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PHILIPPINE LAW GOVERNING JOINT VENTURES

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Introduction Formation Agreement: Nature of Joint Ventures in Philippine Setting Alternative Legal Forms in Structuring a Joint Venture Aspects which Influence Choice of Legal Form overning Laws and Language Freedom to Contract! In eneral Formal or "#trinsic Validit$ of Agreements Capacit$ of Contract Parties Intrinsic Validit$ Language of Joint Venture Agreements %efining Joint Ventures Scope of &usiness Activit$ Foreign Investment Act of '((' "sta)lishing a Corporate Vehicle Procedure in "sta)lishing a Corporate Vehicle %oing &usiness in the Philippines overning Law *hat Constitutes %oing &usiness +ualifications to %o &usiness in the Philippines ,egistration under FIA -(' S"C ,egistration Additional ,e.uirements "ffects of Non/Compliance with FIA 0(' ,e.uirements S"C License for Foreign Corporations %oing &usiness S"C ,e.uirements Issuance of License ,e.uirements 1pon Issuance of S"C License "ffects of Failure to Secure S"C License to %o &usiness )$ Foreign Corporation Incentives Availa)le to Foreign Joint Venture Partners Preferred Areas of Investments 2&3I ,egistered and with Incentives4 Non/Preferred Area Investor2Investment *ithout Incentives4 Incentives of "#port Processing 5one "nterprises ,estrictions on Activities of Foreign Joint Venture Partners Financing Joint Ventures Schemes ,ecogni6ed under the Act ".uit$ Limitations for 3perators of Pu)lic Franchises
The original paper was submitted by the author to the CENTER OR INTERNATIONAL LEGAL STU!IES based in Salzburg !ustria as part of its international publication.
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,easona)le ,ate of ,eturn on Investments and 3perating and 7aintenance Cost Period Covered Financing Allowed Priorit$ Pro8ects Preference to Filipino Contractors ,epa$ment Schemes Land ,eclamation or Industrial "states ,egistration with &3I Antitrust and Competition Law Preparation of Ancillar$ %ocuments 9echnolog$ 9ransfer Agreement Parties to Agreements ,estrictive &usiness Clauses overning Law %uration of Contract *arrant$: uarant$ Provisions ,o$alt$ Incentives %ispute ,esolutions Ar)itration Law Persons and 7atters Su)8ect to Ar)itration Form of Ar)itration Agreement Appointment of Ar)itrators Facilities for Commercial Ar)itration
New ;or< Convention

Impact of Changes in Law Su)se.uent to Formation %ou)le 9a#ation Agreements and Impact on Joint Venture Protection of Foreign Investors

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INTRO!UCTION
#oint $enture arrangements are fairly common media of doing business or underta%ing pro&ects in the 'hilippines both co$ering local transactions such a large infra(structure underta%ings in$ol$ing the resources of big corporations or structuring partnership arrangements between foreign in$estors and their local partners in the pursuit of local pro&ects in the 'hilippines. )n particular the *o$ernment encourages the pursuit of construction pro&ects and petroleum operations under &oint $enture arrangements. +nder the ,ational )nternal -e$enue .ode of 1//0 of the 'hilippines 1,)-.2 &oint $entures formed for the purpose of engaging in petroleum operations pursuant to operating agreements under a ser$ice contract with the *o$ernment or those formed for the purpose of underta%ing construction pro&ects are e3empt from corporate income ta3. #oint $enture arrangements ha$e particularly been the more popular medium when foreign participation is in$ol$ed in local pro&ects since the contractual nature of the arrangement allows the parties fle3ibility to adopt

special rules and procedures co$ering their situation which would otherwise be inapplicable in a straight corporate $ehicle because of the restricti$e rules of the 'hilippine .orporation .ode and &urisprudence on 'hilippine .orporate 4aw.

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OR"ATION AGREE"ENT# NATURE O JOINT VENTURES IN

PHILIPPINE SETTING

There is no statutory pro$ision that recognizes or go$erns directly &oint $entures although they ha$e been recognized in &urisprudence and commonplace in commercial $entures. .onse6uently &oint $enture arrangements fall generally within the realm of the 4aw on .ontracts and particularly within the applicable pro$isions of the 4aw on 'artnership both of which are go$erned under the .i$il .ode of the 'hilippines. Since the pre$ailing contract rule in the 'hilippines is that parties to a contract may establish such stipulations clauses terms and conditions as they may deem con$enient pro$ided they are not contrary to laws morals good customs public order or public policy 1 no model &oint $enture agreements ha$e been published by the Securities and 73change .ommission 1S7.2 8oard of )n$estments 189)2 or any other authority. The pre$ailing school of thought in the 'hilippines is that a &oint $enture is a species of partnership. 8y specific statutory pro$ision when :two or more persons bind themsel$es to contribute money property or industry to a common fund with the intention of di$iding the profits among themsel$es : then a partnership is created by definition of law. 2 The main distinction between an ordinary partnership and a &oint $enture is that the ordinary partnership is organized for general business $enture and does not ha$e a definite term of e3istence; whereas a &oint $enture is organized for a specific pro&ect or underta%ing. The 'hilippine Supreme .ourt has adopted 8lac%<s definition of a &oint $enture thus= :#oint $enture is defined as an association of persons or companies &ointly underta%ing some commercial enterprise"generally all contribute assets and share ris%s. )t re6uires a community of interest in the performance of the sub&ect matter a right to direct and go$ern the policy connected therewith and duty which may be altered by agreement to share both in profit and losses.:5 The foregoing definition of a &oint $enture essentially falls within the statutory definition of what constitutes a partnership. 9ther reasons on why a &oint $enture must be considered a species of partnership is that the 4aw on 'artnership pro$ides that :! partnership may be constituted in any form e3cept where immo$able property or real rights are contributed thereto in which case a public instrument shall be necessary.: > That means that no special form e$en one see%ing to establish a &oint $enture arrangement is necessary to gi$e rise to a partnership.
!rt. 150? .i$il .ode. !rt. 10?0 .i$il .ode. 5 =ilos)a$an! Inc> v> uingona 252 S.-! 110 1>5(1>> >1 S.!@ ?01 11//>2 citing 84!.A<S 4!B @).T)9,!-C. > !rt. 1001 .i$il .ode.
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)n addition the 4aw on 'artnership recognizes that in the 'hilippines a partnership may either be uni$ersal or particular. 5 ! uni$ersal partnership of profits comprises all that the partners may ac6uire by their industry or wor% during the e3istence of the partnership.? ! particular partnership has for its ob&ect determinate things their use or fruits or specific underta<ing or the e3ercise of a professional or $ocation. 0 .learly therefore a &oint $enture as an underta%ing of two or more persons who contribute money or property to a common fund with intention of di$iding the profits from a particular pro&ect or particular underta%ing is defined by law as a particular partnership. Dinally the position that a &oint $enture is a species of partnership has been upheld in Aur)ach v> Sanitar$ *ares 7anufacturing Corp> E where the Supreme .ourt held that=
. > > The main distinction cited by most opinions in common law &urisdiction is that the partnership contemplates a general business with some degree of continuity while the &oint $enture is formed for the e3ecution of a single transaction and is thus of a temporary nature. . . This obser$ation is not entirely accurate in this &urisdiction since under the .i$il .ode a partnership may be particular or uni$ersal and a particular partnership may ha$e for its ob&ect a specific underta%ing. / It would seem therefore that under Philippine law! a 8oint venture is a form of partnership and should thus )e governed )$ the laws of partnership>10

Since a &oint $enture is a species or a special type of partnership it would ha$e the following characteristics of partnership= 1a2 )t would ha$e a &uridical personality separate and distinct from that of each of the &oint($enturers. !rticle 10?E .i$il .ode pro$ides specifically that the partnership has a &uridical personality separate and distinct from that of each of the partners e$en in case of failure to comply with the registration re6uirements of law. Therefore a &oint $enture as a firm can enter into contract and own properties in the firm<s name;11 1b2 7ach of the co($enturers would be liable with their pri$ate property to the creditors of the &oint $enture beyond their contributions to the &oint $enture;

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!rt. 100? .i$il .ode. !rt. 10E0 .i$il .ode. 0 !rt. 10E5 .i$il .ode. E 1E0 S.-! 150 11/E/2. / !rt. 10E5 .i$il .ode. 10 I)id? emphasis supplied> 11 cf !rt. 100> .i$il .ode.

