Doing Business In... 2021

Last Updated July 13, 2021

Philippines

Law and Practice

Authors



Villaraza & Angangco was established in 1980 and is a full-service law firm based in the Philippines with consistently recognised expertise in the areas of litigation and dispute resolution, corporate and commercial law, intellectual property, and labour and employment. The firm is headed by legal luminaries and practitioners who are deemed experts in their respective fields, and has about 70 lawyers and 100 highly trained non-legal staff who capably provide comprehensive, multi-layered, innovative and practical solutions to both foreign and domestic clients. With decades of experience in serving at the forefront of the evolving landscape of Philippine law, Villaraza & Angangco continues to gain the confidence of prominent individuals, multinational corporations and business leaders across practice areas, and to establish itself as one of the leading firms in both the international and domestic legal spheres offering professional service of the highest calibre.

The Philippine legal system is a blend of civil law and common law. The civil law origins of statutes and principles are evident in areas such as family relations, property, succession, contract and criminal law, while common law operates in areas such as constitutional law, remedial law, corporation, taxation, banking, insurance and labour.

The Philippine judicial order is a hierarchical organisation consisting of the municipal and regional trial courts, the Court of Appeals, and the Supreme Court as the top tier exercising supervision over all lower level courts, including all court personnel.

As a general rule, foreign individuals, corporations or other entities are allowed to engage in business in the Philippines, except in activities or industries that are reserved for Filipino citizens, as provided in the Constitution and existing legislation. In particular, the extent of equity held by foreigners in certain businesses and/or activities is restricted or limited as enumerated in the Foreign Investment Negative List (FINL) issued by the President of the Philippines pursuant to Republic Act No 7042, or the Foreign Investments Act of 1991 (FIA). The maximum equity interest held by a foreigner in a corporation will therefore depend on the type of activity in which the entity will engage.

Philippine law requires foreign corporations to obtain a licence from the Securities and Exchange Commission (SEC) to do business in the Philippines. A foreign corporation found to be doing business in the Philippines without a licence can be sued in Philippine courts, but cannot sue or maintain suits to enforce its rights. Under the Revised Corporation Code, a foreign corporation may also be subject to fines and penalties at the discretion of the court.

Additionally, the approval of the SEC is required for the primary registration of foreign investments that will trigger the foreign equity restrictions in the FIA and FINL. New corporations with more than 40% foreign equity are required to apply for authority to do business under the FIA by submitting the requisite SEC Application Form (SEC Form No. F-100) and declaring their percentage of foreign equity and intention to operate either a domestic market enterprise or an export market enterprise, as defined under the FIA. Existing corporations increasing their foreign equity to more than 40% are also required to file the requisite SEC Application Form No. F-101 with the SEC, while existing corporations that have more than 40% foreign equity but are increasing the percentage of their foreign equity participation under the FIA are required to file SEC Application Form No. F-102. Such corporations are required to declare whether the increase in foreign equity will be through the allowable assignment of shareholdings to non-Philippine nationals, the issuance of new stocks from the unsubscribed capital stock, an increase/decrease of authorised capital stock, a merger or consolidation, or other means.

Foreign corporations intending to establish a Branch and Representative Office are also required to submit the requisite SEC Application Form prior to registration (SEC Form No. F-103 and F-104, respectively).

Upon receiving the relevant application forms as discussed in 2.1 Approval of Foreign Investments, the SEC evaluates the application to ascertain its compliance with the FIA. The entire evaluation and approval processes take approximately one to two months from the submission of the application and documentary requirements.

If there are incomplete details or inconsistencies in the application forms, the SEC allows the applicant to rectify the deficiency in the form to ensure compliance, instead of denying the application outright. However, the SEC may still deny the application for non-compliance with the requirements of the FIA.

In cases of foreign investment in excess or violation of the allowable foreign equity percentage in the FIA, Section 14 thereof provides that a violation of any provisions of the law or the terms and conditions of registration (which necessarily includes the foreign equity restrictions), shall give rise to fines, penalties and the forfeiture of all benefits granted under the FIA. In addition, the president and/or officials responsible therefor shall also be subject to a fine. The imposition of these penalties, however, is without prejudice to the administrative sanctions that may be imposed by the SEC.

In addition, failure to comply with nationality restrictions will be deemed a violation of Commonwealth Act No 108, as amended by Presidential Decree No 715, otherwise known as the Anti-Dummy Law, and is punished by imprisonment and a fine of not less than the value of the right franchise or privilege that is enjoyed or acquired in violation of the law. Presidents or managers and directors of corporations that falsely simulate the existence of minimum stock or capital as owned by Filipino citizens for the purpose of evading the foreign equity restrictions may also be punished by imprisonment. Furthermore, a corporation that allows the use, exploitation or enjoyment of a right, franchise or privilege by persons or entities not qualified to do so shall forfeit such right, franchise or privilege, as well as the property or business enjoyed or acquired in violation of the law.

The SEC evaluates an application for registration for compliance with the minimum capitalisation rules. Certain corporations are subject to minimum capitalisation requirements pursuant to special laws, including those engaged in the insurance business or issuance of pre-need plans, and investment houses.

Under the FIA, a domestic corporation or Philippine subsidiary that produces goods for sale, renders services or otherwise engages in any business in the Philippines is known as a “domestic market enterprise”. Foreigners can invest as much as 100% equity in domestic market enterprises, except in areas included in the FINL. For domestic market enterprises whose equity is more than 40% foreign-owned, the minimum paid-up capital requirement for the establishment of a subsidiary is generally USD200,000. The amount of required minimum capital may be reduced to USD100,000 if the enterprise involves advanced technology, as determined by the Department of Science and Technology, or if it directly employs at least 50 employees, as certified by the Department of Labor and Employment (DOLE).

On the other hand, an enterprise wherein a manufacturer, processor or service enterprise exports 60% or more of its output is known as an “export enterprise”. In export market enterprises, foreigners can invest as much as 100% equity, except in areas included in the FINL. The minimum paid-up capital requirement for the establishment of a subsidiary engaged in an export market enterprise is PHP5,000.

In addition, certain corporate vehicles require specific minimum paid-up initial capitalisation. For the establishment of a Philippine Representative Office, at least USD30,000 must be remitted into the Philippines, or its equivalent in other acceptable foreign currency. For Regional Headquarters (RHQ), an initial inward remittance of USD50,000 is required; thereafter, USD50,000 is required to be inwardly remitted annually to cover operating expenses. The establishment of a Regional Operating Headquarters (ROHQ) requires a one-time remittance of USD200,000 as capital is required.

A Foreign Branch Office engaged in a domestic market enterprise requires a capitalisation of at least USD200,000. If the Foreign Branch Office is engaged in an export market enterprise, a capitalisation of at least PHP50,000 is required.

The SEC verifies the applicant’s compliance with the following financial ratios:

  • solvency, or the ratio of total assets to total liabilities;
  • liquidity, or the ratio of current assets to current liabilities; and
  • debt to equity, or the ratio of total liabilities over equity.

The applicant shall also be required to deposit securities with an actual market value of at least PHP500,000 with the SEC within 60 days of the issuance of its SEC licence.

There is no specific remedy under the law for a foreign investor to challenge the SEC’s denial of its application in court.

If there are deficiencies in the submitted application, the SEC usually recommends modification and rectification of the application to ensure compliance, instead of denying the application outright.

If a foreign investor has questions of law with respect to the interpretation and application of the FIA vis-a-vis the circumstances of its intended investments, it may request a Legal Opinion from the SEC Office of the General Counsel (SEC-OGC) for guidance prior to filing an application with the SEC. However, the issuance of the Legal Opinion may take several months, depending on the complexity of the issues involved and the workload of the SEC-OGC.

There are several legal vehicles available for a foreign investor to do business in the Philippines.

The most common form of legal entity is a Domestic Subsidiary. Where a domestic subsidiary of a foreign corporation is created, two separate and distinct corporate entities shall exist, so the Philippine subsidiary becomes a legally independent unit as a domestic corporation. Registration with the SEC requires the following.

