Recent revisions in foreign investment laws in the Philippines
20 October 2023
Michael Marlowe Uy and Michaela Camitan from Sky Law, AGA's member firm in the Metro Manila region, look at the recent significant changes to foreign investment laws.
In the last few years, there have been significant changes to the Philippines’ foreign investment laws. These include the passage of the Public Service Act (PSA) Amendatory Law (RA 11659), the Foreign Investments Act (FIA) Amendatory Law (RA 11647), the Retail Trade Liberalization Act (RTLA) Amendatory Law (RA 11595), and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law (RA 11534). The overall objective of these laws is to attract more foreign investment and promote economic growth in the Philippines.
First, the PSA Amendatory Law, which was signed into law on 02 March 2022, removes restrictions on foreign ownership in public services, such as telecommunications, transportation, and power generation. This means that foreign investors can now own 100% of businesses in these sectors, up from the previous limit of 40%.
Second, the FIA Amendatory Law, which was signed into law on 11 July 2022 also removed restrictions on foreign ownership in a number of sectors, including manufacturing, agriculture, and healthcare.
Lastly, the Philippines has also passed a number of other laws that are making it easier for foreign investors to do business in the country. These include the RTLA Amendatory Law, which was signed into law on March 9, 2022, and the CREATE Law, which was signed into law on May 28, 2021.
These are all part of the government's ongoing efforts to attract necessary capital and technology from foreigners looking for investment opportunities in the country.
1. The PSA Amendatory Law and its Implementing Rules and Regulations
The 1987 Philippine Constitution requires a public utility to obtain a franchise or any other form of authorization before it may operate in the Philippines, which may be granted only to Filipino citizens or to corporations organized under Philippine law with a maximum foreign ownership of 40%. However, the 1987 Philippine Constitution does not define the term "public utility".
Under the PSA, the term "public utility" was used interchangeably with "public services", but the PSA Amendatory Law and its Implementing Rules and Regulations (“IRR”) has now differentiated the two terms, providing an exhaustive list of public utilities such that there will be no foreign ownership restriction for those not classified as public utilities under said list.
The PSA Amendatory Law and its IRR narrows public utilities to just the following:
- Distribution of Electricity;
- Transmission of Electricity;
- Petroleum and Petroleum Products Pipeline Transmission Systems;
- Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including sewerage pipeline systems;
- Seaports; and
- Public utility vehicles.
Thus, starting 01 April 2023, select sectors such as railways, airports, expressways, and telecommunications are now open to 100% foreign ownership, which were previously limited to 40% foreign ownership. With the narrowing down of what are considered public utilities, the country opens its doors for more foreign investment, possibly leading to increased competition and lower prices for consumers. It can also lead to innovation and improved services, since foreign investors may bring new technologies and ideas to the Philippines.
2. The Foreign Investments Act Amendatory Law and its Implementing Rules and Regulations
To promote foreign investments, the FIA Amendatory Law was passed to finally allow foreign investors to set up and fully own domestic enterprises (including micro and small enterprises) in the Philippines.
The FIA Amendatory Law made procedures for foreign entry infinitely easier by creating the Inter-Agency Investment Promotion Coordination Committee (IIPCC) tasked to create a comprehensive and strategic Foreign Investment Promotion and Marketing Plan (“FIPMP”) and to spearhead the government's promotion and facilitation efforts to encourage foreign investments into the country. The establishment of the IIPCC, combined with the anti-corruption penal provision in the law, makes the FIA Amendatory Law attractive to investors.
Under the FIA, micro, small, and medium-sized enterprises (MSME) with paid-in capital of less than US$200,000 are reserved for Philippine nationals. However, this threshold is lowered to USD 100,000, provided that the enterprises meet any of the following conditions:
1. Utilize advanced technology (to be determined by the Department of Science and Technology);
2. Are endorsed as startup enablers or as a startup in accordance with the Innovative Startup Act; or
3. The company hires no less than 15 Filipino employees, a reduction from the previous requirement of 50.
Similar to the PSA Amendatory Law, the FIA Amendatory Law also includes provisions to safeguard national interests. Thus, the President has the power to order the IIPCC, in coordination with the National Security Council (NSC), and the NEDA, to review foreign investments involving military-related industries, cyber infrastructure, pipeline transportation, or such other activities that may threaten territorial integrity and the safety, security and well-being of Filipino citizens, when such foreign investments are:
1. Made by a foreign government-controlled entity or state-owned enterprises except independent pension funds, sovereign wealth funds and multinational banks, or
2. Located in geographical areas critical to national security.
Aside from this, the FIA Amendatory Law provides that foreign businesses employing foreign nationals and are enjoying fiscal incentives must come up with an understudy or skills development program that benefits Filipino workers, to ensure that local workers receive the knowledge and skills from their foreign colleagues.
