Taxwise Or Otherwise

To ease restrictions against foreign equity, the Eleventh Foreign Investment Negative List (FINL) was issued by the President on Oct. 29, 2018 and takes effect 15 days from its publication in a newspaper of general circulation.
Under the Foreign Investments Act, as amended, the FINL is “a list of areas of economic activity whose foreign ownership is limited to a maximum of forty percent (40%) of the equity capital of the enterprises” engaged in these industries. It is composed of two listings: List A and List B.
List A enumerates the areas of activity which are reserved only for Philippine nationals by the Constitution and specific laws. This means that industries included in this list would either prohibit foreign ownership or allow limited foreign participation subject to conditions indicated on the list.
On the other hand, List B contains areas of activities and enterprises regulated pursuant to law, such as: a) defense-related activities requiring prior clearance and authorization from the Department of National Defense, and b) those which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs, gambling, dance halls, etc. Industries under List B are restricted due to the nature of the activities themselves.
Under the law, amendments to List A may be made at any time to reflect changes introduced by specific laws, while amendments to List B shall not be made more than once every two years.
Considering that it has been three years since the issuance of the last FINL in 2015, the release of the 11th FINL is apt as it coincides with the evolving trends in the global investment environment.
One of the notable changes under the 11th FINL is in Mass Media. Section 11(1), Article XVI of the Constitution provides that ownership and management of Mass Media shall be limited to Filipinos or corporations which are wholly owned and managed by Filipinos. With the 11th FINL, the Internet business is now open for foreign ownership. The amendment was based on an opinion issued by the Department of Justice (DoJ Opinion No. 040) in 1998 in which the DoJ addressed the question of whether the Internet business constitutes Mass Media and therefore should be barred to foreign investors.
According to the DoJ, mass media involves the transmittal and creation/publication, gathering and distribution of the news, information, messages and other forms of communication to the general public. In contrast, the Internet business is limited only to “offering to the owner of a computer the services of inter-connecting… to a network of computers, thereby giving him access to said services offered by Internet”.
Another change provided by the 11th FINL is the further relaxation of the rules on the practice of professions. Under the new list, pharmacy and forestry may now be practiced by foreigners provided that their home countries allow Filipinos the same privilege. All other professions that are open for reciprocity are found in Part A of the Annex on Professions. However, the practice of radiology and x-ray technology, criminology, and law remains restricted to Filipinos, with marine deck officers and marine engine officers as new additions to the list.
Part B of the Annex expands the areas of professions allowed for corporate practice to include aeronautical engineering, agricultural and biosystems engineering, forestry, and social work. Metallurgical and marine engineering, however, were delisted from corporate practice.
Also, foreigners are now allowed to teach at higher levels of education provided that they do not teach professional subjects, i.e. those included in the board or bar examinations.
Lending companies and financing and investment houses regulated by the SEC, formerly subject to the 49% and 60% ownership limits respectively, are now open for full foreign ownership.
Wellness centers, facility operators of an infrastructure or a development facility requiring public utility franchise, and adjustment companies which used to only be allowed 40% foreign equity may now be wholly owned by foreigners. In addition, educational institutions for foreign diplomatic personnel and their dependents, and other foreign temporary residents, or for short-term high-level skills development that do not form part of the formal education system are now allowed full foreign participation.
Also, power generation and the supply of electricity to the contestable market, as well as similar businesses or services not covered by the definition of public utilities, have been recognized as exceptions to the operations of public utilities, and therefore not subject to the 40% foreign equity limitation.
However, the limitation on the private security agency industry, where no foreign equity is allowed, now includes organizations and operations of private detectives, watchmen and security guard agencies.
To further boost foreign investment, an increase in foreign equity of up to 40% is now allowed for private radio communication networks (formerly capped at only 20%) and contracts for the construction and repair of locally-funded public works (formerly 25%). The restrictions still do not cover infrastructure/development projects under Republic Act 7718 and foreign funded/assisted projects that undergo international competitive bidding.
While the term “negative” carries a connotation that is the opposite of “positive,” the FINL is actually intended to promote investment in the Philippines by opening up the business landscape to foreigners although under regulated conditions. Hopefully, the changes introduced under the -11th FINL will attract more foreign direct investment, generate more jobs, and help improve the economy.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Aimee Rose DG. Dela Cruz is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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