  • At least two incorporators (either a natural or juridical person).
  • The indication of at least two but not more than 15 directors who shall be elected for a term of one year. The nationality of the directors must comply with nationality restrictions where applicable (eg, if the corporation intends to own land, it must be at least 60% Filipino-owned, and 60% of the total number of members of the board should be Filipinos).
  • A treasurer-in-trust (a resident of the Philippines).

A Branch Office is considered an extension of the parent company. No independent juridical entity is created by the establishment of a branch office, so any judgment or claim for liability against the branch office in the Philippines is a liability of the head office or the foreign corporation. The assets of both the branch office and the foreign corporation may be charged with any liability of the branch office. For the registration of a branch office with the SEC, a resident agent is required.

A Representative Office is considered a mere extension of a head office in the Philippines. It is not authorised to engage in activities that would generate income/revenue and is fully subsidised by its head office. It deals directly with the clients of the parent company and undertakes activities such as information dissemination and promotion of a company's product as well as quality control of products. For the registration of a Representative Office with the SEC, a resident agent is required. The SEC shall also check the applicant’s compliance with the financial solvency ratio of total assets/total liabilities.

On the other hand, the activities of an RHQ are limited to acting as a supervisory, communication and co-ordinating centre for its subsidiaries, affiliates and branches in the Asia-Pacific region. It does not derive income from sources within the Philippines and does not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines.

Lastly, an ROHQ performs the following qualifying services for its affiliates, subsidiaries and branches in the Philippines:

  • general administration and planning;
  • business planning and co-ordination;
  • sourcing/procurement of raw materials components;
  • corporate finance advisory services;
  • marketing control and sales promotion;
  • training and personnel management;
  • logistic services;
  • research and development services and product development;
  • technical support and communications; and
  • business development.

ROHQs are prohibited from offering services to entities other than their affiliates, branches or subsidiaries as declared in their registration with the SEC, nor shall they be allowed to directly and indirectly solicit or market goods and services on behalf of their parent company, branches, affiliates, subsidiaries or any other company.

Please see 2.3 Commitments Required from Foreign Investors regarding the required inward remittance for the above legal entities.

In general, the main steps involved in the incorporation of a domestic corporation or the registration of a legal entity (such as a branch, representative office, RHQ or ROHQ) are as follows:

  • preparation and drafting of the required documentation;
  • remittance of the required initial capitalisation requirement to a treasurer-in-trust for account;
  • for new domestic corporations, securing a favourable endorsement with relevant government entities, if the proposed corporation will engage in an industry requiring a special licence; and
  • submission of the incorporation or registration documents to the SEC and the payment of filing fees.

Application documents submitted to the SEC must generally include the following information:

  • the proposed name of the corporation or legal entity, in a format that follows the rules on naming issued by the SEC, and that is available or not similar to an existing corporate name as may be indicated in the name reservation platform of the SEC; and
  • the primary purpose of the corporation (or, for a branch, representative office, ROHQ or RHQ, the purposes for which it intends to pursue business in the Philippines).

Incorporation or registration with the SEC is done through the SEC’s online platform, called the SEC Company Registration System. The application is assigned to an SEC examiner, who shall evaluate the submitted documents and endorse the application for the approval of SEC directors and the issuance of a Certificate of Incorporation or Registration.

As for timing, the SEC generally take one week to one month, upon the submission of complete documents, to issue a Certificate of Incorporation, or a Licence to Transact Business in the Philippines in the case of a branch, representative office, ROHQ or RHQ.

Upon the incorporation of a domestic corporation or the registration of a foreign corporation with the SEC, post-registration requirements are secured from different government agencies, including a local business permit from the local government unit where the principal office is located, and securing a Certificate of Registration from the Bureau of Internal Revenue (BIR).

In general, Philippine corporations are required to file the following annual reports with the SEC:

  • a General Information Sheet (GIS) must be filed within 30 calendar days of the annual stockholders’ meeting; and
  • the Audited Financial Statements (AFS), as stamped received by the BIR, must be filed with the SEC within 120 calendar days from the end of the fiscal year according to the Financial Statements.

Branch Offices and Representative Offices of foreign corporations, as well as ROHQs and RHQs, are likewise required to file the following with the SEC:

  • a GIS within 30 days of the anniversary of the issuance of the SEC Licence; and
  • the AFS, as stamped received by the BIR, within 120 calendar days from the end of the fiscal year according to the Financial Statements.

For domestic corporations, an amended GIS is submitted to the SEC for any relevant changes, including changes in the directors or officers of the corporation during the year. A Notification Update Form is required for any change in the principal office address, officers or additional subsidiaries of Branch Offices and Representative Offices of foreign corporations, as well as ROHQs and RHQs.

Pursuant to SEC Memorandum Circular No 15-2019, all SEC-registered domestic corporations are also required to identify their beneficial owners, which are defined as natural persons who ultimately own, control or exercise ultimate effective control over the corporation. The corporation’s GIS shall include a beneficial declaration page in compliance with said SEC directive.

Listed and public companies, as well as companies with secondary licences, are subject to more stringent reportorial and disclosure requirements with the SEC, including required reports on changes in beneficial ownership of securities, and the submission of quarterly reports.

There is no explicit requirement for a specific management structure in the Philippines. However, the Revised Corporation Code of the Philippines provides that the Board of Directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation. Directors are elected by those stockholders who are entitled to vote, in a meeting where the owners of the majority of the outstanding capital stock are present.

In addition, the Revised Corporation Code requires the appointment of the following officers after incorporation:

  • a President, who must be a director;
  • a Corporate Secretary, who must be a Filipino citizen and a Philippine resident;
  • a treasurer, who must be a Philippine resident; and
  • such other officers as may be provided in the bylaws.

If the corporation is vested with public interest, the board shall also elect a compliance officer. The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or resolved by the board of directors.

A director holds a position of trust and is considered a fiduciary of the corporation. Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation, or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees, shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

In addition, following the doctrine of separate juridical personality, corporations in the Philippines are treated as separate and distinct legal entities from the natural persons comprising them. By virtue of this doctrine, stockholders of a corporation enjoy the principle of limited liability. Thus, the corporate debt is not the debt of the stockholders.

However, the Supreme Court has warranted the piercing of the corporate veil in situations when the separate personality of a corporation is used as a means to perpetuate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation or the circumvention of statutes, or to confuse legitimate issues.

Therefore, whether the separate personality of the corporation should be pierced hinges on the facts of each case. Any piercing of the corporate veil has to be done with caution, although the Court has held that it shall not hesitate to disregard the corporate veil when it is misused or when doing so is necessary in the interests of justice.

The employment relationship is primarily governed by the Labor Code of the Philippines, rules and regulations issued by the DOLE, and cases decided by the Supreme Court. The employment relationship may be further defined by the employment contract and collective bargaining agreement (CBA), if any, as long as such is not contrary to the Labor Code and established case law.

An employment contract is perfected by mere consent. The Labor Code does not require a specific form or a written employment contract to prove the existence of an employer-employee relationship. However, it is recommended to have a written employment contract to clearly define the relationship between the parties. Notably, an employee is presumed to be a regular employee unless there is a written employment contract showing that he or she is a non-regular employee, such as a probationary, casual, project, seasonal or fixed-term employee.

The normal working hours for any employee must not exceed eight hours a day. It is permissible to exceed eight hours a day if the employee is paid the corresponding overtime pay. An employee may render overtime only if he or she is obliged or permitted by the employer to do so.

Employees are also entitled to a rest period of not less than 24 consecutive hours after every six consecutive normal work days.

“At will employment” is not recognised under Philippine law; an employee may only be terminated for just or authorised causes for dismissal. This policy is anchored on the principle of the security of tenure of employees, which is not only statutorily provided but is constitutionally enshrined.

