Developments strengthen the laws governing business practices in the Philippines

 

The current administration is focusing its energy on instituting economic reform, overcoming roadblocks to investment in the Philippines and liberalising industries for foreign investors. The developments listed here reflect this overarching theme as the Philippines gears itself for a year of change in its legal and economic landscape.

Foreign Investment

International investment into the Philippines is governed by a negative list that enumerates the activities which are subject to certain foreign equity restrictions.

Foreign investment negative list A enumerates areas of investment where foreign ownership is limited pursuant to the Philippine constitution and/ or specific laws. List B enumerates the areas of investment where foreign ownership is limited for reasons of security, defence, risk to health and morals, and protection of local small and medium-size enterprises. This list is amended from time to time to reflect the current economic landscape.

The latest amendment to the foreign investment negative list was in 2015 when Executive Order No. 184 was signed into law promulgating the 10th regular foreign investment negative list. Concurrently, Republic Act No. 10881 now allows adjustment companies, lending firms, financing businesses and investment houses to be 100% foreign owned. Determining compliance: On 18 April 2017 the Supreme Court promulgated its decision in the case of Jose M Roy III vs. Chairperson Teresita Herbosa, et al, wherein it upheld the validity of Securities and Exchange Commission Memorandum Circular No. 8 Series of 2013 (SEC MC No. 8-2013), which prescribes guidelines in determining compliance with limitations on foreign ownership imposed under the constitution and relevant laws. SEC MC No. 8-2013 provides that the required percentage of Filipino ownership shall be applied to both the total number of outstanding shares of stock entitled to vote in the election of directors; and the total number of outstanding shares of stock, whether or not entitled to vote, for the purposes of determining compliance with the constitutional and statutory ownership.

Taxation

The year 2018 signals the full effectivity and implementation of Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Act (TRAIN).

TRAIN is the first package of the Comprehensive Tax Reform Programme, and is geared towards better collection of public revenues to support various projects nationwide, such as infrastructure modernisation and human capital formation.

Income tax, in particular, underwent critical changes. For instance, self-employed individuals and professionals now have the option to avail themselves of an 8% tax on gross sales or gross receipts and other non-operating income in excess of P250,000 ($4940) in lieu of graduated tax rates. Preferential tax rate: One of the more controversial provisions of TRAIN involves the 15% preferential tax treatment for employees of regional operating headquarters (ROHQs), regional headquarters (RHQs), offshore banking units (OBUs), and petroleum service contractors and subcontractors.

The amended provision stated that the 15% preferential tax rate would no longer apply after January 1, 2018, but that existing ROHQs/RHQs, OBUs, and petroleum service contracts and subcontractors who qualified for the preferential tax rate before the enactment of TRAIN shall continue to be entitled to the 15% rate, under the “grandfather rule”. Value-added tax: TRAIN also introduced certain amendments to the imposition of value-added tax (VAT). Businesses with gross annual sales or receipts of P3m ($59,300) or below are now exempt from VAT. Donor’s tax: Donor’s Tax under TRAIN for each calendar year was reduced to 6%, regardless of the relationship between the donor and donee, computed on the basis of the total gifts in excess of P250,000 ($4940) made during the calendar year. By contrast, the old tax code subjected donations made to strangers to a donor’s tax of 30%, while donations to relatives incur a donor’s tax of 2-15%. Estate tax: The estate tax rate under TRAIN is now a flat rate of 6% based on the value of the net estate, whether the decedent is a resident or non-resident of the Philippines. Moreover, exemption of the family home from estate tax, which was previously only at P1m ($19,800), has now been raised to P10m ($198,000). The standard deduction for the computation of estate tax has also been increased from P1m ($19,800) to P5m ($98,800). Transfer of shares of stock: Under TRAIN, a final capital gains tax on sales of shares not traded in the local stock exchange was increased to a flat rate of 15%. Previously, transfers of shares of stock were subject to a capital gains tax of 5% on the net capital gains on the first P100,000 ($1980) plus 10% on any amount in excess of that threshold.

