The Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, reported that in 2023, credit activity in the Philippines further expanded, albeit at a slower pace. Specifically, the total loan portfolio rose by 8.4%, reaching PHP13.1 trillion and marking 27 consecutive months of year-on-year growth since August 2021. This growth was driven by loans for real estate activities, which continued to be the biggest source of borrowing, household loans (eg, credit card receivables, salary-based general-purpose consumption loans, and motor vehicle loans) and loans to the wholesale and retail trade.
As the economy fully reopened in a high inflation and high interest rate environment, lending rates further increased in 2023 with the latest figures at higher levels than those registered in March 2020, the onset of the pandemic.
The various market players in the Philippine financial landscape include local and international banks and direct lenders.
The Philippine banking system serves as the core of the Philippine financial system and the principal source of credit for the Philippine economy. The local banks provide essential banking services to individuals, small and medium enterprises, and other local businesses. On the other hand, international banks, having the ability to operate across borders, facilitate international trade and investment, including cross-border payments and foreign exchange.
Direct lenders are those individuals or institutions that lend directly to borrowers, typically providing an alternative to traditional bank loans. In the Philippines, the term “direct lenders” refers to lending companies and financing companies, which are not regulated by the BSP but by the Philippine Securities and Exchange Commission (SEC).
Ongoing Conflicts
While neither Russia nor Ukraine is a major trading partner of the Philippines, the ongoing conflict between these two countries has had significant implications for the Philippine market, primarily due to the impact of the surge in global oil prices and commodity prices on the local market. The same effects are expected in connection with the ongoing conflict in the Middle East as driven by the disruption of shipping in the Red Sea.
The BSP reported that while the global economy continues to recover from the COVID-19 pandemic, it has struggled to gain momentum due to the ongoing global conflicts and tightening financial conditions.
Long-Term Effects of COVID-19
At the start of the COVID-19 pandemic, transaction timelines were impacted primarily due to the challenges faced during lockdowns, travel restrictions, and economic uncertainty. Loan documentation needed adjustments to accommodate remote working, digital signatures, and virtual meetings. Force majeure clauses were revisited and made more precise and comprehensive to cover pandemics and diseases.
In the Philippines, the legislative branch passed a law imposing a loan moratorium programme on loans falling due on or before 31 December 2020. Specifically, covered institutions were required to implement a non-extendable, mandatory, one-time 60-day grace period for all existing, current and outstanding loans with principal and/or interest, including amortisations, falling due on or before 31 December 2020, without incurring interest on interests, penalties, fees, or other charges. These interventions affected loan documentation, repayment terms, and interest accrual.
Debt finance transactions in the Philippines commonly comprise acquisition finance, debt and capital issuance, asset-based finance, and project finance. There is a legal and regulatory framework in place for securitisations, but the securitisation market has not yet developed.
Debt finance structures vary based on the purpose and risk appetite of the parties. Bank loan facilities are typically structured as term loans (ie, fixed term with regular interest payments), revolving credit lines (ie, credit lines that allow borrowers to draw funds as needed), and bridge loans (ie, short-term loans having a term of less than 365 days used to bridge a financing gap). On the other hand, project financings are typically secured by the project’s cash flows and the project assets. Corporate capital-raising activities may take the form of a bond issuance or a share issuance.
Secured loan facilities are usually documented in an omnibus loan and security agreement (OLSA), where the loan and security component of the facility are contained in a single loan agreement. The OLSA structure is typically used to save on the cost of documentary stamp tax (DST). Under Revenue Regulations No 9–94 issued by the Bureau of Internal Revenue (BIR), where only one instrument is prepared, made, signed and executed to cover a loan agreement or promissory note, or a pledge or mortgage, the instrument will be treated as covering only one taxable transaction and a single DST (at the higher rate) will be paid (instead of each component being subject to DST separately).
Other bank loan facilities may be documented in a term loan agreement or a credit facility agreement, where each drawdown will be covered by a promissory note.
Investors may influence the terms of a bank loan facility, such as borrower covenants and representations, and the security, depending on the investor’s risk appetite, negotiation power, credit rating, and the loan size and structure.
Cross-border loan documentation requires jurisdiction-specific terms that consider Philippine legal, regulatory, and tax considerations.
