As the Philippine economy heats up and political unpredictability remains a feature of the landscape, the frontiers of complex existing and emerging areas of law in the Philippines are changing. In this series of articles some of the nation’s top law firms explain what is working and what is not on the legal frontier
All aboard the tax ‘train’
THE PHILIPPINES IS In the midst of undertaking a comprehensive tax reform programme composed of four packages: Package 1 for individual income and consumption tax; package 2 on corporate income tax and incentives; package 3 on real property tax; and package 4 for capital income tax.
The tax reform will be implemented in phases rather than in “one big bang”. Its main objective is to make the tax system simpler, fairer, and more efficient and supportive of the country’s national agenda for acceleration and inclusion. Thus, it was named TRAIN: an acronym of Tax Reform for Acceleration and Inclusion.
Individual income and consumption taxes. Beginning 1 January 2018, package 1 became effective. Generally, it shifted revenue dependency from income tax to consumption tax. It lowered the income tax on individuals (except for the top bracket), but at the same time it increased excise taxes on consumption goods such as oil, automobiles, sugar-sweetened beverages and minerals, and it introduced a new excise tax on invasive enhancement surgeries.
Specifically, package 1 restructured the individual income tax system by making it more progressive and equitable. It widened the income brackets, resulting in lower taxes on low and middle-income individuals, but increasing the top tax rate from 32% to 35% for those with annual income of PHP8 million (US$150,000) and over.
It likewise simplified the system by removing all exemptions and deductions, replacing them with a single unconditional across-the-board exemption level of PHP250,000. Processes were simplified and the frequency of filing lessened. An 8% presumptive tax, which is in lieu of income and VAT, was introduced to simplify the compliance of micro and small enterprises with gross sales and revenue of PHP3 million or less.
Despite these good features, package 1 is being blamed for causing inflation to shoot up to 6.4% (the highest in the region), despite statements from the government that TRAIN-related inflation is only 0.4%. The increase in excise taxes on oil and the 100% increase in documentary stamp taxes are perceived to have triggered prices of goods and financial intermediation services to spiral upward.
Corporate income taxes and incentives. The objection against package 1 made it difficult for the passage of package 2. Congress already passed its version of package 2 (the TRABAJO Bill) but the senate has yet to pick up and deliberate on it.
The congress version, which is also believed to be the Department of Finance version, gradually reduced corporate income tax from 30% to 20% within a period of 10 years, a reduction of 2% every two years, beginning 2021. All exemptions and special tax rates were removed in an effort to bring everyone on to a level playing field, and to minimize arbitrage. Among those items removed are special rates for offshore banking, regional operating headquarters and petroleum service contractors.
Incentives were streamlined. The incentives laws currently under the Department of Trade were incorporated in the Tax Code as part of the basic tax laws under the Department of Finance. As a prudent measure, all incentives have to be approved by a single body known as the Fiscal Incentives Review Board, chaired by the Secretary of Finance. The tightening of the grant of incentives is also coupled with stringent requirements for transparency in reporting for the purposes of quantifying the tax expenditure, and for accountability to the public.
In addition, the incentive packages were refined to make them more performance-based, targeted, time-bound, transparent and measurable. The 5% gross income tax enjoyed by enterprises registered with the economic zones was phased out and replaced with a 50% reduced income tax (RIT) which can be enjoyed up to a maximum of five years. An income tax holiday may still be given but for a non-extendible period of three years, except for those investing in agriculture, or in less developed regions, which are given an additional one year. In an effort to direct investments to the countryside and less developed areas, super incentives in the form of additional years were given.
Real property taxes. Package 3 is designed to professionalize the valuation of real properties by adopting a single valuation for purposes of taxation, both for local and national taxes. This package has not yet reached an advanced stage and appears to be on the back burner.
Capital income taxes. Package 4 is meant to simplify, harmonize and make regionally competitive the taxation of capital income (i.e. interest income, dividend and capital gains) and financial services in the country.
The bills filed in congress basically reduced the number of tax rates, and adopted a general 15% single tax rate for interest income, dividend and capital gains, both for residents and non-residents, individuals and corporations. It harmonized the taxation of financial products regardless of issuer, and in general it simplified and made the system regionally competitive.
In summary, packages 2 and 4 are still being deliberated in congress. The government intends to have this passed within the year, but considering that election fever has set in with an election scheduled next year, the target date of release may not be met. In the meantime, package 1 is already in place and being implemented.