1c2 7$en if a co($enturer transfers his interest to another the transferee does not become a co($enturer to the others in the &oint $enture unless all the other co($enturers consent. This is in consonance with the delectus personarium principle applicable to partnerships; 1d2 *enerally the co($enturers acting on behalf of the &oint $enture are agents thereof as to bind the &oint $enture; and 1e2 @eath retirement insol$ency ci$il interdiction or dissolution of a co($enturer dissol$es the &oint $enture. #urisprudence howe$er has tended to gi$e &oint $entures special treatment not accorded to ordinary partnerships. 'hilippine &urisprudence has adopted the pre$ailing rule in the +nited States that a corporation cannot ordinarily enter into partnerships with other corporations or with indi$iduals. The basis for such prohibition on corporations is that in entering into a partnership the identity of the corporation is lost or merged with that of another and the direction of the affairs is placed in other hands than those pro$ided by law of its creation. The doctrine is grounded on the theory that the stoc%holders of a corporation are entitled in the absence of any notice to the contrary in the articles of incorporation to assume that their directors will conduct the corporate business without sharing that duty and responsibility with others. 12 9uason v> &ola@os 15 recognized in 'hilippine &urisdiction the doctrine in !nglo(!merican &urisprudence that :a corporation has no power to enter into a partnership.: ,e$ertheless 9uason recognized that a corporation may $alidly enter into a &oint $enture agreement :where the nature of that $enture is in line with the business authorized by its charter.: 1> !lthough 9uason does not elaborate on why a corporation may become a co($enturer or partner in a &oint $enture arrangement it would seem that the policy behind the prohibition on why a corporation cannot be made a partner does not apply in a &oint $enture arrangement. 8eing for a particular pro&ect or underta%ing when the board of directors of a corporation e$aluate the ris%s and responsibilities in$ol$ed they can more or less e3ercise their own business &udgment is determining the e3tent by which the corporation would be in$ol$ed in the pro&ect and the li%ely liabilities to be incurred. The situation therefore in a &oint $enture arrangement unli%e in an ordinarily partnership arrangement which may e3pose the corporation to any and $arious liabilities and ris%s which cannot be e$aluated and anticipated by the board allows the board to fully bind the corporation to matters essentially within the boards business appreciation and anticipation.

8!+T)ST! T-7!T)S7 9, 'F)4)''),7 '!-T,7-SF)' 4!B 1/0E 7d. at p. /. /5 'hil. 10? 11/5>2. 1> I)id .uoting from *$oming/Indiana 3il as Co> v> *eston! E0 !.4.-. 10>5 citing Dletcher .yc. of .orp. 10E22.
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The pre$ious ruling of the S7. on the matter is that a corporation cannot enter into a contract of partnership with an indi$idual or another corporation on the premise that if a corporation enters into a partnership agreement it would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers which is entirely inconsistent with the policy of the law that the corporation shall mange its own affairs separately and e3clusi$ely. 15 4ater the S7. pro$ided for a clear e3ception to the foregoing ruling and allowed corporations to enter into partnership arrangement pro$ided the following conditions are met=1? 1a2 The authority to enter into a partnership relation is e3pressly conferred by the charter or the articles of incorporation of the corporation and the nature of the business $enture to be underta%en by the partnership is in line with the business authorized by the charter or articles of incorporation; 1b2 The agreement on the articles of partnership must pro$ide that all the partners shall manage the partnership and the articles of partnership must stipulate that all the partners shall be &ointly and se$erally liable for all the obligations of the partnership; 1c2 )f it is a foreign corporation it must obtain a license to transact business in the country in accordance with the .orporation .ode of the 'hilippines. )n one opinion the S7. clarified that the conditions imposed meant that since the partners in a partnership of corporations are re6uired to stipulate that all of them shall manage the partnership and they shall be &ointly and se$erally liable for all the obligations of the partnership it necessarily followed that a partnership of corporations should be organized as a Ggeneral partnershipH. 10 4ately the S7. realizing that the second condition actually pre$ented a corporation from entering into a limited partnership which if allowed to do so would then be more congruent with the policy that the corporation would then not be held liable for its $enture beyond the in$estments made and determined by its board of directors and would therefore not be held liable 1beyond its in$estment2 for debts arising from the acts of the general partners reconsidered its position and ruled that a corporation may become a limited partner in a limited partnership since Gthere is no e3isting 'hilippine law that e3pressly prohibits a corporation from becoming a limited partner in a partnership.H )n effect the S7. dropped the second condition imposed pre$iously. 1E
S7. 9pinion 22 @ecember 1/?? S7. D94)9 1/?0(1/0? at p. 20E; citing ? D47T.F7.C.. .9-'. 'erm. 7d. -e$. -epl. 1/50 Sec. 2520. 1? S7. 9pinion 2/ Debruary 1/E0; S7. 9pinion dated 5 September 1/E>. +nder Sec. 1/2 of the ,!T)9,!4 ),T7-,!4 -7I7,+7 .9@7 documentary stamps of '15.00 must be affi3ed on each pro3y. 10 S7. 9pinion 25 Debruary 1//> JJI))) S7. K+!-T7-4C 8+447T), 1E 1,o. 5 Sept. 1//>2. 1E S7. 9pinion 10 !ugust 1//5 JJJ S7. K+!-T7-4C 8+447T), E 1,o. 1 #une 1//?2.
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)n the field of Ta3ation both a partnership and a &oint $enture are treated as corporate ta3payers and both are sub&ect to corporate income ta3 e3cept that under the ,ational )nternal -e$enue .ode of 1//0 :a &oint $enture or consortium formed for the purpose of underta%ing construction pro&ects or engaging in petroleum coal geothermal and other energy operations pursuant to an operating or consortium agreement under a ser$ice contract with the *o$ernment : shall not be ta3ed separately as a corporate ta3payer. 1/

ALTERNATIVE LEGAL

OR"S IN

STRUCTURING A JOING VENTURE

'arties ha$e a $aried choice of legal forms in planning a &oint $enture arrangement and they can pursue the same through a &oint $enture corporation or by straight e6uity &oint $enture by partnership arrangement or contractual &oint $enture. The S7. has ruled that generally a &oint $enture agreement of two corporations need not be registered with the S7. pro$ided it will not result in the formation of a new partnership or corporation. Fowe$er should there be an intention to ac6uire a separate Ta3 )dentification ,umber 1T),2 from the 8ureau of )nternal -e$enue for the business $enture the same re6uires registration with the S7. in order to ha$e a separate legal personality to obtain a separate T),. 20 .o($enturers may pursue the &oint $enture arrangement by a pri$ate contract between them and they choose not to represent a separate firm underta%ing the pro&ect to third parties. )n such an arrangement the relationship of the $enturers their rights and liabilities are go$erned by the &oint $enture contract e3ecuted between them. 76uity &oint $entures are also a$ailable in 'hilippine setting which may co$er the formation of a new &oint $enture company with each co($enturer being allocated proportionate shareholdings in the outstanding capital stoc% of the &oint $enture corporation. 76uity &oint $enture may also be pursued where a co( $enturer is allocated the agreed shares of stoc% in an e3isting corporation either from new issuances of the capital stoc% of the e3isting corporation or sold shares from those already issued in the names of the other co($enturers. )n e6uity &oint $entures the rights and obligations of the parties among themsel$es is co$ered not only in a separate &oint $enture agreement but also implemented by certain pro$isions of the articles of incorporation and by(laws of the &oint $enture corporation. ! third type of &oint $enture arrangement is to formally operate the &oint $enture set(up as a partnership with a separate and distinct &uridical personality. The S7. has ruled that two or more corporations may enter into a &oint $enture through a contract or agreement 1contractual &oint $enture2 if the nature of the $enture is authorized by their charters which contract need not be registered with the S7.; pro$ided howe$er that the &oint $enture will not result in the formation of a new partnership or corporation. 21
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Sec. 22182 ,)-. of 1//0. S7. 9pinion 50 Larch 1//5 JJ)J S7. K+!-T7-4C 8+447T), 52 1,o. 5 Sept. 1//52. 21 S7. 9pinion 2/ !pril 1/E5 S7. !,,+!4 9'),)9,S 1/E5 at p. E/.

)n situations where a corporate $ehicle is formed in pursuance of the &oint $enture arrangements ideally the &oint $entures should be able to fit into the $arious terms and clauses of the articles of incorporation and by(laws 1the charter2 of the &oint $enture company the salient features of their &oint $enture agreements. )n situations where &oint $enture agreements contain pro$isions not co$ered by the charter of the &oint $enture corporation or $ice($ersa the resolutions of issues arising therefrom shall be as follows= 1a2 )n case of conflicts between the pro$isions of the &oint $enture agreement and the charter of the &oint $enture corporation the pro$isions of the latter shall pre$ail; 1b2 )n case there are pro$isions or clauses in the &oint $enture agreement not found in the charter of the &oint $enture corporation such pro$isions and clauses remain binding contracts among the &oint $enture parties signatory to the agreement but do not bind the &oint $enture corporation or other parties not signatories thereto. The foregoing rules of resolution are based on the well(established doctrine under 'hilippine .orporate 4aw that the articles of incorporation is a basic contract document defining the charter of the corporation. The articles of incorporation is characterized as a contract between and among three parties= 1a2 between the State and the corporation; 1b2 between the stoc%holders and the State; and 1c2 between the corporation and its stoc%holders. 22 )n addition although the &oint $enture agreement may contain rules on management and control of the &oint $enture corporation it does not authorize the &oint($enturers as e6uity owners to o$erride the business management of the corporate affairs of the &oint $enture corporation by its board of directors. !ny stipulation therefore in the &oint $enture agreement that see%s to arrogate unto the stoc%holders thereof the management prerogati$es of its board of directors would be null and $oid.

