philippine business

Doing Business in the Philippines

Quisumbing TorresMember Firm of Baker & McKenzie

12th Floor, Net One Center26th Street corner 3rd Avenue

Crescent Park West, Bonifacio Global CityTaguig City, Philippines 1634Tel: +63 2 819 4700 (trunkline)Fax: +63 2 816 0080; +63 2 728 7777

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The material in this publication has been prepared by Quisumbing Torres to provide general information only. It is notoffered as advice on any particular matter, whether it be legal, procedural, commercial or otherwise, and should not betaken as such. For this reason, the information contained in this publication should not form the basis of any decision asto a particular course of action; neither should it be relied upon as legal advice nor regarded as a substitute for detailedadvice in individual cases. The authors expressly disclaim all liability to any person in respect of consequences of anythingdone or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this publication.

This publication is copyrighted. No part of this publication may be reproduced or transmitted by any process or meanswithout the prior permission of Quisumbing Torres.

The law is stated as at January 2009.

Table of Contents

INTRODUCTION ..................................................................1The Philippines...........................................................................................1

Quisumbing Torres .....................................................................................2

I. FOREIGN INVESTMENTS IN THE PHILIPPINES........31. Extent of Foreign Equity.............................................................3

2. Anti-Dummy Law.........................................................................5

3. Forms of Investment Vehicle ......................................................5

4. Domestic Corporation v. Branch.................................................6

5. Other Types of Corporate Vehicle ...............................................6

5.1 Representative Office ...............................................................6

5.2 Regional or Area Headquarters .................................................6

5.3 Regional Operating Headquarters (“ROHQ”) ...................................7

5.4 Regional Warehouses....................................................................7

5.5 Offshore Banking Unit (“OBU”) ....................................................8

6. Post-Registration Requirements ..............................................8

II. TAXATION....................................................................81. Tax Treaties .................................................................................8

2. National Taxes ............................................................................8

2.1 Corporate Income Tax ..............................................................8

2.2 Individual Income Tax ..................................................................9

2.3 Withholding of Taxes....................................................................9

2.4 Fringe Benefits Tax..................................................................... 10

2.5 Business Taxes .......................................................................... 10

2.6 Other Imposts of the National Government ............................. 11

3. Local and Real Property Taxes .............................................. 11

III. FOREIGN EXCHANGE REGULATIONS............... 121. Purchase and Sale of Foreign Exchange ................................ 12

2. Foreign Trade Transactions ..................................................... 12

3. Non-Trade Transactions .......................................................... 12

3.1 Foreign Inward Investments ...................................................... 13

3.2 Outward Investments................................................................ 13

3.3 Foreign Loans and Guarantees................................................. 13

3.4 Other Financing Schemes/Arrangements ................................ 13

IV. INCENTIVES UNDER SPECIAL REGISTRATIONS .. 131. Enterprises Registered Under the Omnibus Investments

Code (“OIC”) ............................................................................. 13

1.1 Tax Incentives ............................................................................ 14

1.2 Non-tax Incentives..................................................................... 15

1.3 Additional Incentives ................................................................. 15

2. Enterprises Registered With the Philippine Economic ZoneAuthority (“PEZA”).................................................................... 15

2.1 Tax and Other Incentives ...................................................... 16

3. Enterprises Registered With the Subic Bay MetropolitanAuthority (“SBMA”) .................................................................. 17

3.1 SBF Enterprises ......................................................................... 17

3.2 SBF Residents ........................................................................... 17

4. Enterprises Located in the Clark Special Economic Zone ..... 18

V. LEASE OF PRIVATE LAND..................................... 19

VI. ENVIRONMENTAL REGULATION ......................... 19Specific Areas of Regulation ................................................................... 20

VII. INTELLECTUAL PROPERTY PROTECTION.......... 20

VIII. BORDER CONTROL MEASURES ......................... 21

IX. TECHNOLOGY TRANSFER ARRANGEMENTS ... 21

X. LABOR LAW............................................................. 221. Labor Standards ...................................................................... 22

1.1 Work Hours ................................................................................ 22

1.2 Wages......................................................................................... 23

1.3 Other Compulsory Benefits ....................................................... 23

1.4 Rule on Non-Diminution of Employment Benefits ................... 23

2. Labor Relations......................................................................... 24

3. Welfare Legislation ................................................................... 24

4. Classification of Employment................................................... 24

5. Termination of Employment................................................... 25

6. Contract of Employment ......................................................... 25

XI. IMMIGRATION.......................................................... 261. Work / Employment Requirements ...................................... 26

1.1 Multiple Entry Special Visa........................................................ 26

1.2 Special Non-Immigrant or 47(a)(2) Visa................................... 26

1.3 Pre-Arranged Employment or 9(g) Visa .................................... 27

1.4 Treaty Trader’s or Investor’s Visa ............................................. 27

1.5 Subic Bay Freeport Work Visa................................................... 27

2. Special Resident Visas ............................................................. 27

2.1 Special Resident Retiree’s Visa (“SRRV”) ................................ 27

2.2 Special Investor’s Resident Visa (“SIRV”) ................................ 27

2.3 SIRV for Investors in Tourist-Related Projects and TouristEstablishments ..................................................................... 28

2.4 Subic Bay Freeport Residency Visas for Retirees ............ 28

3. Special Visa for Employment Generation (“SVEG”) ............ 28

XII. FINANCE-RELATED REGULATIONS .................... 291. Banking..................................................................................... 29

2. Financing Companies ............................................................. 29

3. Securitization Act of 2004 ..................................................... 30

4. Special Purpose Vehicle Act of 2002 ................................... 30

XIII. INSURANCE-RELATED REGULATIONS............... 30Entry of Foreign Insurance Companies ................................................... 30

XIV. ARBITRATION IN THE PHILIPPINES....................... 31

1. Advantages of arbitration compared with court litigation . 31

1.1 Speed ......................................................................................... 31

1.2 Flexibility of the rules ................................................................ 31

1.3 Choice of arbitrators.................................................................. 31

1.4 Finality of the award ................................................................. 32

1.5 Arbitrators as experts ............................................................... 32

1.6 Confidentiality........................................................................... 32

2. Definition of arbitration ........................................................... 32

3. Arbitration as contract ............................................................ 32

4. Disputes that may be referred to arbitration ......................... 32

5. Disputes that are not arbitrable .............................................. 32

6. Definition of international arbitration and domestic arbitration32

7. Republic Act No . 876 on Domestic Arbitration .................. 33

8. International Arbitration .......................................................... 34

9. The New York Convention on the Recognition andEnforcement of Foreign Arbitral Awards (“New YorkConvention”) ............................................................................ 36

10. Construction Industry Arbitration Commission ....................... 37

XV. INSOLVENCY IN THE PHILIPPINES......................... 381. Overview and Introduction to the Jurisdiction / Applicable

Legislation ................................................................................. 38

2. Proceedings for Solvent Debtors (Individuals or Corporations)38

2.1 Suspension of Payments .......................................................... 38

2.2 Corporate Rehabilitation ........................................................... 39

3. Insolvency Proceedings (Individuals or Corporations)............ 40

3.1 Voluntary Insolvency.................................................................. 41

3.2 Involuntary Insolvency............................................................... 41

3.3 Provisions applicable to both voluntary or involuntaryinsolvency proceedings .......................................................... 41

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Doing Business in the Philippines 2009

INTRODUCTION

The Philippines

The Philippines stands firm as a strong prospect for conducting businessin the Southeast Asia region.

Investment opportunities abound in these priority areas:

Production and processing of biofuels, feeds, organic fertilizers, and otheragricultural or fishery products

Alternative power generation using environment-friendly technologies

Infrastructure, specifically mass rail transport and oil and gas pipelineprojects

Build-Operate-Transfer (BOT) projects and contractual joint ventureswith the government

Development of hotels, resorts, and retirement villages, and the productionof healthcare and wellness products to promote medical tourism

Mining, quarrying and exploration and development of mineral resources

Waste treatment and recycling facilities

Nontraditional export-oriented business

IT-enabled business process outsourcing industry

Office and residential property development and public infrastructureconstruction

Abundant country resources support these investments:

A vibrant democracy advocates liberalization and deregulation of industries.

An open economy welcomes 100 percent foreign ownership in many sectors.

Special economic zones offer preferential tax incentives.

Affordable wages and utilities contribute to business cost savings.

Expanded telecommunication infrastructure facilitates smooth globalbusiness operations.

Diverse transportation choices, coupled with a modern network ofhighways, airports, and ports, support the unencumbered flow of goodswithin and between cities, towns, provinces, and islands.

A young, highly trainable English-speaking Filipino workforce is refreshedwith over 400,000 graduates annually.

A competitive consumer market serves as an arena for showcasing thelatest trends in the retail goods sector.

First-rate convention facilities host major local and international exhibits,fairs, and seminars.

Remarkable lifestyle amenities replicate the expatriate’s home environment.

Hardworking, ethics-bound, fun-loving Filipinos from multiculturalbackgrounds play host to a rewarding economic and sociocultural investment.

Sources: Information was retrieved on October 27-31, 2008 fromNational Statistics Office - http://www.census.gov.ph/Official Website of the Republic of the Philippines - http://www.gov.ph/default.aspPhilippine Board of Investments - http://www.boi.gov.ph/

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Quisumbing Torres

Your partner every step of the way.

Quisumbing Torres is the Philippine-based member firm of Baker & McKenzieInternational. It was established in 1963 by Juan G. Collas, Jr. , and was laternamed Collas and Guerrero.

In 1974, its name was changed to Guerrero & Torres. It became Quisumbing Torres& Evangelista on 1 July 1988, when the firm merged with the law office ofNorberto J.Quisumbing. The firm adopted its present name when Rafael E.Evangelista retired.

Quisumbing Torres has over 50 lawyers who provide clients with a full range of legalservices.

Quisumbing Torres is a full service law firm with the following areas of practice:

Banking & Finance

Corporate and Commercial

Immigration

Intellectual Property

Labor & Employment

Litigat ion

Tax

For more than 45 years, Quisumbing Torres has helped foreign and domesticcompanies succeed in the Philippines. Our client base currently consists of Philippine,European, American, and Asia Pacific entities. The firm represents clients doingbusiness abroad and clients from other countries doingbusiness in the Philippines,including Australia, Brunei, Canada, China, France, Germany, Hong Kong, India,Indonesia, Japan, Korea, Malaysia, Singapore, Switzerland, Taiwan, the UnitedKingdom, and the United States.

Our lawyers are knowledgeable in the relevant business, legal, social, and politicalissues. Some have helped draft significant business laws and regulations, includingthose dealing with labor, media and communications, oil and gas, mining, hazardouswaste, clean air, intellectual property, and tax.

Many of our lawyers are also admitted to practice in other jurisdictions, such as theStates ofCalifornia, New York, Virginia, and Washington D.C. A number of our lawyershavepracticed or have had legal exposure in Australia, Hong Kong, Indonesia, Japan,Singapore,Thailand, the United Kingdom, and the United States.

Together with the other member firms of Baker & McKenzie in Asia, Europe, theMiddle East, and the Americas, Quisumbing Torres in Manila provides a convenientcoordination point for regional and global work.

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I. FOREIGN INVESTMENTS IN THE PHILIPPINES

The law that governs the participation of foreign entities in economic andcommercial activities in the Philippines is Republic Act No. 7042, as amended,otherwise known as the Foreign Investments Ac t of 1991 (“FIA”). According to theFIA, it is the policy of the State to attract, promote, and welcome productiveinvestments from foreign individuals, partnerships, corporations, and governments,including their political subdivisions, in activities whic h significantly contribute tonational industrialization and socioeconomic development to the extent that foreigninvestment is allowed in such activity by the Constitution and relevant laws.

To encourage foreign investments, Philippine laws expressly reco gnize various rightsof foreign investors in the Philippines, including the rights to repatriation ofinvestments, remittance of earnings, and freedom from expropriation (except forpublic use or in the interest of national welfare or defense and upon paym ent of justcompensation).

Foreigners may hold interests in corporations, partnerships, and other entities in thePhilippines, provided that such corporations, partnerships, and other entities are notengaged in an activity that is reserved by law only to Philippine citizens or to entitiesthat are wholly owned by Philippine citizens. The maximum amount of foreign

equity that is allowed in a company depends on the type of activity that the companyis engaged in.