20th Floor Chatham House
Valero cor. Rufino Sts, Salcedo Village
Makati City, 1227 Philippines
Overcoming legal barriers to FDI in infrastructure
PERHAPS THE SINGLE biggest challenge to developing infrastructure in the Philippines is the decision made long ago to carve foreign direct investment (FDI) restrictions into the provisions of the Constitution itself, rather than retaining flexibility through legislation.
These restrictions include ownership and control limits on foreign investments in public utilities, communications, mass media, advertising, educational institutions, property and the exploitation, development and utilization (EDU) of natural resources.
As the country seeks to sustain the past few years’ growth, it increasingly has to look abroad for additional capital and technology to continue fuelling expansion. External factors aside, the Philippine outlook remains positive overall but the country faces steep competition for FDI from other developing economies like Vietnam, Laos, Cambodia and even Myanmar.
PUBLIC UTILITIES AND ENERGY SOURCES
Short of amendment, the Constitution does leave policy makers and lawyers alike with room to exclude certain infrastructure services from the limitations applicable to “public utilities”. This is so because the term is not precisely defined by the Constitution or the Public Service Act (Commonwealth Act 146).
For instance, the Supreme Court ruled, in 2003, that a shipyard is not a public utility. Moreover, “the fact that a business offers services or goods that promote public good and serve the interest of the public does not automatically make it a public utility” (JG Summit v Court of Appeals, GR No. 124293).
Even earlier, the Electric Power Industry Reform Act unbundled the electric power industry into different sectors and expressly declared that power generation should not be considered a public utility. Consequently, it is exempt from the requirements of a national franchise (section 6, Republic Act 9136).
Taking these cues from the courts and congress, it may also be theoretically possible to seek clarification regarding other vague provisions in the Constitution. One potentially promising area for clarification is the definition of “all forces of potential energy” included in the enumeration of natural resources under article XII, section 2 of the Constitution.
Specifically, there is an argument to be made that energy derived from the use of solar photovoltaic (PV) technology should not be considered EDU of natural resources. This would not even require a legislative amendment, as there is actually no provision in the Renewable Energy Act [Republic Act 9153] itself which mandates the imposition of ownership restrictions for solar PV technology.
In many instances, the level of capital required from the foreign investor in developing a project does not appear to correspond with the level of participation the investor is allowed under the various laws.
Parties need to carefully structure their relationships in order to divide economic benefits equitably, without running afoul of nationality requirements.
Strategies built solely around some form of corporate layering scheme must now be closely examined or otherwise re-evaluated in light of the latest pronouncements on the proper meaning to be given to the term “capital” (Roy III v Herbosa, GR No. 207246 in relation to Gamboa v Teves, GR No. 176579).
The good news is that the courts recognize the foreign investor’s right to “recoup investments and costs” (La Bugal B’laan v Secretary, GR No. 127882]. In fact, judicial pronouncements provide guidance on what a foreign investor is allowed to do in view of the seemingly conflicting concerns arising from the protectionist prov-isions in the Constitution and the recognition of private sector’s contribution to developmental goals.
Using the ruling in Tatad v Garcia, GR No. 114222, for example, parties can structure their business relationship around the “distinction between … ‘operation’ of a public utility and the ownership of the facilities … used to serve the public”. Another example is in the case of hydropower dams, where the Supreme Court confirmed that utilization of water from the dam by a foreigner is not violative of the Constitution (Ideals v Psalm, GR No. 192008).
The Philippines’ fast-growing economy provides the impetus for increasing the pace of infrastructure development. While the legal environment can be challenging, the Philippines retains many of the advantages that have always made it an attractive destination for investment.
Liberalization of trade restrictions, renewed focus on anti-corruption and the passage of critical legislation should only add to the appeal. As in most things, selection of partners and proper guidance are the keys to navigating the hurdles.
Pitfalls of enforcing foreign arbitral awards in the Philippines
INTERNATIONAL COMMERCIAL arbitration is a relatively new area of practice in the Philippines. While the Philippines became a signatory to the UN Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention) as early as 10 June 1958, no laws were enacted prescribing the mechanics for the conduct of international arbitration, or for the enforcement of foreign arbitral awards in the Philippines, for almost 50 years. All we had back then was Republic Act 876 – a law for domestic arbitration.
Since there was no law enacted in the Philippines providing a specific procedure for the enforcement of foreign arbitral awards, Philippine courts treated these awards as foreign judgments. Thus, foreign arbitral awards have sometimes been deemed only presumptively valid, rather than conclusively valid, as required by the New York Convention. It was only in 2004 that the Philippine Congress enacted Republic Act (RA) 9285 (Alternative Dispute Resolution Act of 2004).
In 2008 the Philippine Supreme Court issued the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules) to provide guidance on the interpretation of some provisions of RA 9285.