Loans that are secured by a mortgage or security interest over Philippine assets should comply with the local law requirements on the perfection and enforcement of the security, and the loan documentation should reflect such requirements. For instance, the Personal Property Security Act (Republic Act No 11057) (PPSA) provides that a security interest over personal property may be perfected to bind third parties through the following means: registration of a notice with the registry, actual or constructive possession of the tangible collateral by the secured creditor, or control of the investment property or deposit account. With respect to real estate mortgages, the Civil Code provides that the same must be registered in the Registry of Property in order to bind third parties. The loan documentation would typically reflect these requirements as conditions precedent to drawdown of the loan.
The typical security package in connection with debt financings in the Philippines includes a combination of a real estate mortgage over real properties, a security interest over personal properties, and guarantees.
Real Estate Mortgage
Security may be taken over real property by way of a real estate mortgage.
The primary laws governing the creation, perfection and foreclosure of a mortgage on real property are the Civil Code of the Philippines (Republic Act No 386) (the “Civil Code”) and Act No 3135. To constitute a mortgage, it is necessary that the mortgagor be the owner of the item mortgaged. Generally, there is no specified form for the mortgage agreement. The document is not required to be registered in the Registry of Deeds for validity, and an unregistered mortgage is binding between the parties. However, real mortgages must be recorded in the Registry of Deeds if the property is situated to bind third parties.
Security Interest on Personal Property
The Personal Property Security Act (Republic Act No 11057) (PPSA) introduced new rules governing the creation and registration of security interests over personal property in the Philippines. Under the implementing rules and regulations of the PPSA (the “PPSA Rules”), parties are free to enter into any form of security arrangements over movable property as long as the security arrangement is not inconsistent with the PPSA or the PPSA Rules. Further, subject to existing law, parties may also apply the PPSA Rules to other functional equivalents of security interests, including fiduciary transfers of title; financial leases; assignment or transfer receivables; and sale with retention of title.
Under the PPSA, a security interest over personal property may be created by a security agreement, an operating lease for not less than one year, or the sale of an account receivable (unless otherwise stipulated by the parties in the document of sale). Except as otherwise provided in the PPSA, the PPSA Rules, or the agreement of the parties, a security interest will continue in the collateral notwithstanding its disposition. A security interest is extinguished when all secured obligations have been discharged and there are no outstanding commitments to extend the credit secured by the security interest.
A security agreement must be in writing and signed by the parties, it must identify the collateral and the secured obligation, and it must provide for the language to be used in the agreements and notices. A model security agreement is annexed to the PPSA Rules. There is no requirement under the PPSA that the security agreement be in a public instrument, but it is advisable, given the practical effects of placing documents in a public instrument. In creating a security interest, it is sufficient that the collateral be reasonably identified. The security agreement may provide for the creation of a security interest in future property or after-acquired assets, but the security interest in that property will be created only when the grantor acquires rights in it or the power to encumber it. The security agreement may also provide that a security interest in a tangible asset that is transformed into a product extends to that product (but it will be limited to the value of the encumbered asset before it became part of the product). It may likewise provide that a security interest in a tangible asset extends to its replacement (but it will be limited to the value of the encumbered asset before it was replaced).
The PPSA provides that a security interest over personal property may be perfected to bind third parties through the following means: registration of a notice with the registry, actual or constructive possession of the tangible collateral by the secured creditor, or control of the investment property or deposit account.
Specifically, a security interest in any tangible asset may be perfected by registration or possession (whether actual or constructive), while a security interest in investment property or a deposit account may be perfected by registration or control – that is, through:
Guarantees and Other Forms of Credit Support
Corporate guarantees are typically provided by parents and affiliates of a borrower. A Philippine company may guarantee a debt of the borrower if the guarantor is authorised to do so under its articles of incorporation and has obtained the requisite corporate approvals.
Below are some key considerations for security and guarantees under Philippine law.
Priority of Security Interests
The priority of security interests in the same collateral is generally determined by time of perfection. However, with respect to security interests over personal property, there are rules for determining priority for specific types of properties.
Deposit accounts or investment property
For a deposit account or investment property where the secured creditor is the deposit-taking institution, the order of priority is as follows:
Certificated securities
For security certificates, the order of priority is as follows: possession and registration.
Non-intermediated securities
For electronic securities not held with an intermediary, the order of priority is as follows:
Intermediated securities
For electronic securities held with an intermediary, the order of priority is as follows: conclusion of a control agreement, and registration.
Instruments and negotiable documents
For an instrument or negotiable document, the order of priority is as follows: possession and registration.
