Overview of Foreign Investment Laws

In order to successfully establish a sound and legal business in the Philippines, the foreign investor must comply with several foreign investment laws. The following provides an overview of the most important legislation on the subject.

The Omnibus Investments Code of 1987 (Executive Order No. 226) provides the general rules and regulations for foreign investments in the Philippines, with provision on grant of incentives in particular industries and sectors. The Foreign Investments Act of 1991 (Republic Act No. 7042, as amended by Republic Act No. 8179) provides the regulatory framework of foreign investments without incentives. Those providing incentives to foreign investments are: Bases Conversion and Development Act of 1992 (Republic Act No. 7227), which provides incentives to enterprises with plants and offices located within the Subic Bay Freeport Zone; Special Economic Zone Act of 1995 (Republic Act No. 7916), which provides incentives to enterprises which are located in the Special Economic Zones; and Export Development Act of 1994 (Republic Act No. 7844), which provides incentives to export industries.

Republic Act No. 7721 is a law liberalizing the entry and operations of foreign banks and financial institutions. The Investor's Lease Act (Republic Act No. 7652) allows foreign investors to lease private lands for a period of 50 years, which may be renewed for another 25 years. The Build-Operate-Transfer Act (Republic Act No. 7718 as amended) established various Public-Private Partnership schemes.

The following are agencies enforcing relevant to foreign investments regulation: (i) Board of Investments, for the enforcement of the Omnibus Investments Code, (ii) Securities and Exchange Commission, for the registration of corporations and partnerships, as well as the enforcement of securities regulation and the Foreign Investments Act, (iii) the Philippine Economic Zone Authority, for the enforcement of the Philippine Economic Zone Authority Law, (iv) the Subic Bay Metropolitan Authority, for the enforcement of the Bases Conversion and Development Act, (v) the Bases Conversion Development Authority, also for the enforcement of the Bases Conversion and Development Act, and (vi) Bureau of Internal Revenue, for the enforcement of the National Internal Revenue Code of 1997.

Respicio & Co. Law Firm can help you establish your business in the Philippines.

Forms of Business Organizations for Foreign Investors

Foreign companies may do business in the Philippines by establishing any of the following forms of business organizations: (i) regional headquarter, (ii) regional operating headquarter, (iii) representative office, or (iv) branch.

A regional head quarter or RHQ must be endorsed by the Board of Investments to the Securities and Exchange Commission (SEC). It also needs to be registered with the SEC for its legitimate existence. It must have an annual minimum inward remittance of at least USD 50,000. One condition for approval relates to its functions, which must be relevant to (i) supervisory role, (ii), communication, or (iii) coordination. Another condition is that it does not earn income in the Philippines.

A regional operating headquarter or ROHQ, like the RHQ, must also be endorsed by the Board of Investments to the SEC. Also like the RHQ, it must be approved and registered with the SEC. It must have a minimum inward remittance of at least USD 200,000. The condition for approval and registration in terms of function is that it must perform qualifying services to its affiliates, subsidiaries, and branches. The second condition is that it earns income from such qualifying services. The income earned is subject to 10% tax.

A representative office needs SEC registration as a representative office. It is an extension of the personality of its mother company. Its activities are limited only to liaison work between mother company and its clients. It does not derive income. A representative office must have an initial minimum inward remittance of USD 30,000 to cover its operating expenses.

A branch is a foreign corporation organized and existing under foreign laws that carries out business activities of the head office and derives income from the host country. A branch needs SEC registration as a branch. It carries out the business activities of the parent company. It must have an assigned capital from the head office of at least USD 200,000, which can be reduced to USD 100,000 subject to conditions. These conditions are: (i) the activity involves advanced technology, or (ii) the company employs at least 50 direct employees.

The Foreign Investments Act provides an exception to the USD 100,00 and USD 200,000 capital requirement. This exception is applicable for businesses that are classified as export enterprises. An export enterprise is one which has 60% export sales. It is immaterial whether these are sales of goods or sales of services. These enterprises include foreign-owned branches in the Philippines that function as an outsourcing operation.