Section 44 of RA 9285 states that a foreign arbitral award is not a foreign judgment. For the recognition and enforcement of a foreign judgment, the applicable rule is section 48, rule 39 of the Rules of Court, which requires only proof of fact of the said judgment, and that once proven, the said foreign judgment enjoys a disputable presumption of validity (BPI Securities Corp v Guevara, 2015).
A petition for the recognition and enforcement of foreign arbitral award is a special proceeding. Under rule 13.3 of the Special ADR Rules, the petition shall, at the petitioner’s option, be filed with the Regional Trial Court (RTC): (1) where the assets to be attached or levied upon is located; (2) where the act to be enjoined is being performed; (3) in the principal place of business in the Philippines of any of the parties; (4) if any of the parties is an individual, where any of the individuals reside: or (5) in the national capital judicial region.
Rule 1.4 of the Special ADR Rules requires that the petition be verified and accompanied by a Certification Against Forum Shopping.
Rule 13.5 of the Special ADR Rules further requires that the petitioner plead in the petition: (1) the addresses of the parties to arbitration; (2) the country where the arbitral award was made, and whether that country is a signatory to the New York Convention; and (3) the relief sought. The petitioner is likewise required to attach to the petition: (1) an authentic copy of the arbitration agreement; and (2) an authentic copy of the arbitral award.
An action for recognition and enforcement of a foreign arbitral award is incapable of pecuniary estimation (Mijares v Ranada, 2005). Hence, under rule 20.1 of the Special ADR Rules, only a minimal filing fee is required.
Under rule 13.6 of the Special ADR Rules, upon receipt of the petition, the court shall initially determine whether it is sufficient in form and in substance, after which the court shall cause the service of a copy of the petition upon the respondent.
Under rules 13.6 and 13.7, the court sends a notice to the respondent to file a verified opposition within 30 days from receipt of the notice and petition. This 30-day period is non-extendible since a motion for extension is a prohibited pleading under rule 1.6.
Under rule 1.9, the court “acquires authority to act on the petition or motion upon proof of jurisdictional facts, i.e. that the respondent was furnished with a copy of the petition and the notice of hearing”. The burden of proof lies with the petitioner.
The hearing referred to in rule 1.9 is the initial hearing to prove the jurisdictional facts. The notice of initial hearing contains a directive for the respondent to file an opposition to the petition for recognition and enforcement of the foreign arbitral award. A respondent’s failure to submit an opposition shall not be cause for a declaration of default, as this is also a prohibited pleading under rule 1.6 (g).
Once the respondent has filed its opposition, the court determines whether the issue between the parties is one of law or fact. Under rule 13.8 of the Special ADR Rules, if the issue is mainly one of law, the court will require the submission of a brief of legal arguments not more than 30 days from receipt of the order.
On the other hand, if there are issues of fact, the court in accordance with rule 13.8 shall, motu proprio, or upon the request of a party, require the parties to simultaneously submit the affidavits of their respective witnesses within a period of not less than 15 days nor more than 30 days from receipt of the order.
Under section 45 of the ADR Act, and under Rule 13.4 of the Special ADR Rules, the RTC shall refuse recognition and enforcement of the foreign arbitral award only upon proof that:
(1) A party to the arbitration agreement was under some incapacity, or the agreement is not valid under the law to which the parties have subjected it, or, failing any indication, under the law of the country where the award was made; or
(2) The party making the application was not given proper notice of the appointment of an arbitrator or of arbitral proceedings, or was otherwise unable to present their case; or
(3) The award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award that contains decisions on matters not submitted to arbitration may be set aside; or
(4) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where arbitration took place; or
(5) The award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which that award was made.
Rule 13.4(b) further provides that the foreign arbitral award may be refused recognition and enforcement by the court if it finds that:
(1) The subject matter of the dispute is not capable of settlement or resolution by arbitration under Philippine law; or
(2) The recognition or enforcement of the award would be contrary to public policy.
Although the RTC can deny recognition and enforcement, it has no power to vacate or set aside a foreign arbitral award (rule 19.11, Special ADR Rules).
An appeal from a final order of the RTC may be taken to the Court of Appeals via petition for review under rule 19.12 of the Special ADR Rules within 15 days from notice of the RTC decision. The decision of the RTC is immediately executory (rule 13.11 of the Special ADR Rules). Rule 19.22 of the Special ADR Rules categorically states that: “The appeal shall not stay the award, judgment, final order or resolution sought to be reviewed unless the Court of Appeals directs otherwise upon such terms as it may deem just.”