ASPECTS WHICH IN

LUENCE

CHOICE O LEGAL

OR"

The most important aspects in choosing the form to pursue &oint $enture arrangement would be the issues of limited liability ta3 conse6uences and limitation of foreign e6uity is specified areas of in$estments or acti$ities. The contractual &oint $enture has the ad$antage of limiting the e3tent of the arrangement between and among the &oint($enturers as in underta%ings that re6uire pri$acy. )n addition since formal &oint $entures are ta3ed as corporate ta3payer the contractual &oint $enture lessens the need to ha$e to register the pro&ect as a separate corporate ta3payer since the pri$ate arrangements should allow the &oint($enturers to continue reporting separately their participation in the pro&ect in their own ta3 returns. 9n the other hand the choice of pursuing a &oint $enture arrangement for underta%ing constructions pro&ects or engaging in
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overnment of the P>I> v> 7anila ,ailroad Co> 52 'hil. ?// 11/2/2.

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petroleum coal geothermal and other energy operations pursuant to an operating agreement under a ser$ice contract with the *o$ernment is usually made because the &oint $enture itself would not be sub&ect to corporate income ta3 liabilities under the ,)-.. The use of the corporate entity to pursue the &oint $enture arrangement allows the &oint($enturers to ta%e full ad$antage of the limited liability features of the corporate $ehicle especially in pro&ects and underta%ings which embody certain ris%s. The corporate entity route also allows the &oint($enturers to ta%e ad$antage of zero rate ta3ability of di$idends declared by corporations. )n the 'hilippines the corporation has traditionally been sub&ected to hea$ier ta3ation than other forms of business organization; di$idends distributed are sub&ect to another ta3 when recei$ed by the stoc%holders. Bith the trust of *o$ernment to encourage both local and foreign in$estments in the country and to entice the use of the corporation as the $ehicle for such in$estment many of the pre$ious ta3 laws that tended to ma%e corporate $ehicles e3pensi$e ha$e been abolished. 73cept for di$idends declared by domestic corporation in fa$or of foreign corporation 25 di$idends recei$ed by indi$iduals from corporation 2> as well as inter(corporate di$idends between domestic corporations 25 are sub&ect to zero rate of income ta3ation. There has also been an abolition of the personal holding companies ta3 and ta3 on unreasonably accumulated surplus of corporations.2? 4ately howe$er under the reforms embodied in the ,)-. of 1//0 a final ta3 of 10M has been re(imposed on di$idends recei$ed by residents and citizens declared from corporate earnings after 1 #anuary 1//E; 20 a final ta3 of 20M on di$idends recei$ed by a nonresident alien indi$idual has been re(imposed from corporate earnings after 1 #anuary 1//E; 2E and the ta3 on improperly accumulated earnings has li%ewise been re(imposed. 2/ The pursuit of &oint $enture arrangements under a formal partnership arrangement has the disad$antage of in$iting into the arrangement the features of unlimited liability for partnership debts to the &oint($enturers and also the inability to ta%e ad$antage of the zero(rate of di$idends for corporation when the partnership declares and distributes profits. The aspect of double ta3ation looms largely in a partnership &oint $enture arrangement since partnerships are sub&ect to the 52M net income ta3 for corporations. ,e$ertheless &oint $entures formed for the purpose of underta%ing construction pro&ects 50 and those formed to engage in petroleum operations pursuant to an operating agreement under a ser$ice contract with the *o$ernment 51 are e3empt from corporate ta3ation.
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Sec. 251a2 and 1b2 ,)-. of 1/00. Sec. 21 ,)-. of 1/00. 25 Sec. 2> ,)-. of 1/00. 2? 73ecuti$e 9rder ,o. 50 11/E?2. 20 Sec. 2>182122 ,)-. of 1//0. 2E Sec. 251!2112 ,)-. of 1//0 2/ Sec. 2/ ,)-. of 1//0. 50 'res. @ecree /2/ 11/0?2. 51 'res. @ecree 1?E2.

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GOVERNING LAW AN! LANGUAGE

Since &oint $enture arrangements are go$erned primarily by the 4aw on .ontracts the following rules would be rele$ant to &oint $entures. $% ree&o' to Contra(t) In General The 'hilippine .onstitution prohibits any law impairing the obligation of contracts.52 The established rule is that contracting parties may establish such stipulations clauses terms and conditions as they may deem con$enient pro$ided they are not contrary to law morals good customs public order or public policy.55 .ontracts generally are perfected by mere consent and from that moment the parties are bound not only to the fulfillment of what has been e3pressly stipulated but also to all the conse6uences which according to their nature may be in %eeping with good faith usage and law. 5> #oint $enture arrangements are therefore generally binding on the &oint($enturers in whate$er form they were constituted. *% or'al or E+trinsi( Vali&it, o- A.ree'ents 'hilippine laws recognize the principle that the formal or e3trinsic $alidity of contracts including a &oint $enture arrangement shall be go$erned by the laws of the country in which they are e3ecuted. 55 Therefore &oint $enture arrangements which are essentially partnership agreements are $alid in whate$er form e3ecuted. /% Ca0a(it, o- Contra(t Parties The capacity of the parties to enter into a &oint $enture agreement is generally go$erned by their national law. 5? Fowe$er in case of &oint $enture agreements co$ering the alienation or encumbrance of properties both real and personal located in the 'hilippines the capacity of the parties is go$erned under 'hilippine laws.50

52 55

Sec. 10 !rt. ))). !rt. 150? .i$il .ode. 5> !rt. 1515 .i$il .ode. 55 !rt. 10 .i$il .ode. 5? !rt. 15 .i$il .ode. 50 !rt. 1? .i$il .ode.

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1% Intrinsi( Vali&it, The intrinsic $alidity of a &oint $enture agreement as in all contracts in general e3ecuted in the 'hilippines including consideration or cause thereof the interpretation or constructions of its pro$isions and the nature and amount of damages for breach thereof are go$erned by the law $oluntarily agreed upon by the parties. The parties to a &oint $enture arrangement can therefore $alidly stipulate which laws shall go$ern their arrangement. Fowe$er any stipulation in the &oint $enture agreement cannot operate to oust 'hilippine courts of their &urisdiction under the law although the local courts would still apply the laws chosen by the parties to the agreement. 5E !lthough the parties to a contract including a &oint $enture arrangements are granted liberty under 'hilippine laws to stipulate on go$erning laws including the laws of another country ne$ertheless 'hilippine restricti$e laws on ta3es and prohibition on foreign e6uity in some business areas or acti$ities are li%ely to be imposed as mandatory if suit is brought before a local forum see%ing any remedy under the &oint $enture arrangement. 2% Lan.ua.e o- Joint Venture A.ree'ents There are li%ewise no restrictions on the language in which a document or contract may be e3ecuted since the language does not go into the $alidity or enforceability of the agreement. ,e$ertheless it would be prudent for the parties to draw the documents in an official language since any future suit on a document must always be accompanied by an official transaction in the official language. +nder Section 55 -ule 152 of the 'hilippine -ules of .ourt documents written in an unofficial language shall not be admitted as e$idence unless accompanies with a translation into 7nglish or Dilipino. +nder the 1/E0 .onstitution of the 'hilippines the official languages are Dilipino and until otherwise pro$ided by law 7nglish. 5/ Lost if not practically all contracts and agreements in 'hilippine setting are drawn(up and e3ecuted in 7nglish since it is the official and dominant language of commerce and the &udiciary.

!E

INING

JOINT VENTURES SCOPE O 3USINESS ACTIVIT4

The principal consideration in defining the scope of business to be underta%en by &oint $enture in the 'hilippines basically de$ol$e on the issue when it in$ol$es foreign in$estment of restrictions on foreign e6uity and foreign management and control on certain restricted areas or acti$ities.

7olina v> %e la ,iva ? 'hil. 12 11/0?2; Companie de Commerce v> Aam)urg/Ameri<a! 5? 'hil. 5/0 11/102. 5/ Sec. 0 !rt. J)I.

5E

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$% orei.n Invest'ent A(t o- $55$ -epublic !ct 00>2 %nown as the :Doreign )n$estment !ct of 1//1: or :D)! </1: was enacted to promote foreign in$estments and prescribes the procedures for registering enterprises doing business in the 'hilippines. )t is the basic law that pro$ides the conditions acti$ities and procedures where foreign enterprises may in$est and do business in the 'hilippines. )t applies to &oint $enture arrangements in the 'hilippines. 8y the negati$e list scheme the !ct simply established the restricted areas and declared all other areas as open to unlimited foreign e6uity participation. 7ssentially the D)! N/1 pro$ides for foreign in$estment negati$e list which spells out the acti$ities reser$ed for 'hilippine national. 73port enterprises may enter all acti$ities not restricted by 4ists ! and 8 of the negati$e list and domestic enterprises with foreign e6uity may enter all acti$ities not restricted by 4ists ! 8 and . of the negati$e list. The salient points of D)! </1 are the following= 1a2 +nder the concept of a negati$e list more areas are open to foreign in$estments and in$estment policy is made transparent and stable; 1b2 The law redefined :e3port enterprise: to mean at least ?0M e3port 1from the former 00M e3port le$el2. 1c2 )t opened the domestic economy to 100M foreign in$estments e3cept for those in the negati$e lists. 1d2 9ne layer of bureaucracy is reduced because there is no need for 8oard of )n$estments 189)2 appro$al if the in$estor is not see%ing incenti$es. The criteria for the negati$e list are the following= List A co$ers area of in$estment in which foreign ownership is limited by the .onstitution and nationalization laws as follows= NO
OREIGN

