Philippine economic policy is considered to be one of the most restrictive in the world. As per the National Economic Development Authority, the Philippines has the third most restrictive economy worldwide and the most restrictive in the region when it comes to foreign investment policies. Since the 1987 Constitution came into effect, the country has continued to give preference to Filipino citizens in the grant of rights, privileges, and concessions covering national economy and patrimony. However, as of late, the current administration has taken strides in opening up the country’s economy to foreign investments by amending the existing laws limiting foreign equity participation. Amendments to the Public Service Act, the Foreign Investments Act, and the Retail Trade Liberalization Act have been signed into law in the hopes that such relaxation and liberalization will strengthen the Philippines’ economic recovery efforts.
Public Utilities Now Defined and Enumerated; Public Services May Now Be 100% Foreign-owned
One of the areas wherein foreign ownership is limited is in the operation of public utilities. Under the Constitution, no franchise for the operation of a public utility shall be granted to non-Filipino citizens or corporations with more than 40% foreign equity. Until recently, there has been no fixed definition or enumeration of what constitutes “public utilities” under the law. As a result, the government has been requiring all entities engaged in “public services” as listed in the Public Service Act of 1936 to comply with the minimum 60% Filipino ownership rule.
On March 21, 2022, R.A. No. 11659 was signed into law, amending the Public Service Act of 1936. Section 13 of the Public Service Act, as amended, now provides for the specific definition and enumeration of “public utilities” which are subject to Filipino ownership requirements. Additionally, the law now contains the criteria for declaring a public service as a public utility. Absent such classification as a public utility, the nationality requirement shall not be imposed on a particular industry. Because of the amendments, telecommunications, airlines, domestic shipping and railways are now considered as businesses affected with public interest and may therefore be fully owned by non-Filipino citizens.
However, based on the initial enumeration of public utilities, businesses engaged in the operation, management, or control of the following industries and areas of investment are still subject to foreign equity restrictions:
- 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.
The amendments to the Public Service Act are expected to aid the country’s economic recovery efforts after taking a hit due to the COVID-19 global pandemic. This liberalization of the Public Service Act is aiming to boost the Philippines’ investment climate and assist the next administration’s economic agenda.
Minimum Capitalization Requirement for Foreign-owned Domestic Market Enterprises Lowered From $200K to $100K
In 1991, the Foreign Investments Act (“FIA”) was enacted to govern the entry of productive investments by foreign entities into the Philippines. Until now, it remains as one of the statutes primarily governing Philippine foreign economic policy along with the Public Service Act. Under the FIA, foreigners are allowed to own as much as 100% equity in domestic market enterprises except in areas specifically limited by law. One of the continuing measures for the protection of Filipinos under the FIA is the formulation and issuance of the Foreign Investment Negative List – a list of areas of economic activity where foreign equity is limited to a certain percentage of the capital of a given enterprise. The most recent Foreign Investment Negative List was promulgated in 2018 upon recommendation of the NEDA.
The amendments to the FIA introduced by R.A. No. 11647 on March 2, 2022, include several salient features which intend to boost foreign investments and generate more jobs for Filipinos. One of the noteworthy provisions of R.A. No. 11647 is the lowering of the threshold for the paid-in capital required of micro and small domestic market enterprises. Prior to the amendments, foreign participation is not allowed in domestic market enterprises with paid-in equity of less than $200,000, as these are reserved exclusively for Filipinos who wish to start micro and small businesses. However, as introduced by the amendment, the threshold has been lowered to $100,000 for (1) enterprises involved in advanced technology, (2) those endorsed as “start-up” or “start-up enablers” under the Innovative Startup Act, and (3) those enterprises with at least fifteen (15) direct Filipino employees, who comprise a majority of their total employees.
Another major amendment introduced by R.A. No. 11647 is the relaxation of the restrictions on practice of profession under the Foreign Investments Act. Under the new law, occupations, employment, or practice of profession not governed by any existing law or reciprocity agreement are now also governed by the Foreign Investments Act, as amended.
An Inter-Agency Investment Promotion Coordination Committee or “IIPCC” will also be created to develop a comprehensive Foreign Investment Promotion and Marketing Plan and to integrate all the country’s promotion and facilitation efforts to boost foreign investments.
Paid-in Capital Requirement for Foreign-owned Retail Enterprises Lowered From $2.5M to $500K
R.A. No. 8762 or the “Retail Trade Liberalization Act of 2000” is the statute governing foreign equity participation in the local retail industry. Some features thereof have been amended on December 10, 2021 by the provisions of R.A. No. 11595.
Prior to the amendments introduced in December 2021, foreign retailers were categorized into four (4) classes with their respective minimum paid-in capital requirements. However, under the new law, these capitalization requirements have been consolidated into one rule which requires that foreign-owned enterprises engaged in retail trade in the Philippines must have a minimum paid-in capital of $500,000. This amount is a substantial reduction from the previous minimum capitalization requirement of $2.5M for foreign enterprises. This paid-in capital requirement shall be reviewed by the NEDA, the SEC, and the DTI every three (3) years from the effectivity of the amendments.
Moreover, the requirement of offering a minimum of 30% of the foreign enterprise’s equity to the public through a local stock exchange within eight (8) years from the start of their operations has been removed under the new law. This provision has been replaced by a requirement of the preferential use of Filipino labor in the operation of their business in the country.
The percentage requirement of locally manufactured products in a foreign enterprise’s stock inventory has also been deleted and replaced by a provision encouraging foreign retailers to have a stock inventory of Philippine-made products. Finally, the pre-qualification certification requirement from the BOI has been removed by the new amendments.