Financial Assistance
There are no laws that prohibit a company from granting financial assistance for the purpose of the acquisition of its shares or those of a parent company. The same may be conducted provided that the corporation is duly authorised to do so under its articles of incorporation, and the necessary corporate approvals are obtained.
Corporate Benefit in Guarantees
The Philippine Supreme Court ruled that it is not ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the legitimate furtherance of its purposes and business (Carlos v Mindoro Sugar Co, GR No L-36207, 26 October 1932).
The SEC has stated that for a corporation to validly guarantee the obligations of another person or entity, the same must be in furtherance of the corporate objectives and for the benefit of the corporation (SEC Opinion No 60-03, 18 November 2003).
Guarantee Fees
There is no requirement of guarantee fees under Philippine law. In fact, under the Civil Code, a guarantee is gratuitous, unless there is a stipulation to the contrary. However, if the guarantor is executing a guarantee to benefit a related party (eg, a downstream guarantee executed to secure the obligations of a subsidiary to third-party banks), and the parent does not charge any guarantee fee or premium, there is a risk that local tax regulators may apply transfer pricing guidelines and impute income to the parent guarantor (and potentially, impose penalties and surcharges under tax laws).
Intercreditor arrangements are typically entered into to address the governance of the debt among various creditors. They typically involve the appointment of a facility agent that takes instructions from the creditors based on agreed rules and voting requirements. Intercreditor arrangements are also entered into to address the distribution of payments, including payments arising from an enforcement of security interests or during an insolvency situation.
Contractual Subordination
The Philippines adheres to the principle of autonomy of contract, and the parties to a contract are free to agree on such stipulations as they deem fit, provided they are not contrary to law or public policy. In this connection, a clause whereby a creditor agrees that its loan (or other claim) is expressly subordinated to other obligations, loans or securities issued by the same borrower would be valid under Philippine law.
In the case of Philippine banks, however, such entities are only allowed to issue unsecured subordinated debt to the public with prior approval from the BSP.
Legal Subordination
Philippine law classifies credits into three general categories:
The enumeration of special preferred credits under the Civil Code does not establish an order of preference. Such claims concur and are satisfied on a prorated basis. For special preferred credits, there is a two-tier order of preference: the first tier includes only taxes, duties and fees due to the Philippine state, and the second tier includes all other special preferred credits which are to be satisfied, pari passu and pro rata, out of any residual value of the specific property (ie, net of the taxes, duties and fees due to the Philippine state). Thus, only taxes, duties and fees due to the Philippine state will have priority over secured creditors. As a special case, if the debtor is a securities market participant, the trade-related claims of its customers are deemed to have absolute priority over all other claims of whatever nature or kind in so far as trade-related assets are concerned (Financial Rehabilitation and Insolvency Act of 2010 (Republic Act No 10142) (FRIA), Section 136).
On the other hand, ordinary preferred credits create no liens that attach to determinate property. Ordinary preferred credits only create rights in favour of certain creditors out of the “free property” of the insolvent debtor (ie, the residual value of the debtor’s assets when the special preferred credits have been satisfied) based on the order under Article 2244 of the Civil Code, as modified by Article 110 of the Labor Code of the Philippines (Presidential Decree No 442). These credits have preference according to the order of priority of the dates of the instruments and of the judgments, respectively.
Common credits are the ones that do not enjoy preference and are satisfied pro rata regardless of dates (Civil Code, Article 2251 in relation to Article 2245).
Enforcement of Real Estate Mortgage
Foreclosure of a real estate mortgage may be effected judicially or extra-judicially, that is, by ordinary action by the mortgagee or by foreclosure of the mortgage under power of sale contained in the mortgage.
Foreclosure is the remedy available to the mortgagee-creditor by which they can subject the mortgaged property to satisfaction of the obligation to secure that for which the mortgage was created.
Owing to foreign ownership restrictions on land, a foreign mortgagee cannot bid or purchase land at a foreclosure sale. Its right is limited to receiving the net proceeds from the sale. An exception, however, is in the case of foreign banks. Under Republic Act No 7721 (as amended), foreign banks authorised to do banking in the Philippines are allowed to bid and take part in foreclosure sales of real property mortgaged to them. Foreign banks are also allowed to take possession of the mortgaged property for a period not exceeding five years from actual possession. The title to such property, however, cannot be transferred to the foreign bank. If the foreign bank is the winning bidder for the property during the public auction, it must transfer its rights to a Philippine national within the five-year period of possession.
Judicial foreclosure
Judicial foreclosure is governed by Rule 68 of the Rules of Court.