The just causes for termination are as follows:

  • serious misconduct or wilful disobedience;
  • gross and habitual neglect of duties;
  • fraud or wilful breach of trust;
  • loss of confidence;
  • commission of a crime or offence by the employee against his or her employer, the employer’s immediate family or his or her duly authorised representatives; and
  • other causes analogous to the foregoing.

The authorised causes for the termination of a contract are as follows:

  • the installation of labour-saving devices;
  • redundancy;
  • retrenchment to prevent losses;
  • the closure or cessation of business; and
  • a disease not curable within six months as certified by a competent public authority, and when the continued employment of the employee is prejudicial to his or her health or to the health of his or her colleagues.

The cause of dismissal determines which procedure must be followed prior to the dismissal. For just causes, an employer must:

  • serve the employee with a written notice containing the specific causes or grounds of termination, and giving him or her an opportunity to provide an explanation, within at least five days of receiving notice to clarify his or her defence;
  • conduct a hearing or conference to allow the employee to explain his or her defences, present evidence and rebut the evidence presented against him or her; and
  • serve the employee with a written notice of termination indicating that all circumstances involving the charge against him or her have been considered, as well as the grounds to justify the severance of his or her employment.

Severance pay is not required for just cause dismissals but may be granted in exceptional circumstances.

For authorised causes, the employer must send written notices to the employee and to the DOLE regional office at least 30 days before the intended date of termination of the employment contract. The employee must also be granted severance pay at the rate prescribed by the Labour Code or by the CBA with the union.

Failure to comply with the procedural requirements shall not invalidate a dismissal where just or authorised causes exist. However, an erring employer may be held liable for nominal damages of up to PHP30,000 for just causes, or up to PHP0,000 for authorised causes.

There is no legal requirement to notify a union prior to a termination, but such a requirement may be provided in the CBA. Furthermore, no employee class may be exempt from termination, subject to regulations on the termination of employment contracts for authorised causes as may be prescribed in a CBA.

Employees and employers are encouraged to form labour management councils to facilitate the exercise of the employees’ right to participate in the company’s policy and decision-making processes. Employee representatives to labour management are elected by at least the majority of all employees in the establishment.

Employees also have a constitutionally protected right to self-organisation. Rank-and-file and supervisory employees are free to form, join or assist unions of their own choosing for purposes of collective bargaining.

Unions are "locally" formed within a company through specific bargaining units and are open only to employees within that company. To exercise the rights granted by law to unions, a union must be duly registered with the DOLE either as an independent union (which must generally consist of at least 20% of all the employees in the bargaining unit where it seeks to operate) or as a local chapter created by a national union or federation through the issuance of a charter certificate. A bargaining unit is a group of employees sharing mutual interests within a given employer unit comprised of all or a portion of the entire body of employees in the employer unit, or any specific occupational or geographical grouping within that employer unit.

A union selected as the sole exclusive bargaining representative shall retain this status as follows:

  • for one year from the last certification election;
  • during the course of negotiations for a CBA;
  • during a bargaining deadlock; and
  • during the five-year validity of a CBA, except within the last 60 days prior to its expiry.

Once selected, the bargaining representative and the employer have a duty to bargain collectively.

Based on Section 42(A)(3) of the Tax Code, compensation for labour or personal services performed within the Philippines is considered as gross income earned from the Philippines, and is therefore subject to Philippine income tax.

As a general rule, an employee who is a resident citizen, non-resident citizen or a resident alien shall be subject to Philippine income tax at the rate of 0% to 35%, depending on the amount of taxable income earned within the Philippines for the taxable year. For the resident citizen, income from compensation rendered abroad is also subject to Philippine income tax. Under Revenue Regulation No 08-2018, taxable income for compensation earners is defined as the gross income minus non-taxable income/benefits such as but not limited to the 13th month's pay and other benefits, de minimis benefits, and the employee’s share in government-mandated employee social service contributions and union dues.

On the other hand, an employee who is a non-resident alien not engaged in trade or business within the Philippines is subject to Philippine income tax at the rate of 25% of the income received from salaries and wages earned within the taxable year.

Employers as Withholding Agents

The employers are required to withhold certain amounts from compensation to be transmitted to the employees. The amounts to be withheld and transmitted to the National Government directly depend on the taxable income of the employees.

A corporation doing business in the Philippines is subject to various taxes at varying rates, depending on its classification.

Domestic corporations, or those created or organised in the Philippines, are taxed on their net income from all sources. They are subject to the following Philippine taxes:

  • Regular Corporate Income Tax (RCIT) at the rate of 25% (may be reduced to 20% if certain criteria are met) based on the net taxable income derived during each taxable year from all sources within and without the Philippines, or Minimum Corporate Income Tax (MCIT) at the rate of 1% based on the gross income derived during each taxable year, beginning on the 4th taxable year, from all sources within and without the Philippines, whichever is higher;
  • Value-Added Tax (VAT) at the rate of 12% of the gross selling price for the sale of goods or properties or 12% of the gross receipts for the sale of services, whichever is applicable;
  • Withholding Tax on Compensation at varying rates depending on the taxable income of its employees;
  • Expanded Withholding Tax (EWT) on certain expenses provided under Revenue Regulation No 02-98, as amended;
  • Final Withholding Tax (FWT) at varying rates depending on the type of passive income; and
  • Local Taxes imposed by the Local Government Units (LGU).

Resident Foreign Corporations, including a branch, are subject to the following Philippine taxes:

  • RCIT at the rate of 25% based on the net taxable income derived during each taxable year from all sources within the Philippines, or MCIT at the rate of 1% based on the gross income derived during each taxable year, beginning on the 4th taxable year, from all sources within the Philippines, whichever is higher;
  • VAT at the rate of 12% of the gross selling price for the sale of goods or properties or 12% of the gross receipts for the sale of services, whichever is applicable;
  • Branch Profit Remittance Tax at the rate of 15% of total profits applied or earmarked for remittance;
  • Withholding Tax on Compensation at varying rates depending on the taxable income of the employees;
  • EWT on certain expenses provided under Revenue Regulation No 02-98, as amended;
  • FWT at varying rates depending on the type of passive income; and
  • Local Taxes imposed by the LGU.

Finally, Non-Resident Foreign Corporations are subject to the following Philippine taxes:

  • RCIT at the rate of 25% based on the gross income derived during each taxable year from all sources within the Philippines;
  • VAT at the rate of 12% of the gross selling price for the sale of goods or properties or 12% of the gross receipts for the sale of services, whichever is applicable; and
  • FWT at varying rates depending on the type of passive income.

The amount of income taxes paid or incurred during the taxable year by a domestic corporation to any foreign country may be claimed as a tax credit in the Philippines. However, there are limitations on the tax credits that may be claimed under the Tax Code.

Tax consolidation is not available in the Philippines. Parent companies, subsidiaries and affiliates are taxed separately.

There are no thin capitalisation rules in the Philippines.

Transfer pricing rules are applicable in the Philippines. Section 50 of the Philippine Tax Code provides that the Commissioner of Internal Revenue is authorised to distribute, apportion or allocate gross income or deductions between or among organisations that are owned or controlled directly or indirectly by the same interests, if he/she determines that such distribution, apportionment or allocation is necessary in order to prevent the evasion of taxes or to clearly reflect the income of any organisation.

There are anti-tax evasion rules in the Philippines. Section 254 of the Philippine Tax Code provides that any person who wilfully attempts to evade or defeat any tax provided under the Tax Code shall be punished by a fine, in addition to the other penalties provided by law.

The Guidelines on the Computation of Merger Notification Threshold (Merger Rules) provide the rules on determining whether a merger, an acquisition of shares or assets, or a joint venture is subject to compulsory notification.

Notification is compulsory if the transaction breaches the compulsory notification thresholds:

  • the aggregate annual gross revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity (UPE) of at least one of the acquiring or acquired entities, including that of all entities that the UPE controls, directly or indirectly, exceeds PHP6 billion (Size of the Party Test); and
  • the value of the transaction exceeds PHP2.4 billion (Size of the Transaction Test).