1. Extent of Foreign Equity

The FIA provides for the formulation of a Foreign Investment Negative List(“Negative List”) – a list of economic activities where foreign equity is eitherprohibited or limited to a certain percentage. The Negative List has two componentlists: List A and List B. List A contains areas of investment where foreign ownershipis limited by the mandate of the Philippine Constitution or by specific laws. List Bcontains areas of investment where foreign ownership is limited for reasons ofsecurity, defense, risk to health and moral s, or protection of local small andmedium-sized enterprises. A new Negative List is prospective in application andwillnot affect foreign investment that already exists on the date of its publication.Except with respect to activities where restrictions on foreign equity areimposed under the Philippine Constitution or statutes, the President of thePhilippines may amend the Negative List. However, amendments to List B may not bemade more often than once every two years.

A non-Philippine national may do business or invest in a domestic enterprise in thePhilippines to the extent of 100 percent of its capital , provided that the followingconditions are complied with:

a. It is investing in a domestic market enterprise in areas outside the NegativeList or it is investing in an export enterprise whose products and services donot fall within Lists A and B of the Negative List. A domestic marketenterprise is an enterprise which produces goods for sale or renders serviceor otherwise engages in any business in the Philippines. An export enterprise isa manufacturer, processor, or service (including tourism) enterprise thatexports60percentormore of its output,ora trader that purchasesproductsdomestically and exports 60 percent or more of such purchases.

b. The countryor state of the applicantmust alsoallow Filipinocitizensandcorporations to do business therein.

c. It must have a paid-in capital of at least the peso equivalent of US $200,000

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if it will engage in business as a domestic market enterprise (an export enterprise isnot required to comply with this minimum capitalization requirement). Thecapitalization requirements of a domestic market enterprise may be reduced to thepeso equivalent of US $100,000 (i) if its activity involves advanced technology asdetermined and certified by the Department of Science and Technology, or (ii) if itemploys at least 50 direct employees as certified by the appropriate regional officeof the Department of Labor and Employment.

Some of the activities that are included in the Seventh Negative List(which took effect on 6 January 2007) are as follows:

No Foreign Equity

Mass media, except recording

Except in cases prescribed by law, the practice of all professions,including, but not limited to, engineering, medicine, accountancy,architecture, customs brokerage, geology, and agriculture

Retail trade enterprises with a paid-up capital of less than US $2.5million

Private security agencies

Small-scale mining

Up to 25 percent Foreign Equity

Private recruitment companies, whether for local or overseas employment

Contracts for the construction and repair of locally funded public

works except infrastructure/development projects covered byRA 7718 and projects that are foreign-funded or assisted and required toundergointernational competitive bidding

Contracts for the construction of defense-related structures


Advertising


Exploration, development, and utilization of natural resources

Ownership of private lands

Operation and management of public utilities

Ownership, establishment, and administration of educational institutions

Contracts for the supply of materials, goods, and commodities togovernment-owned or controlled corporations, companies,agenciesor municipal corporations

Culture, production, milling, processing, trading (except retailing),and acquisition of rice and corn and the byproducts thereof

Acting as project proponent and facility operator of a build -operate-transfer project requiring a public utilities franchise

Ownership of condominium units where the common areas of thecondominium project are co-owned by owners of the separate units orowned by a corporation

All forms of gambling

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Domestic market enterprises (i.e., entities that do not export 60percentor more of their output) with a paid-in equity capital of lessthan theequivalent of US $200,000


Financing of companies regulated by the Philippine Securities andExchange Commission (“SEC”)

Investment houses regulated by the SEC

Persons that will engage in construction activities in the Philippines are also requiredto obtain a license from the Philippine Contractors Accreditation Board (“PCAB”).Under the rules of the PCAB, the license is reserved for and issued only to Filipinosole proprietorships or partnerships/corporations with at least 60 percent Filipinoequity participation and duly organized and existing under and by virtue of the lawsof the Philippines.

The foregoing is a non-exhaustive enumeration of the sectors/activities that aresubject to foreign equity limitations.

2. Anti-Dummy Law

The Philippines has an Anti-Dummy Law that imposes criminal and civil penaltieson persons violating foreign equity limitations.

Under the Anti-Dummy Law, a person who, having in his name or under his controla right, franchise, privilege, property or business, the exercise or enjoyment of whichis expressly reserved by law to Philippine citizens or to corporatio ns or associationswhere at least 60 percent of the capital is owned by such citizens, is prohibitedfrom (a) permitting or allowing the use, exploitation or enjoyment of such right,franchise, privilege, property or business by a person, corporation or as sociation notpossessing the qualifications prescribed by law, or (b) in any manner permitting orallowing any person not so qualified to intervene in the management, operation,administration or control of such right, franchise, privilege, property or bus iness,whether as an officer, employee, or laborer, with or without remuneration (excepttechnical personnel whose employment may be specifically authorized by the Secretaryof Justice). However, foreign nationals may serve as members of the board or gover ningbody of corporations engaged in partially nationalized activities in a numberproportionate to their actual and allowable equity in the company.

3. Forms of Investment Vehicle

There are three general forms of business organizations in the Philippines: so leproprietorship, partnership, and corporation.

A sole proprietorship is a business owned and operated by a single natural person.The liability of the sole proprietor is unlimited, and there is no distinct and separatepersonality of the business enterprise from that of the owner.

Subject to nationality requirements pertaining to the intended activity, Philippinelaw allows foreign investors to establish and register a domestic corporation, abranch, and a representative office.

A domestic corporation may be a joint venture or a wholly owned subsidiary.

A branch and a representative office are mere extensions of their head offices.

A foreign investor may also invest as a limited or generalpartner in a partnership.

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For reasons relating to the exercise of management powers and the extent of liability,among others, the corporation isgenerally the most preferred vehicle for investments inthe Philippines among the various forms of business organizations . Foreign investorsthatwish to engage in a business that is not subject to nationality restrictions generally choosebetween establishing a Philippine subsidiary and establishing a Philippine branchoffice.

4. Domestic Corporation v. Branch

Assuming that the proposed activity is not subj ect to any foreign equitylimitation,a foreign investor may be set up as a domestic corporation or a branch of aforeign corporation in the Philippines. These two types of corporate vehicle havetheir relative advantages and disadvantages relating to, amo ng others, the extent ofliability of the parent company/head office, taxation, and the administrative costsof maintaining the same.

If the proposed activity is subject to foreign equity limitations, a foreign investor willhave to set up a domestic corporation with a Philippine national as a joint venturepartner.

Generally, corporations that are more than 40 percent foreign-owned as well asbranches of foreign corporations that are considered domestic market enterprisesmust have a paid-in capital of at least US $200,000. The paid-in capital requirementis reduced to US $100,000 for domestic market enterprises whose activities involveadvanced technology or which employ at least 50 direct employees.

Entities that qualify as export enterprises (enterprises that export 60 percent ormore of their output) are not subject to any minimum paid -in capital requirement.

5. Other Types of Corporate Vehicle

5.1 Representative Office

A representative office may be established to deal directly with the clients of itsparent company in the Philippines and to undertake activities , including, but notlimited to, information dissemination and promotion of the company’s productsas well as quality control. A representative office may not derive income in thePhilippines and is fully subsidized by its head office.

A representative office must have an initial inward remittance of US $30,000 to fundits operations.

5.2 Regional or Area Headquarters

A multinational company may establish a regional or area headquarters in thePhilippines to serve as supervision, communications, or coordination centerfor its subsidiaries, branches, or affiliates in the Asia Pacific region.

The regional or area headquarters may not earn or derive income in thePhilippines. It may not participate, in any manner, in managing anysubsidiary or branch office it may have in the Philippines; neither may itsolicit or market goods or services, whether on behalf of its parent companyor its branches, affiliates, subsidiaries, or any other company.

Its expenses must be financed by the head office or parent company from externalsources in an acceptable foreign currency. To fund its operations in thePhilippines, its head office or parent company must initially remit into thePhilippines at leastUS $50,000 and thereafter US $50,000 annually.

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The regional headquarters is not subject to income tax, value -added tax, andall local licenses, fees, and charges, except real property tax on landimprovements and equipment. It enjoys tax- and duty-free importation ofequipment and materialsnecessary for training and conferences.

5.3 Regional Operating Headquarters (“ROHQ”)

A multinational company may establish a ROHQ in the Philippines to service itsown affiliates, subsidiaries, or branches in the Philippines, in the Asia Pacific region,and other foreign markets.

A ROHQ is allowed to derive income in the Philippines by performing any of thefollowing qualifying services:

a. General administration and planning

b. Business planning and coordination

c. Sourcing/procurement of raw materials and components

d. Corporate finance advisory services

e. Marketing control and sales promotion

f. Training and personnel management

g. Logistics services

h. Research and development services and product development

i. Technical support and maintenance

j. Data processing and communication

k. Business development

A ROHQ must initially remit into the Philippines at least US $200,000.

5.4 Regional Warehouses

A multinational company which is engaged in international trade and supplies spareparts, components, semi-finished products, and raw materials to its distributors ormarkets in the Asia Pacific region and other foreign areas, and which has establishedor will simultaneously establish a regional or area headquarters and/or ROHQ inthe Philippines, may also establish a regional warehouse in the Philippines.

The activities of the regional warehouse are limited to:

a. serving as a supply depot for the storage, deposit, and safekeeping of spareparts, components, semi-finished products, and raw materials, includingpacking, covering, putting up, marking, labeling and cutting or altering thegoods to the customer’s specifications, and mounting and/or packing theseinto kits or marketable lots thereof;

b. filling up transactions and sales made by its head office or parent company;and

c. serving as a storage or warehouse of goods purchased locally by the headoffice of the multinational for export abroad.

The regional warehouse may not engage in trade or directly solicit business,promote any sale, or enter into any contract for the sale or disposition of goodsin the Philippines. It may not derive income from Philippine sources.

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5.5 Offshore Banking Unit (“OBU”)

A foreign bank may operate an OBU in the Philippines. The OBU may be a branch,subsidiary, or affiliate of a foreign banking corporation authorized by the BangkoSentral ng Pilipinas (“BSP”) to conduct business with funds from external sources.

6. Post-Registration Requirements

Upon incorporation/registration with the SEC, the newly incorporated/r egisteredentity must comply with certain basic registration and licensing requirements withdifferent government agencies. These post-registration requirements include obtainingfrom certain government agencies and local government offices tax, employee -welfare-related, and commencement-of-operations permits, licenses, and registrations.

In addition to the basic post-registration requirements, certain businesses in highlyregulated industries may be subject to special licensing or registration requirementswith the government agency having jurisdiction over such industry.

II. TAXATION

Philippine taxes are imposed by both the national government and the localgovernment units.

1. Tax Treaties

The Philippines has tax treaties with the following countries:

Australia Germany Pakistan

Austria Hungary Poland

Bahrain India Romania

Bangladesh Indonesia Russia

Belgium Israel Singapore

Brazil Italy Spain

Canada Japan Sweden

China Korea Switzerland

Czech Republic Malaysia Thailand

Denmark Netherlands United Kingdom

Finland New Zealand United States

France Norway Vietnam

2. National Taxes

2.1 Corporate Income Tax

A domestic corporation is taxed on its net income (gross income less allowabledeductions) from all sources at the rate of 30 percent.

A resident foreign corporation, such as a branch, is taxed only on its net incomefrom Philippine sources at the same rate as a domestic corporation.

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A non-resident foreign corporation is subject to final withholding tax on its grossincome (without the benefit of deductions) from Philippine sources at the rate of30 percent.

A foreign corporation is considered a resident when it is engaged in trade orbusiness in the Philippines and is licensed by the SEC to engage in trade or businessin the Philippines.

The 30 percent corporate income tax rate was 35 percent prior to 1 January2009.

Income Subject to Different Tax Treatment

Interest and Royalties Interest

Dividends

Branch Profits

Gains from Sale of Real Property

Capital Gains from Sale or Exchange of Stock

Tax on Initial Public Offer of Shares of Stock

Income Taxation for Specific Industries

Foreign International Carrier

Non-Resident Cinematographic Film Owner/Lessor/Distributor

Non-Resident Lessor of Aircraft or Machinery and OtherEquipment

Non-Resident Owner of Chartered Vessel

Foreign Currency Transactions of OBUs

Minimum Corporate Income Tax

Tax on Improperly Accumulated Earnings

2.2 Individual Income Tax

A resident citizen is taxed on income from all sources at progressive rates rangingfrom 5 percent to 32 percent of net taxable income.

A non-resident alien engaged in trade or business in t he Philippines is generallysubject to tax on net income from Philippine sources at the same progressive taxrates imposed on resident aliens and citizens. A non -resident alien is deemedengaged in trade or business if he stays in the Philippines for an ag gregate period ofmore than 180 days during any calendar year.

