Foreign retailers and investors in Philippine retail trade

The legal topography in the country’s retail trade sector has become obscure with the promulgation of the Twelfth (12th) Regular Foreign Investment Negative List (RFINL) in the last month of President Rodrigo R. Duterte’s term of office, since it includes in its “No Foreign Equity” listing “Retail trade enterprises with paid-up capital of less than P25,000,000.00 (Section 2 of Republic Act (RA) No. 11595, amending RA 8762).”

RA 8762, officially titled the Retail Trade Liberalization Act of 2000 (RTLA), was enacted into law in March 2000. It expressly repealed RA 1180, more popularly known as the Retail Trade Nationalization Law (RTNL). The Supreme Court (SC) has separately ruled the constitutionality of both the old RTNL, and the RTLA, with each being held to be a valid exercise of the State’s police power.

In December 2021, RA 11595 amended the RTLA and such amendments included complete deletion of the following categories of retail trade:

(a) Category A — Enterprises with paid-up capital of the Philippine peso equivalent of less than US$2.5 million (M) which were “reserved exclusively for Filipino citizens, [former natural-born Filipino citizens residing in the Philippines,] and corporations wholly owned by Filipino citizens.”

(b) Categories B & C — Enterprises with a minimum paid-up capital of the Philippine peso equivalent of US$2.5M with upper limits on capital stock, provided that in no case shall the investments for establishing a store be less than the Philippine Pesos equivalent of US$30,000, which “may be wholly owned by foreigners.”

(c) Category D — Enterprises specializing in high-end or luxury products with a paid-up capital of the Philippine peso equivalent of US$250,000 per store, open to foreign retailers or wholly-owned by foreigners under the conditions provided in the RTLA.”

As now amended by RA 11595, the RTLA provides: (a) a uniform minimum paid-up capital of P25M, (b) a reciprocity by the country of origin allowing the entry of Filipino retailers, and (c) per store investment of P10M, for retail enterprises with foreign ownership.

Essentially, RA 11595 removed the remaining reservation clause for Category A retail trading in favor of Filipino citizens and domestic juridical entities wholly-owned by Filipino citizens, by formally opening the entire retail trade industry to foreign retailers, subject only to compliance with paid-up capital requirements, reciprocity of country of origin, per store investment requirements, and other conditions discussed hereunder.

It is our position that with the amendment of the RTLA under RA 11595, there is no legal basis to ban foreign investment in the retail trade industry, much less to apply the provisions of the Anti-Dummy Law to Philippine citizens allow foreigners to invest in retail trade enterprises with paid-up capital of less than P25M.

SALIENT HISTORICAL BACKGROUND
The SC in its decision in Inchong v. Hernandez, recognized the importance of retail trade in the national economy: “Under modern conditions and standards of living, in which man’s needs have multiplied and diversified to unlimited extents and proportions, the retailer comes as essential as the producer, because thru him the infinite variety of articles, goods and commodities needed for daily life are placed within the easy reach of consumers. Retail dealers perform the functions of capillaries in the human body, thru which all the needed food and supplies are ministered to members of the communities comprising the nation… The retailer, therefore, from the lowly peddler, the owner of a small sari-sari store, to the operator of a department store or a supermarket is so much a part of day-to-day existence.”

The enactment in June 1954 of the old RTNL or RA 1180, which nationalized the country’s entire retail trading system by expressly reserving the commercial sector only to Filipino citizens and domestic juridical entities (partnerships, corporations and associations) 100%-owned by Filipino citizens, was held to have sprung “from deep, militant, and positive nationalistic impulse” which sought to “protect citizen and country from the alien retailer.”

Employing the “control test” for determining the nationality of corporations based on the nationality of the stockholders who control the capital stock, the SC held that even domestic juridical entities engaged in retail trade (partnerships, associations and corporations) could not even accept any minority equity investments from foreigners since RA 1180 required their equities to be wholly-owned (100%) by Filipino citizens. In short, the old RTNL prohibited foreigners from both engaging in retail trade and investing in juridical entities engaged in retail trade.

Almost half a century later, the RTLA liberalized both the engaging and investing sides of the retail trade industry in accordance with the declared policy of the State “to promote consumer welfare in attracting, promoting and welcoming productive investments that will bring down prices for the Filipino consumer, create more jobs, promote tourism, assist small manufacturers, stimulate economic growth and enable Philippine goods and services to become globally competitive through the liberalization of the retail trade sector.”

Pursuant to this policy, RTLA liberalized the Philippine retail industry to encourage Filipino and foreign investors to forge an efficient and competitive retail trade sector in the interest of empowering the Filipino consumer through lower prices, higher quality goods, better services and wider choices.

The passage of RTLA is a confirmation of the truism that Filipino welfare and best interest, especially those of the Filipino merchants and retailers, cannot be promoted by insulating them from competition, whether local or international; and that unreasonable protectionism hampers the growth and development of the affected commercial sectors in the economy.