Computing the value of the transaction depends on the type of the transaction.

For mergers or acquisitions of assets in the Philippines, the amount is computed based on the value of the assets that are the subject of the transaction or the gross revenues generated in the Philippines of such assets.

For an acquisition of voting shares of a corporation or of an interest in a non-corporate entity, the amount is computed based on the aggregate value of the assets of the acquired entity or gross revenues generated by such assets in the Philippines. Furthermore, as a result of the proposed acquisition, the entity acquiring the shares, together with their affiliates, should own voting shares or interests of:

  • more than 35%; or
  • more than 50%, if the entity or entities already own more than 35%.

For joint ventures, the amount is computed based on the aggregate value of the assets that will be contributed into the proposed joint venture or the gross revenues generated by such assets, including any amount of credit or any obligations of the joint venture that any of the joint venture parties agreed to extend or guarantee.

On 15 September 2020, Republic Act No 11494 (otherwise known as the Bayanihan to Recover as One Act, or Bayanihan Law 2) took effect and increased the notification threshold for the review of mergers and acquisitions to PHP50 billion. Mergers or acquisitions with a transaction value of below PHP50 billion are exempted from the Philippine Competition Commission (PCC) compulsory notification requirements for a period of two years from the date of effectivity of Bayanihan Law 2.

Under the Rules for the Implementation of section 4(eee) of Republic Act No 1194, otherwise known as the Bayanihan to Recover as One Act, Relating to the Review of Mergers and Acquisitions (PCC BARO Rules), transactions below the PHP50 billion notification thresholds are likewise exempted from the PCC’s power to review mergers and acquisitions motu proprio for a period of one year from the effectivity of Bayanihan Law 2. However, the transaction below the notification threshold may be reviewed by the PCC motu proprio after one year from the effectivity of the law.

A merger or acquisition consisting of successive transactions that shall take place within a one-year period between the same parties or entities under common control shall be treated as one transaction (Creeping Transactions).

Parties that breach the thresholds are required to notify the PCC within 30 days of the execution of the definitive agreement.

For Creeping Transactions, if a binding preliminary agreement provides for such successive transactions, the entities shall provide notification on the basis of such preliminary agreement. If there is no binding preliminary agreement, notification shall be made when the parties execute the agreement relating to the last transaction that satisfies the thresholds, when taken together with the preceding transactions.

Parties that breach the thresholds are required to notify the PCC within 30 days of the execution of the definitive agreement. The notification process is as follows.

  • Prior to filing the notification, the parties required to notify may inform the PCC of the proposed merger or acquisition and request a pre-notification consultation, in which they may seek non-binding advice as to what information is required to be specified in the notification.
  • Each party shall submit a Notification Form and pay the applicable fees. An electronic copy of the form and a scanned copy of the required certification executed by each party’s representative – providing that the contents of the Notification Form and annexes thereto, if any, are true and accurate of their own personal knowledge and/or based on authentic records – and contained in a secure electronic storage device shall likewise be submitted, simultaneous with the filing of the hard copy.

As the Notification Form requires highly specific information, in practice, the same is provided through appendices, to which supporting documents may likewise be attached as sub-appendices.

  • Upon submission of the Notification Form, the PCC shall determine within 15 days whether the Notification Form and other relevant requirements are complete, and shall inform the parties of other information and/or documents it may have failed to supply, or issue a notice to the parties that the notification is sufficient for the purposes of commencing a Phase 1 review of the merger or acquisition. In the case of the former, a Notice of Deficiency shall be issued, listing the missing information. In the case of the latter, an Order of Payment shall be issued, mandating the payment of a fixed fee of PHP250,000 within a period of ten days from receipt of such order. After the payment, a Notice of Sufficiency shall be issued, informing the parties that their notification is complete, and a Phase 1 review shall commence.

Note that the appropriate periods for the phases of review shall commence only upon the PCC’s determination that the notification is complete. If the parties fail to provide the requested information within 15 days of receiving the request, the notification shall be deemed expired and the parties have to refile the notification. If the parties need additional time to put together the requested information, they may request an extension, in which case the periods for review shall be correspondingly extended.

  • The Phase 1 review lasts for a maximum period of 30 days from complete notification and payment. It involves an assessment to determine if the notified merger or acquisition raises any competition concerns under the Philippine Competition Act (PCA) that would warrant a more detailed review. If no competition concerns are raised, the merger or acquisition may be cleared within the period for Phase 1 review.
  • If, after the conduct of a Phase 1 review, the PCC is unable to conclude that the notified merger or acquisition does not raise competition concerns, it will provide the parties thereto a notice and request for additional information for the purpose of commencing a Phase 2 review. An Order of Payment shall be sent to the parties within five days from such notice. The Phase 2 review fee shall be 1% of 1% of the value of the transaction, which shall not be less than PHP1 million nor more than PHP5 million.

A Phase 2 review lasts for a maximum period of 60 days and is a more detailed and in-depth assessment of the merger or acquisition. The additional 60-day period shall begin on the day after the request for information is received by the parties. In no case shall the total period of review by the PCC exceed 90 days from the time the initial notification of the parties is deemed complete.

  • At any time before the PCC has rendered a final decision, the parties may propose commitments that remedy, mitigate or prevent the substantial lessening of competition arising from the merger or acquisition, and if the PCC approves the proposed commitments, the merger or acquisition may be allowed to proceed subject to the commitments accepted by the PCC.
  • At the end of the Phase 1 or 2 review process, the PCC may decide to (i) approve the merger or acquisition; (ii) prohibit the merger or acquisition; or (iii) prohibit the merger or acquisition, subject to conditions that it considers appropriate to remedy, mitigate or prevent anti-competitive transactions. If no decision is promulgated upon the lapse of the periods of review, the merger or acquisition shall be deemed approved.

The PCC introduced the Interim Guidelines on the Operations of the Mergers and Acquisitions Office during the Modified Enhanced Community Quarantine, the effectivity of which was extended throughout the period of community quarantine in the Philippines and continues to be in effect. Submissions of notification forms are now done through an online facility, to which parties may request access from the PCC.

Philippine law prohibits agreements whose object or effect is to substantially prevent, restrict or lessen competition. Nevertheless, agreements that contribute to improving the production or distribution of goods and services, or that contribute to promoting technical or economic progress while allowing consumers a fair share of the resulting benefits, are not considered a violation of Philippine Law on anti-competitive agreements.

In particular, the PCA prohibits agreements between and among competitors that restrict competition in terms of price, or components thereof, or other terms of trade, or those fixing price at an auction or in any form of bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation.

The PCA likewise prohibits agreements between or among competitors that have the object or effect of substantially preventing, restricting or lessening competition, such as those setting, limiting or controlling production, markets, technical development or investment, or those dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means.

Rules Governing Conduct Amounting to Abuse of Dominant Position

The PCA specifically prohibits situations wherein one or more entities abuse their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition, including:

  • selling goods or services below cost with the object of driving competition out of the relevant market;
  • imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner except those that develop in the market as a result of or arising from a superior product or process, business acumen, or legal rights or laws;
  • making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction;
  • setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions, where the effect may be to lessen competition substantially, subject to permissible price differentials; and
  • imposing restrictions on the lease or contract for sale or trade of goods or services concerning where, to whom, or in what forms goods or services may be sold or traded, such as fixing prices, giving preferential discounts or rebates upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially, provided that the following are not prohibited:
    1. permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements such as those that give each party the right to unilaterally terminate the agreement; or
    2. agreements protecting intellectual property rights, confidential information or trade secrets.

The PCA likewise prohibits making the supply of particular goods or services dependent upon the purchase of other goods or services from the supplier that have no direct connection with the main goods or services to be supplied; directly or indirectly imposing unfair purchase or selling prices on competitors, customers, suppliers or consumers, provided that prices that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be considered unfair prices; and limiting production, markets or technical development to the prejudice of consumers.

