entitled to a reasonable return of its investment and operating and maintenance costs in accordance with its bid proposal as accepted by the concerned contracting infrastructure agency or local government unit and incorporated in the contract's terms and conditions. In the case of a BOT arrangement, this repayment scheme is to be effected by authorizing the contractor to charge and collect reasonable tolls, fees, rentals, and charges for the use of the project facility not exceeding those proposed in the bid and incorporated in the contract. The government infrastructure agency or local government unit concerned shall approve the fairness and equity of the tolls, fees, rentals, and charges except in case of tolls for national highways, roads, bridges and public thoroughfares which shall be approved by the Toll Regulatory Board. The imposition and collection of tools, fees, rentals and charges shall be for a fixed term as proposed in the bid and incorporated in the contract but in no case shall this term exceed 50 years.

17 During the lifetime of the franchise, the contractor shall undertake the necessary maintenance and repair of the facility in accordance with standards prescribed in the bidding documents and in the contract. In the case of build-and-transfer arrangement, the repayment scheme is to be effected through amortization payments by the government infrastructure agency or local government unit concerned to the contractor according to the scheme proposed in the bid and incorporated in the contract. Republic Act 7718 also allows for the receipt by the project proponent of payment in nonmonetary terms such as land (subject, however, to constitutional limitations on ownership of land). 9. Land Reclamation or Industrial Estates In the case of land reclamation or the building of industrial estates, the repayment scheme may consist of the grant of a portion or percentage of the reclaimed land or industrial estate built, subject to the constitutional requirements with respect to the ownership of lands only by Filipino citizens. 10. Registration with BOI Republic Act 7718 provides that projects costing in excess of P1 Billion shall be registered with the Board of Investments and entitled to the incentives provided under the Omnibus Investments Code. ANTI-TRUST AND COMPETITION LAW The Philippine Constitution provides for the policy: "The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed."66 There are however very few detailed legislations governing antitrust and unfair competition, nor to implement the constitutional policy against restraint of trade or unfair competition. The remaining unrepealed portions of Act No. 3247 (1925) merely grants the Supreme Court and the Regional Trial Courts concurrent jurisdiction to prevent and restrain acts of monopolies or combinations in restraint of trade, and authorizes the Solicitor General and public prosecutors to institute proceedings to prevent and restrain such violations. It also provides that any person who shall be injured in his business or property by any other person by reason of anything forbidden or declared to be unlawful under the Law shall recover threefold the damages sustained by him, and the costs of suit, including reasonable attorney's fees. The Revised Penal Code of the Philippines penalizes: (a) Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market; (b) Any person who shall monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market; (c) Any person who, being a manufacturer, producers, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation or such merchandise or object of commerce, or with any person not so similarly engaged, for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines. Whenever any of the offenses described above is committed by a corporation or association, the president and each one of the directors or managers of said corporation or association or its agent or representative in the Philippines, in case of foreign corporations or associations, who shall have knowingly permitted or failed to prevent the commission of such offenses, shall be held liable as principals thereof. PREPARATION OF ANCILLARY DOCUMENTS When a joint venture arrangement involves the use and transfer of intellectual property or technology, certain basic intrinsic and registration requirements are mandated by Philippine laws.

66

Sec. 19, Art. XII.

