Investment Opportunities in the Philippines

MA. CARLA P. MAPALO, AMBER SHAWN A. GAGAJENA, MA. ANDREA V. NAGUIT

The Philippines has exhibited a strong and positive momentum in 2023 with the implementation of key legislative and regulatory measures in a bid to steer the economy to stability. These measures, primarily aimed at attracting foreign direct investments, played a pivotal role in engendering investor confidence by eliminating bureaucratic hurdles and streamlining regulatory complexities.

Foreign Players in the Retail Trade Industry

At the behest of the Philippine government, Republic Act (“RA”) No. 11595 was passed, which amended the Retail Trade Liberalisation Act (“RTLA”) and relaxed the basic requirements for a foreign retailer to engage in retail business in the Philippines. A foreign retailer refers to a foreign national, partnership, association, or corporation of which more than 40% of the capital stock outstanding and entitled to vote is owned and held by a foreign national, engaged in retail trade. Prior to the amendment of the RTLA, a foreign retailer may only engage in retail business if it has a minimum paid up capital of USD 2,500,000.00. With the amendment, the prescribed minimum paid up capital for retail trade enterprises with foreign equity has been lowered to PHP25,000,000.00 (approximately USD 500,000.00). For foreign retailers with more than one physical store, the amendment decreased the minimum investment per store from USD 250,000.00 to USD200,000.00. The amendment also removed certain pre-qualification requirements which foreign retailers must secure from the Board of Investments.

Similarly, under the Foreign Investments Act (“FIA”), micro and small domestic market enterprises with paid-in equity capital of less than USD 200,000 are generally reserved for Filipinos and corporations at least 60% owned by Filipinos. The FIA was recently amended through RA No. 11647 (“FIA Amendment”), which provided a lower capitalisation threshold of USD 100,000.00 for non-Filipino enterprises if any of the following requirements are met: (a) the foreign enterprise utilises advanced technology as determined by the Department of Science and Technology; (b) the foreign enterprise is endorsed as a startup or startup enabler in accordance with RA No. 11337, otherwise known as the Innovative Startup Act; or (c) the foreign enterprise employs no less than 15 Filipino employees who represent a majority of the direct employees of the enterprise.

Deregulation, Privatisation and Liberalisation of Public Services

Through the passage of Republic Act (“RA”) No. 11659 (“PSA Amendment”), the Philippine government relaxed the stringent foreign equity restrictions under the 86-year-old Public Service Act (“PSA”). The amendment enabled the liberalisation of key public services by lifting the nationality requirement for specific industries historically covered by the Constitutional restriction imposed on public utilities.

The Philippine Constitution limits the ownership and operation of public utilities to Filipino citizens and corporations at least 60% of which are owned by Filipinos. However, with the enactment of the PSA Amendment, public utilities have been exclusively narrowed to the following activities: (1) distribution of electricity; (2) transmission of electricity; (3) petroleum and petroleum products pipeline transmission system; (4) water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline system; (5) seaports; and (6) public utility vehicles.

Consequently, all other public services have been liberalised from the 40% foreign equity cap previously applied pursuant to the provisions of the Philippine Constitution. Sectors which have been liberalised from public utility restrictions include: (1) airports, (2) railways and subways, (3) telecommunications, (4) logistics and freight forwarding, (5) shipping, (6) air carriers, (7) expressways and toll ways, and (8) transport network companies.

However, critical infrastructure enterprises remain subject to foreign equity restrictions. Critical infrastructure refers to any public service which owns or operates systems and assets that are vital to the government that the incapacity or destruction of such assets would have a detrimental impact on national security. The PSA Amendment provides that foreign nationals are not allowed to own more than 50% of the capital of entities engaged in the operation and management of critical infrastructure, unless the country of such foreign national accords reciprocity to Philippine nationals as may be provided by foreign law, treaty or international agreement. Thus, where reciprocity is not established, nationality restrictions continue to be applicable to critical infrastructure enterprises.

