Investment Issues

By Jurry

A rule of law becomes ineffective when the reason for its application has ceased to exist
or does not correspond to the reality anymore (cessante ratione legis cessat ipsa lex). Because of
this doctrine, the commercial legal issues below are presented with rationale to evaluate whether
the existing laws in the Philippines conform to the visions of ASEAN integration and the current
reality, and they do not impede investment which is also necessary for the progress of our
country. Below is the list of commercial legal issues affecting investment in the Philippines:
No Foreign Equity
1. Ownership and Management of Mass media except recording
Constitution (1987), Article XVI, sec 11: The ownership and management of mass media shall be
limited to citizens of the Philippines, or to corporations, cooperatives or associations, whollyowned and managed by such citizens.
RATIONALE: The reason behind the provision is that mass media are clothed with public
interest. They play a vital role in the national life, directly influencing the way the people think
and act. The constitution seeks to ensure that these institutions are free from foreign influence.
Press freedom would indeed be meaningless to Filipinos if those who exercise it are aliens,
owing loyalty to a foreign government1
COMMENT: Need to be changed. The equity restrictions in the Constitution have denied
Filipinos access to new technological innovations that require huge investments that local
companies find difficult to raise. Certain sector opposes the liberalization of mass media because
of fear of foreign influence in our culture and society as a whole. However this argument appears
oblivious to the increasing accessibility of foreign content through cable television and the
internet2.
2. Practice of all profession
Constitution (1987), Article XII, sec 14. The sustained development of a reservoir of national
talents consisting of Filipino scientists, entrepreneurs, professionals, managers, high-level
1 Hector S. Deleon, Texbook on the Philippine Constitution(Manila:Rex Book Store
Inc.,2005),p.504-505
2 Antonio La Vina et al., The 1987 Constitution: To Change or Not To Change?
(Manila: Anvil Publishing Inc.,2012),p.20
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technical manpower and skilled workers and craftsmen in all fields shall be promoted by the
State. The State shall encourage appropriate technology and regulate its transfer for the national
benefit.
The practice of all professions in the Philippines shall be limited to Filipino citizens, save in
cases prescribed by law.
R.A 5181, sec.1. No person shall be allowed to practice any profession in the Philippines unless
he has complied with the existing laws and regulations, is a permanent resident therein for at
least three years, and, if he is an alien, the country of which he is a subject or citizen permits
Filipinos to practice their respective professions within its territories: Provided, That the practice
of said professions is not limited by law to citizens of the Philippines: Provided, further, That
Filipinos who became American nationals by reason of service in the Armed Forces of the
United States during the Second World War and aliens who were admitted into the practice of
their profession before July 4, 1946 shall be exempted from the restriction provided herein.
RATIONALE: The practice of a profession involves public interest and is open only to persons
who have undergone the necessary academic preparation and passed the appropriate government
examination and who possesses such other special qualifications prescribed by law. It is not
considered a business where profit is the principal motive but an activity exercised in a spirit of
public service although it may incidentally be a means of livelihood. The right to practice a
profession is not a constitutional right but is in the nature of privilege to be given or withheld by
the State subject only to constitutional limitations.3
The Constitution limits the practice of all professions in the Philippines to Filipino citizens.
However, Congress may provide otherwise in certain cases, e.g., pursuant to a treaty, or on
grounds of reciprocity or with respect only to certain professions such as medicine, or in favour
of a particular foreigner for special reasons. Congress may impose conditions for the exercise of
the privilege to protect public interest4.
COMMENT: The free flow of services and skilled labor (as envision by the ASEAN
integration) will require amendment of Philippine laws reserving practice of profession to
Filipino citizens5. With the committed adoption of the free flow of services and skilled labor, our
3 Hector S. De Leon, Texbook on the Philippine Constitution(Manila:Rex Book Store
Inc.,2005), p.389
4 ibid
5 Lea L. Roque, ASEAN economic integration,Punongbayan and Araullo, Retrieved
March 27, 2014 from http://www.punongbayanaraullo.com/pnawebsite/pnahome.nsf/section_docs/LQ304N_16-10-12
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ASEAN counterparts will be allowed to practice their professions in the Philippines. While there
may be some apprehension in having foreign accountants and doctors freely practicing in the
Philippines, this will also greatly enhance the regional presence of Filipino professionals and
skilled laborers6
Up to Thirty Percent (30%) Foreign Equity
3. Advertising
Constitution (1987), Article XVI, sec.11(2): The advertising industry is impressed with public
interest, and shall be regulated by law for the protection of consumers and the promotion of the
general welfare.
Only Filipino citizens or corporations or associations at least seventy per centum of the capital of
which is owned by such citizens shall be allowed to engage in the advertising industry.
The participation of foreign investors in the governing body of entities in such industry shall be
limited to their proportionate share in the capital thereof, and all the executive and managing
officers of such entities must be citizens of the Philippines.
RATIONALE: The advertising industry is impressed with public interest. It does not merely
provide consumers with information. It persuades people to purchase the particular product that
is advertised, and indirectly aids in reducing cost, lowering prices, and increasing competition.
With the plethora of goods and services offered in the market today, advertising plays a vital role
in the economy. Some advertising may be deceptive, false, misleading or dishonest. It is,
therefore, necessary that this industry be regulated by law for the protection of consumers and
promotion of the general welfare.7
COMMENT: The equity restrictions in the Constitution have denied Filipinos access to new
technological innovations that require huge investments that local companies find difficult to
raise8. The argument for liberalizing advertising industry is the need for new capital, technology
and expertise. It has been noted by the study that the top ten advertising firms are already partly
owned by foreign entities9.
6 ibid
7 Hector S. De Leon, Texbook on the Philippine Constitution(Manila:Rex Book Store
Inc.,2005), p. 506
8 Antonio La Vina et al., The 1987 Constitution: To Change or Not To Change?
(Manila: Anvil Publishing Inc.,2012),p.20
9 ibid
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Up to Forty Percent (40%) Foreign Equity