E6UIT4 ALLOWE!=

1a2 Lass media ownership and management; >0 1b2 4icensed professions li%e lawyers accountants and engineers;>1 1c2 -etail trade;>2 1d2 Disheries; and 1e2 -ice and corn farming.>5
Sec. 11 !rt. JI) .onstitution. Sec. 1> !rt. J)I .onstitution. >2 -ep. !ct ,o. 11E0. -etail Trade has been liberalized under -ep. !ct ,o. E0?2 otherwise %nown as the -etail Trade 4iberalization !ct of 2000. >5 -ep. !ct ,o. 501E; 'res. @ecree 1/>.
>1 >0

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*27

OREIGN

E6UIT4 ALLOWE!#

1a2 -ecruitment agencies;>> and 1b2 4ocally funded public wor%s pro&ect.>5 /87
OREIGN

E6UIT4 ALLOWE!#

1a2 !d$ertising.>? 187

OREIGN

E6UIT4 ALLOWE!=

1a2 73ploitation of natural resources and utilization of land ownership;>0 1b2 'ublic utilities;>E 1c2 7ducational institutions;>/ 1d2 Dinancing companies;50 1e2 .onstruction.51 1f2 .ooperati$es;52 1g2 'ri$ate security agencies;55 and 1h2 Small(scale mining.5> +nder the -etail Trade 4iberalization !ct of 2000 55 the retail trade industry has been liberalized to accommodate foreign in$estments and foreign direct participation. .urrently foreigners are e3cluded only in retail enterprises with paid(up capita of less than +SO2 500 000.00 1.ategory !2 which is resecured e3clusi$ely for Dilipino citizens and corporations wholly(owned by Dilipino citizens. List 3 co$ers defense(related materials which by law are licensed and regulated by the @epartment of ,ational @efense unless specifically authorized with substantial e3port by the Secretary of ,ational @efense. Dor e3ample >0M foreign e6uity is allowed manufacture repair storage and/or distribution of e3plosi$es munitions and armaments.5?

>> >5

!rt. 20 4abor .ode. .omm. !ct ,o. 5>1; 'res. @ecree 15/>; 49) ?50. >? Sec. 11 !rt. JI) .onstitution. >0 Sec. 2 !rt. J)) .onstitution. >E Sec. 11 !rt. J)) .onstitution. >/ Sec. > !rt. J)I .onstitution; 8atas 'ambansa 8lg. 252. 50 -ep. !cts ,os. >5?? and 5/E0. 51 -ep. !ct ,o. 51E5. 52 -ep. !ct ,o. ?/5E. 55 -ep. !ct ,o. 5>E0. 5> -ep. !ct ,o. 000?. 55 -ep. !ct ,o. E0?2 1Larch 20002. 5? -ep. !ct ,o. 00>2.

15

List 3 also includes acti$ities regulated by law because of ris%s they may pose to public health and morals. Dor e3ample dangerous drugs gambling nightclubs bars and message clinics are not open for foreign in$estments. 50 ! third area under the negati$e List 3 refers to domestic mar%et enterprises with less than +SO200 000 paid in e6uity capital unless determined by the @epartment of Science and Technology as in$ol$ing ad$anced technology. Dinally the negati$e List 3 also includes e3port enterprises using raw materials from depleting natural resources and with less than +SO200 000 paid in e6uity capital. The following therefore are co$ered under 4ist 8 and would be open to 100M foreign e6uity in$estments= 1a2 Lanufacture and repair of firearms and similar defense( related material with substantial e3port component and with specific authorization from the Secretary of ,ational @efense. 1b2 @omestic mar%et enterprises certified by the @9ST as in$ol$ing ad$anced technology e$en if the paid(in e6uity capital is less than +SO200 000. 1c2 73port enterprises that use raw materials from depleting natural resources but with paid(in capital of at least +SO200 000. List C enumerates :ade6uately(ser$ed areas.: The criteria to determine :ade6uately ser$ed :areas of economic acti$ity are the following= 1a2 The industry is controlled by firms owned at least ?0M by Dilipinos; 1b2 )ndustry capacity is ample to meet domestic demand; 1c2 Sufficient competition e3ists within the industry; 1d2 )ndustry products comply with 'hilippine standards of health and safety or in the absence of such with international standards and are reasonably competiti$e 6uality with similar products in the same price range imported into the country; 1e2 Kuantitati$e restrictions are not applied on imports of directly competing products; 1f2 )ndustry leaders comply with en$ironmental rules; and 1g2 The prices of industry products are reasonable.

50

-ep. !ct ,o. 00>2.

1?

The transitory Ne.ative List C has already been scrapped under 73ecuti$e 9rder ,o. 1E2 which established the regular Doreign )n$estment ,egati$e 4ist and too% effect last 9ctober 1//>. 9here is in effect no longer Negative List C. Esta9lis:in. a Cor0orate Ve:i(le Lere in$estment by foreign entities into a &oint $enture company would be co$ered by the rules on foreign e6uity allowance under D)! </1. The registration of the &oint $enture company itself would be similar to the normal registration re6uirements of the S7. on the organization formation and registration of a domestic corporation. )n addition if aside from e6uity in$estment in the local company the foreign partners would participate in the affairs or pro&ects of the domestic &oint $enture company it would be considered doing business in the 'hilippines and would ha$e to obtain a license to do business from the S7.. $% Pro(e&ure in Esta9lis:in. a Cor0orate Ve:i(le !side from the D)! </1 the are .orporation .ode pro$isions and S7. rules and regulations that must be complied with in setting(up the &oint $enture company. Section 10 of our .orporation .ode re6uires the incorporators of a corporation to be not less than fi$e 152 natural persons ma&ority of whom must be residents of the 'hilippines. This re6uirement is mandatory e$en to 100M foreign(owned corporations. Since the .ode pro$ides that only natural persons must be incorporators a corporation cannot be considered an incorporator of the corporation to be put up although said corporation may be among the subscribers to the corporation<s capital stoc%. The .ode sets the limit to the number of directors to not less than fi$e 152 nor more than fifteen 1152. Section 25 of the .ode moreo$er re6uires e$ery director to own at least one 112 share of the capital stoc% of the capital stoc% of the corporation. Said section of the .ode also re6uires ma&ority of the directors to be residents of the 'hilippines. Fowe$er the S7. does not insist on ma&ority residency re6uirements for directors when the domestic corporation is 100M foreign(owned. !lien incorporators and subscribers who are residents must furnish pro$ide any of the following= their immigration certificate of residence special in$estor<s resident $isa and any %ind of $isa $alid for at least one 112 year. +nder S7. regulations an alien may be appointed/elected as treasurer only if he is a resident of the 'hilippines. Bhen a &oint $enture company is to be registered with foreign e6uity the following re6uirements are imposed by the S7.=

10

1a2 !ll subscriptions of foreign incorporators to be fully paid. )f they will not be fully paid the Dilipino incorporators must e3ecute an underta%ing to pay for the unpaid subscription; 1b2 !lien subscribers must submit proof of remittance or affida$it stating the source of payment of their subscriptions; 1c2 !lien subscribers who wish to register their in$estments with the .entral 8an% so that they can remit their earnings and capital abroad must necessarily remit their respecti$e subscription payments through the ban%ing system and submit the prescribed ban% certificate of inward remittance as proof of the remittance to the S7.. ,ote that the S7. may allow the remittance to be maintained in a foreign currency account 1not con$erted into pesos2 so long as a letter(e3planation is gi$en to the S7. on the non(con$ersion 1e.g. the foreign currency will be immediately used to buy capital e6uipment abroad2. *% !oin. 3usiness in t:e P:ili00ines = a. Governing Law !side from direct in$estment participation discussed abo$e foreigners may :do business: in the 'hilippines. This mode of in$estment is not a$ailable for incenti$es and is therefore go$erned by D)! </1. b. What Constitutes Doing Business +nder D)! </1 :doing business: in the 'hilippines is deemed to include the following acts= 1a2 Soliciting orders ser$ice contracts opening offices whether liaisons offices or branches; 1b2 !ppointing representati$es or distributors operating under full control of the foreign corporation domiciled in the 'hilippines or who in any calendar year stay in the country for a period or periods totaling 1E0 days or more; 1c2 'articipating in the management super$ision or control of any domestic business firm entity or corporation in the 'hilippines; and 1d2 !ny other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that e3tent the performance of acts and wor%s or the e3ercise of some of the functions normally incident to and in progressi$e prosecution of commercial gain or of the purpose or ob&ect of the business organization.