Dismantling Investment Barriers to Renewable Energy

Foreign investors may now engage in the exploration, development, and utilisation of the Philippines’s renewable energy (“RE”) resources after the Department of Energy (“DOE”) amended a section of the Implementing Rules and Regulations (“IRR”) of the Renewable Energy Act of 2008, with the promulgation of Department Circular No. 2022-11-0034 (“DOE Circular”). Prior to the effectivity of the amendment, a Renewable Energy Service/Operating Contract (“RE Contract”) may be awarded only to Filipinos, or corporations which are at least 60% Filipino-owned. With the issuance of the DOE Circular, foreign investors may hold up to 100% equity in renewable energy projects, particularly for the wind and solar investment areas. Hydropower generation, however, remains to be subject to the nationality limitations. Nationality restrictions are still in place for certain aspects of the business such as land ownership and lease of public lands. However, any of the residual nationality restrictions affecting the business may be addressed by structuring the business appropriately.

The amendment is an encouraging development geared to support the Philippines in achieving its target of a 35% renewable energy share in the power generation mix by 2030, and a 50% share by 2040. Considering the sophistication, huge capital investment, and the amount of time required to bring RE projects from pre-development to commercial deployment, the Philippines expects a significant influx of capital and technology from foreign-owned entities interested in securing RE Contracts, all of which prove instrumental in securing for the country a future built on clean, accessible and sustainable energy.

Furthermore, the fiscal incentives under the Corporate Recovery and Tax Incentives for Enterprise Act (“CREATE Act”) did not revoke the fiscal and non-fiscal incentives available to the renewable energy sector. RE Developers may continue to enjoy undiminished incentives under the Renewable Energy Act such as a 7-year income tax holiday (“ITH”) and a 10% corporate income tax rate after the ITH.

Strategic Investment Priority Plan

The Strategic Investment Priority Plan (“SIPP”) came into effect on 14 June 2022 pursuant to Memorandum Order No. 61 dated 24 May 2022. The 2022 SIPP, formulated as a companion document to the CREATE Act, served to classify into tiers, activities and industries which prove critical in accelerating the country’s technological development and economic transformation. Entities considered engaged in qualified activities are granted the ability to avail themselves to incentives under the CREATE Act. The fiscal and non-fiscal incentives depend on the nature of the business, the location where the business is conducted, the government agency with which the business will be registered, and other performance commitments as may be set by the Fiscal Incentives Review Board (“FIRB”).

The CREATE Act provided a uniform system of granting tax incentives to registered business enterprises to the extent of their approved registered project or activity under the SIPP. The authority to assess and to grant the appropriate tax incentives are lodged with the FIRB or the Investment Promotion Agencies (“IPA”), under a delegated authority from the FIRB. IPAs are government entities charged with promoting investments, granting and administering tax and non-tax incentives, and overseeing the operations of the different economic zones and freeports in accordance with their respective special laws.

All activities or projects which are part of the SIPP may be registered with any of the IPAs. Once registered, an entity may be able to avail of incentives in the SIPP, particularly in the form of income tax holidays, a preferential 5% corporate income tax rate and duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, enhanced deductions. Entitlement to the incentive shall then be based on the tier under which the activity falls, such that a higher tier will consequently grant the qualifying entity a longer period of entitlement to the incentives granted.

Liberalisation of Rule on Entities That May Secure a Regular Contractor’s License from Philippine Contractors Accreditation Board (“PCAB”)

In Philippine Contractors Accreditation Board vs. Manila Water Company, Inc., G.R. No. 217590 (10 March 2020), the Supreme Court of the Philippines struck down a requirement under the Revised Rules and Regulations Governing Licensing and Accreditation of Contractors in the Philippines (“PCAB Rules”) that Regular Contractor’s Licenses are reserved for and issued only to contractor-firms which are Filipino sole proprietorships, or partnerships/ corporations with at least 70% Filipino equity participation and duly existing under the laws of the Philippines. Also, the 2020 Supreme Court decision invalidated the requirement that an introduction of 30% or more of foreign equity into a construction firm holding a Regular Contractor’s License shall invalidate such license. Hence, theoretically, Regular Contractor’s Licenses can now be granted to entities whose equity is more than 40% foreign-owned.