The relevant documentary stamp tax was also raised sharply under TRAIN. A fee of P1.50 ($0.03) is now imposed on every P200 ($3.95), or a fraction thereof, of the par value of the shares of stock transferred (increasing the old rate by 100%).

Data Privacy

Republic Act No. 10173, also known as the Data Privacy Act of 2012, is a landmark legislation which protects the rights of individuals over their personal information. It espouses the state policy of protecting the fundamental human right to privacy of communication, while ensuring free flow of information to promote innovation and growth. The Data Privacy Act was made to apply to the processing of all types of personal information, as well as to any natural and juridical person involved in personal information processing. National Privacy Commission: Under the Data Privacy Act, the National Privacy Commission (NPC) was created to administer and implement its provisions, and to monitor and ensure compliance of the country with international standards set for data protection. In particular, the NPC is empowered to receive complaints, institute investigations, facilitate settlement of disputes, adjudicate, and award indemnity on matters affecting the use and misuse of personal information. Extraterritorial application: The Data Privacy Act’s broad application extends even outside Philippine borders. The law applies to entities that process personal information of Philippine citizens or residents regardless of where they are. The Data Privacy Act also covers entities that have other links with the Philippines, such as in the following instances: 1) when a contract is entered in the Philippines; 2) when a juridical entity is unincorporated in the Philippines but has central management and control in the country; and 3) when an entity that has a branch, agency, office or subsidiary in the Philippines, and the parent or affiliate of the Philippine entity has access to personal information. Processing of personal information: With regard to the processing of personal information, the Data Privacy Act mandates that personal information must be collected for specified and legitimate purposes determined and declared before or, as soon as reasonably practicable, after collection thereof. Personal information can only be retained for as long as is necessary to fulfil the purposes for which the data was obtained, for the establishment, exercise or defence of legal claims, for legitimate business purposes, or as provided by law. The Data Privacy Act also prescribes specific criteria for the lawful processing of personal information, any of which must be fulfilled in order for the processing of such information to be considered lawful.

To protect personal information, the Data Privacy Act mandates the personal information controller (PIC) to implement reasonable and appropriate organisational, physical and technical measures intended for the protection of personal information against any accidental or unlawful destruction, alteration and disclosure, as well as against any other unlawful processing. The PIC shall promptly notify the NPC and affected data subjects when sensitive personal information or other information that may, under the circumstances, be used to enable identity fraud are reasonably believed to have been acquired by an unauthorised person, and the PIC or the NPC believes that such unauthorised acquisition is likely to give rise to a real risk of serious harm to any affected data subject. Registration of data processing systems: A PIC or personal information processor (PIP) may undergo mandatory or voluntary registration of its data processing systems. A PIC or PIP is required to register its data processing systems if it is processing personal data and operating in the country under any of the following conditions:

• The PIC or PIP employs at least 250 employees;

• The processing includes sensitive personal information of at least 1000 individuals;

• The processing is likely to pose a risk to the rights and freedoms of data subjects; and

• The processing is not occasional. To ensure protection of personal data, the regulations require a PIC to register its data processing system with the NPC, and simultaneously appoint a data protection officer (DPO).

The process of registration of data processing systems is divided into two phases. Phase 1 consists of appointing and registering the DPO, while phase 2 of the registration process involves providing the NPC with details on the data processing systems via the NPC’s online platform.

In phase 1, the PIC or PIP, through its DPO, should accomplish and secure the notarisation of the prescribed application form. The same shall be submitted to the NPC together with all necessary supporting documents.

Upon review and validation of the submission, the NPC shall provide the PIC, via email, an access code which shall allow it to proceed to phase 2 of the registration process. To complete this phase, a PIC shall proceed to the online registration platform and, using the access code provided by the NPC, provide all relevant information regarding its data processing systems. The NPC shall notify the PIC via email to confirm the latter’s successful completion of the registration process.