A non-resident alien not engaged in trade or business in the Philippines is taxed ongross income from Philippine sources at the rate of 25 percent, withheld at source.

2.3 Withholding of Taxes

Taxes due on the income of a non-resident alien and a non-resident foreigncorporation are withheld at source.

The salary and certain other income receipts of residents, such as interest and rentincome, are also subject to withholding tax.

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2.4 Fringe Benefits Tax

A final tax of 32 percent is imposed on the grossed -up monetary value of fringebenefits furnished or granted to an employee (except rank-and-file) by theemployer.

Fringe benefits tax is not imposed if the fringe benefit is required by the nature of,or necessary to, the trade, business, or profession of the employer, or when the fringebenefit is for the convenience or advantage of the employer.

2.5 Business Taxes

a. Value-Added Tax (“VAT”)

VAT is a tax on consumption levied on the sale, ba rter, exchange, or leaseof goods or properties and services in the Philippines, and on theimportation of goods into the Philippines.

A person becomes subject to the 12 percent VAT when his gross salesor receipts for the past 12 months exceed Ph P1.5 mil lion.

A VATtaxpayer is allowed input VAT credits againsthisoutput VATliability, subject to certain limitations.

b. Excise Taxes

In addition to VAT, excise taxes apply to goods produced in the Philippinesfor domestic sale or consumption or for any other d isposition, and tothings imported.

Excise taxes, which are based on the weight or volume capacity or anyother physical unit of measurement of the goods , are called specifictaxes.

Excise taxes, which are imposed and based on the selling price or otherspecified value of the goods, are referred to as ad valorem taxes.

The following are subject to excise taxes:

Automobiles Distilled spirits, wines,fermented liquor

Tobacco products, cigarsand cigarettes

Non-essential goods(such as jewelry, perfumesand toilet water)

Yachts and othervesselsintended forpleasure or sports

Manufactured oils andotherfuels

Fireworks

Cinematographicfilms

Saccharine

Mineral products andquarry resources

Excise taxes paid on locally produced goods which are export ed withoutreturn to the Philippines, whether in their original state or as ingredientsor parts of any manufactured goods or products, are credited or refundedupon submission of proof of actual exportation and receipt of thecorresponding foreign exchange payment.

c. Percentage Taxes

Certain persons are subject to percentage taxes at rates ranging from1 percent to 30 percent. Percentage taxes are normally imposed ongross receipts.

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Among those subject to percentage taxes are the following:

Keepers of garages and common carriers by land, air, orwater for the transport of passengers

Entities engaged in the life insurance business

Overseas dispatches, messages, or conversationstransmittedfrom the Philippines by telephone,telegraph, telewriterexchange, wireless, and othercommunication equipment services

Banks and non-bank financial intermediaries

Persons or entities subject to percentage taxes are exempt from VAT.Business establishments whose gross annual sales or receipts do not exceedPh P1.5 million are exempt from VAT but are subject to percentage taxof 3 percent, unless they elect to pay the 12 percent VAT.

d. Documentary Stamp Taxes

Documentary stamp taxes must be affixed to certain documents,instruments, and papers evidencing business transactions, such as:

Bonds

Debentures

Certificates of indebtedness

Certificates of stock

Certificates of profits or ofinterests in property or

accumulations

Bank checks

Drafts

Certificates of deposit

Promissory notes

Bills of exchange

Letters of credit

Insurance policies

Fidelity bonds

Annuity policies

Indemnity bonds

Certificates issued bycertain officers

Warehousing receipts

Jai-alai and horse racetickets

Bills of lading

Proxies

Powers of attorney

Leases of real property

Mortgages

Pledges

Deedsof sale ofrealpropertyand charter parties

2.6 Other Imposts of the National Government

In addition to the 12 percent VAT and any applicable excise tax, importations aregenerally subject to customs duties.

The Tariff and Customs Code provides for the imposition of anti-dumping duty,countervailing duty, marking duty, and discriminating duty under special circumstances.

3. Local and Real Property Taxes

Local government units, such as provinces, cities, municipalities, and barangays , maylevy taxes and impose local license fees pursuant to the Local Government Code.

Furthermore, real property tax applied solely to the lands, buildings, and otherimprovements thereon is levied on the assessed value of the real property.

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III. FOREIGN EXCHANGE REGULATIONS

1. Purchase and Sale of Foreign Exchange

Generally, foreign exchange may be freely bought and sold in the Philippines.

By way of exception, the Bangko Sentral ng Pilipinas regulates the purchase and saleof foreign exchange by authorized agent banks, non-bank BSP-supervised entities,their subsidiary/affiliate foreign exchange corporations, and independent foreignexchange dealers and moneychangers (collectively , “BSP Regulated Entities”). TheBSP, with the approval of the President of the Philippines, may exercise its generalemergency powers and temporarily suspend or restrict the purchase and sale offoreign exchange.

2. Foreign Trade Transactions

Foreign trade includes import and export trade transactions.

As a rule, a wide variety of merchandise may be imported into and exported fromthe Philippines. However, the importation or exportation of certain commoditiesis regulated or prohibited for reasons of public health and safety, national security,international commitments, and the development and rationalization of local industry.

Without prior BSP approval, but subject to reporting requirements and otherconditions, universal and commercial banks may sell foreign exchange to servicepayments for imports under the arrangements prescribed by the BSP. The requirementsinclude letters of credit, documents against payment, documents against acceptance,open account arrangements, and direct remittance. Authorized agent banks may sellforeign exchange to importers up to US $100,000 or its equivalent, without priorBSP approval for partial or full advance payment of imports, subject to the submissionby importers to the selling bank of prescribed documents. Applications for purchasingforeign exchange in excess of US $100,000 , or its equivalent, to service advancepayment of imports must be filed directly with the BSP for approval.

Payments for exports may be made without prior BSP approval under thearrangements prescribed by the BSP, such as letters of credit, documents againstpayment/cash against documents, documents against acceptance, open accountarrangement, intercompany open account offset arrangements with the parentcompany or affiliates abroad, consignment and export advances.

3. Non-Trade Transactions

Non-trade transactions refer to all other foreign exchange transactions that are notimport or export trade transactions. These include foreign inward and outwardinvestments and foreign currency denominated loans and guarantees.

Generally, all BSP Regulated Entities may sell foreign exchange to Philippine residentsto fundpaymentsofnon-trade transactions even withoutprior BSPapproval.However, ifthe sale of foreign exchange exceeds US $30,000, or its equivalent inother foreigncurrency, the BSP Regulated Entity selling the foreign exchange mustrequire thepurchaser to present the documentary requirements prescribed by the BSP. Theserequirements may include documents showing that the purchaser has obtained priorBSP approval or registration of the transaction.

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3.1 Foreign Inward Investments

Foreign investments must be registered with the BSP or, in certain instances, witha custodian bank, so that foreign exchange may be sourced from a BSP RegulatedEntity to fund the repatriation of the investment and the remittance of profits anddividends. If a foreign investment is not registered with the BSP, a BSP RegulatedEntity is not allowed to sell foreign exchange to fund the repatriation of suchinvestment and the remittance of profits and divide nds relating to such investment.

3.2 Outward Investments

Prior BSP approval and registration is required for outward investments if foreignexchange exceeding US $30,000,000 per investor per year will be sourced fromBSP Regulated Entities.

Qualified Investors may apply to the BSP for a higher annual outward investmentlimit. Qualified Investors are currently limited to the following: insurance andpre-need companies; collective/pooled funds, such as mutual funds, unit investmenttrust funds and variable insurance; public or private pension or retirement or providentfunds; and such other entities and funds as the BSP may determine as Qualified Investors.

3.3 Foreign Loans and Guarantees

Foreign currency denominated loans and guarantees must be registered with the B SPso that foreign exchange may be purchased from a BSP Regulated Entity to servicepayments. If a foreign loan or guarantee is not registered with the BSP, a BSPRegulated Entity may not sell foreign exchange to fund payments of such foreignloan or guarantee.

3.4 Other Financing Schemes/Arrangements

Financing schemes or arrangements which involve an option to purchase or a transferof ownership after a certain period of time, as in the case of a Build -Operate-Transferarrangement, must be registered with the BSP to be eligible for servicing using foreignexchange that will be purchased from BSP Regulated Entities.

IV. INCENTIVES UNDER SPECIAL REGISTRATIONS

Qualified enterprises may register with the Board of Investments (“BOI”) under theOmnibus Investments Code (“OIC”) or with the Philippine Economic Zone Authority(“PEZA”)to avail themselves of incentives. Investment opportunities in thePhilippines have also been created by the Philippine Government’s conversion plancovering Clark Air Base, Subic Naval Base, Camp John Hay in Baguio City, andother former US military reservations and their extensions into special economiczones.

1. Enterprises Registered Under the Omnibus InvestmentsCode (“OIC”)

The OIC, through tax exemption and other benefits, encourages investm entsin preferred areas of economic activity specified by the BOI in the InvestmentPriorities Plan (“IPP”).

Although the incentives under the OIC are generally available only to citizens of thePhilippines or to domestic corporations owned and controlled by Philippine nationals,the nationality requirement is waived if the applicant will either export at least70 percent of its total production or engage in a pioneer project.

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A pioneer enterprise either manufactures goods that have not been produced inthe Philippines on a commercial scale, or employs a formula, process, or productionscheme which has not yet been tried in the Philippines.

Agricultural activities or services (especially food processing) contributing to nationalself-sufficiency, the production of non-conventional fuels, or the manufacturing ofequipment which utilizes non-conventional sources of energy are similarly classifiedas pioneer projects. The final product or process should involve substantial use ofdomestic raw materials, whenever possible.

When the BOI waives the nationality requirement, the applicant should attainthe status of a Philippine national within 30 years from the date of its registrationor such longer periods as may be determined by the BOI. Howev er, a registeredenterprise exporting 100 percent of its production need not comply with thisdivestment requirement.

A foreign investor is guaranteed repatriation of investments, remittance of profits,freedom from expropriation and requisition of investm ent, protection of patents,and other proprietary rights.

An enterprise registered with the BOI enjoys the following tax and non -tax specialincentives:

1.1 Tax Incentives

a. Income tax holiday consisting of income tax exemption for six years fromthe start of commercial operations for pioneer firms, and four years fornon-pioneer firms. This incentive may be extended in certaininstances and upon approval by the BOI.

Expanding firms are entitled to an exemption from income taxesproportionate to their expansion for a period of three years fromcommercial operations. However, they are not entitled to additionaldeductions for incremental labor expenses during the period thatthey avail themselves of this incentive.

The income tax holiday may not be extended for more than eightyears.

b. Exemption from taxes and duties on spare parts and consumable suppliesimported by a registered enterprise with a cu stoms bondedmanufacturingwarehouse and exporting at least 70 percent of theirproduction.

c. Exemption from taxes and duties on machinery, equipment, spare parts,and accessories imported by new and expanding registered enterprises .

d. For the first five years from registration, an additional deduction fromtaxable income of 50 percent of the wages of additional skilled andunskilled workers in the direct labor force. This incentive is grantedonly if the registered enterprise meets a prescribed capital to labor ratio .

e. Exemptions from taxes and duties on the importation of breeding stocksand genetic materials within 10 years from the date of registration orcommercial operation.

f. Tax credit for taxes and duties on raw materials, supplies, and semi- manufacturedproducts used for the manufacture of export products and forming part thereof.

g. For registered enterprises with bonded manufacturing warehouses,exemption from taxes and duties on the importation of supplies andspare parts for imported equipment and consigned equipment.

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h. Exemption from wharfage duties and any export tax, duty, im post,and fees onexports by a registered enterprise of its nontraditional export products.

i. Exemption from local taxes for six years from date of registration forpioneer enterprises, and four years from registration for non-pioneerenterprises.

Applications covering new and expansion projects that will locate in Metro Manilaare no longer entitled to income tax holiday, except in the case of:

a. projects locating in governmental industrial estates, resettlement areas,or National Housing Authority sites; and

b. service-type projects and trading projects with no manufacturingfacilities.

The BOI may completely or partially deny incentives to enterprises dealing intraditional export products.

1.2 Non-tax Incentives

a. Simplified customs procedures for the importation o f equipment, spareparts, raw materials and supplies, and the export of processed products .

b. No restriction on the use of consigned equipment but re-export bond isrequired.

c. Employment of foreign nationals in supervisory, technical, or advisorypositions for five years from registration, extendible for limited periods.The president, general manager, and treasurer (or their equivalent) offoreign-owned registered firms are not subject to the foregoing limitations .

d. The privilege to operate bonded manufacturing/trading warehouses, subjectto customs rules and regulations.