To enforce a real estate mortgage under Rule 68:
Extra-judicial foreclosure
Extra-judicial foreclosure of a real estate mortgage is governed by Act No 3135, as amended, and AM No 99-10-05-0, prescribing the rules in cases of extra-judicial foreclosure of mortgages.
Act 3135 is intended merely to regulate the extra-judicial sale of the mortgaged property if and when the mortgagee is given special power or express authority to do so in the deed itself or in a document annexed thereto. A mortgage may be foreclosed extra-judicially where a clause is inserted in the contract giving the mortgagee the power, upon default of the mortgagor, to foreclose the mortgage by extra-judicial sale of the mortgaged property.
All applications for extra-judicial foreclosure of a mortgage, whether under the direction of the sheriff or a notary public, must be filed with the executive judge, through the clerk of the court who is also the ex-officio sheriff.
Upon receipt of an application for extra-judicial foreclosure of a mortgage, it is the duty of the clerk of the court:
The sale will be made at public auction, between the hours of 9 am and 4 pm, and will be under the direction of the sheriff of the province or a notary public of said municipality.
At any sale, the creditor, trustee or other person authorised to act for the creditor, may participate in the bidding, and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.
The clerk of the court will sign and issue the certificate of sale, subject to the approval of the executive judge, or in his absence, the vice-executive judge.
Enforcement of Security Interest Over Personal Properties Under the PPSA
The secured creditor may enforce its security through, among other modes of enforcement, the following: judicial process or extra-judicial process, including (i) the sale of the secured assets through public or private disposition, or (ii) retention of the collateral.
Any judicial enforcement of securities, including the disposition of collateral, will be governed by rules promulgated by the Philippine Supreme Court.
Taking possession of the collateral
If the collateral is not with the secured creditor, upon default, the secured creditor may take possession of the collateral without a judicial process if the security agreement so stipulates, but possession must be without breach of the peace. In this connection, “breach of the peace” includes entering the private residence of the grantor without permission, resorting to physical violence or intimidation, or being accompanied by a law enforcement officer when taking possession or confronting the grantor.
If the secured creditor cannot take possession of the collateral without breach of the peace, the secured creditor may proceed as follows:
In the following special cases, upon default, the secured creditor may take possession of the collateral without judicial process by:
Disposition of the collateral
After default, a secured creditor may (upon prior notice to the grantor, other secured creditors, and any other person from whom the secured creditor received notification of a claim of interest in the collateral) sell or otherwise dispose of the collateral, publicly or privately, in its present condition or following any commercially reasonable preparation or processing. A disposition is commercially reasonable if the secured creditor disposes of the collateral in conformity with commercial practices among dealers in that type of property.
The specific guidelines on private or public disposition are set out in Section 7.09 of the PPSA Rules.
Retention of capital
After default, a secured creditor may also propose to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation by sending a proposal to the grantor, other secured creditors, and any other person from whom the secured creditor received notification of a claim.
The secured creditor may retain the collateral in case of: (i) a proposal for the acquisition of the collateral in full satisfaction of the secured obligation, without objection from any of the addressees of the proposal; or (ii) a proposal for the acquisition of the collateral in partial satisfaction of the secured obligation, but only if the secured creditor received the written affirmative consent of the addressees of the proposal.
As a rule, foreign judgments are presumed to be valid and binding, and may be enforced in the Philippines. However, a judgment against a Philippine national by a foreign court could be rejected if:
The Financial Rehabilitation and Insolvency Act of 2010 (Republic Act No 10142) (FRIA) recognises the remedy of rehabilitation. The FRIA defines “rehabilitation” as “the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated”.
Kinds of Rehabilitation
It provides for three general kinds of rehabilitation:
Court-supervised rehabilitation
In a court-supervised rehabilitation, if the court finds the petition to be sufficient in form and substance, it will issue a commencement order, which will, among other things:
The commencement order also:
Pre-negotiated rehabilitation
Similarly, in a pre-negotiated rehabilitation, if the court finds the petition to be sufficient in form and substance, it will issue an order, which will, among other things:
Out-of-court or informal restructuring or a workout agreement or rehabilitation plan
On the other hand, in out-of-court or informal restructuring or a workout agreement or rehabilitation plan, a standstill period may be agreed upon by the parties, subject to certain requirements, pending negotiation and finalisation of the out-of-court or informal restructuring or workout agreement or rehabilitation plan, which is effective not only against the contracting parties but also against other creditors.
