QuestionsQuestions (Republic Act No. 5186)
RA 5186 is the “Investment Incentives Act.” It declares State policy to accelerate sound national economic development through planned, feasible dispersal of industries, encouraging Filipino and foreign investments in agricultural, mining, and manufacturing projects that increase national income at least cost, increase exports, provide employment, raise living standards, and promote equitable wealth distribution; it also welcomes foreign capital for pioneer, capital-intensive enterprises using substantial domestic raw materials in joint venture with substantial Filipino capital.
A “registered enterprise” is a corporation organized under Philippine laws that (i) owns/has at least 60% of voting capital stock held by Philippine Nationals (subject to Sec. 19), (ii) has at least 60% of Board of Directors as Philippine citizens, (iii) is engaged in a preferred area of investment, and (iv) is duly registered with the Board of Investments; it excludes certain financial and intermediary institutions and organizations primarily providing deposit-lending-borrowing-trading in securities or similar intermediary/trust/fiduciary functions, and also excludes organizations whose exclusive/principal purpose is to provide services or buy and resell goods substantially in the same form.
A Philippine National is (1) a Philippine citizen; or (2) a partnership/association wholly owned by Philippine citizens; or (3) a Philippine corporation with at least 60% of outstanding voting capital owned by citizens of the Philippines; or (4) a trustee of funds for pension/retirement where the trustee is a Philippine National and at least 60% of the fund accrues to Philippine Nationals. If a Philippine corporation and its non-Filipino stockholders co-own stock in a registered enterprise, then at least 60% of voting capital of both corporations must be owned by Philippine citizens, and at least 60% of Board members of both corporations must be citizens for the corporation to be considered a Philippine National.
A pioneer enterprise is a registered enterprise engaged in the manufacture/processing/production (not merely assembly/packaging) of goods or commodities/raw materials not produced in the Philippines on a commercial scale; OR one using a new and untried in the Philippines production/transformation design/formula/scheme/method/process/system—provided the final product involves substantial use and processing of domestic raw materials whenever available.
Measured capacity is the Board’s estimated additional production volume desirable for each preferred and pioneer area to supply economic needs at reasonable prices, taking into account export potential. It is constrained so it is not less than the gap between measurable demand and existing capacity, and not so excessive as to foster overcrowding; and “in no case” should it be construed to result in a monopoly in any preferred or pioneer area.
Foreign investors have rights to: (i) repatriate the entire proceeds of liquidation in the original investment currency at the applicable exchange rate at time of repatriation; (ii) remit earnings in the same currency and at the exchange rate prevailing at remittance; (iii) remit amounts needed to pay interest and principal on foreign loans and obligations from technological assistance contracts; (iv) be free from expropriation except for public use/national welfare and defense with just compensation, with the right to remit compensation; and (v) be free from requisition except in war/national emergency for duration, with just compensation and remittance rights—subject to the rules in Section 74 of RA 265 (as referenced in Sec. 4).
RA 5186 grants exemption from income tax on the portion of capital gains corresponding to the portion of proceeds invested in new issues of the registered enterprise’s capital stock within six months from date the gains were realized—provided (1) the sale/transfer and reinvestment are registered with the Board and BIR, and (2) the shares representing the investment are not disposed/assigned/transferred for five years from investment date; if disposed within five years, all taxes due on the original capital gains become immediately due and payable.
Philippine Nationals receive: (1) a tax allowance deduction of up to 10% of taxable income for actual investment in subscription of shares in the original/increased capital stock of a pioneer enterprise within seven years from registration, with shares held at least three years and registered with the Board; disposition within the three-year period forfeits the deduction and requires recomputation plus interest; (2) capital gains tax exemption similar to reinvestment in new issues of pioneer enterprise capital stock or purchase of foreign-owned stock within six months, but shares must be held for three years; disposition within three years triggers immediate payment of taxes; and (3) exemption on income tax on gains from sale/disposition/transfer of stock dividends received from a pioneer enterprise if the transfer occurs within seven years from registration.
For preferred-area activities, the enterprise may deduct organization and pre-operating expenses over up to 10 years; may take accelerated depreciation; may carry over net operating losses for losses incurred in the first ten years (carried over as deduction for the six years immediately following); may enjoy tax exemption on imported capital equipment and certain spare parts shipped with such equipment within seven years from registration if not domestically produced in reasonable quantity/quality at reasonable prices, directly and exclusively needed and used by the registered enterprise, covered by shipping documents in its name, Board prior approval obtained, and it does not avail of RA 3127 privileges—otherwise if sold/transferred/disposed without prior Board approval within five years from acquisition, it must pay twice the exempt tax; the Board may approve exceptions such as sale to another registered enterprise, proven technical obsolescence, or replacement to improve/expand. It also has a tax credit for purchasing from domestic manufacturers: 100% of compensating tax and customs duties for the enterprise, and 50% for the domestic manufacturer, with similar requirements and potential “twice” repayment if disposed without Board approval within five years.