18 1. Technology Transfer Agreement Contracts or agreements entered into by and between domestic companies and foreign companies and/or foreign-owned companies involving the: transfer of systematic knowledge for the manufacture of a product, the application of a process; rendering of a service, management contracts; licensing of computer softwares; and the transfer, assignment or licensing of all forms of industrial property rights including marketing/distributorship agreements involving the license to use foreign trademarks, tradenames and service marks and other marks of a proprietary nature must be registered with the Technology Transfer Registry.67 The registration with the Registry will enable the remittance of royalty fees and similar foreign exchange obligations arising from a technology transfer arrangement. Under Central Bank Circular No. 1062, parties to the technology transfer arrangement can purchase foreign exchange from a bank to cover royalty remittances only when the bank is shown the certificate of registration with the Technology Transfer Board. 2. Parties to the Agreement The Rules provide that the term "domestic company" refers to an enterprise, partnership, corporation, branch or other form of business organization, formed, organized, chartered or existing under the laws of the Philippines. The foreign company would include: (a) A foreign company or an alien enterprise or foreign firm, association, partnership, corporation or any form of business organization not organized or existing under the laws of the Philippines; (b) A foreign-owned company which refers to an enterprise, partnership, corporation, or any form of business organization formed, organized, chartered or existing under the laws of the Philippines, the majority of the outstanding capital of which is owned by aliens. 3. Restrictive Business Clauses Under the Rules, the following clauses are not allowed in any technology transfer arrangement in view of their restrictive nature: (a) Clauses which restrict directly or indirectly the export of the products manufactured by the technology recipient, unless justified for the protection of the legitimate interest of the technology supplier and the technology recipient; (b) Restrictions on the use of the technology supplied after expiration of the arrangements; provisions which restrict the manufacture of similar or competing products after expiry of the arrangement; and provisions requiring the continued payment for patents and other industrial property rights after their expiration, termination or invalidation; (c) Provisions providing that the technology recipient will not contest the validity of any of the patents being licensed under the arrangement; (d) Provision which prohibit the technology recipient in a non-exclusive technology transfer arrangements from obtaining patents or unpatented technology from other technology suppliers with regard to the sale or manufacture of competing products; (e) Contracts which contain provisions requiring the technology recipient to purchase its raw materials, components and equipment exclusively, or a fixed percentage of the supply requirement, from the technology supplier or a person designated by him; (f) Clauses which restrict the R&D activities of the technology recipient designated to absorb ad adapt the transferred technology to local conditions; provisions which prevent the technology recipient from adapting the imported technology to local conditions, or introducing innovations to it, as long as it does not impair the quality standards prescribed by the technology supplier; (g) Provisions requiring the technology recipient to keep part or all of the information received under the arrangement confidential beyond a reasonable period; and (h) Provisions which exempt the technology supplier from liability for nonfulfillment of his responsibilities under the arrangement and/or liability arising 67

Sec. 1[b], Rule I, Rules of Procedures of the TTR.

19 from third party suits brought about the by use of the licensed products or licensed technology. 4. Governing Law Under the Rules, the governing law under a technology transfer arrangement shall be Philippine laws in the interpretation of the contract, and in the event of litigation, the venue shall be the proper courts in the place where the technology recipient has its principal office. 5. Duration of the Contract Under the Rules, the term of the agreement shall not exceed 10 years with no automatic renewal. However, indefinite term may be allowed for royalty-free agreements and arrangement for the outright purchase of technology. 6. Warranty/Guarantee Provisions Under the Rules, a warranty from the technology supplier is required reflecting that the technology, if used in accordance with the specific instructions of the technology supplier, is suitable for the manufacture of the licensed products or for the extension of services pursuant to the technology transfer arrangement. 7. Royalty Except for pure trademark licensing agreements where a maximum royalty fee of 1% of net sales is allowed, the Rules do not prescribe any ceiling on the rate of fees due under a technology transfer arrangement. However, the rate is subject to evaluation by the Registry based on set criteria in the Rules. 8. Incentives A bonus royalty of 2% of net foreign exchange earnings can be availed of by a supplier who commits to an export development program to assist the recipient to penetrate the export market for the first time. DISPUTE RESOLUTION Outside of judicial remedies, parties to a joint venture arrangement are authorized to submit their controversies to arbitration,68 or they can provide as part of their joint venture arrangements that all issues and controversies shall be resolved by arbitration through a procedure drawn out in the joint venture contract. The stipulation on arbitration can validly provide that the resolution or decision of the board of arbitrators is valid and final.69 When the parties to a contract have a provision requiring arbitration in case of disputes, no party may seek remedy from the courts of law. However, should a case be filed in court without having resorted to prior arbitration, the court will not dismiss the case; instead the court will refer the matter to the arbitrators.70 In case there is a provision for arbitration, and one party refuses to arbitrate, the other party may, through a summary court proceeding, enforce the arbitration provisions of their contract; but the court is without authority to resolve the issues on the merits.71 1. Arbitration Law The special or particular law governing arbitration stipulation and proceedings is Republic Act No. 876 (1953), formally designated as "The Arbitration Law." a. Persons and Matters Subject to Arbitration Under the said Law, two and more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing, between them at the time of the submission and which may be subject of an action, or the parties to any contract may in such contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract. Also, such submission or contract may include questions 68

Art. 2042, Civil Code. Art. 2044, Civil Code. 70 Bengson v. Chan, 78 SCRA 113 (1977). 71 Mindanao Portland Cement Corp. v. McDonough, 19 SCRA 808 (1967). 69