Stays of Proceedings and Moratoriums
The commencement order in rehabilitation proceedings includes a stay or suspension order that suspends all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor, and suspends all actions to enforce any judgment, attachment or other provisional remedies against the debtor. Attempts to seek legal or other recourse against the debtor outside the rehabilitation proceedings will be sufficient to support a finding of indirect contempt of court. The court, upon the motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce its security or lien, or foreclose upon the property of the debtor securing its claim, if the said property is not necessary for the rehabilitation of the debtor. The court, on motion or motu proprio (ie, on its own), may also terminate, modify or set conditions for the continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that:
In liquidation proceedings, no separate action for the collection of an unsecured claim is allowed after the issuance of the liquidation order. Pending actions will be transferred to the liquidator for them to accept and settle or contest. If the liquidator contests or disputes the claim, the court will allow, hear and resolve such contest, except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executory judgment therein for a claim against the debtor may be filed and allowed in the court. Furthermore, no foreclosure proceeding is allowed for a period of 180 days from issuance of the liquidation order. The FRIA provides that the liquidation order will not affect the right of a secured creditor to enforce their lien in accordance with the applicable contract or law.
Set-Off and Netting
As regards court-supervised rehabilitation, it appears that the right of set-off may be exercised only prior to the commencement of the rehabilitation proceedings. The issuance by the court of a commencement order serves as the legal basis for rendering null and void any set-off after the commencement date of the rehabilitation proceedings. The commencement date of the rehabilitation proceedings refers to the date on which the court issues the commencement order, which, however, will be retroactive to the date of the filing of the petition for voluntary or involuntary proceedings. In this connection, under the old law, the stay order was not expressly given any retroactive effect.
With respect to liquidation, the FRIA provides that a debt may be offset against another debt if the insolvent debtor and a creditor are mutually debtor and creditor of each other. The liquidation proceedings will only include the balance, if any, of the set-off.
Clawback
In rehabilitation proceedings, the court may, upon motion and after notice and hearing, rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor’s unencumbered property or any encumbering thereof by the debtor or its agents or representatives after the commencement date, which are not in the ordinary course of the business of the debtor. The court may also rescind or declare as null and void any transaction that occurred before the commencement date that was entered into by the debtor or involving its funds or assets, on the ground that the same was executed with intent to defraud a creditor or that it constitutes undue preference for certain creditors.
Similarly, during liquidation proceedings, any transaction occurring prior to the issuance of the liquidation order or, in the case of the conversion of the rehabilitation proceedings, before the commencement date, entered into by the debtor or involving its assets, may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a creditor or creditors, or that it constitutes undue preference for certain creditors. The liquidator or, with his conformity, a creditor may initiate and prosecute any action to rescind, or declare null and void, such transaction.
Order of Payment and Priority of Claims
Generally, the court cannot change the priority of claims in rehabilitation or liquidation. This can only be done through a waiver of preference by the creditor.
In rehabilitation cases, however, the priority of claims may be modified through confirmation of a rehabilitation plan, which binds the debtor and all participating creditors. While, generally, the rehabilitation plan requires the approval of creditors (holding more than 50% of the total claims), the court can nonetheless confirm the rehabilitation plan (despite creditor rejection) if all of the following circumstances are present:
In terms of priority of claims, see our response in 6.2 Contractual v Legal Subordination.
Section 195 of the National Internal Revenue Code (the “Tax Code”) provides that documentary stamp tax (DST) is due “on every mortgage or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborne to be paid, being payable, and on conveyance of land, estate or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be intended only as a security, either by express stipulation or otherwise.”
Under Section 195, the amount of DST payable (which is approximately 0.4% of the amount secured) is computed as follows:
Where the secured obligation is a fluctuating account or future advances without fixed limit, the DST is computed on the amount actually loaned or given at the time of the execution of the mortgage, pledge or deed of trust. However, if subsequent advances are made on such mortgage, pledge or deed of trust, additional DST shall be paid.
DST must be paid within five days after the close of the month when the taxable document was signed. Payment of DST is required to register the security. Without payment of DST, the security will still be valid between the parties but it will not bind third persons.
However, Revenue Regulation No 9-94 provides that “where only one instrument was prepared, made, signed and executed to cover a loan agreement/promissory note, pledge/mortgage, the documentary stamp tax prescribed in Section 195 of the Tax Code, as amended, shall be paid and computed on the full amount of the loan or credits granted. In this regard, the instrument shall be treated as covering only one taxable transaction, subject to the higher documentary stamp tax.” This means that if the loan and security is one agreement, the DST will be that payable on the loan (which is approximately 0.75% of the loan amount).