4. Ownership of Private Lands
Constitution (1987), Article XII, sec.7: Save in cases of hereditary succession, no private lands
shall be transferred or conveyed except to individuals, corporations, or associations qualified to
acquire or hold lands of the public domain.
RATIONALE: The above provision, the prohibition against alien landholding, is intended to
assure that the limitation in the disposition of lands of the public domain is not defeated or
rendered nugatory when such lands are converted into private lands 10. The provision is inspired
by a desire to prevent the formation of big landed estates which the experience of the Philippines
as well as that of other nations had shown to be the cause of many agrarian troubles and social
unrest, and at the same time to increase the number of landholders in the Philippines, thereby
promoting social and economic stability. Indeed, the purpose of constitutional prohibition is to
equitably diffuse land ownership or to encourage owner-cultivatorship and the economic familysize farm, as a measure to bridge the widening gap between the rich and the poor11.
COMMENT: The recommendation of Preparatory Commission on Constitutional Reform
(PCCR) is to liberalize the ownership of industrial and commercial land, which represents less
than 1% of the total land area of the Philippines, in order to attract more investments and
increase job opportunities.12
5. Ownership/establishment and administration of educational institutions
Constitution (1987), Article XIV, sec 4(2): Educational institutions, other than those established
by religious groups and mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of which is owned by such
citizens. The Congress may, however, require increased Filipino equity participation in all
educational institutions.
RATIONALE: One of the fundamental aims of our educational system is to inculcate patriotism
and nationalism. In limiting the ownership and administration of educational institutions to
citizens of the Philippines, the Constitution recognizes the fact that schools owned and controlled
by foreigners are in a position to orient Filipino youth in the perspective, alien to the ideals of