For registered enterprises: within five years from registration, foreign nationals may be employed in supervisory/technical/advisory positions not exceeding 5% of total personnel in each such category, and no employment per foreign national exceeds 5 years; beyond five years or in excess of proportion is governed by CA 613 as amended (per Sec. 20 references). Foreign employees (their spouse and unmarried children under 21, not excluded by CA 613 Sec. 29) may enter and reside during employment; the enterprise must train Filipinos and submit annual reports to BOI. For pioneer enterprises: foreign nationals must register with the BOI, employment must cease and they must be repatriated five years after the pioneer enterprise begins operating; however, when the majority of pioneer capital stock is foreign-owned, positions of president/treasurer/general manager may be retained by foreign nationals; in exceptional cases, BOI may allow other positions not fillable by Filipinos, subject to Sec. 7(g) limitations.
Registered enterprises are entitled to: (1) double deduction of promotional expenses abroad; (2) double deduction of shipping costs for shipments on Philippine vessels to regular ports, and 150% freight deduction on foreign vessels to non-regular ports of call; and (3) special tax credit on raw materials at 7% of total cost (or amount of taxes actually paid on raw materials, whichever is higher) to the extent used in manufacturing exported products/commodities. Before availing, they must first apply with the Board and prove: good faith intent to create foreign market; export product is included in government priorities plan or exports won’t adversely affect domestic market needs for finished product or domestic raw materials; adequate accounting system segregating export and domestic operations; and products meet Bureau of Standards (or Board default) quality standards.
BOI prepares an Investments Priorities Plan within 120 days after organization and not later than end of January each year. It uses criteria such as demand-supply gaps, market creation, employment, integration, import substitution/new exports, needed capital, risks, indigenous inputs, profitability, rate of return, competition maintenance, etc., and designs measured capacities. The National Economic Council evaluates within 60 days and recommends to the President; if it fails to act within 60 days, it is automatically submitted. The President approves/proclaims or returns for revision; approved portions become effective and the President issues directives to synchronize government agencies, and no government body may act inconsistently with the plan. BOI may amend/terminate preference/pioneer status after notice and public hearing, but cannot impair vested rights of qualified enterprises. The plan/amendments must be published in the Official Gazette and at least two newspapers, and areas remain open for applications until publication of deletion/amendment or until measured capacity is filled.
Applicant must satisfy BOI that: it has required 60% Philippine ownership/control (or, if not, it qualifies as a pioneer-project case under Sec. 19(a) including measured capacity cannot be readily filled by Philippine Nationals; and it must obligate to become a Philippine National via stock listing within 10 years and offering shares to Philippine Nationals not later than year 11, with sufficient shares disposed within 20 years to enable at least 60% Philippine ownership—extendable to another 20 years subject to conditions). It must propose to start and operate within reasonable time set by BOI; must be capable of operating on a sound and efficient basis; and must install an adequate accounting system or separate corporation for each preferred/pioneer project if doing other activities. If measured capacity of a preferred, non-pioneer area is not filled within three years from its declaration, the Board shall allow enterprises not meeting the required Philippine ownership/control (but otherwise qualified) to be registered in such areas under the pioneer conditions framework.
BOI decides controversies between registered enterprises/investors and government agencies after due hearing within 30 days from submission; decisions may be appealed within 15 days to the proper Court of First Instance (now RTC) of Manila or the place of the enterprise principal office. BOI may cancel registration or suspend enjoyment of incentives after notice and hearing for failure to maintain registration qualifications, or for willful/grossly negligent violation of RA 5186, its rules, registration terms, or laws protecting labor/consumers; affected enterprise may appeal within 15 days to the proper CFI/RTC.
BOI records applications in order filed; it ceases to register any enterprise in a preferred or pioneer area once measured capacity is filled, but enterprises already registered within capacity enjoy preferred/pioneer status. Non-registered enterprises may freely engage in preferred areas without incentives within constitutional/statutory limits. A non-Philippine National may engage without incentives in preferred areas where Philippine Nationals are already engaged only after three years from declaration of the area as preferred if measured capacity has not been filled; but if the non-Philippine National manufactures finished products primarily for export, it may do so without incentives, with BOI fixing the minimum export percentage not less than 70% of total production.