1.3 Additional Incentives

The following additional incentives are available to projects (excluding mining, forestry,and processing of minerals and forest products) located in less developed areas :

a. Deduction from taxable income of 50 percent of the wa ges correspondingto the increment in the number of direct labor is doubled .

b. Deduction of the cost of necessary and major infrastructure worksconstructed.

2. Enterprises Registered With the Philippine EconomicZone Authority (“PEZA”)

To disperse industry and generate employment in non -urban areas, the governmenthas established several special economic zones (Ecozones).

Enterprises may establish their businesses within an Ecozone and register with thePEZA as any of the following enterprises:

Export enterprise

Tourism enterprise

Customs brokerage enterprise

Utility enterprise

Trucking enterprise

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Security agency

Information technology enterprise

Service enterprise

Freight forwarder

Warehousing

Logistic service enterprise

Facilities enterprise

An Ecozone Export Enterprise is an entity engaged in a manufacturing, assembling,or processing activity and exporting 100 percent of its production, unless a lowerpercentage of its production for export is prescribed by the PEZA.

An Ecozone IT Enterprise is a company operating or offering IT services, which aredefined as activities involving the use of any information technology software orsystem for value addition. An IT Enterprise is also consi dered an export enterprise.

2.1 Tax and Other Incentives

As a general rule, an Ecozone Enterprise is entitled to the income tax holiday, whichmay have a duration of four years for new registered non -pioneer firms or six yearsfor new registered pioneer firms. Expanding firms may be entitled to an income taxholiday of three years from the start of commercial operation of the expansion.

Upon the expiry of the income tax holiday, an Ecozone Enterprise is subject toa preferential rate of 5 percent of gross income. This is in lieu of all national andlocal taxes.

Ecozone Export and Free Trade Enterprises are further entitled to the followingincentives:

a. Zero-rated VAT on sales

b. Exemption from duties and taxes on importation of merchandise, rawmaterials, and supplies of equipment and machineries, includingimportation of capital equipment, construction materials, specialized officeequipmentand furniture, specialized vehicles and other transportationequipment,professional instruments, and household effects

c. Tax credit for import substitution

d. Exemption from wharfage dues, export tax, impost, or fee

e. Additional deduction for training expenses

f. Tax credit on domestic capital equipment, breeding stocks, and geneticmaterials

g. Additional deduction for labor expense

h. Unrestricted use of consigned equipment

i. Employment of foreign nationals in executive, supervisory, technical,and advisory positions, provided that the total number of foreign nationalsemployed by an Ecozone Enterprise does not at any time exceed 5 percentof its work force

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3. Enterprises Registered With the Subic Bay MetropolitanAuthority (“SBMA”)

The Subic Special Economic and Free Port Zone (“Subic Bay Freeport” or “SBF”)was established by the Philippine Government with t he aim of developing the areainto a self-sustaining industrial, commercial, financial, and investment center inthe Philippines.

The territory of the SBF includes the City of Olongapo and the Municipality of Subic,the former US Naval Base at Subic Bay and its extensions located in the municipalitiesof Hermosa and Morong in Bataan Province.

A business enterprise may register as a SBF Enterprise, and a natural person as a SBFResident, with the SBMA.

3.1 SBF Enterprises

A SBF Enterprise is any business entity or concern within the SBF that is dulyregistered with and/or licensed by the SBMA to operate any lawful economicactivity withinthe SBF.

Registration as a SBF Enterprise is open to any business enterprise in any areaof economic activity, subject only to limitations under the PhilippineConstitution.

The incentives offered to a SBF Enterprise include:

a. right to freely engage in any business, trade, manufacturing, financial, orservice activity, and to import and export freely all types of goods into andout of the SBF, subject to certain laws and regulations;

b. right to employ foreign nationals, subject to evidence of unavailability ofcomparably skilled Filipinos within the Philippines; and

c. exemption from all national and local taxes, in lieu of which a fina l taxof5 percent of gross income must be paid.

A SBF Enterprise which operates facilities or services within the SBF (SBF FacilitiesOperator) is entitled to additional incentives, including:

a. right to manage facilities on real property it owns, has acqui red, or hasleasedwithin the SBF;

b. right to lease out real property it owns or has leased within the SBF, and toacquire and lease land and sell or lease out facilities to SBF Enterprises, subjectto certain guidelines; and

c. right to make improvements in buildings and other facilities, and developinfrastructure necessary to enhance the SBF ’s efficient operation, orgrant contracts or concessions to other private or public parties for theconstruction or provision of any of the said facilities, subject to ce rtainguidelines.

3.2 SBF Residents

Generally, registration as a SBF Resident is available to:

a. any Filipino actually residing within the SBF who is an employee orownerof a SBF Enterprise, and the immediate members of his family, oranyFilipino who has leased or has secured living premises in the SBF;

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b. a foreign national who is a permanent resident of the Philippines and who isemployed or has invested in the SBF; and

c. a foreign national without prior permanent residency status in the Philippines,subject to certain immigration regulations.

The incentives offered to SBF Residents include:

a. right to import directly, free of customs duties and control, foreign articlesin non-commercial quantities, subject to certain regulations; and

b. right to purchase, lease, or otherwise acquire articles from other SBFResidents or Enterprises, and maintain, utilize, or otherwise consume suchgoods within the SBF free of national internal revenue taxes and customsduties.

4. Enterprises Located in the Clark Special Economic Zone

The Clark Special Economic Zone covers certain areas in Angeles City, theMunicipalities of Mabalacat and Porac, Province of Pampanga, and theMunicipalities of Capas and Bamban, Province of Tarlac.

In 2007, Republic Act No. 9400 (“RA 9400”) converted a portion of the CSEZ intoa freeport zone called the Clark Freeport Zone. The Clark Freeport Zone isoperated and managed as a separate customs territory, with the following incentivesavailable to registered business enterprises located therein: (i) tax rate of 5% ongross income earned, in lieu of national and local taxes, and (ii) tax - and duty-freeimportation of raw materials and capital equipment. The government agency thatregisters enterprises and grants and administers incentives to those enterprises is theBases Conversion and Development Authority , with the Clark DevelopmentCorporation as its implementing arm.

Under the Rules and Regulations to Implement Republic Act 9400 (“RA 9400Rules”), PEZA Ecozones may be created within the Clark Special Economic Zone.PEZA-registered enterprises located in PEZA Ecozones within the Clark SpecialEconomic Zone are entitled to the same tax and duty incentives available to PEZA -registered enterprises located in other PEZA Ecozones. The government agencythat registers enterprises and grants and administers incentives to those enterpriseslocated in PEZA Ecozones within the Clark Special Economic Zone is the PEZA.The agency in charge of the development, operation, management and mainten anceof the infrastructure, facilities and utilities in those PEZA Ecozones is the BasesConversion and Development Authority, with the Clark Development Corporationas its implementing arm.

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V. LEASE OF PRIVATE LAND

Foreign investors may lease private lands which will be used exclusively for investmentsfor a period of up to 50 years, renewable once for a period of 25 years. The leasemust be registered with the Philippine Board of Investments under the I nvestors’Lease Act. The long-term lease will be subject to the following conditions, amongothers: (a) the leased area shall be used solely for the purpose of the investmentupon the mutual agreement of the parties; (b) the leased premises shall comprisesuch area as may reasonably be required for the purpose of the investment, subjecthowever to the Comprehensive Agrarian Reform Law and the Local GovernmentCode; and (c) the lease agreement must incorporate certain mandatory conditions.

Foreigners investing at least US $5 million in tourism projects may lease private landsfor the project for the same period.

With respect to land that the foreign investor will not use exclusively for thepurpose of the investment, or land for tourism projects with investme nts of lessthan US $5 million, the lease contract may be for a maximum period of 25 years,renewable for another 25 years.

VI. ENVIRONMENTAL REGULATION

The Philippines adheres to a policy of protecting and advancing the right of its peopleto a balanced and healthful ecology.

Philippine environmental law consists of a series of legislative enactments, executivedecrees, and administrative regulations, each addressing a specific area of concernrelating to the environment.

Therefore, the environmental law applicable to a particular business concern dependslargely on the activities of that business concern.

The Department of Environment and Natural Resources (“DENR”) is the lead agencyin environmental protection and administration.

The DENR is assisted in the formulation and implementation of environmentalpolicies by the Environmental Management Bureau (“EMB”), local governmentunits, and other governmental agencies and departments.

Presidential Decree No. 1586 (“PD 1586”) established the Philippine Environment alImpact Statement (“EIS”) System. Environmental impact assessment (“EIA”) is partof project planning and is conducted to identify and evaluate important environmentalconsequences including social factors that may occur if a project will be undertaken.Measures to eliminate or minimize these impacts are incorporated into project designand operations.

PD 1586 requires proponents of environmentally critical projects (“ECP”) andprojects within environmentally critical areas (“ECA”) to obtain an environmen talcompliance certificate (“ECC”) prior to the commencement of the project.

The ECC is a document certifying that based on the representations of the proponent,the proposed project or undertaking will not cause significant negative environmentalimpact. The ECC also certifies that the proponent has complied with all therequirements of the EIS System and has committed to implement its approvedEnvironmental Management Plan. The ECC contains specific measures andconditions that the project proponent has to undertake.

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An ECA is an area delineated as environmentally sensitive such that significantenvironmental impacts are expected if certain types of proposed projects orprograms are located, developed, or implemented in it. An ECP is a project orprogram that has high potential for significant negative environmental impact.

The EMB of the DENR, together with the EIA Review Committee, is thegovernment agency that implements the EIS System.

Specific Areas of Regulation

Presidential Decree No. 984, otherwise known as the National Pollution ControlDecree of 1976, is the general legislation on pollution prevention and control thatis being enforced by the government.

Republic Act (RA) No. 9003, or the Ecological Solid Waste Management Act of 2000,calls for the institutionalization of a national program that will manage the control,transfer, transport, processing, and disposal of solid waste in the country.

RA 6969 or the Toxic Substances and Hazardous and Nuclear Wastes Control Actprovides the legal framework for the country’s program to control and manage theimportation, manufacture, processing, distribution, use, transport, treatment, anddisposal of toxic substances and hazardous and nuclear wastes.

RA 8749 or the Philippine Clean Air Act of 1999 provides the framework toprevent, manage, control, and reverse air pollution from city to countryside.

The Philippine Clean Water Act of 2004 requires the DENR to implement acomprehensive water quality management program to guarantee effective waterutilization and conservation. The Clean Water Act applies to water quality managementin all water bodies. However, it primarily applies to the abatement and control ofpollution from land based sources.

VII. INTELLECTUAL PROPERTY PROTECTION

The Philippines is a member of the Paris Convention for the Protection of IndustrialProperty, the Berne Convention for the Protection of Literary and Artistic Works,and the World Trade Organization and, by such membership, has adhered to theAgreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”).

The Intellectual Property Office (“IPO”) processes applications for patents, trademarks,service marks, and trade names, and issues the corresponding certific ates of registration.

Trademarks, trade names, and service marks owned by persons, corporations,partnerships, or associations domiciled in the Philippines or in any foreign countrymay be registered with the IPO.

Rights to a mark are acquired by registration. Priority is given to whoever first appliesfor registration. There is a single procedure for both foreign and local applicants forthe registration of marks. An applicant should file a declaration of use within threeyears from the date of application.

Trademark registration is valid for 10 years, provided the registrant files with the IPOa declaration of use/justifiable non-use within one year following the fifth anniversaryof the date of the registration or renewal. The registration is renewable at the end ofeach 10th year from registration so long as the mark is still in commercial use.

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Inventions,utility models, and industrial designs may be patented. A patent is grantedto the inventor who filed his patent application earlier than others, thus simplifyingthe determination of who is entitled to own the patent.

A patent registration for an invention is valid for 20 years from the date of filingthe application. A patent for a utility model is valid for sev en years from the date

of filing the application and automatically expires at the end of the period. The termof registration of an industrial design is five years from the date of filing and may berenewed for two consecutive periods of five years each.

Literary, scholarly, scientific, and artistic works, whether published or unpublished,may be copyrighted. Copyright protection extends to computer programs, multimediaworks, and data bases that are original by reason of the selection, coordination,

or arrangement of their contents.

Copyrights endure for the lifetime of the creator and for 50 years after his death.

VIII. BORDER CONTROL MEASURES

The rules of the Bureau of Customs (“BOC”) on border control measures preventthe entry into the Philippines of infringing merchandise and ensure expeditedprocedures for the handling and disposition of goods suspected to be imported

in violation of the Intellectual Property Code of the Philippines (the “IP Code”).