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Irregularity in Entrapment Operations in Drug Cases

An entrapment operation is a valid way of apprehending perpetrators of sale of illegal drugs. Upon the consummation of the sale, the entrapment team is authorized to immediately arrest the seller of illegal drugs. The case would fall under the category of “in flagrante delicto” arrests, which do not require the issuance of a warrant of arrest. An “in flagrante delicto” arrest is one where the law enforcement officer witnesses that a crime has taken place or is about to take place, based on his own personal knowledge.

However, notwithstanding the fact that the police officers have personally witnessed that a sale of illegal drugs has taken place, a person apprehended through an entrapment operation can still be acquitted. This is possible if he objects to the admissibility of evidence during trial, and the most important evidence in illegal drugs cases is the confiscated drugs themselves. The Comprehensive Dangerous Drugs Law imposes a very strict procedure in handling confiscated drugs as evidence.

The case of People v. Casabuena (G.R. No. 186455, November 19, 2014) is instructive. Sometime in 2004, a group of police officers formed an entrapment team and assigned one agent as a poseur-buyer. The poseur-buyer went to the target area, with the rest of the team positioned 15 meters from the place of sale of illegal drugs. The poseur-buyer entered the seller’s house, and there conducted the sale. The accused was apprehended, and the drugs were confiscated.

However, the Supreme Court acquitted the accused because of an irregularity in the entrapment operation. Specifically, the police officers failed to undertake an inventory and to photograph the seize sachets of shabu at the place where they were seized or at the police station. Furthermore, the police officers did not even attempt to offer any justification why it failed to inventory and to photograph the seized items. The Supreme Court states, “In prosecutions involving narcotics, the narcotic substance itself constitutes the corpus delicti of the offense and its existence is vital to sustain a judgment of conviction beyond reasonable doubt. Proof beyond reasonable doubt demands that unwavering exactitude be observed in establishing the corpus delicti.”

The Comprehensive Dangerous Drugs Law itself provides that the apprehending officer/team having initial custody and control of the drugs shall, immediately after seizure and confiscation, physically inventory and photograph the same in the presence of the accused or the person/s from whom such items were confiscated and/or seized.

The effect of non-compliance with the requirement to conduct an inventory and to photograph the evidence is the non-admissibility of the confiscated drugs as evidence. The judge therefore cannot consider said evidence in writing his decision. The net effect is the failure of sufficient evidence to convict. 

Respicio & Co. specializes in criminal law and defense of persons accused of drug-related offenses.

Chain of Custody Rule in Drug Cases

One of the most common defenses in the criminal prosecution of drug cases under the Comprehensive Dangerous Drugs Act of 2002 (R.A. No. 9165) is the failure of the prosecution to establish the “chain of custody”. The law prescribes a strict procedure for handling object evidence, particularly the custody of confiscated dangerous drugs by law enforcement agencies and by the courts. Non-compliance with the said procedure renders the evidence non-admissible, resulting in the eventual acquittal of the accused if there is no other sufficient evidence to convict him.

Suppose a person is arrested pursuant to an entrapment operation effected by the police for the apprehension of drug traffickers. In the course of the arrest, it is a standard operating procedure for the law enforcement officer to confiscate the illegal drugs obtained in the crime scene.

Section 21 of R.A. No. 9165 directs the apprehending team having initial custody and control of the drugs to immediately undertake a physical inventory of the confiscated drugs, and to take photographs of the same, in the presence of the accused or the person/s from whom such items were confiscated and/or seized, or his/her representative or counsel. The law also requires a representative from the media and the Department of Justice (DOJ), and any elected public official who shall be required to sign the copies of the inventory.

Within 24 hours upon confiscation of dangerous drugs, these must be submitted to the PDEA Forensic Laboratory for a qualitative and quantitative examination. The forensic laboratory examiner must then make a certification of the forensic laboratory examination results. The said certification must be issued within 24 hours after the receipt of the subject item/s.

What if the confiscated drugs are so numerous as to render it impossible to conduct an examination within 24 hours from confiscation? In this case, a partial laboratory examination report shall be provisionally issued stating the quantities of dangerous drugs still to be examined by the forensic laboratory. However, a final certification must be issued on the completed forensic laboratory examination within the next 24 hours. In other words, the law only allows an extension period of 24 hours.