1E

c. Qualifications to Do Business in the Philippines !ny non('hilippine national or entity may do business in the 'hilippines up to 100M of its capital pro$ided= 1a2 )t is doing business as a domestic mar%et enterprise outside the ,egati$e 4ist; 1b2 )t is doing business as an e3port enterprise whose products or ser$ices do not fall within 4ists ! and 8 1e3cept for defense(related acti$ities which may be appro$ed or authorized2 of the ,egati$e 4ists. d. Registration under !" #$% 're$iously foreign nationals or foreign entities see%ing to do business in the 'hilippines e$en without incenti$es must secure a certificate of authority from the 89) aside from a license from the S7.. The passage of D)! </1 howe$er did away with this need for a prior 89) certificate of authority. +nder the D)! what is only re6uired is registration with the S7.. The re6uirements of the D)! </1 from the foreign nationals who are direct foreign in$estors and for those merely see%ing to do business in the 'hilippines under the foregoing definition are the same. D)! </1 does not ma%e a distinction between direct foreign in$estors or those merely see%ing to do business in the 'hilippines in its re6uirements for registration. e. &'C Registration Fowe$er the .orporation .ode re6uires certain registration compliance. Dor foreign corporation or partnerships see%ing to do business in the 'hilippines the following would be re6uired= 1a2 .ertified copy of the board resolution authorizing the establishment of an office in the 'hilippines; designating the resident agent to whom summons and other legal processes may be ser$ed in behalf of the foreign corporation; and stipulating that in the absence of such agent or upon cessation of its business in the 'hilippines the S7. shall recei$e any summons and legal processes as if the same is made upon the corporation at its home office; 1b2 Dinancial statements for the immediately preceding year at the time of the filing of the application certified by an independent .ertified 'ublic !ccountant of the S7.; 1c2 .ertified copies of !rticles of )ncorporation/'artnership with an 7nglish translation thereof in a foreign language; 1d2 Doreign .ompany )nformation Sheet

1/

!ll documents e3ecuted abroad should be authenticated by the 'hilippine embassy or consular office. f. "dditional Re(uire)ents The following would be re6uired for specially defined acti$ities= 1a2 Dor enterprises wishing to engage in defense(related acti$ities clearance from the @epartment of ,ational @efense or 'hilippine ,ational 'olice; 1b2 Dor small and medium sized domestic enterprises with paid( in e6uity capital less than the e6ui$alent of +SO200 000.00 a certificate from the @epartment of Science and Technology that the in$estment in$ol$es ad$anced technology. g. 'ffects of Non*Co)pliance with !" +$% Re(uire)ents !dministrati$e sanctions which would include the impositions of fines and the forfeitures of benefits.5E /% SEC Li(ense -or orei.n Cor0orations !oin. 3usiness !side from the registration re6uirements of the D)! </1 with the S7. Section 125 of the .orporation .ode re6uires foreign corporations wishing to do business in the 'hilippines to secure a license from the S7. allowing the foreign corporation to do business in the 'hilippines. a. &'C Re(uire)ents The following documentary re6uirements would ha$e to be filed with the S7.= 1a2 !pplication for a license; 1b2 .ertified true copies of articles of incorporation and by(laws; 1c2 .ertificate under oath by the authorized official or officials of the &urisdiction of its incorporation attesting to the fact that the laws of the country or state of the applicant allow Dilipino citizens and Dilipino corporations to do business therein and that the applicant is an e3isting corporation in good standing. )f such certificate is in a foreign language a translation thereof in 7nglish under oath of the translator shall be attached hereto; 1d2 Statement under oath by the president or any other person authorized by the corporation showing to the satisfaction of the S7. and other go$ernment agency in proper cases that the applicant is sol$ent and in sound financial condition and
5E

Section 1> D)! N/1.

20

setting forth the assets and liabilities of the corporation as of the date not e3ceeding one 112 year immediately prior to the filing of the application. b. !ssuance of License Bhere the S7. is satisfied that the applicant has complied with all the re6uirements of this .ode and other special laws rules and regulations the S7. shall issue a license to the applicant to transact business in the 'hilippines for the purpose or purposes specified in such license. +pon the issuance of the license such foreign corporation may transact its business in the 'hilippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or of its state of incorporation unless such license is soonest surrendered suspended or annulled in accordance with this .ode or other special laws. c. Re(uire)ents ,pon !ssuance of &'C License 1i2 'osting of Securities Bithin si3ty 1?02 days after the issuance of a license to transact business in the 'hilippines the licensee shall deposit with the S7. for the benefit of present and future creditors of the licensee in the 'hilippines securities satisfactory to the S7. consisting of bonds or other e$idences of indebtedness of the *o$ernment of the -epublic of the 'hilippines its political subdi$isions and instrumentalities or of go$ernment owned or controlled corporations and entities shares of stoc% in registered enterprises as this term is defined in -ep. !ct ,o. 51E? shares of stoc% in domestic corporations registered in the stoc% e3change or any combinations of these %inds of securities in the actual $alue of '100 000.00 1ii2 Cearly -e6uirement of 'osting of !dditional Securities Bithin ? months after each fiscal year the S7. shall re6uire the licensee to deposit additional securities e6ui$alent in actual mar%et $alue to two percent 12M2 of the amount by which the licensee<s gross income for that fiscal year e3ceeds '5 000 000.00. The S7. shall also re6uire deposit of additional securities if the actual mar%et $alue of the deposit has decreased by ten percent 110M2 of their actual mar%et $alue at the time they were deposited. The S7. may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased or if the actual mar%et $alue of the securities on deposit has increased by more than 10M of the actual mar%et $alue of the securities when they were deposited. The S7. may from time to time allow the licensee to substitute other securities for those already on deposit as long as the licensee is sol$ent.

21

1iii2 !ppointment of -esident !gent The appointment of a resident agent is an indispensable re6uirement to the issuance of an S7. license. Should the foreign corporation be sued someone must by duly authorized to recei$e summons and other legal processes so that the 'hilippine courts may ac6uire &urisdiction o$er such corporation. d. 'ffects of ailure to &ecure &'C License to Do Business b- oreign Corporation The following are the legal effects of a foreign corporation doing business in the 'hilippines for failing to obtain the S7. license= 1i2 .riminal liability ( Dine or imprisonment;5/ 1ii2 The foreign corporation cannot sue in 'hilippine courts; ?0 and 1iii2 The foreign corporation can be sued in 'hilippine courts.?1

INCENTIVES AVAILA3LE TO

OREIGN

JOINT VENTURE PARTNERS

73cept for &oint $entures formed for the purpose of underta%ing construction pro&ects?2 and those for formed for engaging in petroleum operations pursuant to an operating agreement under a ser$ice contract with the *o$ernment ?5 which are e3empt from corporate ta3ation the incenti$es a$ailable to &oint $enture partners is directly lin%ed with the acti$ities to be underta%en. )n$estment incenti$es are mainly pro$ided for under the 9mnibus )n$estment .ode of 1/E0.?> $% Pre-erre& Areas o- Invest'ents ;3OI Re.istere& an& wit: In(entives<# *enerally a foreign in$estor can a$ail of incenti$es if he in$ests in what are designated as preferred areas of in$estment as designated in the )n$estment 'riorities 'lan 1)''2 a yearly pamphlet issued by the 8oard of )n$estments 189)2. 8oo% ) of the .ode classifies the preferred areas of in$estments into two= the preferred pioneer and the preferred non/pioneer. The yearly )'' then lists down which economic acti$ities are considered preferred pioneer and which are preferred non(pioneer.
5/ ?0

!rt. 1>> .orporation .ode; Sec. 1> -ep. !ct 550. Sec. 155 .orporation .ode. ?1 I)id> ?2 'res. @ecree /2/ 11/0?2. ?5 'res. @ecree 1?E2. ?> 73ecuti$e 9rder ,o. 22? the 9mnibus )n$estment .ode.

22

Doreigners may in$est up to the e3tent of 100M in the economic acti$ities listed down as preferred pioneer sub&ect only to constitutional or statutory limitations and only up to >0M in economic acti$ities declared as preferred non/ pioneer. )f an enterprise is not listed in the )n$estment 'riorities 'lan and foreign e6uity shall not e#ceed >0M it must to be entitled to the incenti$es gi$en e3port 50M of its production. )f an enterprise is not listed in the )n$estment 'riorities 'lan and foreign e6uity shall e#ceed >0M it must e3port 00M of its production to be entitled to the incenti$es gi$en. ! location restriction howe$er is imposed on the enterprise in order to a$ail of certain incenti$es. Thus pro&ects locating in Letro Lanila are not entitled to income ta3 holiday and capital e6uipment incenti$es. !mong the incenti$es granted by the .ode are= 1a2 *uarantee of in$estment repatriation in the currency in which the in$estment was originally made and at the e3change rate pre$ailing at the time of repatriation; 1b2 *uarantee of remittance of earnings in the currency in which the in$estment was originally made and at the e3change rate pre$ailing at the time of remittance; 1c2 Dreedom from e3propriation; 1d2 ,o re6uisition of in$estment; 1e2 )ncome ta3 holiday for ? years from the commercial operation for pioneer firms and > years for non(pioneer firms; 1f2 !dditional deduction for labor e3pense for the first 5 years from the registration of 50M of the wages corresponding to the increment in the number of direct labor for s%illed and uns%illed wor%ers; 1g2 Ta3 and duty e3emption on imported capital e6uipment; 1h2 Ta3 credit on domestic capital e6uipment; 1i2 73emption from contractor<s ta3; 1f2 Simplification of customs procedure; 1g2 +nrestricted use of consigned e6uipment; 1h2 7mployment of foreign nationals; 1i2 Ta3 credit for ta3es and duties on raw materials; 1&2 73emption from ta3es and duties on imported spare parts; and 1%2 73emption from wharfage dues and any e3port ta3 duty impost and fee.