Intellectual Property (“IP”) owners may record their produc ts covered by patents,trademarks, copyrights, and other similarly protected IP rights with the BOC.

The application for recordal serves as the consent of the IP owner for the BOCto conduct physical inspection of imports suspected to be infringing.

The recordal will be the basis of the BOC to monitor suspected imports to determinewhether they are liable to seizure and forfeiture. A BOC recordal is valid for twoyears from the date of recordal.

IX. TECHNOLOGY TRANSFER ARRANGEMENTS

A technology transfer arrangement (“TTA”) refers to a contract or agreement involvingthe transfer of systematic knowledge for the manufacture of a product, the applicationof a process, or the rendering of a service including management contracts.

A TTA also refers to an agreement to transfer, assign, or license all of forms ofintellectual property rights, including the licensing of computer software, exceptcomputer software developed for the mass market.

There are no restrictions regarding the amount or rate of royalty that may be charged.The parties are free to negotiate the amount or the rate of royalties to be paid underthe TTA. However, the IPO has a quasi-judicial jurisdiction to settle disputes regardingtechnology transfer payments, including the fixing of the appropriate a mount or rateof royalty.

TTAs should not contain certain prohibited clauses and should contain certainmandatory provisions. Nonconformity with the prohibited and mandatory clauses willautomatically render the TTA unenforceable. However, there are except ional caseswhere exemptions from the prohibitory and/or mandatory clauses may be allowed.

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A TTA that conforms to the prohibited and mandatory clauses need not be registeredwith the IPO. However, there are practical benefits to registe ring a compliant TTA,particularly for license agreements. These are:

The registration will serve as evidence that the agreements are compliantwith the IP Code and are enforceable in this respect. Philippine courtsgenerally lend great weight to findings of administrative agencies like theDocumentation Information and Technology Transfer Bureau (“DITTB”). Inthe event of litigation over the Agreement, the DITTB ruling may be usedas evidence of the enforceability of the Agreement;

Registration will allow the Licensee to source currency for royalty paymentsfrom the Philippine banking system. Philippine Central Bank regulationsprovide that banks and foreign exchange companies must require purchasersof foreign currencies that will be used for royalty payme nts to submit therelevant certificate of registration issued by the DITTB;

If the Licensor intends to avail of tax treaty relief with respect to royaltyincome derived under the agreements, a DITTB registration or certificateof compliance must be submitted to the Philippine Bureau of InternalRevenue in support of an application for tax treaty relief; and

If the agreement involves the licensing of a trademark, the registration willfacilitate the recordal of the agreement against the Philippine trademarkapplications or registrations for the licensed marks. Under the IP Code, atrademark license agreement that is not recorded will have no effectagainst third parties. Thus, the non-recordation of a trademark licensemay render the registration of the mark(s) covered by the license vulnerableto cancellation actions by third parties due to non -use. The IP Codespecifically provides that a trademark registration may be cancelled anytime if the registered owner of the mark, without legitimate reason, failsto use the mark in the Philippines or cause it to be used in the Philippinesunder license during an uninterrupted period of three years or longer.

X. LABOR LAW

Philippine labor law recognizes the rights of both workers and management.

Thus, labor law recognizes the workers’ right to a just share in the fruits of productionand management’s right to a reasonable return on investments.

1. Labor Standards

The Labor Code of the Philippines (the “Labor Code”) lays down the minimum terms,conditions, and benefits of employment that employers must provide or comply withand to which the employees are entitled as a matter of right.

1.1 Work Hours

Normal Hours of Work. The normal hours of work should not exceedeight hours in a work day. Employees are entitled to at least 60 mi nutestime off from work for their regular meals.

Overtime Pay. Any work done in excess of eight hours in a work daymust be paid an overtime rate based on the applicable basic rate. TheLabor Code enumerates the specific instances when an employee maybe required to render overtime work and the corresponding overtimepay rate. These overtime pay rates may vary depending on whether theovertime work is rendered on a regular work day, holiday, or rest day.

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Night Shift Differential. An employee must be paid a night shiftdifferential equivalent to a certain rate of his regular wage for workdone between 10 p.m. and 6 a.m.

Premium Pay for Rest Day or Holiday Work. Allemployeesaregenerally entitled to a rest period of not less than 24 consecutive hoursfor every six consecutive normal working days.

For work done on rest days and special holidays, the Labor Code requiresthe employer to pay a certain amount as additional compensation basedon the regular wage of the employee.

The rules on work hours are not applicable to managerial employees,among others.

1.2 Wages

Under the minimum wage law in the Philippines, minimum wages vary accordingto the location of the business.

The minimum wage rate in each region of the countr y varies and is prescribed bythe Regional Tripartite Wages and Productivity Boards.

Wages are generally paid in cash at least twice a month (usually on the 15th and thelast day of every month).

1.3 Other Compulsory Benefits

Holiday Pay

Service Incentive Leave

Thirteenth Month Pay

Retirement Benefits

Military Training Leave

Maternity Leave

Paternity Leave

Parental Leave

Leave Due to Violence

1.4 Rule on Non-Diminution of Employment Benefits

If an employee benefit has been granted by reason of employer practice o r policy,the benefit becomes part of the terms and conditions of employment and cannot beunilaterally withdrawn or discontinued by the employer, despite the absence of alegal or contractual requirement to grant the said benefit.

The following criteria may be used to ascertain the existence of a binding andenforceable employer practice or policy under Philippine law:

a. The act of the employer was done for a long period of time or was consistentlyrepeated;

b. The act was done deliberately, knowingly, and cons istently; and

c. The act was not a product of erroneous interpretation or construction of adoubtful or difficult question of law.

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2. Labor Relations

As a general rule, employees have the right to form and join unions and to engagein concerted activities for their collective protection. Certain classes of employees,however, such as managerial and confidential employees, may not form or becomemembers of labor unions. A labor union has to be registered with the Department

of labor and Employment for it to enjoy all the rights granted by law to labor unions.It may register as an independent labor union or as a charter of a federation ornational union.

Employees, through their union representatives, may negotiate and enter intocollective bargaining agreements (“CBA”) with their employers. The employeesnegotiate the terms and conditions of their employment in CBAs.

Employees, under specified circumstances, have the right to strike in accordancewith law. Corollarily, the employer, under specified circumstances, also has the rightto lock-out employees.

Aside from labor unions, employees may also form and join workers’ associationsand other mutual aid and benefit associations for legitimate purposes, other thancollective bargaining.

3. Welfare Legislation

a. Employee’s Compensation andState Insurance Fund (“ECSIF”).Thisprovides for the benefits in case of work-related illness or injury;

b. National Health Insurance Act (“NHIA”). This provides for the benefitsfor non-work related illness;

c. Social Security Law. This provides employees in the private sector a morecomprehensive benefits program which includes sickness, disability,retirement and funeral benefits; and

d. Pag-IBIG Fund. This provides housing loans to employees in the private sector.

Under the foregoing welfare legislations, the employer is required to register itselfand its employees with the Social Security System (“SSS”; the SSS also administersthe ECSIF), the Philippine Health Insurance Corporation (“PhilHealth”; PhilHealthadministers the NHIA), and the Pag-IBIG Fund.

The employer and the employee both contribute to the common fund from whichthe benefits are sourced. The employer is required to deduct the employee’scontribution and remit the same to the SSS, PhilHealth, and Pag -IBIG Fund,together with the employer’s contribution. The contributions are based on the salaryof the employee.

Contributions for the ECSIF are shouldered by the employer alone.

There are other special laws in the Philippines that govern specific sectors of Philippinelabor such as the Migrant Workers’ and Overseas Filipinos Act of 1995.

4. Classification of Employment

The Labor Code and jurisprudence classify employment status into regular, project,seasonal, casual, probationary, and fixed-term.

The employment status of an employee is not determined by the specific designationgiven to it in the employment contract but by the nature of the work being performedby the employee.

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An employment is presumed to be regular or permanent in nature, unless the legalrequirements for the other types of employment are strictly observed. For instance,a probationary employee must be provided with written standards for regularemployment at the time he is first engaged. Otherwise, he shall be deemed a regularemployee from the start of his employment.

The classification of an employee is important because under Philippine law, thecauses for terminating an employer-employee relationship would depend upon theclassification of the employee.

5. Termination of Employment

Corollary to the employer’s right to hire, terminate, and discipline employees is theemployees’ right to security of tenure.

The employees’ right to security of tenure demands that they be removed only for anyof the just or authorized causes defined under the Labor Code (called “substantivedue process”) and only after the employer observes procedural due process.

In the Philippines, a dismissed employee has the right to question the validity of hisdismissal. Once questioned before the proper labor authorities, the employer mustestablish the validity of the dismissal by proving that the termination was due to a justand/or authorized cause and that the termination was done after complying withdue process.

An employee who is unjustly dismissed from work without a legally defined causeis entitled to the following:

a. reinstatement without loss of seniority rights and other privileges;

b. payment of full back wages, including allowances and other benefits ortheir monetary equivalent, computed from the time his compensation waswithheld from him up to the time of his actual reinstatement.

Even if there may have been a just or authorized cause for termination, an employeewho is dismissed without procedural due process is entitled to nominal damages, theamount of which is subject to the discretion of the court. For this purpose, the courtwill take into consideration the relevant circumstances of each case, particularly thegravity of the employer’s failure to follow due process requ irements. The nominaldamages serve as a penalty on the employer for its failure to comply with therequirements of procedural due process for terminating employment.

6. Contract of Employment

Although not required, it is best to put the employment contract b etween the employerand the employee in writing. This will protect the employer in the event of a futuredisagreement as to the terms and conditions of employment.

It is also advisable for the employer to have an employment handbook whichcontains the rules and regulations that will govern the employment relation.

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XI. IMMIGRATION

1. Work / Employment Requirements

A foreigner who comes to the Philippines to work must obtain a work visa from therelevant government agency, primarily, the Bureau o f Immigration (“BI”), as well asan alien employment permit (“AEP”) from the Department of Labor and Employment(“DOLE”).

The visa and AEP applications must be filed by a local petitioning company on behalfof the foreigner.

The foreigner may commence work in the local petitioning company upon the filingof his/her application for an AEP with the DOLE.

In cases of short-term employment (i.e., less than six months) for positions that aretemporary in nature (i.e., consultancy), a foreigner will only be requi red to applyfor a special work permit with the BI.

Generally, the work visa and AEP applications are filed after the foreigner has arrivedin the country and has been admitted on a tourist or 9(a) visa. An application will befiled for the conversion of the tourist or 9(a) visa into the appropriate work visa.

Except for certain restricted nationals, a foreigner may enter the country withouta pre-approved tourist or 9(a) visa. Upon entry, he will be provided either a 21 -dayor 7-day visa, depending on his nationality, provided that he has an outbound ticketwith him.

The following are the more common types of work visas:

1.1 Multiple Entry Special Visa

This visa is available to:

foreign personnel of offshore banking units of foreign banks dulylicensed by the Central Bank of the Philippines to operate as such; and

foreign personnel of regional or area headquarters of multinationalcompanies which are officially recognized by the PhilippineGovernment.

The expatriate, his spouse, and unmarried minor children un der 21 years ofage, if accompanying or joining him/her after his/her admission into thecountry as a non-immigrant, may be issued multiple entry special visas valid forone year, which may be extended from year to year upon legal and meritoriousgrounds.

1.2 Special Non-Immigrant or 47(a)(2) Visa

This visa is granted under Section 47(a)(2) of the Philippine Immigration Act thatallows the President to issue such visas when public interest so warrants, subjectto such conditions as he may prescribe.

The President, acting through the appropriate government agencies, has exercisedthis authority by allowing the entry of foreign personnel employed in supervisory,technical or advisory positions in Export Processing Zone Enterprises, Board ofInvestments registered enterprises, and Special Government Projects (e.g. MRT,Skyway).

This visa is generally valid for an initial period of one year and is renewable fromyear to year.

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1.3 Pre-Arranged Employment or 9(g) Visa

This visa is available to a foreigner who will be occupying an executive, technical,managerial, or highly confidential position in a local company and who is proceedingto the Philippines to engage in any lawful occupation, whether for wage or salary orfor other forms of compensation, where a bona fide employer-employee relationshipexists.

The pre-arranged employment visa is granted for a period co -terminus with the AEP,which in turn, is granted for a period discretionary to the DOLE, usually based onthe duration of the election or appointment of the foreigner. However, the officersof the BI have the discretion to shorten the validity period of the approved 9(g) visato one year.