While the PDEA has custody of the confiscated drugs, the police agents file the complaint with the prosecutor, who in turn files the criminal Information in court. Seventy-two (72) hours after filing, the court must conduct an ocular inspection of the confiscated, seized and/or surrendered dangerous drugs. Within 24 hours thereafter, the PDEA shall then proceed with the destruction or burning of the confiscated drugs, in the presence of the accused or the person/s from whom such items were confiscated and/or seized, or his/her representative or counsel, a representative from the media and the DOJ, civil society groups and any elected public official.

The PDEA Board afterward issues a sworn certification as to the fact of destruction or burning of the subject item/s which, together with the representative sample/s in the custody of the PDEA. The sworn certification must be submitted to the court having jurisdiction over the case. In all instances, the representative sample/s shall be kept to a minimum quantity as determined by the Board.

During trial, the prosecution has the burden of proving the chain of custody — i.e., the prosecutor must prove that the sample of drugs being presented into evidence forms part of the inventory of drugs at the time and place of confiscation. Moreover, the prosecutor must prove that the said drugs which are being presented into evidence are the same substances taken from the possession of the accused.

If there are substantial gaps in the testimony of witnesses on the chain of custody of the seized dangerous drugs, these raise doubts about the authenticity of the evidence presented in court, and therefore the accused cannot be convicted beyond reasonable doubt.

Respicio & Co. specializes in criminal law and defense of persons accused of drug-related offenses.

Buy-Bust Operations

One of the most common ways in which law enforcement agencies apprehend persons accused of illegal sale of drugs is through buy-bust operations. A buy-bust operation is a form of entrapment, whereby a police agent disguised as a buyer of illegal drugs undertakes a sales transaction with a seller. Suppose, however, that there is an irregularity in the buy-bust operation, and illegal drugs are confiscated from an alleged seller, what are the remedies and defenses of the accused seller?

To convict a person for the sale of illegal drugs under the Comprehensive Dangerous Drugs Law, the prosecutor must prove the following: (a) the identities of the buyer and seller, object, and consideration; and (b) the delivery of the thing sold and the payment for it. In short, the prosecutor must prove that the sale took place, and that the accused was the seller.

There is one important requirement to convict the accused under this law: the prosecution must establish and present the “corpus delicti” or “body of the crime”, which in this case is the confiscated drugs. Concomitant to this requirement is the duty of the prosecution to establish the integrity and evidentiary value of such seized items. Absent this requirement, there is no sufficiency of evidence to convict the accused beyond reasonable doubt.

The case of People v. Sorin (G.R. No. 212635, March 25, 2015) is instructive. Here, the accused was acquitted because of an irregularity in the buy-bust operations. Specifically, the apprehending officer who seized the sachets from the accused Sorin during the buy-bust operation failed to mark the sachets and, instead, turned them over unmarked to another police officer. The latter officer was the person who marked the sachets of shabu, and who eventually took custody of the confiscated drugs and delivery to the PDEA.

According to the Supreme Court, the fact that the sachets of drugs were not marked for inventory in the presence of the apprehending officer who confiscated the drugs is fatal to the cause of the prosecution. “The Court cannot over-emphasize the significance of marking in illegal drugs cases. The marking of the evidence serves to separate the marked evidence from the corpus of all other similar or related evidence from the time they are seized from the accused until they are disposed of at the end of the criminal proceedings, thus, preventing switching, planting, or contamination of evidence.”

The same case occurred in People v. Sabdula (G.R. No. 184758, April 21, 2014), where the accused was also acquitted because of failure of the apprehending officer to mark the confiscated drugs in the buy-bust operations. The Supreme Court noted that due to the procedural lapse in the first link of the chain of custody, serious uncertainty hangs over the identification of the shabu that the prosecution introduced into evidence.

It is well-settled that in criminal prosecutions involving illegal drugs, the presentation of the drugs which constitute the corpus delicti of the crime calls for the necessity of proving with moral certainty that they are the same seized items. The lack of conclusive identification of the illegal drugs allegedly seized from the accused strongly militates against a finding of guilt, as in this case. As reasonable doubt persists on the identity of the drugs allegedly seized from the accused, the latter's acquittal should come as a matter of course.

Respicio & Co. specializes in criminal law and defense of persons accused of drug-related offenses.