25

*% Non=Pre-erre& Area Investor ;Invest'ent Wit:out In(entives<# 're$iously before the enactment of D)! </1 because foreign e6uity in the enterprise will not e3ceed >0M the enterprise is denominated as a permitted investment under the 9mnibus )n$estment .ode. +nder the .ode the enterprise may immediately incorporate directly with the S7. without need of prior 89) authority. Now the re.uirements of FIA B(' should )e complied with . /% In(entives o- E+0ort Pro(essin. >one Enter0rise# )f the &oint $enture is to be established within an e3port processing zone area under the .ode it shall ha$e the following incenti$es= 1a2 Dacility in employment of foreign nationals; 1b2 Da$orable ta3 treatment of merchandise within the zone; 1c2 7n&oy the same incenti$es as a 89)(registered pioneer enterprise; and 1d2 73emption from local ta3es and licenses. )n addition under 'res. @ecree ,o. ?? the following incenti$es are e3pressly granted to locators within the e3port processing zone areas are= 1a2 73emption from customs duties and internal re$enue ta3es raw materials supplies and e6uipment imported within such areas; 1b2 !llowing net(operating loss carry(o$er for the first 5 years of operations; 1c2 !llowing accelerated depreciation of fi3ed assets to not more than twice the normal rate of depreciation; 1d2 73emption from e3port ta3; 1e2 73emption from local ta3es and licenses; 1f2 @eduction of labor(training e3penses incurred of 1/2 the $alue of such e3penses; 1g2 @eduction for organizational and pre(operating e3penses o$er a period of 10 years; 1h2 *rant of ta3 credit e6ui$alent to the sales compensating and specific ta3es and duties paid on supplies raw materials and other products purchased.

2>

RESTRICTIONS ON ACTIVITIES O JOINT VENTURE PARTNERS

OREIGN

Lost of the restrictions placed on &oint $enture partners are basically on the types of business which may be underta%en and the e3tent of e6uity participation allowed in each type of acti$ity or business which are drawn(up and detailed under the Doreign )n$estments ,egati$e 4ists. There has been a thorough liberalization of foreign e3change regulations in the 'hilippines with the issuance by the .entral 8an% of the 'hilippines ?5 .ircular ,o. 5 in September 1//5. Doreign e3change may be freely sold and purchased outside the ban%ing system. Doreign e3change receipts ac6uisitions or earnings may be sold for pesos within or outside the ban%ing system or retained or deposited in foreign currency accounts or may be used for any other purpose whether in the 'hilippines or abroad. There are therefore no limits on the repatriation of profits nor on the duration for which a &oint $enture may be formed.
INANCING

JOINT VENTURES

#oint $entures pro&ects in 'hilippine &urisdiction are financed through a combination of e6uity infusion and commercial or special loans. Bhat has become a $ery popular scheme of financing &oint $entures co$ering infrastructure pro&ects is the 8uild(9perate(Transfer 18(9(T2 schemes under -ep. !ct ,o. ?/50. The !ct implements the declared policy of the 'hilippine *o$ernment to recognize the indispensable role of the pri$ate sector as the main engine for national growth and de$elopment and pro$ide the most appropriate fa$orable incenti$es to mobilize pri$ate resources for the purpose. Subse6uently -ep. !ct 001E e3tended the co$erage and applicability of the 8(9(T 4aw not merely to :go$ernment infrastructure pro&ects: but also to go$ernment :de$elopment pro&ects.: $% S(:e'es Re(o.ni?e& un&er t:e A(t The schemes now recognized under the !ct are as follows= ;a< Build*.perate*and*/ransfer 0B./1 / ! contractual arrangement whereby the contractor underta%es the construction including financing of a gi$en infrastructure facility and the operation and maintenance thereof. The 89T scheme includes a supply(and(operate situation which is a contractual arrangement whereby the supplier of e6uipment and machinery for a gi$en infrastructure facility if the interest of the *o$ernment so re6uires operates the
?5

9fficially designated as &ang<o Sentral ng Pilipinas under -ep. !ct ,o. 0?55.

25

facility pro$iding in the process technology transfer and training to Dilipino nationals. ;9< Build*and*/ransfer &che)e 0B/1 ( The contractor underta%es the construction including financing of a gi$en infrastructure facility and its turno$er after completion to the go$ernment agency or local go$ernment unit concerned which shall pay the contractor its total in$estment e3pended on the pro&ect plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure pro&ect including critical facilities which for security or strategic reasons must be operated directly by the *o$ernment. ;(< Build*.wn*.perate 0B..1 ( ! pro&ect proponent is authorized to finance construct own operate and maintain an infrastructure or de$elopment facility from which the proponent as allowed to reco$er its total in$estment operating and maintenance costs plus a reasonable return thereon by collecting tolls fees rentals and other charges from facility users. +nder this scheme the proponent which owns the assets of the facility may assign its operation and maintenance to a facility operator. ! :facility operator: is defined as a company registered with the S7. which may or may not be the pro&ect proponent and which is responsible for all aspects of operation and maintenance of the infrastructure or de$elopment facility including but not limited to the collection of tolls fees rentals or charges from facility users. )n case the facility re6uires a public utility franchise the facility operator shall be Dilipino or at ?0M owned by Dilipinos. ;&< Build*Lease*/ransfer 0BL/1 ( ! pro&ect proponent is authorized to finance and construct an infrastructure or de$elopment facility and upon its completion turns it o$er to the go$ernment agency or local go$ernment unit concerned on a lease arrangement for a fi3ed period after which ownership of the facility is automatically transferred to the go$ernment agency or local go$ernment unit concerned. ;e< Build*/ransfer*and*.perate 0B/.1 ( The public sector contracts out the building of an infrastructure facility to a pri$ate entity such that the contractor builds the facility on a turn(%ey basis assuming cost o$errun delay and specified performance ris%s. 9nce the facility is commissioned satisfactorily title is transferred to the implementing agency. The pri$ate entity howe$er operates the facility on behalf of the implement agency under an agreement.

2?

;-< Contract*"dd*and*.perate 0C".1 ( The pro&ect proponent adds to an e3isting infrastructure facility which it is renting from the go$ernment. )t operates the e3panded pro&ect o$er an agreed franchise period. There may or may not be a transfer arrangement in regard to the facility. ;.< Develop*.perate*and*/ransfer 0D./1 ( The fa$orable conditions e3ternal to a new infrastructure pro&ect which is to be built by a pri$ate pro&ect proponent are integrated into the arrangement by gi$ing that entity the right to de$elop ad&oining property and thus en&oy some of the benefits the in$estment creates such as higher property or rent $alues. ;:< Rehabilitate*.perate*and*/ransfer 0R./1 ( !n e3isting facility is turned o$er to a pri$ate sector to refurbish operate and maintain for a franchise period at the e3piry of which the legal title to the facility is turned o$er to the go$ernment. The term is also used to described the purchase of an e3isting facility from abroad importing refurbishing erecting and consuming it within the host country. ;i< Rehabilitate*.wn*and*.perate 0R..1 ( !n e3isting facility is turned o$er to the pri$ate sector to refurbish and operate with no time limitation imposed on ownership. !s long as the operator is not in $iolation of its franchise it can continue to operate the facility in perpetuity. *% E@uit, Li'itations -or O0erators o- Pu9li( ran(:ises The ownership structure of the contractor of an infrastructure facility whose operation re6uires a public utility franchise must be in accordance with the .onstitution which re6uires at least ?0M Dilipino ownership. 9riginally under the 8(9(T 4aw in the case of corporate in$estors in the 89T corporation the citizenship of each stoc%holder in the corporate in$estors shall be the basis for the computation of Dilipino e6uity in the said corporation. ,ep> Act CC'D has done awa$ with the citi6enship test applied to corporate investors in &39 corporations and its variations involving operation of pu)lic facilities 2e>g>! &33! &93! CA3! %39 and ,334. /% Reasona9le Rate o- Return on Invest'ents an& O0eratin. an& "aintenan(e Cost The contractor operates the facility o$er a fi3ed term during which it is allowed to charge facility users appropriate tolls fees rentals and charges sufficient to enable the contractor to reco$er its operating and maintenance e3penses and its in$estment in the pro&ect plus a reasonable rate of return thereon.