1.4 Treaty Trader’s or Investor’s Visa

A foreigner is entitled to enter the Philippines as a treaty trader or investor only ifhe is a national of the US, Germany or Japan, countries with which the Philippineshas concluded a reciprocal agreement for the admission of treaty traders or investors.The local petitioning company must be majority -owned by US, German or Japaneseinterests. The nationality of the foreigner and the majority of the shareholders of theemployer company must be the same.

The foreigner must be employed in a supervisory or executive capacity.

When granted, the visa may be extended to the foreigner’s spouse and unmarriedchildren below 21 years of age. The visa is generally valid for a one -year periodsubject to extension upon application.

1.5 Subic Bay Freeport Work Visa

A foreign national who possesses executive or highly technic al skills, which noFilipino citizen within the Subic Bay Freeport possesses, as certified by the DOLE,may apply for this visa with the Subic Bay Metropolitan Authority.

2. Special Resident Visas

In addition to work visas, a foreigner may also apply for spec ial resident visas.These visas allow a foreigner to work in the Philippines, subject to other requirementsor limitations imposed by law.

The following are the different types of special resident visas:

2.1 Special Resident Retiree’s Visa (“SRRV”)

The SRRV program is available to foreigners and former Filipinos at least 35 yearsof age, who deposit the minimum amount required by law with a bank accreditedby the Philippine Leisure and Retirement Authority.

The holder of an SRRV may stay in the Philippines ind efinitely or visit the countryat any time.

The holder may also invest in or establish a business in the Philippines.

2.2 Special Investor’s Resident Visa (“SIRV”)

Any foreigner, at least 21 years of age, willing and able to invest at least US $75,000in the Philippines, may apply for this visa.

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The applicant’s spouse and unmarried children who are less than 21 years of age,accompanying the applicant, may be included in the visa application. Unlike theSRRV, there is no limit to the number of unmarried children that can be includedin the application.

2.3 SIRV for Investors in Tourist-Related Projects and TouristEstablishments

A foreigner who invests the amount of at least US $50,000 in a qualified tourist - relatedproject or tourism establishment, as determined by a governmental committee, shallbe entitled to an SIRV.

2.4 Subic Bay Freeport Residency Visas for Retirees

This visa requires the applicant to be over 60 years old, of good moral character, with noprevious conviction of a crime involving moral turpitude, no longer employed or notself-employed, and receiving a pension or passive income which is payable in the SubicBay Freeport in an amount exceeding US $50,000 per year.

3. Special Visa for Employment Generation (“SVEG”)

On 20 October 2008, President Gloria Macapagal-Arroyo enacted executive OrderNo. 758 which prescribes guidelines for the issuance of a special visa to non -immigrantsfor employment generation, otherwise known as the SVEG.

The SVEG is a special visa issued to a qualified non-immigrant foreigner who shallactually employ at least 10 Filipinos in a lawful and sustainable enterprise, trade, orindustry. Qualified foreigners who are granted the SVEG shall be considered

special non-immigrants with multiple entry privileges and co nditional extended stay.The privileges of the SVEG may extend to the foreign national’s spouse and dependentunmarried children below 18 years of age.

Foreign nationals who wish to avail of the SVEG must comply with the followingconditions:

He/she mustactually, directly,or exclusivelyengage ina viable andsustainable commercial investment/enterprise in the Philippines,exercise/perform management acts, or have the authority to hire,promote, and dismiss employees;

He/she evinces a genuine intention to indefinitely remain in the Philippines;

He/she is not a risk to national security; and

His/her commercial investment/enterprise must provide actual employmentto at least 10 Filipinos in accordance with Philippine labor laws and otherapplicable special laws.

The SVEG may be revoked by the Bureau of Immigration:

If the SVEG holder fails to maintain compliance with any of the aboveconditions;

If the SVEG was obtained through fraud or willful misrepresentationof material facts;

Upon conviction of the foreign national for a crime or offense in thePhilippines;or

Upon a final determination by competent authority that the foreignnational poses a risk to national security.

The SVEG program will be operational as soon as the implementing rules and regulationsare issued.

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XII. FINANCE-RELATED REGULATIONS

1. Banking

A foreign bank may operate in the Philippines, subject to the prior approval of theMonetary Board of the BSP, by owning up to 60 percent of the voting stock of anexisting domestic bank.

At present, the BSP has imposed an indefinite moratorium on the establishment ofnew banks except in cities and municipalities where there are no existing bankingoffices. Thus, a foreign bank cannot invest in the voting stock of a ne w bankingsubsidiary.

Until such moratorium is lifted, the only mode for foreign banks to enter thePhilippine banking industry is to invest in existing domestic banks.

If the moratorium is lifted, a foreign bank may also operate in the Philippines,subject to the prior approval of the Monetary Board of the BSP, by investing in upto 60 percent of the voting stock of a new banking subsidiary incorporated underthe laws of the Philippines.

2. Financing Companies

Financing companies are corporations that are pri marily organized for the purposeof extending credit facilities to consumers and to industrial, commercial, oragricultural enterprises by:

direct lending;

discounting or factoring commercial papers or accountsreceivables;

buying and selling contracts, leases, chattel mortgages, or otherevidence ofindebtedness; or

financial leasing of movable as well as immovable property.

The term “financing companies” excludes banks, investment houses, savings andloan associations, insurance companies, cooperatives, and other financial institutionsorganized or operating under other special laws.

A financing company must be organized as a stock corporation, at least 40 percentof the voting stock of which is owned by citizens of the Philippines. A foreign nationalmay own stock in any financing company if the country of which he is a nationalaccords the same reciprocal rights to Filipinos.

A financing company must have a paid-up capital ranging from at least Ph P2.5 millionto Ph P 10 million depending on where the fi nancing company will set up its officein the Philippines.

Financing companies providing financial leases in connection with any purchase,importation, acquisition, or other transaction are entitled to the same incentives,exemptions, benefits, or privileges that are available to lenders, importers, purchasers,or other eligible person in such transactions. In addition, financing companies thatprovide medium and long-term credit to small and medium enterprises are entitledto the same rights, powers, benefits, and privileges that are granted to other non-bankfinancial institutions providing similar credit.

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3. Securitization Act of 2004

The Securitization Act took effect on 10 April 2004. The Act establishes the legaland regulatory framework for asset securitization and grants tax exemptions andother incentives in favor of securitization transactions.

In order to promote the development of the Philippine capital market, the Act seeksto create a favorable environment for the establishment of Special Purpose Entities(“SPE”) and the issuance by such entities of a wide range of asset-backed securities.The Act also prescribes the rules for the creation and operation of Secondary

Mortgage Institutions to develop a secondary market for the asset-backed securities,particularly for residential mortgage-backed securities and other housing-relatedfinancial instruments.

In securitization, loans, receivables, or similar financial assets with an expected cashpayment stream (“Assets”) are sold, on a “without recourse” basis, by a seller to aspecial purpose entity. The SPE then issues to investors asset-backed securities (“ABS”)that depend for their payment on the cash flow from the Assets. The issuance of theABS must be in accordance with the securitization plan approved by the SEC.

Prior endorsement of the BSP must be obtained in the following cases:

a. if the original obligee of the Assets is a bank, or any other entity subjectto the supervision of the BSP, or is controlled by such bank or entity; or

b. if the SPE is constituted in the form of a special purpose trust.

Subject to certain conditions, the Securitization Act grants various tax and fiscalincentives.

4. Special Purpose Vehicle Act of 2002

The Special Purpose Vehicle Act of 2002 (“SPV Act”) provides the framework for thecreation and regulation of Special Purpose Vehicles (“SPVs”) that acquire or invest inthe non-performing assets (“NPA”) of financial institutions (“FI”). The SPV Act grantedtax and fiscal incentives and exemption privileges to transactions involving the transferof NPAs from an FI to an SPV and, subject to certain conditions, from an SPV to athird party.

The SPV Act prescribed a period within which the application to organize and registeran SPV must be filed with the SEC. This period expired on 18 September 2004.

There appears to be a growing clamor from the banking sectors to allow additionaltime within which interested parties may register an SPV, thus paving the way forthe filing of Senate Bill 1830, which seeks to allow registration of SPVs for anotherfive years. The bill is currently pending in the Philippine Senate.

XIII. INSURANCE-RELATED REGULATIONS

Entry of Foreign Insurance Companies

Subject to the approval of the Insurance Commission, a foreign insurance companymay be allowed to do business in the Philippines under any one of the followingmodes of entry:

a. ownership of the voting stock of an existing domestic insurancecompany;

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b. investment in a new insurance company incorporated in the Philippines(i.e., a subsidiary); or

c. establishment of a branch.

To be allowed entry, the foreign insurance company must be among:

a. the top 200 foreign insurance corporations globally; or

b. the top 10 in their country of origin; and

c. has been doing business for the last 10 years as of the date of theapplication.

To qualify as a branch or a new company incorporated in the Philippines, the applicantmust be:

a. widely owned and/or publicly listed in its country of origin; or

b. majority-owned by the government of the country of origin.

Depending on the extent of foreign equity, an applicant foreign insurance corporationmust comply with certain capitalization requirements pertaining to minimum paid -upcapital and contributed surplus fund.

XIV. ARBITRATION IN THE PHILIPPINES

Parties have the option of resorting to arbitration to resolve their disputes in thePhilippines. Arbitration, which is steadily growing in popularity as an alternativemode of dispute settlement, may be more attractive than court litigation for severalreasons.

1. Advantages of arbitration compared with court litigation

1.1 Speed

Despite the efforts of the Supreme Court to streamline the judiciary, the docketsof Philippine courts remain clogged. Consequent ly, it usually takes several yearsfor the trial courts to hear and resolve the cases filed with them.

Incontrast,disputes submitted to arbitrationare more speedily resolved.Unlike judges,arbitrators do not have to contend with heavy caseloads. The pa rties can choosearbitrators whose schedules can accommodate the long hours necessary to hear anddecide a case.

1.2 Flexibility of the rules

Foreign investors who are not familiar with local court procedures may prefer amore neutral process. Arbitration allows the parties to choose or craft the rulesthat will govern the arbitration proceedings. Since the procedure is mutuallyagreed upon,the parties have more faith in the integrity of the process. Also, theparties need notbe bound by the strict rules of evidence.

1.3 Choice of arbitrators

The parties are free to choose the arbitrators. The parties are expected to appointarbitrators whom they regard as honest and competent. The ability to choose thearbitrator is especially attractive to a foreign party who ma y harbor reservationsabout the neutrality of a “home court” judge. Since the parties are given a freehandin choosing their arbitrator(s), the outcome becomes more “acceptable.”

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On the part of the arbitrators, they have an added incentive to build and nurture areputation for competence and integrity. The greater their reputation for competenceand integrity, the higher will be the demand for their services.

1.4 Finality of the award

Philippine law recognizes as valid a stipulation that an arbitral award shall be “final.”However, “final” does not mean that an arbitral award is beyond judicial review.“Final” means that an arbitral award cannot be modified or reversed except onlimited grounds.

1.5 Arbitrators as experts

Parties usually appoint arbitrators who are knowledgeable in the subject matterof the dispute.

1.6 Confidentiality

Whereas court proceedings are open to the public, arbitration proceedings areconfidential.

2. Definition of arbitration

“Arbitration” is formally defined as “a voluntary dispute resolution process in whichone or more arbitrators, appointed in accordance with the agreement of the parties,or rules promulgated pursuant to law, resolve a dispute by rendering an award.”

3. Arbitration as contract

Arbitration is a creature of contract. There can be no arbitration unless the partiesagree to submit their dispute to arbitration. If there is no agreement to submit adispute to arbitration, the remedy of the aggrieved party is to file a case in court.An aggrieved party cannot compel the other party to arbitrate.

The parties may agree to submit a dispute to arbitration either before orafter a dispute arises.

4. Disputes that may be referred to arbitration

All types of commercial disputes may be referred to arbitration. The word “commercial”is broadly defined as “matters arising from all relationships of a commercial nature,whether contractual or not.”

5. Disputes that are not arbitrable

The following disputes cannot be submitted to arbitration: (a) labor disputes coveredby Presidential Decree No. 442, otherwise known as the Labor Code of thePhilippines, as amended, and its Implementing Rules and Regulations; (b) the civilstatus of persons; (c) the validity of a marriage; (d) any ground for legal separation (ofmarried persons); (e) the jurisdiction of courts; (f) future legitime; (g) criminalliability; and (h) thosedisputes which by law cannot be compromised.

