Taxwise Or Otherwise

Barriers to foreign direct investment (FDI) in the Philippines are highly restrictive. In 2020, the Philippines ranked third-most restrictive out of the 84 countries in the Organization for Economic Cooperation and Development’s (OECD) foreign direct investment regulatory restrictiveness index (FDI Index).

The FDI Index released by the OECD gauges the restrictiveness of a country’s FDI rules by looking at four main types of restrictions: 1) Foreign equity limitations; 2) Discriminatory screening or approval mechanisms; 3) Restrictions on the employment of foreigners as key personnel; and 4) Other operational restrictions, e.g., restrictions on branching and capital repatriation or land ownership by foreign-owned enterprises.

The restrictions are evaluated on a 0 to 1 scale (1 being the most restrictive). It is no surprise that the Philippines scored 0.374, as we have several laws restricting FDI and most of them are enshrined directly in the Constitution. The Philippines is just a few points behind Libya and Palestine, both scoring a total FDI index of 0.713 and 0.388, respectively.

Last year, the President certified three bills as urgent —amendments to the 85-year-old Public Service Act (Senate Bill No. 2094), the 30-year-old Foreign Investments Act (Senate Bill No. 1156), and the 20-year-old Retail Trade Liberalization Act (Senate Bill No. 1840). These reforms primarily aim to spur economic activity by creating employment in the wake of the pandemic. 

Before closing the first month of the new year, we welcomed the roll-out of Republic Act No. 11595 – An Act Amending Republic Act No. 8762, otherwise known as the Retail Trade Liberalization Act of 2000, signed into law on Dec. 10 and taking effect on Jan. 21.  Below are the substantial amendments to the law:

LOWERING MINIMUM PAID-UP CAPITAL REQUIREMENT AND INVESTMENT PER STORE
Prior to the amendment, corporations engaged in retail trade under Category B, i.e., with foreign participation of not more than 60%, were required to have a minimum paid-up capital of $2.5 million. On the other hand, an enterprise may be wholly foreign-owned (Category C) if it has paid-up capital equivalent to at least $7.5 million, while enterprises under engaged in the sale of high-end or luxury goods (Category D) must have a paid-up capital of at least $250,000 per store. 

Furthermore, the minimum investment per store for foreign retailers engaged in retail trade through more than one physical store was $830,000.

Now under RA 11595, the investment categories have been removed. Foreign-owned corporations, partnerships, and sole proprietorships may engage or invest in a retail business in the Philippines with a minimum paid-up capital requirement of P25 million (approximately $500,000).

In the case of retail trade through more than one physical store, the minimum investment per store is now down to P10 million (approximately $200,000).

SIMPLIFIED CONDITIONS FOR FOREIGN RETAILERS
Previously, all retail trade enterprises under Categories B and C, with foreign ownership exceeding 80%, must offer a minimum of 30% of their equity to the public, through any stock exchange in the Philippines, within eight years from their start of operations.

In addition, foreign retailers were required to submit an application for pre-qualification to the Board of Investments before filing a formal application with the Securities and Exchange Commission (SEC) to engage in retail or invest in a retail store.

RA 11595 removes both the public offering of shares of stocks and the pre-qualification requirements.

IMPLEMENTING AGENCIES
The monitoring and regulation is to be the responsibility of the SEC instead of the Department of Trade and Industry (DTI). However, the DTI will continue to have regulatory authority over foreign retailers that have or will establish sole proprietorships in the Philippines.

In coordination with the SEC and National Economic and Development Authority (NEDA), the DTI will issue the implementing rules and regulations of RA 11595 within 90 days after approval of the law, or by March 10.

REDUCTION OF PENALTIES
RA 11595 also reduced the penalties for violations from the imprisonment of six to eight years to four to six years, and capping the fine to P5 million, down from the previous maximum of P20 million.  

As with all things, balance is the key. To protect domestic retailers, RA 11595 encourages foreign retailers to have a certain level of inventory consisting of products made in the Philippines. Moreover, it explicitly mandates compliance with the provisions of the Labor Code of the Philippines on the determination of non-availability of a competent, able, and willing Filipino citizen, before engaging the services of a foreign national.

The P25 million minimum paid-up capital is also subject to review by the DTI, SEC, and NEDA every three years from the effectivity of the law.

The scale of the disruption caused by the pandemic has pushed the government to prioritize amendments to FDI rules.  Even prior to the updated rules, foreign retailers had been selling directly to Filipino consumers through e-commerce and internet retailing. Relaxing the restrictions and allowing foreigners to register and invest directly in the Philippines may allow the country to reap more benefits, particularly employment generation.

The amendments to the Retail Trade Liberalization Act (RTLA) represent just the first of three priority bills seeking to lift or reduce FDI barriers to put our country in a more competitive position relative to our Asian peers. We wait in anticipation whether the other bills (Senate Bill No. 2094 and Senate Bill No. 1156) pending before Congress will be enacted before the upcoming national elections or carried over as priority bills in the next administration. Either way, I hope the government continues to relax the rules while also protecting the local industry because I believe that easing barriers to FDI will help boost economic recovery. 

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.

 

Kyra Kae B. Diola is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

kyra.kae.diola@pwc.com