10 De Leon, opt. cit., p. 374

11 De Leon, opt. cit., p. 368
12 Antonio La Vina et al., opt. cit., p.21
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patriotism and nationalism. Likelier than not, a foreigner would identify himself with his
countrys interests even if these are antagonistic to the Filipinos own13
COMMENT: The educational sector in the Philippines is also becoming less competitive
because of lack of funds for new technology, basic facilities, and infrastructure. The latest
developments in the use of information technology and alternative media require huge
investments. There is a need to open up the educational sector to foreign investors to give our
students access to better education and raise educational standards to those of other countries.
Sectors opposed to this proposal cite the possible weakening of the national values of students
owing to the influence of foreign educators. The PCCR study, however, contends that the basic
education curricula will still be controlled by the Department of Education. At present, the
Constitution already allows foreigners to own and manage educational institutions but only
through religious orders and mission boards.14
6. Operation and management of public utilities
Constitution (1987), Article XII, sec 11: No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The State
shall encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines.
RATIONALE: The evident purpose of the limitation and citizenship requirement (of the
operation and management of public utilities) is to prevent aliens from assuming control of
public utilities which may be inimical to national interest and at the same time permit the inflow
of foreign capital for the operation of public utilities15.
COMMENT: PCCR (Preparatory Commission on Constitutional Reform) recommended that
foreigners be allowed to invest in and manage public utilities like transportation, communication,
power, and water supply based on a policy of non-discrimination and merit. The power to grant
13 De Leon, opt. cit., p.453
14 Antonio La Vina et al., opt. cit., p.20-21
15 De Leon, opt. cit., p. 384
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franchises should be given to specialized regulatory agencies, and this would result in greater
efficiency and expertise in the supervision of the industry16
7. Exploration, development and utilization of natural resources
Constitution (1987), Article XII, sec. 2: All lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber,
wildlife, flora and fauna, and other natural resources are owned by the State. With the exception
of agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and supervision
of the State. The State may directly undertake such activities, or it may enter into co-production,
joint venture, or production-sharing agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and under such terms and conditions as may be provided by law. In cases of
water rights for irrigation, water supply fisheries, or industrial uses other than the development of
water power, beneficial use may be the measure and limit of the grant.
RATIONALE: The adoption of the regalian theory of ownership over the national resources of
the country was deemed necessary to (1) insure their conservation for Filipino posterity, (2) serve
as an instrument for national defense, helping prevent the extension into the country of foreign
control through peaceful economic penetration, and (3) prevent making the Philippines a source
of international conflicts with the consequent danger to its national security and
independence17.The 60% equity requirement is intended, among other purposes, for the
conservation of indigenous natural resources for Filipino posterity18.
COMMENT: The huge capital requirement to develop our natural resources particularly the
energy, mining, fisheries and forestry sectors are the main argument to liberalize these sectors.
Likewise, the entry of foreign investors into these areas of the economy is expected to bring not
only capital but new technology and expertise in operating these industries. The PCCR
recommended that these sectors be regulated through regular legislation and not through the
Constitution19.
8. Self-reliant and independent national economy
16 Antonio La Vina et al., opt. cit., p.20
17 De Leon, opt. cit., p. 362
18 Ibid p. 364
19 Antonio La Vina et al., opt. cit., p.21
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Constitution (1987), Article II, sec 19: The State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos.
RATIONALE: Laws on the economy of a country are designed to achieve the goal of economic
growth and development and the improvement of the material welfare of the people 20. This
provision provides the constitutional guidelines in the development of the economy: economic
self-reliance, independent national economy, and effective Filipino control of the economy. 21 The
national economy must be free from undue foreign control or intervention. This is especially true
in such vital or strategic industries as the development of natural resources and public utilities
where foreign interference could cause incalculable harm to the nation22
COMMENT: Need to be reviewed because of ambiguity in language. The phraseology aspiring
for an "independent" national economy "effectively controlled" by Filipinos taken together with
other provisions in the Constitution gives rise to controversial policy decisions that affect
investments. A concrete example is the Supreme Court decision on the choice of site for a
proposed petrochemical complex. When the decision was made in 1990, investments from
Taiwan fell from P3.4 billion in 1990 to P329 million in 199123.
The above presented issues are the restrictive economic provisions of the 1987
Constitution that affects investment in the Philippines. If the intention is to attract foreign
investors and/or to conform ASEAN vision, they must be reviewed and if necessary amended to
facilitate the free flow of investment in the Philippines. Since the fundamental law cannot be
changed easily, all our economic policies should not be in the Constitution. They should be
dynamic and, hence, appropriate by mere legislations.
However, amendment of the Constitution by itself is not sufficient to attract foreign investors to
invest in the Philippines. Even if the restrictive economic provisions under the Constitution and
other laws be amended, the same is not enough to entice the attention of potential investors. The
Philippines must also solve the issues on electricity and corporate income tax. Since establishing
a business in ones country entails the use of power (electricity), most if not all investors
consider the availability of power supply and its cost. Unfortunately, the Philippines is among of
the highest electricity rates in the region24 and for this reason electricity is included herein as 9th
investment issue.
20 De Leon, opt. cit., p. 355
21ibid p.66
22ibid p. 357
23 KOKO PIMENTEL, Senate of the Philippines Press Release July 3, 2013. Retrieved
from http://www.senate.gov.ph/press_release/2013/0703_pimentel1.asp
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9. Electricity Issue
Causes of Expensive Electricity in the Philippines
1. Inequitable Contracts. The main culprit is the high cost of contracts with independent
power producers (IPPs) entered by the government at the height of the energy crisis in the
90s25.Inequitable IPP contract causes great financial burden to the government of the
Philippines. The take-or-pay clause, which forces the government to buy all the
unutilized energy, caused the state-owned enterprise, the National Power Corporation
(NAPOCOR), to shut down its plants and buy electricity at higher prices from some IPPs
when demand was low. Moreover, it has put the government into large debt during the
1997 Asian financial crisis. The situation worsened when countries faced currency
devaluation but payment is dollar-pegged. The state-owned enterprise had to bear great
financial burden26
2. Flawed law, the Electric Power Industry Reform Act (EPIRA) of 2001 27 . The Electric
Power Industry Reform Act allowed ERC to change the system of tariff setting, and it
did. But the systems it now follows allows both transmission and distribution companies
to earn far more than what they were allowed to earn in the past. And as far as generation
and supply companies are concerned, the ERC has little if any say in the prices they
charge because generation and supply are deregulated under EPIRA28.
24 Iris Gonzales (3013). Phl power rates among highest in Asia, The Philippine Star.
Retrieved from http://www.philstar.com/business/2013/10/07/1242233/phl-powerrates-among-highest-asia
25 EDU H. LOPEZ. COMPILATION: Why is Electricity Expensive in the Philippines?.
Retrieved from http://sanamagan.wordpress.com/2010/07/26/compilation-why-iselectricity-expensive-in-the-philippines/
26 Nikomborirak & Manachotphong (2007). Electricity Reform in Practice: The Case
of Thailand, Malaysia, Indonesia and the Philippines. Retrieved from
http://unctad.org/sections/wcmu/docs/c2clp_ige8p25asia_en.pdf
27 Iris Gonzales (2014). SPECIAL REPORT: Why power rates will continue to increase.
The Philippine Star. Viewed April 10, 2014 from
http://www.philstar.com/headlines/2014/01/13/1278202/special-report-why-powerrates-will-continue-increase-first-two-parts
28 Freedom from Debt Coalition (2008). A position paper submitted to the:Joint
Congressional Power Commission (JCPC). Retrieved from http://fdc.ph/index.php?
view=article&id=304%3A10-reasons-why-electricity-bills-arehigh&option=com_content&Itemid=87
8

