Legal updates for Japanese investors in the Philippines

The Philippines and Japan share a long history of economic partnership and co-operation. Japan ranks as a top strategic economic partner and is the Philippines’ top export market and second-biggest import supplier, as well as its second-largest source of foreign direct investments (FDIs). According to the Japan External Trade Organisation, the presence of Japanese companies in the manufacturing industry is on the rise. There is also an uptrend in the investment fields of IT business process outsourcing, electronics, retail and infrastructure.

In recognition of its strong partnership with Japan as a key driver of its economic resurgence, the Philippine government continues to keep in force the Japan-Philippines Economic Partnership Agreement (JPEPA). The JPEPA improved market access by setting regulations on trade in goods and services, investments, movement of natural persons, IP, government procurement, competition, and improvement of the business environment. Among its key benefits, the JPEPA reduced or eliminated customs duties and accorded preferential tariff treatment between the two countries.

Recent legal developments and legislative action promise a more attractive investment landscape for Japanese investors in the Philippines, particularly with the move to open the Philippine market to FDIs and introducing tax reforms.

FDI LIBERALISATION

The Philippine FDI rules are regarded as more restrictive than its Southeast Asian peers. Foreign equity restrictions are imposed by the constitution and specific laws. Among others, the constitution imposes a 40% restriction on the ownership of land and the operation of public utilities, and no foreign equity is allowed for mass media, the practice of professions, and small scale mining.

Recently, the Philippines liberalised its restrictions in a series of legislative measures to boost the country’s recovery from the effects of the pandemic. The first measure, Republic Act No. 11595, was enacted on 10 December 2021 to ease the restrictions for foreign retailers.

Prior to its passage, two minimum capital requirements were required from foreign retailers – (1) paid-up capital of USD2.5 million; and (2) investment per store of USD830,000. The act reduced said minimum capital requirements to (1) paid-up capital of PHP25 million or approximately USD500,000; and (2) investment per store of PHP10 million or approximately USD200,000.

It also simplified the qualifications required for foreign retailers with the removal of the minimum net worth for its parent corporation, the five-year track record in retailing, and the minimum number of retailing branches or franchises in operation around the world. It also removed the condition for certain retail trade enterprises with foreign equity to do public listing.

FDI restrictions to participate in the domestic market were also eased. No foreign equity is allowed for domestic market enterprises with paid-in capital of less than USD200,000. However, foreign investment may be allowed for enterprises with paid-in capital at USD100,000 if it involves advanced technology or employs at least 50 direct employees. This exemption allowing the lower paid-in capital requirement of USD100,000 was expanded in a new law passed on 2 March 2022. Republic Act No. 11647 allowed the lower minimum capital requirement of at least USD100,000 for enterprises that are startup or startup enablers, or those that involve advanced technology, or enterprises that employ Filipinos as the majority of its direct employees, provided that the number of Filipinos direct employees should not be less than 15.

Finally, on 21 March 2022, the much anticipated legal measure allowing full foreign ownership in industries traditionally classified as public utilities – airlines, subways, tollways, and expressways – was enacted.

Under Republic Act No. 11659, only the following are now considered as public utilities, which are subject to 40% foreign equity restriction: (1) distribution of electricity, (2) transmission of electricity, (3) petroleum and petroleum products, (4) water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems, (5) seaports, and (6) public utility vehicles. Subject to reciprocity, entities engaged in operating and managing critical infrastructures, such as telecommunications, are subject to 50% foreign equity restriction. Also, foreign-owned enterprises may not own capital in any public service classified as a public utility or critical infrastructure.

Registration of foreign investments with the central bank is not required but would be useful for convenient repatriation or remittance of earnings or investment.

TAXATION REFORMS

Taxation reforms have been recently instituted to make the Philippines a more attractive investment destination. The Philippine Tax Code was amended to reduce income tax rates for domestic and resident foreign corporations (RFC) to 25% from 30% starting 1 July 2020. Dividends received by a domestic corporation or an RFC from a Philippine domestic corporation are not subject to tax. Interest income and royalties are generally subject to a final tax of 20%.

Taxes on income derived by a non-RFC from the Philippines, including royalties and interest, were also reduced from 30% to only 25% of the gross income. Subject to certain conditions, dividends from a domestic corporation are subject to a 15% final withholding tax. Further, preferential tax rates may be availed of in certain conditions under the Republic of the Philippines-Japan Tax Treaty. Among others, the treaty prescribes a preferential tax rate of 10% or 15% for dividends, 10% for interest and 10% or 15% for royalties, subject to the existence of certain conditions.

Other fiscal reforms under the Philippine Tax Code include the granting of income tax holidays for four to seven years for qualified and registered export and domestic market enterprises. The tax holidays may be followed by a special corporate income tax rate of 5% of gross income earned, in lieu of all national or local taxes, or enhanced deductions, which shall allow qualified enterprises to claim additional business deductions for a period of five or 10 years. Other tax incentives include duty exemptions on the importation of capital equipment, raw materials, spare parts, or accessories, and a value-added tax exemption on imports and a zero-rating for value-added tax on local purchases.

Among others, enterprises engaged in the following industries identified as priorities in the most recent priority plan may avail of the tax incentives:

(1) All qualified activities relating to the fight against the pandemic;

(2) Investment in activities supportive of programmes to generate employment outside of urban areas;

(3) All qualified manufacturing activities, including agro-processing;

(4) Agriculture, fishery and forestry;

(5) Strategic services such as integrated circuit design, creative industries or knowledge-based services, maintenance, repair and overhaul of aircraft, charging or refuelling stations for alternative energy vehicles, industrial waste treatment, telecommunications, state of the art engineering, procurement and construction;

(6) Healthcare and disaster risk reduction management services;

(7) Mass housing;

(8) Infrastructure and logistics, including local government units in private-public partnerships;

(9) Innovation drivers;

(10) Inclusive business models;

(11) Environment or climate change-related projects; and

(12) Energy.

Areas identified as an investment priority also include export activities such as the production and manufacture of certain export products, services exports, and activities in support of exporters.

Notably, the tax reform offers incentives to businesses engaged in the production and manufacture of medicines, medical equipment and devices, an industry the Board of Investments encourages Japanese companies to invest in. Japan’s Kansai region is recognised for medical device manufacturing and life sciences as it accounts for 30% of Japan’s total non-pharmaceutical medical products manufacturing. This stimulatory policy aims to capitalise on Japan’s expertise in the medical device industry.

ENTRY TO THE PHILIPPINES

Foreign nationals who intend to work in the Philippines must secure an Alien Employment Permit (AEP) from the Department of Labour and Employment. The issuance of the AEP is subject to the non-availability of a competent, willing, and able Filipino worker. The AEP shall be valid for the position and company for which it was issued for a period of one to three years. The permit is required before the issuance of a pre-arranged employment (9g) visa. If the expected employment duration in the Philippines will not exceed six months or while the 9g visa is still being processed, the foreign national may also apply for a provisional work permit.

For startup companies, certain visas have been authorised under the Innovative Startup Act, including the startup owner visa, startup employee visa, and startup investor visa. These visas have an initial validity of five years and may be renewed or extended for three years. The visa holders shall be exempt from the AEP requirement. Multiple entry interim startup visas valid for six months to a year may be issued for free to prospective startup owners, investors or enablers on endorsement of a Philippine host agency.

CONCLUSION

The Philippines’ robust tax incentives and relaxed equity restrictions are game-changers aimed at encouraging Japanese investors to expand their operations in the country. Heading into a post-pandemic recovery, the Philippines expects to reinforce its ties with Japan and continue its successful economic partnership.