Global M&A activity has climbed sharply since last year, creating opportunities in emerging markets like India and the Philippines, which have relaxed and liberalised their investment policies
The Philippine economy’s resilience amid global uncertainty and the pandemic is unprecedented, with the National Economic Development Authority (NEDA) reporting GDP growth of 7.7% in Q4 2021 – edging full-year growth beyond the government’s 5-5.5% target to 5.6%. This bullish trend for one of Asia’s fastest growing economies is expected to continue in 2022, with GDP growth projected at 7-9%, bouncing back to pre-pandemic levels by Q3. Sustaining this momentum are the nationwide vaccination programme, looser mobility restrictions and public infrastructure spending prioritised by the government.
Significant foreign investment roadblocks are, meanwhile, removed in a shift in economic policy direction – making the Philippines more competitive against its neighbours. With the central bank reporting a 52.8% business confidence index, the Philippines is positioning itself among the world’s most attractive global destinations for business combinations.
Regulations affecting M&A transactions are not codified under one law. Depending on the structure, parties and businesses involved and transaction size, they are usually regulated by foreign investment restrictions under the Philippine Constitution and special laws, along with antitrust policies codified in the Competition Act and regulatory and corporate authorisations required under the Revised Corporation Code and Securities Regulation Code.
To drive economic recovery, new measures are being adopted to change the tax and legal landscape affecting M&A. These changes are primarily aimed at bringing new capital, ideas and technology at globally competitive prices.
EASING FDI RESTRICTIONS
Particularly critical for inbound M&A are restrictions on foreign direct investment (FDI), usually restricting equity and management. The Philippines has previously adopted a protectionist approach, with among the most restrictive FDI rules in the region. However, in a series of recent legislative enactments, Philippine policy is shifting to favour a more liberal free-trade environment.
Paving the way for this historic economic reform is an amendment to the Retail Trade Liberalisation Act, which reduced required minimum paid-up capital on entities engaged in retail to allow foreign equity to PHP25 million (USD480,000). This is a significant reduction from the previous requirement of USD2.5 million. Minimum investment per store for foreign retailers was likewise reduced to just under USD200,000 per store, from the previous USD830,000. Additionally, retail enterprises with more than 80% foreign ownership are no longer required to make a public offering of at least 30% of their equity.
A minimum paid-up capital requirement of USD200,000 is placed on foreign equity on domestic market enterprises, or those engaged in the sale of products or services to the domestic market. This particularly aims to protect local micro and small domestic market enterprises from foreign competition. But certain enterprises allowed to have a lower minimum paid-up capital of USD100,000 of foreign equity now include startups or startup enablers – aiming to make the country a leading startup hub. The number of mandatory Filipino direct hires is also lowered from 50 to just the majority of the enterprise’s employees, provided there is no less than 15 Filipino direct hires.
The most recent and anticipated foreign investment-friendly reform is an amendment of the 85-year-old Public Service Act. Public utility refers to a business engaged in regularly supplying the public with some commodity or service of public consequence. As a critical component to establishing a self-reliant community, the constitution formerly placed a 40% foreign equity restriction on public utilities. While the question of which enterprises may be deemed public utilities had been much disputed, it has been traditionally considered to include enterprises providing electricity, gas, water, transportation and telephone services to the public.
With the amendment, public utilities have now been identified and limited to the following: (1) distribution of electricity; (2) transmission of electricity; (3) petroleum and petroleum products pipeline transmission systems; (4) water pipeline distribution systems and wastewater pipeline systems including sewerage pipeline systems; (5) seaports; and (6) public utility vehicles. This effectively allows full foreign ownership of other entities traditionally considered public utilities such as subways, airports, airlines, railways, expressways and tollways. This liberalisation is moderated by certain safeguards, including 50% foreign equity restriction on entities engaged in the operation and management of critical infrastructure, but subject to reciprocity.
These amendments are expected to transform the foreign investment landscape and boost inbound M&As.
M&A NOTIFICATION REQUIREMENT
As an antitrust safeguard, M&A parties must notify the Philippine Competition Commission (PCC) if their transaction exceeds the specified threshold. Upon notice, the PCC will conduct a review to determine if the transaction will significantly reduce competition in the relevant market. An M&A agreement consummated in violation of the notification requirement is void and will subject the parties to an administrative fine.
To push an M&A rebound for economic recovery, the country has temporarily eased the compulsory notification requirement. Before the pandemic, the notification threshold was PHP6 billion for the size of the party, and PHP2.4 billion for the transaction size. Under the “Bayanihan to Recover as One Act”, a law granting the president additional authority to combat the pandemic, the threshold was temporarily adjusted to exempt M&A with transaction values below PHP50 billion for two years, or until 15 September 2022.
Corporate approvals are necessary for a corporation to enter into an M&A. Depending on the structure and subject to the stricter requirements under the corporations’ charters, approval of the board majority and shareholders representing at least two-thirds of the outstanding capital stock are required. The plan for mergers or consolidation must also be duly approved by the Philippine Securities and Exchange Commission.
The acquisition of a listed or public company is also subject to mandatory tender offer rules. The acquirer must undertake a tender offer to all shareholders for acquisitions triggering the threshold. The threshold is currently set at 35% of the outstanding voting shares – or such that would be sufficient to gain control of the board – whether by single acquisition or a creeping acquisition within 12 months, and any acquisition that would result in ownership of over 50% of the total outstanding equity securities. If 15% of the outstanding shares will be acquired within 12 months, only a declaration to that effect must be filed.
Foreign investments are not required to be registered with the central bank unless the repatriation of capital or remittance of related earnings in the Philippine peso is funded by foreign currency resources of authorised agent banks, their subsidiaries, or affiliate corporations. In such a case, the registered investment will be entitled to full and immediate repatriation using the banks’ foreign currency resources. For unregistered investments, the foreign currency to fund their repatriation should be sourced outside the banking system.
Tax consequences also hinge on the M&A structure. Share acquisitions, for example, are subject to capital gains tax (CGT) of 15% on net gain; documentary stamp tax (DST) of approximately 0.75% of the par value of the shares sold for unlisted shares; and a stock transaction tax of 0.6% of the selling price for listed shares.
In contrast, taxes on asset acquisitions depend on the asset classification at the seller’s hands. The sale of ordinary assets is subject to income tax and value-added tax (12%). DST and withholding tax are also imposed on the sale of certain assets such as real property. On the other hand, the sale of real property held as capital assets is subject to CGT (6%) and DST (1.5%). M&A transactions made purely for reorganisation purposes are exempt from tax. Proof of payment of these taxes must be presented and approved by the Bureau of Internal Revenue. A certification issued by the bureau is a precondition for registration of the transfer of title in the corporate books or registry of properties.
Notably, the Philippines recently adopted tax reforms to make the country a more attractive investment destination. This includes reduction of corporate income tax to 25% from 30% of net income for domestic and resident foreign corporations. Income received by non-resident foreign corporations from the Philippines is subject to reduced income tax of 25% on gross income, and 15% final withholding tax for dividends from domestic corporations, subject to certain conditions. Preferential tax rates may be availed of in certain conditions under existing tax treaties.
RIPE FOR M&A
The pandemic crisis induced a reshaping of the Philippine economy, inspiring structural reforms that caused asymmetric recovery across various sectors. With the government’s continuing efforts to revitalise the economy, coupled with key legislative and regulatory developments designed to improve the investment landscape, the Philippines is ripe for transformative M&A activities that can assist companies in positioning themselves as global market leaders.
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