Long denied access to full business ownership in the Philippines, foreign investors are poised as new laws are now effective. What do they need to know before they move in?
It’s been billed as a game changer for the Philippines. The nation – long shackled by red tape, corruption and one of the region’s tightest pro-domestic ownership regimes – is enacting laws that open its gates to crucial foreign investment. With it will come expertise and growth in key sectors such as telecoms, infrastructure and energy.
Buoyed by GDP growth of 7.6% last year and with a new leadership keen on courting foreign investment and interests, local law firms are upbeat. They cite interest from around the world as international clients seek information on the key amendments to laws to guide investment selections.
While these are solid indications that protectionism is being set aside in favour of attracting massive economic investment and cutting-edge knowhow, there are also warning signs that need to be read and understood before investors take the plunge.
The laws
Four amendatory laws are taking effect and – on the face of it – placing mouth-watering opportunities within reach of foreign investors:
- The Public Service Act (PSA) Amendatory Law;
- The Foreign Investments Act (FIA) Amendatory Law;
- The Retail Trade Liberalisation Act (RTLA) Amendatory Law; and
- The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law.
Between them, these amendments are cracking holes in a system that has shielded some plum investment opportunities from overseas eyes.
Eric Dykimching, a partner at Cruz Marcelo & Tenefrancia, says the PSA law has rationalised foreign equity restrictions and liberalised key public services by allowing full foreign ownership of businesses in major industries including airports, railways, expressways and telecommunications. “Prior to the amendment, foreign ownership in these industries was limited to 40%,” he says. “We expect more foreign player participation in government projects which will, in turn, potentially lead to more work for the infrastructure practice.”
Dykimching says the RTLA law has lowered capital for foreign investors in the retail trade in the Philippines, from PHP25 million to USD2.5 million (USD500,000). “For foreign retailers [trading] through more than one store, the new law also lowered the minimum investment per store from USD830,000 to about USD200,000. This … will encourage foreign retailers to invest in the country, which will potentially lead to more [legal] work for the corporate practice,” he says.
With the FIA law, Dykimching says, the required capital for a foreign national or entity to engage in a domestic market enterprise has been lowered from USD200,000 to USD100,000 in the following instances:
- The business will involve advanced technology, as determined by the Department of Science and Technology;
- It is endorsed as a startup or startup enablers pursuant to RA No. 11337; or
- If most of its direct employees are Filipinos, but in no case less than 15 employees as certified by the Department of Labour and Employment.
“Prior to the FIA law, micro, small and medium-sized enterprises (MSMEs) with paid-in capital of less than USD200,000 were reserved only for Philippine nationals,” says Dykimching. “The lowering of capital requirements will [now] encourage foreign investors to engage in MSMEs in the country.” This should bring more corporate practice work.
Finally, he says the CREATE Law reduces corporate income tax from 30% to 25% for corporate taxpayers in general, and to 20% for domestic corporations with net taxable income not exceeding PHP5 million and with total assets not exceeding PHP100 million. “The minimum corporate income tax [was] reduced from 2% to 1% effective 1 July 2020 to 30 June 2023,” he says. “Further, the imposition of an Improperly Accumulated Earnings Tax is repealed.” The changes to tax rules have brought more work for the corporate and tax practices.
Ocampo & Suralvo partner Jude Ocampo says the new laws are now being implemented. “The most recent development is the release by the National Economic Development Authority (NEDA) of the implementing rules and regulations (IRRs) of the Public Service Act (PSA) on 20 March 2023,” he says.
According to Dykimching, the status of all the crucial IRRs is as follows:
- PSA Amendatory Law (Republic Act No. 11659), issued on 20 March 2023;
- FIA Amendatory Law (RA No. 11647), issued on 11 July 2022;
- RTLA Amendatory Law (RA No. 11595), issued on 9 March 2022; and
- CREATE Law (RA No. 11534), Revenue Regulations (RRs) 2-2021, 3-2021, 4-2021, and 5-2021 (8 April 2021), RR No. 8-2021 (11 June 2021), RR No. 21-2021 (7 December 2021), and RR No. 4-2022 (26 May 2022).
“With the issuance of the IRRs, these amendatory laws are already fully enforced and implemented by the concerned government agencies,” says Dykimching. “This monumental change is expected to draw more foreign investment into the country and boost our economy.”
However, Ramon Bacani, a partner at Quisumbing Torres, says the amendments to the PSA are not yet being implemented by all government agencies.
“While generally the CREATE Law and amendments to the FIA and RTLA are being implemented … we have noticed that not all government agencies have been implementing the amendments to the PSA,” he says.
“These laws can attract more foreign investment in vital sectors. In particular, the amendments to the PSA open foreign investment in telecommunications, railways, expressways and airports, which previously were subject to Filipino ownership requirements. The entry of foreign players in these industries would increase competition in the local market, which may result in established players revisiting their strategies and improving their products and services.”