20

-epublic !ct 001E defines :reasonable rate of return: as the rate of return that reflects the pre$ailing cost of capital in the domestic and international mar%ets. 1% Perio& Covere& The contractor transfers the facility to the go$ernment unit concerned at the end of the fi3ed term which shall not e3ceed 50 years. 2% inan(in. Allowe& Dor the construction stage the contractor may obtain financing from foreign and/or domestic sources and/or engage the ser$ices of a foreign and/or Dilipino contractor. The financing of a foreign or foreign(controlled contractor from 'hilippine go$ernment financing institutions shall not e3ceed 20M of the total cost of the infrastructure facility or pro&ect. The financing from foreign sources shall not re6uire a guarantee by the *o$ernment or by go$ernment(owned or controlled corporation. 'ro&ects which would ha$e difficulty in sourcing funds may be financed partly from direct go$ernment appropriations and/or from 9fficial @e$elopment !ssistance 19@!2 funds of foreign go$ernments or institutions not e3ceeding 50M of the pro&ect cost and the balance to be pro$ided by the pro&ect proponent. A% Priorit, Proje(ts The 'hilippine .ongress passed #oint -esolution ,o. 05 enumerating the following national priority infrastructure pro&ects= 1a2 Fighways including e3pressways roads bridges inter( changes tunnels and related facilities; 1b2 -ail(based pro&ects pac%aged with commercial de$elopment opportunities e.g. use of go$ernment facilities; 1c2 ,on(rail based mass transit facilities waterways and related facilities; na$igable inland

1d2 'ort infrastructure li%e piers whar$es 6uays storage handling ferry ser$ices and related facilities; 1e2 !irports air na$igation and related facilities; 1f2 'ower generation distribution electrification and related facilities; 1g2 Telecommunications bac%bone networ%s terrestrial and satellite facilities and related ser$ice facilities; 1h2 @ams irrigation and related facilities; 1i2 Bater supply sewerage drainage and related facilities;

2E

1&2 Tourism educational and health infra(structure; 1%2 4and reclamation dredging and other related de$elopment facilities; 1l2 )ndustrial estates regional industrial centers and e3port processing zones including steel mills iron(ma%ing and petrochemical comple3es and related infrastructure facilities and utilities; 1m2 Lar%ets slaughterhouses and related facilities; 1n2 Barehouses and posthar$est facilities; 1o2 'ublic fishports and fishponds processing facilities; including storage and

1p2 7n$ironmental and solid waste management(related facilities such as collection e6uipment composting plants incinerators landfill and tidal barriers among others; and 162 @e$elopment of new townsites and communities and related facilities. B% Pre-eren(e to ili0ino Contra(tors -epublic !ct 001E raises the standards that must be met by Dilipino contractors in order for them to be accorded preference o$er foreign contractors bidding for 8/T and 84T contracts. )n order to be accorded preference a Dilipino contractor is re6uired to submit an e6ually ad$antageous bid with the same price and technical specifications as that of the foreign contractor. ! Dilipino contractor will not be accorded preference unless his bid is at par on both price and technical aspects with that of the foreign contractor. C% Re0a,'ent S(:e'es Dor the financing construction operation and maintenance of any infrastructure pro&ect underta%en pursuant to the 8(9(T 4aw the contractor shall be entitled to a reasonable return of its in$estment and operating and maintenance costs in accordance with its bid proposal as accepted by the concerned contracting infrastructure agency or local go$ernment unit and incorporated in the contract<s terms and conditions. )n the case of a 89T arrangement this repayment scheme is to be effected by authorizing the contractor to charge and collect reasonable tolls fees rentals and charges for the use of the pro&ect facility not e3ceeding those proposed in the bid and incorporated in the contract. The go$ernment infrastructure agency or local go$ernment unit concerned shall appro$e the fairness and e6uity of the tolls fees rentals and charges e3cept in case of tolls for national highways roads bridges and public thoroughfares which shall be appro$ed by the Toll -egulatory 8oard.

2/

The imposition and collection of tools fees rentals and charges shall be for a fi3ed term as proposed in the bid and incorporated in the contract but in no case shall this term e3ceed 50 years. @uring the lifetime of the franchise the contractor shall underta%e the necessary maintenance and repair of the facility in accordance with standards prescribed in the bidding documents and in the contract. )n the case of build(and( transfer arrangement the repayment scheme is to be effected through amortization payments by the go$ernment infrastructure agency or local go$ernment unit concerned to the contractor according to the scheme proposed in the bid and incorporated in the contract. -epublic !ct 001E also allows for the receipt by the pro&ect proponent of payment in non(monetary terms such as land 1sub&ect howe$er to constitutional limitations on ownership of land2. 5% Lan& Re(la'ation or In&ustrial Estates )n the case of land reclamation or the building of industrial estates the repayment scheme may consist of the grant of a portion or percentage of the reclaimed land or industrial estate built sub&ect to the constitutional re6uirements with respect to the ownership of lands only by Dilipino citizens. $8% Re.istration wit: 3OI -epublic !ct 001E pro$ides that pro&ects costing in e3cess of '1 8illion shall be registered with the 8oard of )n$estments and entitled to the incenti$es pro$ided under the 9mnibus )n$estments .ode.

ANTI=TRUST AN! CO"PETITION LAW

The 'hilippine .onstitution pro$ides for the policy= :The State shall regulate or prohibit monopolies when the public interest so re6uires. ,o combinations in restraint of trade or unfair competition shall be allowed.: ?? There are howe$er $ery few detailed legislations go$erning antitrust and unfair competition nor to implement the constitutional policy against restraint of trade or unfair competition. The remaining unrepealed portions of !ct ,o. 52>0 11/252 merely grants the Supreme .ourt and the -egional Trial .ourts concurrent &urisdiction to pre$ent and restrain acts of monopolies or combinations in restraint of trade and authorizes the Solicitor *eneral and public prosecutors to institute proceedings to pre$ent and restrain such $iolations. )t also pro$ides that any person who shall be in&ured in his business or property by any other person by reason of anything forbidden or declared to be unlawful under the 4aw shall reco$er threefold the damages sustained by him and the costs of suit including reasonable attorney<s fees. The -e$ised 'enal .ode of the 'hilippines penalizes=
??

Sec. 1/ !rt. J)).

50

1a2 !ny person who shall enter into any contract or agreement or shall ta%e part in any conspiracy or combination in the form of a trust or otherwise in restraint of trade or commerce or to pre$ent by artificial means free competition in the mar%et; 1b2 !ny person who shall monopolize any merchandise or ob&ect of trade or commerce or shall combine with any other person or persons to monopolize said merchandise or ob&ect in order to alter the price thereof by spreading false rumors or ma%ing use of any other artifice to restrain free competition in the mar%et; 1c2 !ny person who being a manufacturer producers or processor of any merchandise or ob&ect of commerce or an importer of any merchandise or ob&ect of commerce from any foreign country either as principal or agent wholesale or retailer shall combine conspire or agree in any manner with any person li%ewise engaged in the manufacture production processing assembling or importation or such merchandise or ob&ect of commerce or with any person not so similarly engaged for the purpose of ma%ing transactions pre&udicial to lawful commerce or of increasing the mar%et price in any part of the 'hilippines. Bhene$er any of the offenses described abo$e is committed by a corporation or association the president and each one of the directors or managers of said corporation or association or its agent or representati$e in the 'hilippines in case of foreign corporations or associations who shall ha$e %nowingly permitted or failed to pre$ent the commission of such offenses shall be held liable as principals thereof.

PREPARATION O ANCILLAR4 !OCU"ENTS

Bhen a &oint $enture arrangement in$ol$es the use and transfer of intellectual property or technology certain basic intrinsic and registration re6uirements are mandated by 'hilippine laws. $% Te(:nolo., Trans-er A.ree'ent .ontracts or agreements entered into by and between domestic companies and foreign companies and/or foreign(owned companies in$ol$ing the= transfer of systematic %nowledge for the manufacture of a product the application of a process; rendering of a ser$ice management contracts; licensing of computer softwares; and the transfer assignment or licensing of all forms of industrial property rights including mar%eting/distributorship agreements in$ol$ing the license to use foreign trademar%s tradenames and ser$ice mar%s and other

51

mar%s of a proprietary nature must be registered with the Technology Transfer -egistry.?0 The registration with the -egistry will enable the remittance of royalty fees and similar foreign e3change obligations arising from a technology transfer arrangement. +nder .entral 8an% .ircular ,o. 10?2 parties to the technology transfer arrangement can purchase foreign e3change from a ban% to co$er royalty remittances only when the ban% is shown the certificate of registration with the Technology Transfer 8oard. *% Parties to t:e A.ree'ent The -ules pro$ide that the term :domestic company: refers to an enterprise partnership corporation branch or other form of business organization formed organized chartered or e3isting under the laws of the 'hilippines. The foreign company would include= 1a2 ! foreign company or an alien enterprise or foreign firm association partnership corporation or any form of business organization not organized or e3isting under the laws of the 'hilippines; 1b2 ! foreign(owned company which refers to an enterprise partnership corporation or any form of business organization formed organized chartered or e3isting under the laws of the 'hilippines the ma&ority of the outstanding capital of which is owned by aliens. /% Restri(tive 3usiness Clauses +nder the -ules the following clauses are not allowed in any technology transfer arrangement in $iew of their restricti$e nature= 1a2 .lauses which restrict directly or indirectly the e3port of the products manufactured by the technology recipient unless &ustified for the protection of the legitimate interest of the technology supplier and the technology recipient; 1b2 -estrictions on the use of the technology supplied after e3piration of the arrangements; pro$isions which restrict the manufacture of similar or competing products after e3piry of the arrangement; and pro$isions re6uiring the continued payment for patents and other industrial property rights after their e3piration termination or in$alidation;

?0

Sec. 1PbQ -ule ) -ules of 'rocedures of the TT-.