3. Higher demand without corresponding increase in supply. From 2001 to 2013, the peak
demand of electricity increased by 2,659 MW while the increase in installed capacity
contributed by additional power plant during the same period only amounted to 652 MW.
This kind of situation results in scarcity in the supply of electricity. The increasing
demand in the market without the corresponding increase in the supply will inevitably
result in price increases29.
4. Inherently inefficient power sector. The power sector is inherently inefficient. Average
capacity utilization of Transcos transmission lines, according to an ADB report, is only
at 12%. We are paying for the investment and loans incurred to set up a transmission grid
and on the average, only 12% of the capacity is being utilized. With regard to generation,
dependable capacity in the Philippines amounted to 13,639MW at the end of 2006, but
that same year, peak demand for electricity was only 8,760MW. We pay for capacity we
dont use, and this is such a heavy burden on consumers that we economize on our use of
electricity even further. However, the less we consume of electricity, the more we have to
pay of unused capacity. This is a vicious cycle similar to a debt trap. Industries cannot
survive such a set-up. Poor consumers, even less so.30
5. EPIRA-mandated removal of subsidies. Following the logic of privatization and marketreforms, EPIRA states that instruments such as cross-subsidies which distort the real
price of electricity should be removed. This is in keeping with the transformation of
electricity industry from a public service industry to a commodity market. The prices
should be subjected to market rules alone and considerations such as equity and justice
in the provision of electricity should be abolished. Households no longer enjoy subsidies
from the industrial and commercial sectors, and households in Mindanao and Visayas are
no longer being subsidized by households in Luzon. These households that no longer
enjoy the subsidies of the pre-EPIRA days have experienced a hike in rates as a result of
the removal of these subsidies.31
6. Unfair and unjust practices of industry players that the ERC is ineffectual to regulate, or
may even condone. ERC is known to have been powerless in providing more substantial
solutions to recurrent abuse (overcharging and corporate malpractice) of DUs such as
MERALCO. There had already been a number of times when MERALCO was proven to
have engaged in such unscrupulous practice, yet MERALCO can and will probably
29 Gonzales, loc.cit.
30 Freedom from Debt Coalition (2008). A position paper submitted to the:Joint
Congressional Power Commission (JCPC). Retrieved from http://fdc.ph/index.php?
view=article&id=304%3A10-reasons-why-electricity-bills-arehigh&option=com_content&Itemid=87
31 ibid
9