Bacani says the CREATE Law provides a clear framework on fiscal and non-fiscal incentives. As such, it will further attract foreign investment in industries covered by the Strategic Investment Priority Plan (SIPP). “Among the key industries in the SIPP that may see increased investment are green ecosystems (e.g. electric vehicles and energy storage), data centres and export-oriented industries,” he says.
Chrysilla Bautista, a partner at ACCRALAW, cautions that while the PSA, FIA and RTLA amendments sought to liberalise certain industries, they are still subject to conditions. “For example, in the telco sector, it is still considered a critical infrastructure, which is subject to a foreign equity limitation unless the country of the foreign investor accords reciprocity,” she says.
“There is still an issue on how these conditions are to be interpreted and applied. There are investments, though, to improve the internet connectivity in the country with the entry of Starlink in satellite internet.”
Bautista expects foreign investment in internet-related business (telecoms towers, satellite internet, cloud services), e-commerce (and as an offshoot logistics) and fintech. “Investors are waiting for any legislation affecting e-commerce, for example, taxation of e-commerce transactions,” she says. “Practice areas on telecoms, e-commerce and technology-related fields are expected to be most active.”
Ocampo says the CREATE Law’s impact has been felt by the business community for some time. “The lower corporate income tax rate in particular has been well-received,” he says. “The new incentive scheme has already taken shape after the issuance by the Fiscal Incentives Review Board (FIRB) of the guidelines to implement both the substantive and procedural rules of the CREATE Law.
“Our firm has certainly observed how the amendments to the PSA, as well as the RTLA, have spurred interest among foreign investors. We have received requests for assistance from regional, European and American law firms to provide advice or legal support to their clients looking to take part in infrastructure projects and retail trade.”
He says there are still some roadblocks. “The Supreme Court has still yet to resolve the challenge against the rules of the Philippine Contractors Accreditation Board on the licensing of foreign contractors. The court already issued a decision opening the industry to foreign entities, but this decision is the subject of a motion for reconsideration.”
Pros and cons
PunoLaw partner Kristie Enriquez-Concepcion says the firm has been doing advisory and transactional work for new investments and acquisitions in renewable energy, infrastructure and retail, and on restructuring projects with existing foreign shareholders to investigate increasing the investments of the foreign shareholders.
“The changes have generally been received positively, albeit with caution,” she says. “Most are curious at how the relevant administrative agencies/regulatory bodies will effectively implement the changes to the laws. Some have also asked how the changes … will work with the foreign ownership restrictions that are still in place on land and property ownership under the constitution.”
Elizabeth Peralta-Loriega, founding and co-managing partner, and head of the taxation and commercial laws practice at Sarmiento Loriega Law Office (SL Law), said the amendatory laws had relaxed the nationality restrictions for various industries and services, allowing greater foreign participation in businesses in the Philippines. “These industries and services, whose ownership was previously restricted to Filipino citizens and Filipino-owned corporations, now can be fully owned by foreigners or foreign-owned corporations,” she says.
“As the previous barriers to entry have diminished, we therefore foresee an influx of foreign investment in the Philippines. We expect that the influx will be also driven by the incentives introduced by the amendatory laws, such as the relaxing of various requirements and the granting of tax reductions or exemptions.”
Peralta-Loriega expects a corresponding increase in legal work, particularly from foreign clientele. “More foreigners and foreign-owned corporations will be more interested in investing in various industries and businesses following the reduction, if not the removal, of the uncertainty of compliance with local laws and regulations, and the additional incentives from the Philippine government,” she says.
“Particularly, we foresee an expansion in the practices of corporate and commercial law, remarkably in M&A, regulatory compliance, competition and antitrust, and taxation law. We also foresee the further growth of technology law, resulting from the encouragement of innovation and startups in the country.”
Dykimching agrees. “The enactment of these amendatory laws is a monumental change for the Philippines and a critical part of government efforts to attract more foreign investment, promote growth and innovation, and create more jobs in the country,” he says.
Dykimching says the IRRs are bedding down at business level. “Except for the value-added tax treatment of the sale of goods and services to enterprises located within economic and freeport zones, the implementing agencies and business owners generally have not encountered any substantial issues in the implementation of the amendatory laws,” he says.
Peralta-Loriega points out “…the Inter-Agency Investment Promotion Co-ordination Committee, which is the body tasked to integrate all promotion and facilitation efforts to encourage foreign investment in the country, was already established and had convened in November 2022 to provide direction on investment promotion drives and ensure efforts will lead to improvement in the country’s foreign direct investment inflow.”
However, crucial to the laws being effective is the efficient processing of departmental guidelines. This has crippled initiatives in the past. Bacani, of Quisumbing Torres, says all relevant departmental appointments at cabinet level are complete following last year’s election of a new president.