6. Definition of international arbitration and domesticarbitration

Arbitration is considered international if:

(a) the parties to an arbitration agreement have, at the time of the conclusionof such agreement, their places of business in different States (countries); or

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(b) one of the following places is situated outside the State in which theparties have their places of business:

(i) the place of arbitration if determined in, or pursuant to,the arbitration agreement;

(ii) any place where a substantial part of the obligations of the commercialrelationship is to be performed or the place with which th e subjectmatter of the dispute is most closely connected; or

(c) the parties have expressly agreed that the subject matter of the arbitrationagreement relates to more than one country.

On the other hand, domestic arbitration is simply defined as arbitrat ion that is notinternational. Thus, if the dispute is between parties who have their place of businessin the Philippines, and their obligations are to be performed in the Philippines, andthere is no stipulation in their arbitration agreement that the su bject matter of thearbitration agreement relates to another country, the arbitration will be considereddomestic.

International arbitration is governed by the United Nations Commission onInternational Trade Law (UNCITRAL) Model Law.

Domestic arbitration is governed by Republic Act No. 876, otherwise known as theArbitration Law, a Philippine law that was enacted in 1953.

Despite the distinction between international and domestic arbitration, there are fewvital distinctions between the two regimes. The reason for this is that the AlternativeDispute Resolution Act of 2004 (“ADR Act of 2004”) has grafted several of theUNCITRAL Model Law provisions onto R.A. No. 876.

7. Republic Act No . 876 on Domestic Arbitration

a. Form of arbitration agreement

The arbitration agreement must be in writing and subscribed by the party soughtto be charged, or by his lawful agent. An agreement that incorporates by reference adocument that contains an arbitration clause gives rise to a valid arbitration agreement.

b. Th i rd part ies

Where a civil action is commenced in court by or against multiple parties, one ormore of whom are parties to an arbitration agreement, the court shall refer to

arbitration those parties who are bound by the arbitration agreement, although thecivil action may continue as to those who are not bound by such arbitration agreement.

c. Qualifications of arbitrator

An arbitrator must possess the following qualifications: He must be of legal age, infull enjoyment of his civil rights, and must know how to read and write. Furthermore,the arbitrator should not possess any of the following disqualifications: He should notbe related by blood or marriage within the sixth degree to either party to thecontroversy. Neither should he have a financial, fiduciary, or other interest in thecontroversy, or any personal bias, which might prejudice the right of any party to afair and impartial award.

The law prohibits an arbitrator from “championing” or “advocating” the causeof either party.

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d. Inter im measures

A party may apply for provisional relief or interim measures with the courts prior tothe constitution of the arbitral tribunal or even during the arbitration proceedings tothe extent that the arbitral tribunal has no power to act or is unable to act ef fectively.

e. Grounds for vacating/setting aside a domestic arbitral award

A domestic arbitral award may be vacated on the following grounds:

(i) The award was procured by corruption, fraud, or other undue means; or

(ii) There was evident partiality or corruption in the arbitrators or anyof them; or

(iii) The arbitrators were guilty of misconduct in refusing to postpone thehearing upon sufficient cause shown, or in refusing to hear evidencepertinent and material to the controversy; or one or more of the arbitratorswere disqualified to act as such under Section 10 of R. A. No. 876, andwillfully refrained from disclosing such disqualifications, or were guiltyof any other misbehavior by which the rights of any party were materiallyprejudiced; or

(iv) The arbitrators exceeded their powers, or so imperfectly executed them,that a mutual, final, and definite award upon the subject matter submittedto them was not made.

Where an award is vacated, the court, in its discretion, may direct a new hearingeither before the same arbitrators or before a new arbitrator or arbitrators to bechosen in the manner provided in the submission or contract for the selection of theoriginal arbitrator or arbitrators, and any provision limiting the time in which thearbitrators may make a decision shall be deemed applicable to the new arbitrationand to commence from the date of the court's order.

The petition to vacate a domestic arbitral award must be filed with the appropriateRegional Trial Court within 30 days from receipt of the award.

A domestic arbitral award may also be appealed directly to the Court of Appealson questions of fact and law.

f. Confirmation of domestic arbitral award

A domestic arbitral award is not self-executory. In order to convert the domesticarbitral award into an enforceable judgment, the winning party has to file with theappropriate Regional Trial Court a petition for confirmation of the arbitral award.The court should, as a matter of course, grant the petition, unless there are groundsto vacate the award.

8. International Arbitration

a. Interpretation of the UNCITRAL Model Law (“Model Law”)

The provisions on domestic arbitration are more or less similar to the provisions oninternational arbitration. The one area where the two arbitration regimes may partways is in the interpretation of the applicable laws, R.A. No. 876 (for domesticarbitration) and the Model Law (for international arbitration).

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The ADR Act of 2004 provides that, in interpreting the Model Law, regard shall be hadfor its international origin and to the need for uniformity in its interpretation, and resortmay be made to the travaux preparatories and the report of the Secretary General ofthe United Nations Commission on International Trade Law dated 25 March 1985,entitled “International Commercial Arbitration: Analytical Commentary on Draft Textidentified by reference number a/CN. 9/264.”

For example, since other jurisdictions tend to interfere less with internationalarbitral awards, domestic arbitration and international arbitration will most likelydiverge with respect to the scope of judicial review. While domestic arbitration awardsmay be reviewed on appeal on both questions of fact and law, Philippine courts,having regard for the international origin of the Model Law and to the need foruniformity in its interpretation, should limit the scope of its review to the groundsto set aside an arbitral award under the Model Law.

b . Form

The arbitration agreement shall be in writing. The definition of “writing” under theModel Law is broader than the definition of “writing” under R. A. No. 876. The ModelLaw considers an agreement to be in writing “if it is contained in a document signedby the parties or in an exchange of letters, telex, telegrams or other means oftelecommunication which provide a record of the agreement, or in an exchange

of statements of claim and defense in which the existence of an agreement is allegedby one party and not denied by another. The reference in a contract to a documentcontaining an arbitration clause constitutes an arbitration agreement provided thatthe contract is in writing and the reference is such as to make that clause part of thecontract.”

c . Inter im measures

As with domestic arbitration, a party in an international arbitration may apply forprovisional relief or interim measures with the courts prior to the constitution ofthe arbitral tribunal or even during the arbitration proceedings to the extent that thearbitral tribunal has no power to act or is unable to act effectively.

d. Grounds for setting aside/vacating an international arbitral award

An international arbitral award may be set aside by the courts only if the partymaking the application furnishes proof that:

(i) a party to the arbitration agreement referred to in Article 7 of the ModelLaw was under some incapacity, or the said agreement is not valid underthe law to which the parties have subjected it or, failing any indicationthereon, under the law of this State; or

(ii) the party making the application was not given proper notice of theappointment of an arbitrator or of the arbitral proceedings or wasotherwise unable to present his case; or

(iii) the award deals with a dispute not contemplated by or not falling withinthe terms of the submission to arbitration, or contain s decisions on mattersbeyond the scope of the submission to arbitration, provided that, if thedecisions on matters submitted to arbitration can be separated from thosenot so submitted, only that part of the award which contains decisions onmatters not submitted to arbitration may be set aside; or

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(iv) the composition of the arbitral tribunal or the arbitral procedure was notin accordance with the agreement of the parties, unless such agreementwas in conflict with a provision of the Model Law from which the partiescannot derogate, or, failing such agreement, was not in accordance withthe Model Law; or

An international arbitral award may also be set aside if the court finds that:

(i) the subject matter of the dispute is not capable of settlement by arbitrationunder the law of this State (the Philippines); or

(ii) the award is in conflict with the public policy of this State.

An application for setting aside an international arbitral award may not be made afterthree months have elapsed from the date on which the party making that applicationreceived the award.

e. Recognition and enforcement of international arbitral award

An international arbitral award, irrespective of the country in which it was made, shallbe recognized as binding and, upon application in writing to the competent court,shall be enforced unless there exists any of the grounds to set aside/vacate the award.

9. The New York Convention on the Recognition andEnforcement of Foreign Arbitral Awards (“New YorkConvention”)

The Philippines acceded to the NewYork Convention, a landmark internationalinstrument, in 1967. The parties to this convention recognize the validity andbinding effect of foreign arbitral awards.

Section V of the NewYork Convention provides that the recognition or enforcementof an arbitral award, irrespective of the country in which it was made, may be refusedonly on the following grounds:

“(1) Recognition or enforcement of an arbitral award, irrespective of thecountry in which it was made, may be refused only :

(a) at the request of the party against whom it is invoked, if that partyfurnishes to the competent court where recognition or enforcementis sought proof that:

(i) a party to the arbitration agreement referred to in article 7 wasunder some incapacity; or the said agreement is not valid under thelaw to which the parties have subjected it or, failing any indicationthereon, under the law of the country where the award was made; or

(ii) the party against whom the award is invoked was not given propernotice of the appointment of an arbitrator or of the arbitralproceedings or was otherwise unable to present his case; or

(iii) the award deals with a dispute not contemplated by or not fallingwithin the terms of the submission to arbitration, or it containsdecisionsonmattersbeyondthescope of the submissiontoarbitration,provided that, if the decisions on matters submitted to arbitrationcan be separated from those not so submitted, that part of the awardwhich contains decisions on matters submitted to arbitr ation maybe recognized and enforced; or

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(iv) the composition of the arbitral tribunal or the arbitral procedurewas not in accordance with the agreement of the parties or, failingsuch agreement, was not in accordance with the law of the countrywhere the arbitration took place; or

(v) the award has not yet become binding on the parties or has beenset aside or suspended by a court of the country in which, or underthe law of which, that award was made; or

(b) if the court finds that:

(i) the subject-matter of the dispute is not capable of settlementby arbitration under the law of this State; or

(ii) the recognition or enforcement of the award would be contraryto the public policy of this State.”

In a recent case, the Philippine Supreme Court recognized the enforcement of aprovisional/interim foreign award, as opposed to a final foreign award.

The NewYork Convention also seeks to put international arbitration on equalfooting with domestic arbitration by providing that the parties t o the conventionshould not impose more onerous conditions on the enforcement of foreign arbitralawards than on the enforcement of domestic awards.

To date, there are more than 140 signatories to the NewYork Convention, a testamentto the near-universal recognition of the validity and binding nature of foreignarbitral awards.

Notably, there is no similar convention with respect to the recognition andenforcement of foreign court judgments.

10. Construction Industry Arbitration Commission

Executive Order No. 1008 established the Construction Industry ArbitrationCommission (“CIAC”). The CIAC has original and exclusive jurisdiction overconstruction disputes, which shall “include those between or among parties to,

or who are otherwise bound by, an arbitration ag reement, directly or by referencewhether such parties are project owner, contractor, subcontractor, fabricator, projectmanager, design professional, consultant, quantity surveyor, bondsman or issuer of aninsurance policy in a construction project.”

The CIAC is a hybrid of voluntary arbitration and compulsory arbitration.

If the parties do not enter into an arbitration agreement, then the constructiondispute between them shall be resolved by the courts.

On the other hand, the Philippine Supreme Court has held that “as long as the partiesagree to submit their dispute to voluntary arbitration, regardless of what forum theymay choose, their agreement will fall within the jurisdiction of the CIAC, such that,even if they specifically choose another forum, the parties will not be precluded fromelecting to submit their dispute before the CIAC because this right has been vestedby law.”Thus, for example, if the parties to a construction contract designate Singaporearbitration as the venue of any dispute that may arise between them, either party maystill elect to file a request for arbitration with the CIAC notwithstanding the agreementof the parties to submit their dispute to arbitration in Singapore, and the CIAC shallassume jurisdiction over the dispute.

The CIAC is known for its efficiency. It takes the CIAC an average of around sixmonths from the time of filing of the request for arbitration to hear the case andrender an award.

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XV. INSOLVENCY IN THE PHILIPPINES

1. Overview and Introduction to the Jurisdiction / ApplicableLegislation

There are three types of remedies available to a financially distressed individualor juridical person, to wit, suspension of payments, corporate rehabilitation, and

insolvency. The applicable laws are the Civil Code of the Philippines (“Civil Code”),the Insolvency Law, Presidential Decree No. 902-A (“P.D. 902-A”), and the Rulesof Procedure on Corporate Rehabilitation. The type of proceeding that applies to

a debtor depends on the particular relief sought.