Recent Application

In 2019, the PCC decided on its first abuse of dominance case, involving a property developer that imposed a sole internet service provider on its residents, thereby preventing the residents from utilising alternative, cheaper internet services. As a corrective measure, the PCC ordered the property developer to pay a fine of PHP27 million and invited other internet service providers to offer their services to residents.

The PCC also blocked a major food manufacturer’s proposed acquisition of a sugarcane milling entity, as it decided that the acquisition would substantially lessen competition in the market for sugarcane milling services in Southern Luzon. The prohibition of the transaction supposedly prevented the creation of a monopoly that could significantly harm the welfare of sugarcane farmers, purportedly demonstrating the PCC’s growing focus on stakeholders who belong to priority sectors.

A patent is a bundle of exclusive rights granted to the owner of a technical solution, such as a product or process, which is new, involves an inventive step, is industrially applicable, and is not excluded by law from patent protection.

Patent applications must be filed within 12 months from the priority date, if any. A national phase entry application under the Patent Co-operation Treaty (PCT) must be filed within 30 months from the priority date or the international filing date, if no priority is claimed, subject to a one-month extension upon payment of a surcharge fee.

A patent application undergoes both formal and substantive examination. Currently, it takes around three years from filing before an application is examined. Depending on the issues and objections found, the examination stage takes around two years. Once allowed, a Letters Patent Certificate is issued.

A patent owner has the exclusive right to restrain, prohibit and prevent any unauthorised making, using, offering for sale, selling or importing of a patented product or a product obtained from a patented process. If the patent application was filed prior to 1 January 1998, the term of the patent is 17 years from the issuance of the patent; otherwise, the term is 20 years from the filing of the application.

Any violation of the patent owner’s exclusive rights constitutes patent infringement. To claim damages and secure an injunction against an infringing activity, the infringement action may be filed as an administrative complaint with the Philippine Intellectual Property Office (IPOPHL), or as a civil case with the commercial courts. A criminal action for patent infringement may only be pursued if the infringement is repeated after a court has found the defendant guilty of a previous infringement.

A trade mark is any visible sign capable of distinguishing the goods or services of an enterprise, including a stamped or marked container of goods.

The Philippines follows the first-to-file rule for trade mark protection. An application is granted a filing date upon the filing of complete requirements, then undergoes substantive examination to determine registrability. If registrable, the mark is published for opposition. If no opposition is filed within 30 days of said publication, the mark is deemed registered and a Certificate of Registration is issued in due course.

A trade mark registration remains in force for ten years, unless it is cancelled or removed sooner. It may be renewed for ten-year periods by filing a request for renewal before the expiration, or within six months after expiration subject to the payment of a surcharge.

A trade mark application or registration must be kept active by filing a Declaration of Actual Use (DAU) together with proofs of use of the mark within the following periods:

  • three years from its filing date;
  • six years from its registration date; or
  • one year from its renewal date.

Failure to comply with these DAU requirements will result in the refusal of the application or the removal of the registered mark.

A trade mark registrant has the exclusive right to prevent anyone from using an identical or confusingly similar mark in relation to the same or related goods and/or services covered by the trade mark registration. A violation of this right constitutes trade mark infringement and/or unfair competition, which may be filed before the IPOPHL as an administrative case, or before the regular courts as a civil and/or criminal case. To claim damages, it must be shown that the infringer had prior notice of the mark’s registration. Where fraud or deception is employed to pass off one’s goods as that of another’s, with or without a registered mark, an unfair competition case may be filed.

An industrial design is a composition or combination of shapes, lines or colours, or a three-dimensional form, which produces an aesthetic and ornamental effect and gives a special appearance to and can serve as a pattern for an industrial product or handicraft.

Only a formality examination is conducted for industrial design applications, which can take around eight months depending on the issues and objections found. Once allowed, a Certificate of Registration is issued.

An industrial design is registered for five years from its filing date, and may be renewed for not more than two consecutive five-year periods.

Like patents, an industrial design owner has the exclusive right to restrain, prohibit and prevent any unauthorised making, using, offering for sale, selling or importing of a registered design, and may pursue an infringement action against violations to claim damages and/or secure an injunction.

Copyright is a statutory right granted to the proprietor of a literary, artistic or scientific work for its exclusive use and enjoyment to the extent specified by the law.

Works are protected by the sole fact of their creation. Nonetheless, an author may register his work with the National Library, the Supreme Court Library (for works in the field of law) and the IPOPHL, and will be issued a certificate of copyright registration.

Copyright is generally protected until 50 years after the death of the author. An author’s right to attribution shall last his lifetime and in perpetuity after his death, while other moral rights are coterminous with the economic rights.

The author enjoys the exclusive right to use, authorise and prevent others from the reproduction, publication or communication of his work, subject to fair use exceptions. In case of infringement, the author may institute an administrative, civil or criminal case with a claim for damages and injunctive relief within four years from the cause of action. Copyright infringement can take the form of direct infringement, beneficial infringement, or contributory or causal infringement.

Trade Secrets

A trade secret is a plan or process, tool, mechanism or compound known only to its owner and those of his employees to whom it is necessary to confide it. Trade secrets are not registered with the IPOPHL. Philippine laws are instead tailored towards preventing compulsory disclosure of such secrets, and parties usually resort to non-disclosure agreements.

Plant Variety

A plant variety may be a seed, transplant, plant, tuber, tissue culture plantlet, and other forms that can be defined by the expression of the characteristics resulting from a given genotype or combination of genotypes, distinguished from any other plant groupings by the expression of at least one characteristic, and considered as a unit with regard to the suitability for being propagated unchanged.

An application for plant variety protection is filed with the National Plant Variety Protection Board and, if allowable, a Certificate of Plant Variety Protection is issued. For trees and vines, the term of protection is 25 years from the date of the grant of protection and 20 years for all other types of plants.

Indigenous/Traditional Knowledge

Traditional knowledge is knowledge, know-how, skills and practices that are developed, sustained and passed on from generation to generation within a community, often forming part of its cultural or spiritual identity. Through the Indigenous People’s Rights Act of 1997, indigenous cultural communities and peoples are entitled to recognition of the full ownership and control and protection of their cultural and intellectual rights.

Under Republic Act No 10173, otherwise known as the Data Privacy Act of 2012, the collection, processing, sharing and retention of personal data shall be allowed, subject to adherence to general principles laid out in said law, including the implementation of adequate and appropriate safeguards to ensure the integrity and confidentiality of the same.

In addition, the law requires entities that process or collect data to designate data protection and/or compliance officers to be accountable for establishing compliance with data privacy and security policies under the applicable laws and regulations enacted by the National Privacy Commission (NPC). The law likewise provides for acts made punishable under the law and the consequent penalties for the same, which include the imposition of fines and possible imprisonment. The Implementing Rules and Regulations (IRR) of the Data Privacy Act and issuances of the NPC also prescribe the minimum standards for qualifications of the designated data protection officer, the factors to be taken into consideration in the registration of entities processing or collecting data, and the procedure for rectifying data breaches.

The Data Privacy Act applies extraterritorially, particularly to an act or practice engaged in and outside of the Philippines by an entity if:

  • the act, practice or processing relates to personal information about a Philippine citizen or a resident;
  • the entity has a link with the Philippines and is processing personal information in the Philippines, or even if the processing is outside the Philippines as long as it is about Philippine citizens or residents, such as:
    1. a contract is entered into in the Philippines;
    2. a juridical entity is unincorporated in the Philippines but has central management and control in the country; and
    3. an entity that has a branch, agency, office or subsidiary in the Philippines and the parent or affiliate of the Philippine entity has access to personal information; and
  • the entity has other links in the Philippines, such as but not limited to:
    1. the entity carries on business in the Philippines; and
    2. the personal information was collected or held by an entity in the Philippines.