“Some government agencies have deferred the implementation until they have issued their own policies in response to the IRR of the PSA,” he says. “The PSA IRR only took effect on 4 April 2023. The delay in the issuance of the PSA IRR has held up the formulation of government agencies of their own policies to implement the amendments to the PSA.”
Manolito Manalo, managing partner at Ocampo Manalo Valdez & Lim Law Firm, acknowledges the progress and challenges.
“We have already seen some of the affected agencies implement the new provisions of the law pertaining to nationality,” he says. “The SEC has already allowed foreign equity to go beyond previously restricted shareholdings by approving capital restructuring. Both the CAB [Civil Aeronautics Board] and DTI FTEB [Department of Trade and Industry’s Fair Trade Enforcement Bureau] have also opened applications for 100%, or more than 40%, foreign equity in logistics companies. We have also seen some interest in investment in 100% foreign-owned domestic airlines.”
With the CREATE Law, Manalo says some ecozone locators now face the dilemma of expanding their business within the zones where new activities will no longer be covered by existing privileges and incentives. “Also, new locators will no longer be enjoying privileges still being extended to old locators,” he says.
“With both the PSA and CREATE laws, it appears that the implementing agencies are experiencing birth pains. I am not sure if this is a result of the laws themselves being in effect or the simultaneous launch of online processing by these agencies. I believe it’s the latter. Instead of streamlining the process, it seems that it has created much slower processing due to the lack of interaction between the applicant and the regulator.”
ACCRALAW’s Bautista observes: “Slower processing is not due to the lack of interaction between the applicant and the regulator, but sometimes due to a slower response time from the regulator concerned. Despite efforts to streamline government processes, red tape and bureaucracy remain an issue.”
Who is interested?
Manalo is upbeat. “The potential remains huge and there is strong interest being manifested by foreign investors to come in due to the opening up of business opportunities in port facilities, transport networks and construction,” he says.
“Based on personal experience, the interest has been from various sectors: transportation and port development, mining, agriculture, construction, manufacturing and IT; and from countries such as China, South Korea, Japan, Malaysia, Cambodia, Turkey, France and Singapore.”
Bacani observes foreign interest in the measures has been steadily increasing. “The current administration has shown that it is keen to build an environment friendly for foreign investors and this may increase the confidence of foreign companies to invest in the Philippines,” he says.
“The foreign interest is coming from the US, China, Japan and Singapore, and primarily in the IT, manufacturing, energy and BPO [business process outsourcing] sectors.”
Peralta-Loriega, of SL Law, says that, based on a 15 February 2023 report of the Philippine Statistics Authority, total approved foreign investment in Q4 2022 amounted to PHP173.61 billion, 30.1% higher than the same quarter the previous year. The bulk came from Singapore, Japan and the UK.
“Similarly, according to the Central Bank of the Philippines, as of October 2022, FDI has emanated largely from Japan, the US and Singapore,” she says. “The Philippines is expected to receive more investment from Japan in the manufacturing, food, agriculture, pharmaceutical, electronics and machinery sectors. As of March 2023, there were about 887 Japanese companies registered, which have so far generated PHP745.63 billion worth of investment, USD17.25 billion worth of exports and 350,710 direct jobs.
“While we cannot ascertain that the increase in the amount of foreign investment in the Philippines is a direct effect of the enactment and the implementation of the amendatory laws, these statistics would show the growth of interest by foreigners in investing in the Philippines.”
Dykimching says most of the FDI interest and inquiries relate to retail trade, MSMEs, telecoms and government projects, and are coming from Asian countries, especially Singapore, Japan and China. Businesses in the US, Middle East and Europe have also shown interest.
Bacani says it is worth noting that recent issuances by the Department of Energy indicate the renewable energy sector is now open to full foreign ownership. “We expect to see increased interest in this sector from foreign investors,” he says.
Enriquez-Concepcion, at PunoLaw, says the Department of Energy issued a circular that removed the nationality requirement imposed on businesses engaged in the exploration, development and utilisation of solar, wind, hydropower and ocean energy by deleting section 19(A) and amending section 19(B) of rule 6 of the Renewable Energy Law IRRs, thereby allowing the entry of 100% foreign capital into the Philippines’ renewables industry, save for certain exceptions.
“We find renewable energy and infrastructure (telecoms, airports, railways) to be key sectors of interests for foreign investment,” she says.
Ocampo, at Ocampo & Suralvo, acknowledges increased investor interest from the removal of foreign equity limits on the renewable energy sector. “The Department of Justice and the Department of Energy have released opinions and new rules that allow greater foreign investor participation in the renewable energy sector,” he says. “Our firm is now assisting various foreign investors to take significant stakes in wind and solar energy projects.”