However, the above-stated 2020 Supreme Court decision has yet to attain finality. At present, the Motion for Reconsideration filed by one of the intervenors is still pending with the Supreme Court. Hence, PCAB is maintaining the status quo and continuously implementing its PCAB Rules. PCAB confirmed that it has yet to issue new regulations or amend its existing regulations implementing the 2020 Supreme Court decision to allow 100% foreign-owned domestic corporations to secure Regular Contractor’s Licenses.

Ease of Paying Taxes

The Ease of Paying Taxes Act (“EPTA”) was recently enacted to make the process of filing tax returns and payment of taxes faster and easier. The law grants taxpayers (“TPs”) the option to file and pay their taxes through authorised agent banks, RDO (through the Revenue Collection Officer) or online platforms (i.e., through Authorised Software Providers). The option to pay taxes to the city or municipal treasurer was removed in order to encourage the shift to electronic payment. This is a much-anticipated advancement as the public is relying more on online payment platforms and QR codes. This technological leap is primarily designed to provide TPs with efficient and accessible ways of paying their taxes, ultimately reducing the time and effort required for compliance. The modernisation of the process is a welcome development to everyone, especially foreign investors who wish to enter the Philippine market.

The other key features under the EPTA are as follows:

• a. Removal of requirement to pay annual registration fees;
• b. Cancellation of BIR registration is effected by mere electronic or manual filing without the need to conduct an audit;
• c. Transfer of BIR registration is effected by mere electronic or manual filing but any pending audit shall be continued by the same RDO;
• d. Harmonisation of the rules on the valueadded tax (“VAT”) treatment of sales of goods and services;
• e. Mandatory issuance of invoices for each sale will also be increased from PhP100.00 to PhP500.00, except for VAT-registered TPs who are still required to issue invoices regardless of the amount;
• f. Classification of TPs based on gross sales (i.e., micro, small, medium, or large) to form a tax system responsive to each classification’s needs;
• g. Withholding of taxes is no longer a requirement for deductibility of certain expenses; and
• h. Books of account are now required to be preserved only for a period of 5 years (previously 10 years).

Indeed, the country is off to a good start in 2024 as it moves towards a more efficient, responsive, and taxpayer-centric tax system.

Conclusion

In conclusion, the recent amendments to the Philippine legal framework signify a significant milestone in the country’s initiatives to attract more foreign investment, boost economic growth, and streamline business operations. Enacted with the purpose of facilitating a more business-friendly environment, these laws are specifically designed to liberalise certain industries from the foreign equity restrictions, eliminate red tape, and simplify the process of doing business in the Philippines. With these transformative changes, both local and foreign investors now have the opportunity to operate more freely within the country, engaging in a broader range of economic activities. The anticipated outcomes include heightened competition, increased innovation, and expanded job opportunities across various sectors of the economy. As the country opens its doors wider to international investors, foreign investors are urged to consider and explore the vast potential that the country has to offer.

consider and explore the vast potential that the country has to offer.

Ma. Carla P. Mapalo, Partner, Villaraza & Angangco

Ma. Carla P. Mapalo is a Partner at the Corporate and Commercial Law Department of Villaraza & Angangco. Carla heads the Banking and Finance, Capital Markets, and Natural Resources practice groups of V&A. She is a dual qualified lawyer, admitted to practice in the Philippines and New York. She regularly advises clients on M&A transactions and strategic foreign investments in the Philippines.

Contact Email: mp.mapalo@thefirmva.com

Amber Shawn A. Gagajena, Senior Associate, Villaraza & Angangco

Amber Shawn A. Gagajena is a Senior Associate at the Corporate and Commercial Law Department of Villaraza & Angangco. He is a lawyer and a certified public accountant. He has extensive experience advising clients on M&A transactions, taxation, competition laws and strategic foreign investments in the Philippines.

Contact Email: aa.gagajena@thefirmva.com

Ma. Andrea V. Naguit , Associate, Villaraza & Angangco

Ma. Andrea V. Naguit is an Associate at Villaraza and Angangco. She was admitted to the Philippine Bar in 2023 and joined the Firm at the same year.

Contact Email: ma.naguit@thefirmva.com