20 arising out of valuations, appraisals or other controversies which may be collateral, incidental, precedent or subsequent to any issue between the parties. b. Form of Arbitration Agreement A contract to arbitrate a controversy thereafter arising between the parties, as well as a submission to arbitrate an existing controversy shall be in writing and subscribed by the party sought to be charged, or by his lawful agent. The making of a contract or submission for arbitration shall be deemed a consent of the parties to the jurisdiction of the Regional Trial Court of the province or city where any of the parties resides, to enforce such contract or submission. c. Appointment of Arbitrators If, in the contract for arbitration or in the submission to arbitration, provision is made for a method of naming and appointing arbitrators, such method shall be followed; but if no method be provided therein, it is the Regional Trial Court that shall designate an arbitrator or arbitrators. The Arbitration Law provides specifically for the procedure of arbitration, qualification of arbitrators, challenge of arbitrators, hearing by arbitrators, rendering of awards and the form and contents of award, confirmation of award, grounds for vacating, modifying or correcting awards, and appeals procedure. 2. Facilities for Commercial Arbitrations The Philippine Chamber of Commerce and Industry, as a service to its members and in response to request for assistance to provide arbitration facilities and services to parties to a commercial dispute, has adopted its own Rules on Conciliation and Arbitration. In the construction industry, The Philippine Domestic Construction Board was created under Pres. Decree No. 1476 "to adjudicate and settle claims and disputes in the implementation of public construction contracts" and to "formulate and recommend rules and procedures for the adjudication and settlements of claims and disputes in the implementation of contracts in private construction." Subsequently, the Philippine Construction Industry Arbitration Commission (CIAC) was constituted under Executive order No. 1008, giving it original and exclusive jurisdiction over claims and disputes arising from or connected with public and private constructions contracts in the Philippines. 3. New York Convention In 1965, the Philippines adhered, 72 to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, otherwise known as the New York Convention. The Convention seeks to make arbitral awards rendered in a foreign state enforceable in any state which is a party to the Convention. IMPACT OF CHANGES IN THE LAW SUBSEQUENT TO FORMATION The general rule under Philippine laws is that subsequent changes in the law, such as the introduction of new incentives or abolition of existing incentives, is within the power of Legislature to so provide even as it affects existing enterprises, including joint ventures. This rule emanates from constitutional doctrines that provide that even with a guarantee of nonimpairment of contract obligations, it does not prevent changes of rights of parties to a contract only as between them, and not with reference to third-parties, including the State. More importantly, Section 11, Article XII of the Philippine Constitution provides for a reservation clause in favor of the Government to revoke or amend existing grants and privileges, including incentives granted to investors: "Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires." DOUBLE TAXATION AGREEMENTS AND IMPACT ON THE JOINT VENTURE As of 20 November 1995, the Philippines had tax treaties in force with the following countries: Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Indonesia, Italy, Japan, Korea, Malaysia, Netherlands, New Zealand, Norway, Pakistan, Singapore, Spain, Sweden, Thailand, United Kingdom, and the United States. The tax treaties reduce the effects of double taxation and provide for certain favorable tax benefits. For example, although under the Philippine National Internal Revenue Code, royalty payments are subject to a final 20% tax, pursuant to the tax treaty with the United States, royalties paid to a U.S. corporation are subject to only 10% withholding tax. 72

Senate Resolution No. 71 (May, 1965).

21 Another illustration, under certain conditions, the sale of shares of stock in a domestic corporation by a Swedish corporation is tax-exempt. Fees paid to a Japanese corporation for the dispatch of its personnel to provide technical assistance to a domestic corporation pursuant to a technical assistance agreement constitute "royalties" subject to the 10% withholding tax under the RP-Japan tax treaty. Gains to be realized by a U.S. citizen from the transfer of his shares of stock in a domestic corporation are taxable only in the U.S. The royalty fees paid to a U.S. corporation pursuant to software license agreement are subject to only 10% tax under the most-favored-nation clause of the RP-US tax treaty. Finally, gains realized by a US-based firm not doing business in the Philippines from all its outstanding shares of stock in its local subsidiary are taxable only in the U.S. under the RP-US tax treaty. PROTECTION OF FOREIGN INVESTORS The following are basic guarantees under the Philippine Constitution as protection to foreign investors: (a) Freedom from expropriation without just compensation; (b) Right to remit profits, capital gains and dividends within the guideline of the Central Bank of the Philippines; (c) Right to obtain foreign exchange to meet principal and interest payments on foreign obligations.

—oOo—

APPENDIX C-LAW ON JOINT VENTURES\06-22-2001

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