If what is sought is merely a little financial breathing space, then the remedy is asuspension of payments, which provides for the deferment of payments and temporaryprotection against actions/executions by unsecured creditors. If, on the other hand,the rehabilitation of a company entails more radical measures such as changes inorganization, management, and/or strategy, and requires temporary protectionagainst both secured and unsecured creditors, then the remedy is to seek corporaterehabilitation. Finally, if the debtor company is no longer capable of or interested inmaintaining its business, it may apply for insolvency and have its assets distributedaccordingly among its various creditors.

Each of these remedies is discussed in more detail below.

2. Proceedings for Solvent Debtors (Individuals orCorporations)

2.1 Suspension of Payments

An individual debtor who possesses sufficient property to cover all of his/its debtsbut foresees the impossibility of meeting them when they respectively fall due, mayfile a petition with a Philippine Regional Trial Court (the “Court”) to be declared ina state of suspension of payments. The petition must be filed with the Court of theplace where the debtor has his/its residence within six months prior to the filingof the petition.

a. Effects of a Petition for Suspension of Payments

The filing by a debtor of a petition for suspension of payments:

i. Suspends all pending executions against the debtor’s properties,except executions against properties specially mortgaged;

ii. Bars ordinary creditors from instituting proceedings in any Philippinecourt against the debtor; and

iii. Prohibits the debtor from disposing of his property or makingpayments, except in the ordinary course of the business in which thedebtor is engaged.

b. Court Proceedings

The petition for suspension of payments must include a “Schedule of Creditors,”astatement of the debtor’s assets and liabilities, and the debtor’s proposedagreement for the suspension of payments. The proposed agreement must beapproved by two thirds (2/3) of the creditors representing at least three fifths(3/5) of the debtor’s total liabilities. If the required vote is not achieved, theproceeding is terminated and the creditors may enforce their respective credits.If the required vote is achieved without any objection from the creditors, theCourt will issue an order that the proposed agreement be carried out, andsuch

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agreement shall be binding on all creditors that have been properly summonedand included in the Schedule of Creditors. If the required vote isachieved butthere is an objection from any of the creditors, the Court will conduct a hearingon the objection. If the objection is found to be meritorious, the proceeding willterminate. If the objection is found to be unmeritorious, the Court willproceed as though no objection had been made.

The amount of the debts of the debtor is not affected by a suspension ofpayments. However, the payment for such debts is delayed.

c. Objections to the debtor’s proposed agreement

The possible grounds for objecting to the proposed agreement are as follows:

i. defects in the call for the meeting of the creditors, in the holdingthereof, and in the deliberations thereat, which prejudice the rightsof the creditors;

ii. fraudulent connivance between one or more creditors and the debtorto vote in favor of the proposed agreement;

iii. fraudulent conveyance of claims for the purpose of obtaining therequired majority.

If the debtor fails wholly or in part to perform the Court-approved agreement,therights which the creditors had against the debtor before the agreement shallre-vest in them.

2.2 Corporate Rehabilitation

A debtor, which is a corporation, partnership, or association, that foresees theimpossibility of meeting its debts when they respectively fall due, or any creditor

or creditors holding at least 25 percent of such debtor’s total liabilities, may petitionthe proper Court to have the debtor placed under rehabilitation. The petition forrehabilitation must be filed with the Court of the place where the debtor’s principaloffice is located. The petition for rehabilitation must be accompanied by, amongothers, a rehabilitation plan.

a. Effects of a Petition for Rehabilitation

If the Court finds the petition to be sufficient in form and substance, it will,not later than five days from the filing of the petition, issue a “Stay Order”which, among others: (a) appoints a Rehabilitation Receiver; (b) stays theenforcement of all claims, whether for money or otherwise and whether suchenforcement is by court action or otherwise, against the debtor, its guarantorsand sureties not solidarily liable with the debtor; (c) prohibits the debtor fromselling, encumbering, transferring, or disposing in any manner any of itsproperties except in the ordinary course of business; (d) prohibits the debtorfrom making any payment of its liabilities outstanding as at the date of filingof the petition; (e) prohibits the debtor’s suppliers of goods or services fromwithholding supply of goods and services in the ordinary course of businessfor as long as the debtor makes payments for the services and goods suppliedafter the issuance of the stay order; (f) directs the payment in full of alladministrative expenses incurred after the issuance of the Stay Order; and (g)sets an initial hearing on the petition, and directs all creditors and interestedparties to file their verified comments on or oppositions to the petition beforethe said initial hearing.

The Stay Order applies to both secured and unsecured creditors. The StayOrder is effective from the date of its issuance until the dismissal of thepetition or the termination of the rehabilitation proceeding.

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b. Court proceedings

If, after the initial hearing on the petition for rehabilit ation, the Court is satisfiedthat there is merit in the petition, it will give due course to the petition andrefer the same to the Rehabilitation Receiver. The Rehabilitation Receiver willevaluate the rehabilitation plan and submit his recommendations t o the Courtnot later than 120 days from the date of the initial hearing.

The petition will be dismissed if no rehabilitation plan is approved by the Courtupon the lapse of 180 days from the date of the initial hearing. The Court mayextend this period only if it appears by compelling evidence that the debtor maysuccessfully be rehabilitated. However, the period for approving ordisapproving a rehabilitation plan may not exceed 18 months from the date offiling of thepetition.

The Court may approve a rehabilitation plan even over the opposition ofcreditors holding a majority of the total liabilities of the debtor if, in itsjudgment, the rehabilitation of the debtor is feasible and the opposition ofthe creditors is manifestly unreasonable. The Court may impose such terms,conditions, or restrictions as the effective implementation and monitoringof the rehabilitation plan may reasonably require, or for the protection andpreservation of the interests of the creditors should the plan fail.

On motion by a party or on its own, within 90 days from the approval of therehabilitation plan, the Court may revoke the approval thereof on the groundthat the same was secured through fraud.

c. Clawback provisions

Upon motion by a party or on its own, the Court may decla re void anytransfer of property or any other conveyance, sale, payment, or agreementmade in violation of the Court’s Stay Order or in violation of the Rules onCorporate Rehabilitation.

d. Effects of an approved rehabilitation plan on prior agreementsbetweenthe debtor and creditor(s)

Contracts and other arrangements between the debtor and its creditorswill continue to be effective to the extent that these contracts and otherarrangements do not conflict with the approved rehabilitation plan.

In a recent decision involving a creditor’s security agreement with a debtorunder rehabilitation, the Supreme Court of the Philippines ruled that a StayOrder and an approved rehabilitation plan merely suspend the enforcementof the security, and do not prejudice the status of the secured creditor vis-à-visthe unsecured creditors.

3. Insolvency Proceedings (Individuals or Corporations)

In insolvency proceedings, the basic premise is that the debtor does not have enoughassets/properties to cover his obligations. Insolven cy proceedings may be voluntaryor involuntary.

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3.1 Voluntary Insolvency

A debtor owing debts exceeding Ph P1,000 (approx. US $25) may seek a declarationof insolvency.

a. Court Proceedings

The petition for voluntary insolvency must be filed in the Court of the placewhere the debtor has resided (in case of an individual) or has had its principaloffice (in case of a corporation, partnership or association) for six monthspreceding the filing of the petition. The petition m ust allege, among others,the debtor’s inability to pay all his/its debts in full; his/its willingness tosurrender all his/its property, estate, and effects not exempt from executionfor the benefit of the creditors; and an application to be adjudged inso lvent.The debtor must also include in the petition a schedule of debts and of creditors,and an inventory of all his/its assets. The filing of the petition is deemed an actof insolvency. If the debtor is a corporation, the petition may be filed by anyofficer of the corporation, duly authorized by the board of directors.

Upon the filing of the petition, the court will issue an order declaring thedebtor insolvent.

3.2 Involuntary Insolvency

Three or more creditors whose total credits exceed Ph P1,000 (approx. US $25) mayseek a declaration of insolvency against a debtor. The creditors must be Philippineresidents whose credits accrued in the Philippines, and did not become creditors

by assignment within 30 days prior to the filing of the petition.

a. Court Proceedings

The petition for involuntary insolvency must be filed in the Court of the placewhere the debtor resides or has his/its principal place of business, and mustbe verified by at least three of the petitioners. The petition must also allegeone or more acts of insolvency.

The petition must be accompanied by a bond, in such sum as the Court willdirect, conditioned upon the payment to the debtor of all costs and damagesoccasioned by the proceedings in insolvency if the petition is dismissed bythe Court, or withdrawn by the petitioners, or if the debtor is not declared

insolvent. The Court may, upon motion, direct the filing of an additional bondwhen deemed necessary.

The Court will require the debtor to show cause why he/it should not bedeclared insolvent. If the Court finds the petition meritorious, the Courtwill issue an order declaring the debtor insolvent.

3.3 Provisions applicable to both voluntary or involuntary insolvency

proceedings

a. Effect of Order of Insolvency

An Order of Insolvency generally suspends all civil proceedings pendingagainst the debtor.

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All property of the insolvent not exempt by law from execution will beconveyed to an assignee-in-insolvency elected by the creditors. By way ofexception, the debtor’s property that is subject of a pledge or mortgage is notincluded in the debtor’s assets that are assigned to the assignee -in-insolvencyfor the satisfaction of the debtor’s general creditors.

No discharge is granted to a corporation that is declared insolvent.

b. Rights of secured creditors

A creditor whose credit is secured by a mortgage or pledge is allowed, at itsoption, either (i) to foreclose the property subject of such securityarrangement (notwithstanding the stay effected by the Order of Insolvency),or (ii) to pursue his/its claim in the insolvency proceeding together withother creditors, by releasing or surrendering to the assignee -in-insolvencythe properties subject of the pledge or mortgage.

If the secured creditor opts for foreclosure, such creditor canno t participate inthe election of the assignee-in-insolvency. But the creditor may be admitted inthe insolvency proceeding to recover the balance of the debt, after deductingthe value of the property foreclosed. The creditor recovers the balance byparticipating in the pro-rata distribution of the debtor’s estate.

If the creditor pursues his claim in the insolvency proceeding, he may recoverhis credit by participating in the pro-rata distribution of the debtor’s estate, butwill have to relinquish his security and surrender the properties subject of thesecurity to the assignee-in-insolvency.

c. Preference of Credits

In an insolvency proceeding, certain types of credits enjoy preference withrespect to specific movable or immovable properties (“Special Prefer redCredits”).

Among the Special Preferred Credits, taxes and assessments due upon theproperty to which the claims relate enjoy absolute preference. All the remainingclasses of Special Preferred Credits with respect to specific movable orimmovable property (e.g., credits secured by a pledge or mortgage) do notenjoy priority among themselves, but must be paid concurrently and pro rata,i.e., in proportion to the amount of the respective credits.

Credits that do not enjoy any preference with respect to sp ecific property aresatisfied in the order established in Article 2244 of the Civil Code. Article 2244provides for the preference of certain claims and credits which, without specialprivilege, appear in (i) a public instrument ( i.e., the instrument is notarized)or (ii) a final judgment. These credits have preference among themselves in theorder of priority of the dates of the instruments and of the judgments, respectively.

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d. Clawback provisions

The assignee-in-insolvency may recover property given as security, or thevalue thereof, if the debtor, being insolvent, or in contemplation of insolvency,within 30 days before the filing of a petition to be declared insolvent by or

against him, procures any of his property to be attached, sequestered, or seizedon execution, or makes any pledge, mortgage, assignment, transfer, sale, orconveyance thereof to anyone with a view to: (i) giving a preference to anycreditor or person having a claim against him; or (ii) preventing the propertyfrom being distributed ratably among his creditors; or (iii) defeating the objectof, or in any way hindering, impeding, or delaying the operation of the provisionsof the Insolvency Law. In such a case, the attachment, sequestration, seizure ,pledge, mortgage, transfer, sale, assignment, or conveyance is considered void.Under the Insolvency Law, if the pledge, mortgage, conveyance, sale, assignment,or transfer of the property is not made in the usual and ordinary course ofbusiness of the debtor, or if such seizure is made under a judgment which thedebtor has confessed or offered to allow, that fact is deemed as prima facieevidence of fraud.

Furthermore, any pledge, mortgage, conveyance, sale, assignment, or transfer ofproperty made by the insolvent within one month before the filing of a petition ininsolvency by or against him, except for a valuable pecuniary consideration made ingood faith, is considered void.

Quisumbing Torres

12th Floor, Net One Center26th Street corner 3rd Avenue

Crescent Park West, Bonifacio Global City

Taguig, Metro Manila

Philippines 1634

Phone: +63 2 819 4700Fax: +63 2 816 0080; 728 7777

[email protected]

Quisumbing Torres is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordancewith the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent,in such a law firm. Similarly, reference to an “office means an office of any such law firm.

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