engage in such practice because of the lack of fundamental action on the part of the
ERC32.
7. Value Added Tax (VAT). Because of the ballooning fiscal deficit of the government,
which is in part caused by guaranteed obligations of Government-Owned and -Controlled
Corporations (GOCCs) like NPC, the 12% VAT now includes oil and electricity which
was exempted before (zero-rated) in the previous consumption tax regime because it was
categorized as socially-sensitive raising its prices will translate to rising prices of
other commodities. According to some studies, VAT raises electricity prices by
PhP0.60/kWh to PhP0.90/kWh. It is estimated that the government earned at least
PhP7.668 billion from VAT in the electricity industry in 2005.33
8. Corruption and Mismanagement
A. In NPC. Corruption in National Power Corporation (NPC) artificially inflates
generation charges. This includes allegations of overpricing in the process of buying
coal and oil supply for NPC-owned power plants and NPC-IPPs.
B. In PSALM. The privatization of NPC plants is anomaly-ridden, the most outstanding
proof of which is the halted sale of the Masinloc Power Plant to the winning bidder the
YNN. Aside from the fact that YNN capacity is questionable (it failed to pay down
payment despite three extensions), sale of Masinloc to YNN will only raise electricity
prices form PhP2.80 to PhP4.80/kWh. What is more revolting is this case is that,
according to a COA report, PSALM officials gave themselves PhP10-million bonus
because of the successful closing of the failed transaction with YNN34.
Solution
Luis Corral, Co-Convenor of Alliance for Consumer Empowerment (ACE), recommends the
following to solve high electricity problem in the Philippines35:
1. Define generation sector legislatively as a public utility and therefore subject to 12%
RORB ceiling under Public Utilities Law: 12% RORB only.
2. Halt additional programs that would only bring up electricity rates: (a) open access; (b)
aggregation; (c) PEMC-WESM expansion; (d) RE FIT program.
3. Do away with PBR Formula: Return to RORB ceilings for Distribution Utilities.
32 ibid
33 ibid
34 ibid
35 Luis Corral. Why Electricity is so Expensive in the Philippines? Causes and
Proposed Solutions. Retrieved from http://isslerhall.org/drupal/sites/default/files/Why
%20electricity%20is%20expensive_corral-sep2012.pptx
10