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1c2 'ro$isions pro$iding that the technology recipient will not contest the $alidity of any of the patents being licensed under the arrangement; 1d2 'ro$ision which prohibit the technology recipient in a non( e3clusi$e technology transfer arrangements from obtaining patents or unpatented technology from other technology suppliers with regard to the sale or manufacture of competing products; 1e2 .ontracts which contain pro$isions re6uiring the technology recipient to purchase its raw materials components and e6uipment e3clusi$ely or a fi3ed percentage of the supply re6uirement from the technology supplier or a person designated by him; 1f2 .lauses which restrict the -R@ acti$ities of the technology recipient designated to absorb ad adapt the transferred technology to local conditions; pro$isions which pre$ent the technology recipient from adapting the imported technology to local conditions or introducing inno$ations to it as long as it does not impair the 6uality standards prescribed by the technology supplier; 1g2 'ro$isions re6uiring the technology recipient to %eep part or all of the information recei$ed under the arrangement confidential beyond a reasonable period; and 1h2 'ro$isions which e3empt the technology supplier from liability for non(fulfillment of his responsibilities under the arrangement and/or liability arising from third party suits brought about the by use of the licensed products or licensed technology. 1% Governin. Law +nder the -ules the go$erning law under a technology transfer arrangement shall be 'hilippine laws in the interpretation of the contract and in the e$ent of litigation the $enue shall be the proper courts in the place where the technology recipient has its principal office. 2% !uration o- t:e Contra(t +nder the -ules the term of the agreement shall not e3ceed 10 years with no automatic renewal. Fowe$er indefinite term may be allowed for royalty(free agreements and arrangement for the outright purchase of technology. A% Warrant,DGuarantee Provisions +nder the -ules a warranty from the technology supplier is re6uired reflecting that the technology if used in accordance with the specific instructions

55

of the technology supplier is suitable for the manufacture of the licensed products or for the e3tension of ser$ices pursuant to the technology transfer arrangement. B% Ro,alt, 73cept for pure trademar% licensing agreements where a ma3imum royalty fee of 1M of net sales is allowed the -ules do not prescribe any ceiling on the rate of fees due under a technology transfer arrangement. Fowe$er the rate is sub&ect to e$aluation by the -egistry based on set criteria in the -ules. C% In(entives ! bonus royalty of 2M of net foreign e3change earnings can be a$ailed of by a supplier who commits to an e3port de$elopment program to assist the recipient to penetrate the e3port mar%et for the first time.

!ISPUTE RESOLUTION
9utside of &udicial remedies parties to a &oint $enture arrangement are authorized to submit their contro$ersies to arbitration ?E or they can pro$ide as part of their &oint $enture arrangements that all issues and contro$ersies shall be resol$ed by arbitration through a procedure drawn out in the &oint $enture contract. The stipulation on arbitration can $alidly pro$ide that the resolution or decision of the board of arbitrators is $alid and final. ?/ Bhen the parties to a contract ha$e a pro$ision re6uiring arbitration in case of disputes no party may see% remedy from the courts of law. Fowe$er should a case be filed in court without ha$ing resorted to prior arbitration the court will not dismiss the case; instead the court will refer the matter to the arbitrators.00 )n case there is a pro$ision for arbitration and one party refuses to arbitrate the other party may through a summary court proceeding enforce the arbitration pro$isions of their contract; but the court is without authority to resol$e the issues on the merits.01 $% Ar9itration Law The special or particular law go$erning arbitration stipulation and proceedings is -epublic !ct ,o. E0? 11/552 formally designated as :The !rbitration 4aw.: a. Persons and 2atters &ub3ect to "rbitration

?E ?/

!rt. 20>2 .i$il .ode. !rt. 20>> .i$il .ode. 00 &engson v> Chan 0E S.-! 115 11/002. 01 7indanao Portland Cement Corp> v> 7c%onough! 1/ S.-! E0E 11/?02.

5>

+nder the said 4aw two and more persons or parties may submit to the arbitration of one or more arbitrators any contro$ersy e3isting between them at the time of the submission and which may be sub&ect of an action or the parties to any contract may in such contract agree to settle by arbitration a contro$ersy thereafter arising between them. Such submission or contract shall be $alid enforceable and irre$ocable sa$e upon such grounds as e3ist at law for the re$ocation of any contract. !lso such submission or contract may include 6uestions arising out of $aluations appraisals or other contro$ersies which may be collateral incidental precedent or subse6uent to any issue between the parties. b. or) of "rbitration "gree)ent ! contract to arbitrate a contro$ersy thereafter arising between the parties as well as a submission to arbitrate an e3isting contro$ersy shall be in writing and subscribed by the party sought to be charged or by his lawful agent. The ma%ing of a contract or submission for arbitration shall be deemed a consent of the parties to the &urisdiction of the -egional Trial .ourt of the pro$ince or city where any of the parties resides to enforce such contract or submission. c. "ppoint)ent of "rbitrators )f in the contract for arbitration or in the submission to arbitration pro$ision is made for a method of naming and appointing arbitrators such method shall be followed; but if no method be pro$ided therein it is the -egional Trial .ourt that shall designate an arbitrator or arbitrators. The !rbitration 4aw pro$ides specifically for the procedure of arbitration 6ualification of arbitrators challenge of arbitrators hearing by arbitrators rendering of awards and the form and contents of award confirmation of award grounds for $acating modifying or correcting awards and appeals procedure. *% a(ilities -or Co''er(ial Ar9itrations The 'hilippine .hamber of .ommerce and )ndustry as a ser$ice to its members and in response to re6uest for assistance to pro$ide arbitration facilities and ser$ices to parties to a commercial dispute has adopted its own -ules on .onciliation and !rbitration. )n the construction industry The 'hilippine @omestic .onstruction 8oard was created under 'res. @ecree ,o. 1>0? :to ad&udicate and settle claims and disputes in the implementation of public construction contracts: and to :formulate and recommend rules and procedures for the ad&udication and settlements of claims and disputes in the implementation of contracts in pri$ate construction.: Subse6uently the 'hilippine .onstruction )ndustry !rbitration .ommission 1.)!.2 was constituted under 73ecuti$e order ,o. 100E gi$ing it original and e3clusi$e &urisdiction o$er claims and disputes arising from or connected with public and pri$ate constructions contracts in the 'hilippines.

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/% New 4orE Convention )n 1/?5 the 'hilippines adhered 02 to the 1/5E +nited ,ations .on$ention on the -ecognition and 7nforcement of Doreign !rbitral !wards otherwise %nown as the ,ew Cor% .on$ention. The .on$ention see%s to ma%e arbitral awards rendered in a foreign state enforceable in any state which is a party to the .on$ention.

I"PACT O CHANGES IN THE LAW SU3SE6UENT TO

OR"ATION

The general rule under 'hilippine laws is that subse6uent changes in the law such as the introduction of new incenti$es or abolition of e3isting incenti$es is within the power of 4egislature to so pro$ide e$en as it affects e3isting enterprises including &oint $entures. This rule emanates from constitutional doctrines that pro$ide that e$en with a guarantee of non(impairment of contract obligations it does not pre$ent changes of rights of parties to a contract only as between them and not with reference to third(parties including the State. Lore importantly Section 11 !rticle J)) of the 'hilippine .onstitution pro$ides for a reser$ation clause in fa$or of the *o$ernment to re$o%e or amend e3isting grants and pri$ileges including incenti$es granted to in$estors= :,either shall any such franchise or right be granted e3cept under the condition that it shall be sub&ect to amendment alteration or repeal by the .ongress when the common good so re6uires.:

!OU3LE TAFATION AGREE"ENTS AN! I"PACT ON THE JOINT VENTURE

!s of 20 ,o$ember 1//5 the 'hilippines had ta3 treaties in force with the following countries= !ustralia !ustria 8elgium 8razil .anada @enmar% Dinland Drance *ermany )ndonesia )taly #apan Aorea Lalaysia ,etherlands ,ew Sealand ,orway 'a%istan Singapore Spain Sweden Thailand +nited Aingdom and the +nited States. The ta3 treaties reduce the effects of double ta3ation and pro$ide for certain fa$orable ta3 benefits. Dor e3ample although under the 'hilippine ,ational )nternal -e$enue .ode royalty payments are sub&ect to a final 20M ta3 pursuant to the ta3 treaty with the +nited States royalties paid to a +.S. corporation are sub&ect to only 10M withholding ta3. !nother illustration under certain conditions the sale of shares of stoc% in a domestic corporation by a Swedish corporation is ta3(e3empt. Dees paid to a #apanese corporation for the dispatch of its personnel to pro$ide technical assistance to a domestic corporation pursuant to a technical assistance agreement constitute :royalties: sub&ect to the 10M withholding ta3 under the -'( #apan ta3 treaty.
02

Senate -esolution ,o. 01 1Lay 1/?52.

5?

*ains to be realized by a +.S. citizen from the transfer of his shares of stoc% in a domestic corporation are ta3able only in the +.S. The royalty fees paid to a +.S. corporation pursuant to software license agreement are sub&ect to only 10M ta3 under the most(fa$ored(nation clause of the -'(+S ta3 treaty. Dinally gains realized by a +S(based firm not doing business in the 'hilippines from all its outstanding shares of stoc% in its local subsidiary are ta3able only in the +.S. under the -'(+S ta3 treaty.

PROTECTION O

OREIGN INVESTORS

The following are basic guarantees under the 'hilippine .onstitution as protection to foreign in$estors= 1a2 Dreedom from e3propriation without &ust compensation; 1b2 -ight to remit profits capital gains and di$idends within the guideline of the .entral 8an% of the 'hilippines; 1c2 -ight to obtain foreign e3change to meet principal and interest payments on foreign obligations.

GoOoG

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