The NPC administers and implements the provisions of the Data Privacy Act. Its tasks include monitoring and ensuring the Philippines' compliance with international standards set for data protection and receiving complaints, instituting investigations and awarding indemnity on matters affecting personal information.

If processing is found to be detrimental to national security and public interest, the NPC is also empowered to issue cease and desist orders and to impose bans, whether temporary or permanent, on the processing of personal information. It can also recommend prosecution and the imposition of penalties specified under the Data Privacy Act.

Several legislative reforms have been adopted, promulgated or put forward, particularly in response to the COVID-19 pandemic.

Regarding foreign investments, several bills are pending with Congress that seek to relax foreign investments to aid the Philippines' economic recovery after the COVID-19 pandemic. In particular, Senate Bill No 2094 seeks to update the 83-year-old Commonwealth Act 146, more commonly known as the Public Service Act. Senate Bill No 1156 seeks to amends some provisions of the Foreign Investments Act of 1991 to ease equity restrictions of foreign investments in the Philippines. Likewise, Senate Bill No 1840 seeks to amend the Retail Trade Liberalization Act of 2000 to lower the required paid-up capital for foreign enterprises. These measures are supported by President Duterte, who certified the urgent passage of these economic bills.

As of June 2021, several stimulus package bills are also pending in the Congress to provide measures for economic recovery in the face of COVID-19, such as House Bill No 9411, which is the substitute bill for the known as Bayanihan to Arise as One Act (Bayanihan 3) and Senate Bill No 2123, known as the Expanded Stimulus Package Act of 2021. Both pending bills propose to align funds, provide assistance to certain business sectors, and direct relief to households.

The proposed amendments to Republic Act No 8293, otherwise known as the Intellectual Property Code, as stated in House Bill No 8620 endorsed by the Philippine IPOPHIL, are welcome improvements to the current IP system in the country. The proposed amendments provide more stringent penalties for IP rights violations and stronger enforcement powers for the IPOPHIL, among other matters. IP rights are guaranteed a higher level of protection that would undoubtedly promote their creation, use and commercialisation in the Philippines.

Following the promulgation of Republic Act No 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), which is referred to as Package Two of the Comprehensive Tax Reform Programme of the Duterte Administration, it is hoped that Package Three or the Real Property Valuation Reform will be passed into law. Package Three involves proposals to rationalise real property tax administration and collection, including the establishment of a single valuation base through a schedule of market values.

Villaraza & Angangco

11th Avenue corner 39th Street
Bonifacio Triangle
Bonifacio Global City 1634
Metro Manila, P.O. Box 3559
Makati Central
Philippines

+632 8988 6088

+632 8988 6000

info@thefirmva.com www.thefirmva.com
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Trends and Developments


Authors



Villaraza & Angangco was established in 1980 and is a full-service law firm based in the Philippines with consistently recognised expertise in the areas of litigation and dispute resolution, corporate and commercial law, intellectual property, and labour and employment. The firm is headed by legal luminaries and practitioners who are deemed experts in their respective fields, and has about 70 lawyers and 100 highly trained non-legal staff who capably provide comprehensive, multi-layered, innovative and practical solutions to both foreign and domestic clients. With decades of experience in serving at the forefront of the evolving landscape of Philippine law, Villaraza & Angangco continues to gain the confidence of prominent individuals, multinational corporations and business leaders across practice areas, and to establish itself as one of the leading firms in both the international and domestic legal spheres offering professional service of the highest calibre.

Trends and Developments

Recent developments in the Philippine legal framework include increased digitalisation, economic recovery and a mission to increase foreign direct investments. In order to mitigate the impact of the pandemic and boost economic activity, the Philippine government has passed stimulus package laws and certified several Senate Bills as urgent, in a consolidated effort to move the country forward at this unprecedented time.

Labour and Employment

Impact of COVID-19 on the Philippine economy

The Philippine economy continues to grapple with the effects of the COVID-19 pandemic. According to the Philippine Statistics Office, the unemployment rate in the Philippines dropped from 8.8% in February 2021 to 7.1% in March 2021, translating to roughly 3.44 million unemployed Filipinos.

The Department of Labor and Employment (DOLE) has issued guidelines encouraging employers to adopt alternative work arrangements in lieu of the outright dismissal of employees or total business closure. The following arrangements were encouraged:

  • reduction of work hours and/or work days;
  • rotation of workers; and
  • forced leave for employees.

However, employers were not limited to these arrangements and may explore other options.

COVID-19-related dismissals

Employers placed under great financial strain by the pandemic may have no other option but to dismiss employees for authorised causes, namely retrenchment or closure of business. Philippine jurisprudence defines retrenchment as a reduction of personnel, usually due to poor financial returns so as to cut down on the costs of operations in terms of salaries and wages to prevent the bankruptcy of the company. It is sometimes also referred to as downsizing. Closure of business is the reversal of fortune of the employer, whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of an establishment, usually due to financial losses.

A valid retrenchment programme requires the following:

  • retrenchment must be reasonably necessary and likely to prevent business losses;
  • losses, if already incurred, are substantial, serious, actual and real, or if only expected, are reasonably imminent;
  • expected or actual losses must be proved by sufficient and convincing evidence;
  • retrenchment must be in good faith and not to defeat or circumvent the employees' right to security of tenure; and
  • fair and reasonable criteria must be used in ascertaining the retention and dismissal of employees.

For the closure or cessation of an operation to be a valid ground for termination, the following must apply:

  • a decision to close or cease operation of the enterprise has been made by the management;
  • such decision was made in good faith; and
  • no other option is available to the employer except to close or cease operations.

Employees who are terminated due to retrenchment are entitled to separation pay equivalent to one month's pay or at least one-half of a month's pay for each year of service, whichever is higher; a fraction of six months' service is considered as one whole year.

Employees terminated due to the closure or cessation of a business operation that was not due to serious business losses shall be paid separation pay equivalent to one month's pay or at least one-half of a month's pay for every year of service, whichever is higher; a fraction of six months is considered as one whole year. Where the closure is due to serious business losses or financial reversals, no separation pay needs to be paid.

For terminations due to retrenchment or closure of business, the employer must comply with the due process requirements under the law. This is achieved by serving a written notice to the employee and the appropriate Regional Office of the DOLE at least 30 days before the termination comes into effect.

Working in the COVID-19 era

Now more than ever, employers are receptive to alternative work arrangements. The Philippines has enacted the Telecommuting Act, which outlines work arrangements whereby an employee in the private sector operates from an alternative workplace with the use of telecommunication and/or computer technologies.

Telecommuting may be offered by the employer on a voluntary basis and on such terms as both parties agree upon, which must not be less than the minimum labour standards set by law. The employer must also comply with the Fair Treatment provision in the law, whereby they must ensure that telecommuting employees are given the same treatment as comparable employees working in the employer’s premises.

A sticking point for employers is compliance with the Occupational Safety and Health Standards (OSHS) Law, which imposes a hefty maximum fine of PHP100,000 per day on employers who fail or wilfully refuse to comply with the required occupational safety and health standards.

Under the OSHS Law, employees have the right to refuse work without threat or reprisal from the employer if, as determined by the DOLE, an imminent danger situation exists in the workplace that may result in illness, injury or death, and corrective actions to eliminate the danger have not been undertaken by the employer.

Economic Impact and Recovery Measures

Passage of economic stimulus legislation

With the passage of Republic Act No 11469 (the Bayanihan to Heal as One Act – Bayanihan 1) and Republic Act No 11494 (the Bayanihan to Recover as One Act – Bayanihan 2), the Philippine government has introduced much-needed measures to accelerate economic recovery in the time of COVID-19, including relaxing regulatory requirements for a period of not more than one year, expediting infrastructure programmes and healthcare measures, providing tax breaks, and extending livelihood assistance to low-income households.