Competition Law

Republic Act No. 10667, or the Philippine Competition Act, was passed in order to address the country’s growing need to maintain a free market and to prohibit conduct in restraint of trade. The Philippine Competition Act is the primary competition legislation in the Philippines with the objective of protecting the well-being of consumers and preserving the efficiency of competition in the marketplace. Geared towards the regulation and prohibition of monopolies and combinations in restraint of trade, the Philippine Competition Act prohibits anti-competitive agreements, the abuse of dominant position, and the undertaking of anti-competitive mergers. Competition Commission: The Philippine Competition Act established the Philippine Competition Commission (PCC) as an independent body with a remit to implement the national competition policy and attain the objectives and purposes of the law. Notably, the PCC may motu proprio conduct inquiry, investigate, hear and decide on cases involving any violation of the Philippine Competition Act and other existing competition laws. The PCC also has the power of reviewing and prohibiting proposed mergers and acquisitions (M&A) that will restrict competition. Since the PCC’s establishment, it has received 151 notifications, 41 (or over 25%) of which, have been raised in relation to global M&A activity. Extraterritorial application: The Philippine Competition Act is not only enforceable against any person or entity engaged in trade in the Philippines. It is also applicable to international trade having direct, substantial, and reasonably foreseeable effects in Philippine commerce, including those that result from acts done outside the Philippines. Anti-competitive agreements: The Philippine Competition Act prohibits agreements between or among competitors which involve price fixing, controlling production, markets, technical development, or investment, and dividing or sharing the market. Abuse of dominant position: The Philippine Competition Act also prevents abuse of market power by dominant players within their respective sectors. Examples of conduct that is prohibited by the Philippine Competition Act which constitute abuse of dominant position include: predatory pricing, imposing barriers to entry, and making the supply of particular goods or services dependent on the purchase of other goods or services. Anti-competitive M&A: Proposed M&A agreements that would be expected to substantially prevent, restrict or lessen competition in the relevant market or in the market for goods or services as may be determined by the PCC shall be prohibited.

Parties to a merger or acquisition are required to provide notification when both of the following two conditions are met:

• The aggregate annual gross revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity of at least one of the acquiring or acquired entities, including that of all the entities that the ultimate parent body controls either directly or indirectly, exceeds P5bn ($98.8m).

• The transaction value exceeds P2bn ($39.5bn). The thresholds for notification vary depending on the type and location of M&A activity.

• For M&A of assets in the Philippines: The aggregate value of the local assets being acquired; or the gross revenues generated domestically by assets acquired locally exceeds P2bn ($39.5bn).

• For M&A of assets outside the Philippines: The aggregate value of the local assets of the acquiring entity; and the gross revenues generated in or into the Philippines by those assets acquired externally exceeds P2bn ($39.5bn).

• For M&A of assets inside and outside the Philippines: The aggregate value of the acquiring entity’s local assets; and the aggregate gross revenues generated in or into the Philippines by assets acquired domestically and abroad collectively exceeds P2bn ($39.5bn).

• For the acquisition of voting shares of a corporation: The aggregate value of the assets in the Philippines that are owned by the corporation or the entities it controls (other than shares of those corporations); or the gross revenues from sales in, into, or from the Philippines of the corporation or the entities it controls (other than shares of those corporations), exceeds P2bn ($39.5bn); and as a result of the acquisition of the voting shares, the entity or entities acquiring the shares, together with their affiliates, would own voting shares that, in the aggregate, carry more than 35% of the votes attached to all outstanding voting shares (or 50%, if the entity already owns more than 35%).

• For a joint venture: The aggregate value of the assets that will be combined in the Philippines or contributed into the joint venture; or the gross revenues generated locally by assets to be combined in the Philippines or contributed into the joint venture exceeds P2bn ($39.5bn). Time line for notification: On November 23, 2017 the PCC published revised Rules on Merger Procedure. The same took effect on December 8, 2017. Under the new PCC rules, parties to a merger or acquisition that meets the thresholds must notify the PCC within 30 days from the signing of definitive agreements. In the previous rules, notifications were to be made prior to the execution of a definitive agreement.