4. Stop Open Access until full multi-stakeholder national consultations are held with
realistic tariffs simulations showing no resultant tariff increase in the captive residential
rates.
5. Register all electric cooperatives with CDA to ensure genuine consumer ownership and
lower rates through tax exemptions including all national taxes, local taxes, and VAT.
This will ensure greater management accountability and transparency of operations to the
true owners: the General Assembly
6. Compel all generation corporations through legislation to have at least 50% of their
shares to be publicly held.
7. Undertake public bidding of the purchase by all distribution firms of their power
requirements within the next six (6) to eight (8) months.
8. Require all power firms to invest a set percentage of their annual earnings to the
development of the baseload of the country with priority to Mindanao.
9. Establish a National Distribution Corporation for the purpose of doing away with all
sweetheart deals between related companies in the generation and distribution sectors.
10. Amend the EPIRA to prohibit cross ownership in the power sector.
10. Corporate Income Tax

The corporate tax rate in the Philippines is 30%. Corporations and resident foreign corporations
are subject to a 2% minimum corporate income tax (MCIT) starting their fourth year of
operation. The MCIT is based on gross income and it is paid in lieu of the 30% corporate tax on
net income whenever it is greater than the latter. A 10% improperly accumulated earnings tax
(IAET) is imposed on undistributed earnings of closely-held corporations, except branches of a
foreign corporation and Philippine Economic Zone Authority (PEZA) registered corporations.
PEZA registered corporations pay the special tax on gross income earned in lieu of all taxes36.
According to the news37, the Philippines has the highest corporate income tax rate in Southeast
Asia. Benjamin E Diokno38 points out that among ASEAN-5 economies, the Philippines has the
highest total tax rate as percent of commercial profits: 44.5%, as opposed to Singapores 27.1%,
36 Kpmg. Corporate tax rates table. Retrived April 15, 2014 from
http://www.kpmg.com/global/en/services/tax/tax-tools-andresources/pages/corporate-tax-rates-table.aspx
37 INQUIRER.net. House bill pushes for lower income tax rates. Retrieved from
http://business.inquirer.net/166937/house-bill-pushes-for-lower-income-tax-ratesMichelle V.
Remo. DOF studies proposal to cut corporate income tax( Philippine Daily Inquirer).
Retrieved April 15, 2014 from http://business.inquirer.net/139063/dof-studies-proposal-tocut-corporate-income-tax

38 Benjamin E Diokno (2014). Why we attract the lowest FDIs. Retrieved from
http://www.econ.upd.edu.ph/perse/?p=3709.
11

Thailands 29.8%, Indonesias 32.2% and Malaysias 36.3%. Yet, we have one of the lowest taxto-GDP ratio: 12.8% as opposed to Thailands 17.6%., Malaysias 16.1%, Singapores 13.8% and
Indonesias 11.8%. Our statutory corporate tax rate is the highest in the region at 30%, with
Singapore as the lowest at 17%.
On the other hand, Agns Bnassy-Qur et.al 39 and Donghyun PARK40 stated that high relative
corporate taxation does discourage the inflow of foreign direct investment (FDI) in the country.
Although market potential does matter, corporate tax differentials also play a significant role in
driving the flow of FDI. Accordingly Benjamin E Diokno says that the Philippines should reform
its tax system to make it more efficient, fairer and more harmonized with its Asian neighbors. It
should therefore, among other things, reduce the corporate income tax rate to align it with other
Asian economies to attract foreign direct investment in the Philippines41.

39 Agns Bnassy-Qur et.al (2004).How Does FDI React to Corporate Taxation?.

Retrieved from http://www.oecd.org/tax/public-finance/36986898.pdf
40 Donghyun PARK. Foreign Direct Investment and Corporate Taxation: Overview of
the Singaporean Experience. Retreived April 15, 2014 from http://www.econ.hitu.ac.jp/~ap3/apppfdi6/paper/SINGAPORE.pdf
41 Benjamin E Diokno (2014). Why we attract the lowest FDIs. Retrieved from
http://www.econ.upd.edu.ph/perse/?p=3709
12