Section 195 of the Tax Code does not specify which party is liable for the payment of DST and consequently, the determination of the party liable for the DST is contractual. Typically, the obligation to pay the DST and file the relevant returns is imposed on the borrower/mortgagor/grantor.
The principal legislations applicable to debt financings in the Philippines are as follows:
The Civil Code, RA 3135, and the Property Registration Decree govern the manner of creating, perfecting and enforcing real estate mortgages; while the PPSA governs the manner of creating, perfecting and enforcing personal property security.
Choice of Law
A Philippine court may disregard the parties’ choice of law and apply the laws of the Philippines:
Formalities
Under Philippine law, forms and solemnities of contracts (ie, the signing process and notarisation requirements) are governed by the laws of the country in which they are executed, regardless of where the parties are domiciled or the choice of law of the parties. This rule applies even if the signing is done in counterparts, in which case, the formalities in the country in which execution takes place should be complied with by the person signing the contract.
Assignment of Receivables
Under Philippine law, an assignment of a receivable must appear in a public instrument in order to bind against third parties, but failure to comply with this formality will not necessarily render the assignment void under Philippine law. Notice to the debtor is not required to effect the transfer but is required to stop the debtor discharging the receivable by paying the assignor. Under Philippine law (Article 1285, Civil Code), the debtor who has consented to the assignment of rights made by a creditor in favour of a third person cannot set up against such third person the compensation between the debtor and the creditor, unless the debtor reserved their right to compensation when they gave their consent to the assignment.
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In recent years, the Philippines has seen significant changes in its taxation system. These changes have been brought about by new tax legislations such as the Tax Reform for Acceleration and Inclusion (“TRAIN”) Law and the Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) Act. Proposed legislations, such as the Passive Income and Financial Intermediary Taxation Act (“PIFITA”), are under way with the aim of reforming taxation of financial transactions.
Further, large traditional banks have focused on wholesale and commercial products, leaving a vast potential retail customer base under-served. Regulatory reforms have generally focused on addressing this gap.
In 2018, Congress passed the Personal Property Security Act (Republic Act No 11057) (PPSA), allowing retail customers and micro, small and medium enterprises least-cost access to credit. In May 2022, to protect financial consumer rights and grant financial regulators powers to protect such rights, the Financial Products and Services Consumer Protection Act (Republic Act No 11765) (FPSCPA) was signed into law. In December 2023, to regulate internet transactions, which are becoming prevalent in the Philippines, the Internet Transactions Act (Republic Act No 11967) (ITA) was signed into law.
Tax Reforms
Proposed Passive Income and Financial Intermediary Taxation Act
The Passive Income and Financial Intermediary Taxation Act (PIFITA), also known as House Bill No 304, is a legislative proposal that aims to amend certain provisions of the National Internal Revenue Code of 1997, and reform the taxation of passive income and the income of financial intermediaries. It is part of the Philippine government’s comprehensive tax reform programme and seeks to make taxation of passive income, income of financial intermediaries and income on financial transactions simpler, fairer and more efficient.
The key aspects of the proposed PIFITA are as follows:
The bill is still pending and has not yet been enacted into law. If passed, it could significantly impact the financial sector and investors by altering the tax landscape for various forms of passive income and financial transactions.
Guidelines for the Availment of Tax Incentives Under the Renewable Energy Act of 2008
The Department of Finance has issued Revenue Regulations (RR) 7-2022 (Tax Incentives Under the Renewable Energy Act of 2008 and the Policies and Guidelines for the Availment Thereof), which implements the tax-incentive provisions of the Renewable Energy Act of 2008 (Republic Act No 9513) (the “RE Act”). This long-awaited regulation provides the procedures and requirements for companies and entities engaged in renewable energy (RE) projects to avail themselves of tax incentives and it outlines the specific conditions and criteria for eligibility.
Taxpayers entitled to incentives under the RE Act
The following taxpayers are entitled to tax incentives under the RE Act:
To take advantage of the incentives, existing and new RE developers and RE manufacturers must:
Fiscal incentives available to RE developers
The tax incentives and treatments which DOE-certified RE developers may avail themselves of include:
Fiscal incentives available to RE manufacturers
The tax incentives and treatments which RE manufacturers may avail themselves of include:
Fiscal incentives available to RE equipment purchasers
Purchasers of RE equipment are entitled to a rebate equivalent to the VAT passed on to such purchasers. However, they will not be VAT-registered. The rebate will be in the form of a tax credit from income tax liability during the year of purchase. Any unutilised rebate or tax credit will be forfeited.