The PCC clarified that a definitive agreement sets out the complete and final terms and conditions of a merger or acquisition, including the rights and obligations between or among the transacting parties.

Covered parties that fail to give notification prior to consummation of the transaction shall be subject to a fine equivalent to 1-5% of the value of the transaction and the transaction shall be voided.

Consummation is defined as when the parties have transferred, conveyed, assigned, encumbered any right, title, interest, property or asset pursuant to the executed definitive agreement or agreements or, more generally, acted in exercise of their rights and obligations under the definitive agreement/s. Recent developments in enforcement: The PCC previously nullified Udenna’s purchase of 100% of KGL Investment Coöperatief’s shares in KGL Investment (KGLI) for failure to notify the PCC prior to finalising the deal. At the time of the transaction, KGLI had a 39.71% share interest in KGLI-NM Holdings, a domestic corporation. The Udenna-KGLI acquisition, worth P6.3bn ($124.5m), is the first deal to be voided by the PCC for non-notification. However, in a recent decision the PCC approved Udenna’s share purchase after the latter filed their notification.

The acquisition by the Philippines’ largest telecommunications players, Globe Telecommunications and Philippine Long Distance Telephone Company, of the assets of Vega Telecom prompted the PCC to appeal the Court of Appeals’ decision permitting the acquisition to the Supreme Court. Moreover, the recent acquisition by ride-hailing app Grab of its competitor Uber also prompted the PCC to review the acquisition, as it is likely to have extensive impact on the riding public and the transportation services.

Virtual Currency (VC)

VC is gaining popularity at a rapid pace. Compared to its neighbours, the Philippines has been more open-minded in its treatment of bitcoin and other cryptocurrencies. The central bank, Bangko Sentral ng Pilipinas (BSP), issued BSP Circular No. 944 on February 6, 2017 on regulations governing VC exchanges. It defines a VC exchange as an entity that offers services or engages in activities that provide for the conversion or exchange of fiat currency to VC or vice versa. Nature of VC: VC is defined as any type of digital unit that is used as a medium of exchange or a form of digitally stored value created by agreement with the community of users. It is not issued nor guaranteed by any jurisdiction and does not have legal tender status. VC is broadly construed to include digital units of exchange that (1) have a centralised repository or administrator; (2) are decentralised and have no centralised repository or administrator; or (3) may have been created or obtained by computing or manufacturing effort. E-money, digital units used solely within online gaming platforms that are not convertible to fiat currency or real-world goods or services, and digital units with store value redeemable exclusively in goods or services and limited to transactions involving a defined merchant, are expressly excluded from the definition of a VC. Regulations: VC exchanges are required to put in place adequate risk-management and security control mechanisms to address, manage and mitigate technology risks associated with VCs. BSP Circular No. 944 requires large-value payouts of more than P500,000 ($9880) or its foreign currency equivalent in any single transaction to be made via cheque or direct credit to deposit accounts.

For VC exchanges providing wallet services for holding, storing and transferring VCs, an effective cybersecurity programme encompassing storage and transaction security requirements, as well as sound key-management practices, must be established to ensure the integrity and security of VC transactions and wallets. VC exchanges are required to maintain internal control systems commensurate to the nature, size and complexity of their business.

A VC exchange is required to comply with the notification and reporting requirements of remittance agents. VC exchanges must also maintain records and submit the following: (1) audited financial statements (annually); (2) quarterly reports on total volume and value of VCs transacted; and (3) lists of operating offices and websites (quarterly).

Violations such as operating without BSP registration or failure to comply with reporting requirements may subject a VC exchange to monetary penalties, administrative sanctions and enforcement actions after observance of due process of the law.

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The Report: Philippines 2018

Legal Framework chapter from The Report: Philippines 2018

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