Some of these measures have already expired, but bills are currently pending in the Congress to provide additional measures for economic recovery. As of June 2021, House Bill No 9411, known as the substitute bill for the Bayanihan to Arise as One Act (Bayanihan 3), and Senate Bill No 2123 (the Expanded Stimulus Package Act of 2021) are currently pending in Congress. These laws propose to augment COVID-19 response and recovery interventions by aligning funds, providing stimulus packages to affected sectors, and even providing wage subsidies and homelessness assistance.

Reforms in financial sector

There is also significant development in the banking industry, heralded by the passage of Republic Act No 11523 (the Financial Institution Strategic Transfer Act – FIST Act), pursuant to which banks and financial institutions are allowed to dispose of non-performing loans (NPLs) and non-performing assets (NPAs) to FIST corporations.

Attracting More Foreign Direct Investments

Proposed amendments to the Public Service Act

Perhaps one of the most significant and relevant developments is the proposed legislation that seeks to update the 83-year-old Commonwealth Act 146, more commonly known as the Public Service Act.

Senate Bill No 2094 distinguishes between “public services” and “public utilities”, and defines a “public utility” as a person that operates, manages and controls any of the following for public use:

  • the distribution of electricity;
  • the transmission of electricity; and
  • water pipeline distribution systems and sewerage pipeline systems.

No other person shall be deemed a public utility unless otherwise subsequently provided by law. Unless otherwise included in the definition of a public utility under this proposed bill, persons currently classified as public utilities under Commonwealth Act No 146 (ie, those engaged in telecommunications and transportation) shall be considered as “public services”.

Under Section 16 of Senate Bill No 2094, foreign nationals shall be allowed to own more than 40% of capital in public services engaged in the operation and management of critical infrastructure, provided that the country of such foreign national accords reciprocity to Philippine nationals as may be provided by foreign law, treaty or international agreement. Consequently, a public service may employ a foreign national, but only after the determination of non-availability of a Philippine national who is competent, able and willing to perform the services. The employment of foreign nationals is limited to 25% of the total employees of a public service.

The President has certified Senate Bill No 2094 as urgent, so the proposed legislation is expected to be enacted soon.

Proposed amendments to the Retail Trade Liberalisation Act

Senate Bill No 1840 seeks to amend Republic Act No 8762 or the Retail Trade Liberalisation Act of 2000 to reduce the required paid-up capital for foreign enterprises intending to engage in retail trade business.

Under the current legislation, retail trade enterprises with paid-up capital of less than USD2.5 million are exclusively reserved for Filipino citizens. Full foreign participation is allowed only if any of the following qualifications are met:

  • the corporation has paid-up capital of USD2.5 million or more, provided that investment for establishing a store is not less than USD830,000; or
  • the company specialises in high-end or luxury products, provided that the paid-up capital per store is not less than USD250,000.

By contrast, under Senate Bill No 1840, the minimum paid-up capital for foreign retail investors is reduced to just USD300,000. Foreign independent platform e-commerce retailers, foreign on-platform e-commerce retailers or any other foreign retailer without a physical store in the Philippines must have a fixed place of business in the Philippines, such as a place of management, a physical office housing their staff or employees, or a warehouse. Note that under present and proposed legislation, the applicant foreign retailer must be a national from, or a juridical entity incorporated in, countries that allow the reciprocal entry of Filipino retailers.

Proposed amendments to the Foreign Investments Act

Senate Bill No 1156 seeks to amend provisions of Republic Act No 7042, otherwise known as the Foreign Investments Act of 1991, as amended, and to ease equity restrictions on foreign investments in the Philippines.

Under the proposed legislation, small and medium domestic market enterprises with paid-in capital of less than the required equivalent of USD200,000 are still reserved to Philippine nationals. However, foreign entry to small and medium-sized domestic market enterprises is allowed, with a lesser minimum paid-in capital of USD100,000, if the enterprise employs at least 15 direct employees, down from the current requirement of 50 direct employees.

Senate Bill No 1156 also proposes the inclusion of foreign online business in the definition of domestic market enterprises to be regulated under the Foreign Investments Act of 1991 and other relevant laws.

Tax

Trends and developments

There have been significant developments in the area of corporate taxation and incentives, as Republic Act No 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act) came into effect on 11 April of this year.

The CREATE Act is the second package of the Comprehensive Tax Reform Programme of the Duterte Administration. Before the present Administration ends, it is hoped that Package Three – the Real Property Valuation Reform – will be passed into law. Package Three is aimed at generating higher local government revenue by rationalising real property tax administration and collection for the faster roll-out of infrastructure projects.

The salient features of the CREATE Act include the following.

  • Since 1 July 2020, corporate income tax rate has been reduced from 30% to 25% for large corporations. Meanwhile, small and medium corporations, including one-person corporations, with net taxable income not exceeding PHP5 million and total assets not exceeding PHP100 million shall be subject to a reduced tax rate of 20%. Foreign corporations are eligible for a reduction in the corporate income tax rate to 25%.
  • For the period of 1 July 2020 to 30 June 2023, Minimum Corporate Income Tax is reduced from 2% to 1%.
  • For the period of 1 July 2020 to 30 June 2023, Percentage Tax is reduced from 3% to 1%. This is applicable to all non-VAT registered taxpayers with annual gross sales of PHP3 million and below.
  • For the period of 1 July 2020 to 30 June 2023, non-profit and proprietary educational institutions are subject to a reduced special corporate income tax rate of 1%.

The CREATE Act also streamlines fiscal incentives for qualified enterprises. Also, under the CREATE Act, improperly accumulated earnings tax (IAET) of 10% is no longer imposed.

Real Estate

Amendment of regulations on Real Estate Investment Trusts

There has been significant development in the efforts to revive interest in setting up Real Estate Investment Trusts (REITs) pursuant to Republic Act No 9856, and following the release of SEC Memorandum Circular No 1-2020, or the Revised Implementing Rules and Regulations (IRR) of the REIT Law, and Bureau of Internal Revenue (BIR) Revenue Regulations No 3-2020 (collectively, the Revised Rules).

The Revised Rules introduced significant amendments, including:

  • the Minimum Public Ownership (MPO) requirement has been adjusted to one-third of the outstanding capital of the REIT (from the 40% requirement from the old rules);
  • the transfer of property to a REIT in exchange for shares, which qualifies as a “tax-free exchange” pursuant to Section 40(c)(2) of the Tax Code, shall be exempt from 12% VAT;
  • the old requirement to place the Documentary Stamp Tax incentive and income tax incentive in escrow has already been removed; and
  • the Revised Rules require clear rules for the independence of fund manager and property manager.

Intellectual Property

Doing business in a post-COVID world

While the pandemic has irreversibly disrupted the Philippine economy, it has also fast-tracked the “upgrading” of the country’s IP system, facilities and rules to embrace technological solutions. Ironically, the Philippine IP system has never been more convenient, accessible, affordable and relevant than it is now.

IP filings and prosecution

While the Philippine Intellectual Property Office (IPOPHL) had an online filing system in place prior to the pandemic, it was initially limited to trade marks and suffered from various technical infirmities, which made online filing more tedious than convenient. The onset of the pandemic forced the IPOPHL to not only improve its online filing system but also to expand it to cover all IP prosecution, namely patents, utility models and industrial designs. Filings and payments can now be made online directly through the IPOPHL website (www.ipophil.gov.ph). Even the registration and deposit of copyrighted works can now be made online through e-mail submission. Electronic copies of relevant issuances and actions affecting pending applications and/or active registrations are now communicated through the IPOPHL E-Correspondence system.

The shift to mandatory online filing and payment for IP prosecution has also done away with the need to submit original documents, unless issues arise regarding the authenticity or due execution of the scanned copies. This speeds up the entire process and does away with the added costs of courier and postage fees for foreign and even non-Metro Manila rights holders.

As a by-product of going online, IP prosecution has now become almost paperless, which is very much attuned to a more environmentally conscious way of doing business.

IP litigation

Under the revised rules on inter partes proceedings, when there is a failure of service of the initiatory pleading, the IPOPHIL shall now post the Notice to Answer on its website, and this shall serve as a constructive notice to the respondent. This avoids unnecessary delays in the issuance of default orders, which essentially favours the opposer/petitioner.

