One of the most common inquiries we receive from foreign investors pertains to questions involving setting up subsidiaries in the Philippines and their concerns about minimum capital requirements relevant to the nature of their business or industry. The restrictions on foreign ownership to some industries surely affect the flow of foreign investment into the country, the Philippines being notably one of the strictest within the Asia-Pacific in terms of foreign investment policy. For some time now, the law easing these restrictions has been long anticipated to stimulate investment from foreign enterprises.
Last week, President Rodrigo Duterte signed into law Republic Act (RA) 11647, “An Act Promoting Foreign Investments, Thereby Amending Republic Act 7042 Otherwise Known as the Foreign Investments Act of 1991, as Amended and For Other Purposes.” This was signed by the President almost three months after signing RA 11595, a law which amended the Retail Trade Liberalization Act of 2000 (RTLA). Both laws aim to attract foreign investors to the Philippines to make its industries more competitive with those of the ASEAN neighbors.
SALIENT FEATURES OF THE AMENDED RTLA
The recently amended RTLA removed the categorization of enterprises and reduced the minimum paid-up capital of foreign retailers from $2.5 million to P25 million. For foreign retailers engaged in retail trade through more than one physical store, the minimum investment per store must be at least P10,000,000.
While the pre-qualification requirement with the Board of Investments (BoI) was removed as well, foreign retailers must maintain the required minimum paid-up capital. Compliance with this requirement will be subject to review by the Department of Trade and Industry (DTI), Securities and Exchange Commission (SEC), and National Economic and Development Authority (NEDA) every three years.
Another notable requirement under this law is the submission of a certificate from the Bangko Sentral ng Pilipinas (BSP) of the inward remittance of the capital investment. While the law also allows other proofs certifying that the foreign retailer’s capital investment is deposited and maintained in a bank in the Philippines, it is better to secure a Bangko Sentral Registration Document (BSRD) to facilitate the ease in repatriation of foreign investment.
The relaxation of the RTLA is expected to generate foreign investment to help the economy recuperate from the devastating effects of the COVID-19 pandemic. I have personally experienced the influx of inquiries from foreign retailers showing clear interest in setting up companies here.
SALIENT FEATURES OF THE AMENDED FIA
Relevant to the lowered minimum paid up capital under RTLA, Section 8 of the amended Foreign Investment Act (FIA) provides that, among others, micro and small domestic market enterprises with paid-in capital less than the equivalent of $200,000.00 are reserved to Philippine nationals. However, under certain conditions, foreign nationals are allowed a minimum paid-up capital of $100,000.00 provided that the enterprises: (1) utilize advanced technology as determined by the Department of Science and Technology (DoST); (2) are endorsed as startup or startup enablers by the lead host agencies in accordance with RA No. 11337 (Innovative Startup Act); or (3) are composed of a majority of Filipino employees, the number of which shall in no case be less than 15, a reduction from the previous requirement of at least 50 direct Filipino employees. Further, registered foreign enterprises employing foreign nationals and enjoying fiscal incentives are required to implement an understudy or skills development program to ensure the transfer of technology or skills to Filipinos.
The latest amendments to the FIA are expected to generate more foreign investment to boost the economy for the long term. RA 11647 recognizes that increased capital and technology benefits the Philippines, and that global and regional economies affect the Philippine economy. Fittingly, the law allows foreign investors to invest up to 100% in a domestic enterprise unless participation of foreigners is limited or prohibited to a smaller percentage. Similarly, foreign investment in export enterprises is allowed up to 100%, provided the products and services do not fall within the Foreign Investment Negative List (FINL). Notably, the law mandates that amendments to the FINL be made at least once every two years. But then, foreign export enterprises are required to register with the BoI and submit reports to ensure compliance with the BoI’s export requirements. Failure to comply with these requirements may result in a reduction of the entity’s sales to the domestic market to not more than 40% as may be ordered by the BoI or DTI.
To integrate all the promotion and facilitation efforts to encourage foreign investment, the Inter-Agency Investment Promotion Coordination Committee (IIPCC) was also created which will be chaired by the Secretary of Trade and Industry. The IIPCC was created mainly to establish both medium- and long-term Foreign Investment Promotion and Marketing Plans (FIPMP), among other functions.
Considering the increase in the national debt due to the pandemic and the government’s effort to stimulate economic growth, legislation easing the requirements and relaxing the limitations on foreign investors will help the Philippines recover and sustain economic development. We are one with the government in working towards attracting and welcoming productive foreign investment for economic growth to provide more opportunity to our fellow Filipinos.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Gemmalu Molleno-Placido is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.