Taxwise Or Otherwise

Under Republic Act No. 4566, otherwise known as the Contractors’ License Law, a license shall first be issued by the Philippine Contractors Accreditation Board (PCAB) before an individual, firm, partnership, corporation, association or other organization can engage in the construction business as a contractor.

For 31 years, PCAB has been imposing a nationality restriction on the issuance of a Regular License to contractors. At first, the minimum Filipino ownership in construction companies was set at 70% in the Implementing Rules and Regulations (IRR) of RA No. 4566, formulated by PCAB. Later, the minimum Filipino ownership was reduced to 60%.

In implementing this requirement, PCAB requires that: (1) Filipino participation must be at least 60% of the total shares subscribed; (2) Filipino paid-up capital must be at least 60% of the total paid-up capital; (3) Filipino peso value contribution must be at least 60% of the total capital contributions (i.e., including additional paid-in capital) of both voting and non-voting shares; and (4) no Filipino shares may be assigned or encumbered to foreigners. The IRR even states that the introduction of foreign equity in excess of 40% into a construction company that holds a Regular License shall ipso facto invalidate the license.

Should a contractor not qualify for a Regular License, it may apply for a Special License, but this is only valid for a specific project. As can be seen, PCAB has imposed a unique and strict rule on the determination of the nationality of a construction company. It even veers away from the usual manner of determining whether a corporation is Filipino-owned, which involves two tests. First, at least 60% of the total number of voting shares must be held by Filipinos; and second, 60% of the total outstanding shares must be Filipino-owned.

In a recent decision of the Supreme Court (G.R. No. 217590 dated March 10), Section 3.1, Rule 3 and Section 12.7, Rule 12 of the IRR, which imposes the nationality requirement and the ipso facto revocation of the license of those who violate the nationality requirement, were struck down. The High Court ruled that PCAB went beyond the confines of the delegating statute when it created the nationality-based license types in its IRR.

Based on the text of the Contractor’s License Law, there is nothing that shows that Congress intended to discriminate against foreign contractors. The Supreme Court reiterated that “the clear letter of the law is controlling and cannot be amended by a mere administrative rule issued for its implementation.” Thus, it ultimately ruled that the construction industry is not an area reserved exclusively for Filipinos under the Constitution, and neither do laws show any indication that foreigners are prohibited from entering the field of construction.

Furthermore, the Supreme Court rejected PCAB’s contention that it can adopt necessary rules and regulations to change the classification of contractors. While Section 17 of RA 4566 grants PCAB the power to classify contractors in a manner consistent with established usage and procedure in the construction industry, it cannot override a law. The only statutorily mandated classifications in the construction industry are provided under Section 16 of RA 4566: general engineering contracting, general building contracting, and specialty contracting.

The Supreme Court also struck down PCAB’s argument that construction is a profession limited to Filipino citizens under the Constitution. The term profession refers to “the practice of natural persons of a certain field in which they are trained, certified, and licensed.” Being a licensed contractor does not necessarily bring a construction company within the ambit of the Constitutional provision restricting the practice of professions to Filipino citizens.

Based on this decision, a Regular License can be issued to domestic corporations regardless of foreign equity ownership. In other words, even a 100% foreign-owned construction company can secure a Regular License from PCAB. That said, construction companies currently holding a Regular License can also restructure its ownership to increase foreign equity participation without its license being ipso facto invalidated.

While a Regular License may be issued to a foreign-owned domestic construction company, it does not give blanket authority to undertake any projects in the Philippines, as some projects require that the construction company maintain a certain degree of Filipino ownership. One example would be the foreign equity limitation imposed on entities engaged in the construction of defense-related structures. Under Commonwealth Act No. 541, the construction required for the national defense of the Philippines (i.e., land, air, and sea-coast defenses, arsenals, barracks, depots, hangars, landing fields, quarters, hospitals, all other buildings, and structures alike) can be undertaken only by a 75% Filipino-owned corporation. Another example is the foreign equity limitation imposed on bidders of infrastructure projects under RA 9184, otherwise known as the Government Procurement Reform Act (GPRA). Under its IRR, the bidder for an infrastructure project should be at least 75% owned by Filipinos.

Also, construction companies, incorporated and organized under foreign laws, are still required to secure a Special License from PCAB before they can undertake construction activities in the Philippines. Likewise, joint ventures and consortiums organized for a specific construction undertaking are still required to secure a Special License from PCAB.

All in all, the voiding of the 40% foreign equity limit is a welcome development that would allow the entry of foreign investment and generate employment in the construction industry. It is a game-changer in the realm of corporate structuring, tearing down the 31-year-old foreign equity restriction on the issuance of a Regular License to contractors. Now, it’s time for PCAB to formulate new rules or guidelines to implement the Supreme Court ruling, hopefully, this time on well-grounded foundation. 

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.


Sidharta Felice Mae O. Garcia  is a Senior Associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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