PDF and Word files of all pleadings and supporting documents are now required to be submitted, which supports a faster decision-making process for the IPOPHL. Courier service is now also expressly recognised as an acceptable mode of filing and service of pleadings, orders and other processes.

Subsequent IPOPHL office orders mandated the filing and payment via email to the Bureau of Legal Affairs (BLA) of all pleadings, submissions and fees in relation to inter partes and IP violation cases. The other party may likewise be furnished with a copy electronically if the e-mail address is known. Appeals to the Office of the Director General of the IPOPHL from the decisions of the Bureau Heads shall also be filed and paid electronically. To ensure the continuous delivery of adjudication/dispute resolution services, interlocutory orders and notices from the BLA are also delivered to the parties via email.

With regard to regular court hearings, A.M. No. 19-10-20-SC allows and recognises electronic means as a viable mode of filing and service. A.M. No. 10-3-10-SC also allows the service of summons, orders and other court processes by email, including as a means for extra-territorial service to foreign private juridical entities not registered in the Philippines or without any resident agents in the country.

To minimise the spread of COVID-19, both the IPOPHL and the courts have opted to avoid face-to-face transactions as much as possible. Thus, judicial and administrative proceedings for IP cases now have electronic options for mediation, preliminary conference and even trial proper. A.M. No. 20-12-01-SC allows the conduct of videoconferencing as an alternative to in-court proceedings. Meanwhile, IPOPHL mediation is conducted through online/virtual video conference, while parties to an inter partes case or an IP violation case may request for the conduct of the preliminary conference, hearings, pre-trials and trials through online videoconference by filing a joint request addressed to the BLA.

IP protection and enforcement over the internet

The revised rules for the administrative enforcement of IP rights grant the IPOPHL some authority over IP rights-infringing activities conducted online. The Deputy Director General of the IPOPHL has the power to issue an order requesting the removal of counterfeit goods or pirated goods or content, including advertisements in relation to such goods or content, or the blocking of access thereto, in co-ordination with the appropriate agency, body or intermediary service provider.

The IPOPHL recently signed a Memorandum of Understanding (MoU) with several e-commerce platforms that set out a code of practice in relation to the sale of counterfeit and pirated goods over the internet. Part of the commitment of online e-commerce platforms under the MoU is to offer effective notice and take-down procedures, and to take practical and commercially and technically reasonable preventative measures against counterfeit or pirated goods.

Arbitration and Dispute Resolution

Videoconferencing hearings

A significant development triggered by the pandemic is the issuance by the Supreme Court of the Guidelines on the Conduct of Videoconferencing. The virus has forced courts to embrace the reality that the “new normal” involves fewer face-to-face hearings and more virtual hearings, in order to avoid transmission of the infection.

Under the Guidelines, videoconferencing is an alternative mode to in-court proceedings. Videoconferencing shall closely resemble in-court hearings, with remote locations seen as extensions of the courtroom and with formality and proper decorum observed.

Litigants who are overseas Filipino workers, Filipinos residing abroad or temporarily outside of the Philippines, or non-resident foreign nationals who would like to participate through videoconferencing may do so by filing a motion with the court, in which case it will be conducted in an embassy or consulate of the Philippines. Thus, persons who are forced to stay abroad because of the pandemic may now participate remotely in hearings in the Philippines, which will facilitate the resolution of the case without it being held hostage to travel restrictions and lockdowns.

The Guidelines apply to all actions, both civil and criminal, at whatever stage, when the court finds that videoconferencing will be beneficial to the fair, speedy and efficient administration of justice.

In civil cases, documentary evidence and judicial affidavits with their attachments shall be filed and served at least three days prior to the hearing. In criminal cases where the accused has consented to the conduct of videoconference hearings, he or she shall enjoy the same rights to be present and defend in person at every stage of the proceedings, to testify as a witness on his or her behalf, and to confront and cross-examine the witness against him/her.

In sum, the conduct of videoconferencing hearings has paved the way for Philippine courts and litigants to successfully cope with the challenges of the pandemic without sacrificing fundamental principles such as due process and equal protection of the law.

The 2019 Rules of Court

Another important development in dispute resolution is the amendments introduced to the Rules of Court in late 2019, which now allow the electronic filing and service of pleadings, the service of summons by email, and the removal of the requirement of hearings for filed motions.

The changes are timely, since courts and offices are frequently physically closed or operating with a skeleton workforce due to quarantine, making it impossible to file and serve pleadings and summons in person. The reduction in hearings has also sped up the court process because parties will no longer attend hearings just to set the periods for the filing of pleadings and can file these right away, and the court can immediately act thereupon.

The 2019 Rules generally permit the filing of all kinds of submissions through electronic means, subject to certain exclusions. Before a party can be served by electronic service, he or she should first consent to being served through such mode. However, the consent of a party is insufficient and court leave must first be secured if the orders and documents to be served involve the following:

  • initiatory pleadings and responsive pleadings;
  • subpoenas, protection orders and writs;
  • appendices and exhibits that cannot be easily scanned; or
  • sealed and confidential documents.

Electronic service has solved pandemic-related problems in doing personal service. Where a pleading cannot be personally served due to restrictions and suspensions of work, e-service presents the most efficient way to move the case process along.

The amended rules also provide that summons can now be served by sending an email to the defendant’s email address if the defendant cannot be served personally after at least three attempts on two different dates. Counsels of record shall now serve summons on their client if the summons is improperly served and the lawyer makes a special appearance to question the validity of the service of summons.

Defendants beyond the jurisdiction of Philippine courts may already be validly summoned by the mere sending of an email and/or through their lawyer, which would trigger the requirement of filing an answer with the court. The electronic service of summons also solves the problem of defendants evading service.

Lastly, under the new rules, the requirement for hearings of motions has been removed. Motions shall no longer be set for hearing and shall be resolved by the court within the required periods under the rules. This is a welcome development as court calendars and dockets are unclogged through the reduction in hearings and pleadings, and cases are resolved at a much faster pace since delays caused by unnecessary hearings and absences of parties due to the pandemic are eliminated.

Villaraza & Angangco

11th Avenue corner 39th Street
Bonifacio Triangle
Bonifacio Global City 1634
Metro Manila, P.O. Box 3559
Makati Central
Philippines

+632 8988 6088

+632 8988 6000

info@thefirmva.com www.thefirmva.com
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Law and Practice

Authors



Villaraza & Angangco was established in 1980 and is a full-service law firm based in the Philippines with consistently recognised expertise in the areas of litigation and dispute resolution, corporate and commercial law, intellectual property, and labour and employment. The firm is headed by legal luminaries and practitioners who are deemed experts in their respective fields, and has about 70 lawyers and 100 highly trained non-legal staff who capably provide comprehensive, multi-layered, innovative and practical solutions to both foreign and domestic clients. With decades of experience in serving at the forefront of the evolving landscape of Philippine law, Villaraza & Angangco continues to gain the confidence of prominent individuals, multinational corporations and business leaders across practice areas, and to establish itself as one of the leading firms in both the international and domestic legal spheres offering professional service of the highest calibre.

Trends and Development

Authors



Villaraza & Angangco was established in 1980 and is a full-service law firm based in the Philippines with consistently recognised expertise in the areas of litigation and dispute resolution, corporate and commercial law, intellectual property, and labour and employment. The firm is headed by legal luminaries and practitioners who are deemed experts in their respective fields, and has about 70 lawyers and 100 highly trained non-legal staff who capably provide comprehensive, multi-layered, innovative and practical solutions to both foreign and domestic clients. With decades of experience in serving at the forefront of the evolving landscape of Philippine law, Villaraza & Angangco continues to gain the confidence of prominent individuals, multinational corporations and business leaders across practice areas, and to establish itself as one of the leading firms in both the international and domestic legal spheres offering professional service of the highest calibre.

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