CONDITIONS ON FOREIGN RETAILERS AND FOREIGN INVESTORS
Section 5 of the RTLA, as amended by RA 11595, retaining the caption “Foreign Equity Participation,” provides that “Foreign-owned partnerships, association, and corporations may, upon registration with the … SEC.., or in case of foreign-owned single proprietorship, upon registration with the … DTI.., engage or invest in the retail trade business, under the following conditions:

(a) A foreign retailer shall have a minimum paid-up capital of P25M;

(b) The foreign retailer’s country of origin does not prohibit the entry of Filipino retailers; and

(c) In the case of foreign retailers engage in retail trade through more than one (1) physical store, the minimum investment per store must be at least P10M…”

In addition, Section 5 provides that failure to maintain in the Philippines the minimum paid-up capital of P25M prior to notification of the SEC or DTI “shall subject the foreign retailer to penalties or restrictions on any future trading activities /business in the Philippines.”

Prior to the amendments of RA 11595, the RTLA clearly distinguished between “foreign investor” from “foreign retailer,” and provided different conditions or qualifications.

a. Registration with the SEC/DTI

A reading of the RTLA, as amended by RA 11595, indicates that the first legal requirement for a foreigner to engage or invest in retail trade in the Philippines would be the act of registration with the SEC or DTI, and that such registration can be accomplished only with compliance with the minimum P25M paid-up capital, reciprocity and per store investment of P10M and other requirements/conditions laid out in the RTLA.

If a foreign retailer engages in retail trade in the Philippines, even with the requirement and conditions being present, it may constitute a violation of the RTLA and punishable under Section 11 providing for criminal penalties and disqualifications.

b. Reciprocity Requirements

Section 5 of the RTLA requires that a foreign-owned partnership, association or corporation may engage or invest in retail trade only when “the foreign retailer’s country of origin does not prohibit the entry of Filipino retailers.” Strictly speaking, the RTLA’s reciprocity requirement has no application to Filipino citizens and to domestic corporations which fall within the definition of “Philippine nationals” under the Foreign Investment Act of 1991, since they are not subject to regulations under the RTLA, much less would they have a foreign country of origin.

However, the RTLA’s IRR, under Section 5 (Philippine Nationals) of its Rule III (Registration), provides that “the minimum paid-up capital requirement … as well as the minimum investment per store requirement … shall not apply to corporations engaged in retail trade of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines,” which does not do away with the reciprocity requirement.

The implication of such provision, as it covers corporations engaged in retail trade, whether domestic or foreign, which are classified as “Philippine nationals” (i.e., they have at least 60% of their voting equity held by Filipinos) is the need to comply with the reciprocity requirement insofar as their qualified minority foreign investors (40% or less) are concerned.

It seems therefore, that under the RTLA’s IRR, all juridical retail enterprises with foreign equity must always comply with the reciprocity requirement, i.e., that the country of origin of the foreign equity holders must provide for reciprocity to Filipinos.

Nonetheless, when the foreign investors in a retail enterprises operating in the Philippines with at least 60% of its equity held by Filipino citizens and with a paid-up capital of less P25M do not register with the SEC or DTI compliance with the reciprocity requirement, neither the retail enterprise nor the foreign investor can be held criminally liable for violating the RTLA, since the retail enterprise is not a foreign retailer covered by Section 5 of the RTLA, nor is the foreign investor deem to be investing in a “foreign retailer,” but actually in a “Philippine national retailer.”

c. Minimum Paid-Up Capital Requirement

The RTLA’s IRR define “paid-up capital” to mean “the total investment in a business that has been paid-in in a corporation; or working capital for partnerships and single proprietorships; or assigned capital in the case of foreign corporations or its branch offices.” The IRR define “minimum paid-up capital” to mean originally invested in cash.

For purposes of registration with the SEC or the DTI, the foreign retailer shall submit a certification from the Bangko Sentral ng Pilipinas (BSP) of the inward remittance of its capital investment, or in lieu thereof, such other proof certifying that its capital investment is deposited and maintained in a bank in the Philippines.

The foreign retailer shall be required to maintain in the Philippines at all times the paid-up capital of P25M, unless it has notified the SEC or the DTI, whichever is appropriate, of its intention to repatriate its capital and cease operations in the Philippines.

Failure to maintain in the Philippines the required paid-up capital, prior to notification of the SEC or the DTI, whichever is appropriate, shall subject the foreign retailer to penalties or restrictions on any future trading activities/business in the Philippines.

d. Investment Per Store Requirement

The term “store” means “a physical outlet established in the country where goods are sold on a retail basis. For purpose of online retailing, the warehouse where goods are stored shall be deemed as store.”

The “minimum investment per store” covers the gross assets, tangible or intangible, including but not limited to buildings, leaseholds, furniture, equipment, inventory, and common use investments and facilities, such as administrative offices, warehouses, preparation or storage facilities.

Investments for common use and facilities, as reflected in the financial statements following the accounting standards adopted by the SEC and DTI shall be pro-rated among the number of stores being served.

The article re f lects the personal opinion of the author and does not re f lect the of fi cial stand of the Management Association of the Philippines or the M.A.P.

Cesar L. Villanueva is a member of the Management Association of the Philippines (M.A.P.), the former chair of the Governance Commission for GOCCs and the founding partner of the Villanueva Gabionza & Dy Law Offices.

cvillanueva @vgslaw.com

map@map.org.ph