3. The Retail Trade Liberalization Act Amendatory Law and its Implementing Rules and Regulations
The RTLA Amendatory Law, which was signed into law on 9 March 2022, provides a uniform capital and per store investment requirement for all foreign retailers, which further opens up the retail sector to foreign investment.
While the RTLA provided several categories for the minimum paid-up capital requirement depending on which category an enterprise belongs in, the RTLA Amendatory Law allows foreign companies to own up to 100% of a single-brand retail store in the Philippines so long as the following requirements are met:
1. The foreign retailer shall have a minimum paid-up capital of Php 25 million (approximately USD 500,000);
2. The foreign retailer's country of origin does not prohibit the entry of Filipino retailers; and
3. In case the foreign retailers engaged in retail trade through more than one physical store, the minimum investment per store must be at least Php 10 million (approximately USD 200,000).
Under its IRR, paid-up capital may be used to purchase assets for purposes of complying with the investment requirement per store.
The RTLA Amendatory Law was clearly passed to attract foreign retailers to enter the country and offer their products to the Filipino market since it significantly decreased the paid-up capital required and the minimum investment per store, removed the requirement for a certificate of pre-qualification to the Philippine Board of Investments (BOI), and removed the requirement for foreign-owned retail enterprises to offer a minimum of 30% equity through any stock exchange in the Philippines within 8 years of starting operations, allowing newly established foreign retail enterprises to remain privately owned.
The RTLA Amendatory Law safeguards the Filipinos by including provisions mandating foreign retail enterprises to hire Filipino workers before hiring a foreign national and encouraging foreign retailers to keep a stock inventory of locally manufactured products.
4. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law
The CREATE Law, which was signed into law on 28 May 2021, aimed to counter the effects of the COVID-19 pandemic by providing fiscal relief to corporations. Complementing the abovementioned laws in increasing the country’s investment appeal, it provides significant tax incentives for foreign investors. Specifically, the CREATE Law reduces the corporate income tax rate from 30% to 25%, to make the Philippines more competitive with other Asian countries. The corporate income tax rate will be reduced further by 1% annually in the next years and shall eventually reach 20% by 2027 onwards. The lower corporate income tax rates will inevitably make it more profitable for businesses to operate in the Philippines, leading to increased investment and job creation.
Corporate income tax incentives were also provided under the CREATE Law, and exporters and domestic enterprises engaged in strategic activities as defined under the Strategic Investment Priority Plan (SIPP) are to enjoy an Income Tax Holiday (ITH) granted for a period of 4 to 7 years, followed by the Special Corporate Income Tax Rate of 5% on gross income earned (GIE), in lieu of all national and local taxes, or enhanced deductions (ED) for 5 or 10 years (the incentive period varies depending on which area the registered project or activity will be located), and duty exemption on importation of capital equipment, raw materials, spare parts, or accessories.
The CREATE Law also added more Value Added Tax exemptions, including:
1. Sale, importation, printing or publication of books, and any newspaper, magazine, journal, review bulletin, or any such educational reading material including its digital or electronic format, as long as the materials are not principally devoted to the publication of paid advertisements
2. Sale or importation of prescription drugs and medicines for diabetes, high cholesterol and hypertension (beginning 1 January 2020).
3. Sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis and kidney diseases (beginning 1 January 2021).
4. Sale or importation of capital equipment, its spare parts and raw materials for the production of personal protective equipment (PPE) for COVID-19 prevention, and all drugs, vaccines and medical devices used for the treatment of COVID-19 (effective from 1 January 2021 to 31 December 2023)
Further, the Fiscal Incentives Review Board (FIRB) — a government agency responsible for supervising tax breaks — is now a matchmaker for businesses and incentives. It has the power to recommend the perfect fiscal and non-fiscal incentives for businesses based on their specific needs, a win-win for businesses and the economy.
The recent amendments to Philippine foreign investment laws are a sign of the government's commitment to attracting more foreign capital. These new amendatory laws are expected to have a significant impact on the Philippine economy, as they were passed to make it easier for foreign investors to set up and operate businesses in the Philippines, hopefully leading to increased investment, innovation, job creation, and economic growth.
Overall, the recent changes to Philippine foreign investment laws are a positive development. Foreign investors who are considering doing business in the Philippines should carefully review the new laws and regulations to take advantage of possible opportunities.
About SKY Law:
Sky Law is AGA's legal representative for the Metro Manila region in the Philippines.
At SKY Law, the team supports local and internationally based individuals and businesses in resolving conflict, safeguarding their futures, and maximizing opportunities, and their broad range of practice areas reflects the extensive experience and background of the firm's lawyers, all of whom work collaboratively to provide the highest quality service.
The lawyers at Sky Law constantly strive to provide clients with the most creative, practical, and cost-effective solutions for their businesses and this enables them to satisfy their legal needs across their day-to-day business operations, as well as in their significant commercial transactions.
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