Regulatory Reforms
The Personal Property Security Act (PPSA) and its regulations
One of the most significant developments in Philippine legislation was the passing of the PPSA, amending or repealing certain laws, including the Civil Code provisions on the creation of pledges and the Chattel Mortgage Law regarding the creation of chattel mortgages and registration procedures for security interests over personal property.
The PPSA was enacted to strengthen the legal framework for secured transactions in the Philippines. It provides for the creation, perfection, determination of priority, establishment of a centralised notice registry, and enforcement of security interests in personal property (tangible and intangible), except aircraft and ships.
The PPSA took effect on 9 February 2019. However, its full implementation is conditional on the issuance of the relevant implementing rules and regulations and the establishment and operation of a new centralised registry (wherein notices of security interests may be registered). The implementing rules and regulations of the PPSA (the “PPSA Rules”) were published and took effect on 3 December 2019, and directed the Land Registration Authority (LRA) to establish the registry within six months from that date. The LRA announced the soft launch of the Personal Property Security Registry (PPSR) on 25 March 2021 for the registration of user accounts. Until the PPSR achieves full implementation, there will be no centralised and publicly searchable registry for security interests or encumbrances in the Philippines. As of March 2024, the PPSR has not achieved full implementation or operations.
Before the PPSA, the creation of a valid security interest over personal property under Philippine law was governed by the Civil Code and the Chattel Mortgage Law. Under the PPSA Rules, however, all security interests created from 9 February 2019 until the PPSA’s full implementation when the registry is established and operational (ie, during the “Transitional Period”) will be governed by the PPSA, except for registration, which should be completed in accordance with the Chattel Mortgage Law. Once the registry is established, the creation of a valid security interest over personal property under Philippine law will be entirely governed by the PPSA and the PPSA Rules, except interests in aircraft and in ships.
Creation of security interests
The PPSA introduced new rules governing the creation and registration of security interests over personal property in the Philippines. Under the PPSA Rules, parties are free to enter into any form of security arrangements over movable property as long as the security arrangement is not inconsistent with the PPSA or the PPSA Rules. Further, subject to existing law, parties may also apply the PPSA Rules to other functional equivalents of security interests, including a fiduciary transfer of title; financial lease; assignment or transfer receivables; and sale with retention of title.
A security agreement must be in writing and signed by the parties; identify the collateral and the secured obligation; and provide for the language to be used in the agreements and notices. A model security agreement is annexed to the PPSA Rules. In creating a security interest, it is sufficient that the collateral be reasonably identified. The security agreement may provide for the creation of a security interest in future property or after-acquired assets, but the security interest in that property will be created only when the grantor acquires rights in it or the power to encumber it.
Perfection of security interests
The PPSA provides that a security interest over personal property may be perfected to bind third parties through the following means: registration of a notice with the registry, actual or constructive possession of the tangible collateral by the secured creditor, or control of the investment property or deposit account.
The PPSA also sets out new rules for determining priority of security interests over the same collateral. Generally, priority is still determined by the time of perfection. However, specific rules apply, depending on the nature and kind of property involved.
Priority of security interests
The priority of security interests in the same collateral is generally determined by the time of perfection. However, with respect to security interests over personal property, there are rules for determining priority for specific types of properties, such as a deposit account or investment property where the secured creditor is the deposit-taking institution, security certificates, electronic securities not held with an intermediary, electronic securities held with an intermediary, and negotiable documents.
Enforcement of security interests
With respect to enforcement, a secured creditor may enforce its security interest by selling or disposing of the collateral, publicly or privately, or proposing to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation, subject to certain notice and consent requirements. The debtor is also required to satisfy any deficiency. Under previous laws governing pledges, a secured creditor cannot recover any deficiency after a foreclosure sale.
The Financial Products and Services Consumer Protection Act (FPSCPA)
Signed on 6 May 2022, the FPSCPA aims to protect the rights of financial consumers. It gives financial regulators, such as the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, powers for rule-making, market conduct surveillance and examination, market monitoring, enforcement, consumer redress or complaints handling mechanism, adjudication, and other powers as provided by its enabling law. It also requires financial service providers, those that provide financial products or services that are under the jurisdiction of financial regulators, to provide appropriate product design and delivery; ensure transparency, disclosure, and reasonable pricing; ensure fair and respectful treatment of clients; respect client privacy and protect client data; establish a financial consumer protection assistance mechanism; and adopt and implement information security standards.
The law renders void any provision of a contract for a financial product or service (ie, those products or services developed or marketed by a financial service provider which may include, but are not limited to, savings, deposits, credit, insurance, pre-need and health maintenance organisation (HMO) products, securities, investments, payments, remittances and other similar products and services) if the provision deprives a client of a legal right to sue the financial service provider, receive information, have their complaints addressed and resolved, or have their non-public client data protected.
The FPSCPA provides for criminal and administrative sanctions for violations and declares as unlawful the commission of investment fraud.
On 17 November 2022, the BSP issued BSP Circular No 1160 to implement the FPSCPA. On 24 March 2023, the BSP issued Circular No 1169, providing the Rules of Procedure for the Consumer Assistance Mechanism, Mediation, and Adjudication of Cases in the BSP, to carry out the objectives of the FPSCPA and provide for just and speedy determination of complaints.
Internet Transactions Act (ITA) of 2023
The ITA was passed on 5 December 2023, and took effect on 20 December 2023, with an 18-month transitory period for affected online merchants, e-retailers, e-marketplaces and other digital platforms to comply with the requirements of the law.
The ITA governs all business-to-business and business-to-consumer internet transactions where one of the parties is situated in the Philippines or where the digital platform, e-retailer, or online merchant is using the Philippine market and has minimum contacts therein. However, online media content, and consumer-to-consumer (C2C) transactions are not covered under the ITA.
The “e-marketplace” refers to digital platforms whose business is to connect online consumers with online merchants; facilitate and conclude the sales; process the payment of the products, goods or services through the platform; or facilitate the shipment of goods or provide logistics services and post-purchase support within such platforms; and otherwise retains oversight over the consummation of the transaction. An “internet transaction” refers to the sale or lease of digital or non-digital goods and services over the internet.
An “online consumer” refers to a natural or juridical person who purchases, leases, receives, or subscribes to goods or services over the internet for a fee; and an “online merchant” refers to a person selling non-financial goods or services to online consumers through an e-marketplace or third-party digital platform. An “e-retailer” will also be considered an online merchant if it offers the same goods or services outside its own website through a third-party digital platform and the online consumer purchases, leases, subscribes to, or obtains the services of the e-retailer through the said third-party platform.
The ITA creates the “E-Commerce Bureau” under the authority of the Department of Trade and Industry, which is mandated to implement the ITA’s provisions. It has the power to issue compliance orders to ensure conformity with the ITA and direct the removal of a listing or offer on a platform (takedown orders), among others.
The ITA not only regulates internet transactions but also provides rights, obligations and liabilities for those covered under the said law. It provides obligations applicable to e-marketplaces, other digital platforms, e-retailers and online merchants.
E-marketplaces and digital platforms facilitating such transactions are subsidiarily liable if they fail to meet obligations, including exercising diligence, promptly addressing intellectual property infringements, or providing contact details of online merchants without legal presence in the Philippines.
E-retailers or online merchants are primarily liable for compensating online consumers in civil actions or administrative complaints resulting from internet transactions. E-marketplaces and digital platforms facilitating such transactions are subsidiarily liable if they fail to meet their obligations, including exercising diligence, promptly addressing intellectual property infringements, or providing contact details of online merchants without legal presence in the Philippines.
An e-marketplace or digital platform will be solidarily liable if it fails, after notice, to act expeditiously to remove or disable access to goods or services appearing on its platform that are prohibited by law, imminently injurious, unsafe, or dangerous. Digital platforms or e-marketplaces will not be held liable for their reliance in good faith on an online merchant’s representations, warranties, or submitted registration documents, regardless of whether such information or documents are later proved to be inaccurate, false, or untrue. However, the digital platform or e-marketplace must show evidence of good faith and that reasonable effort was exerted to ascertain and maintain the accuracy, authenticity and veracity of the documents or information submitted.
The ITA provides administrative fines for the sale or lease, or allowing the sale or lease, of goods or services, whether digital or not, that are imminently injurious, unsafe, dangerous, or illegally done through the internet, in addition to the penalties imposable under the relevant laws, rules and regulations that prohibit or regulate such acts.
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