Strategies for foreign companies investing in the Philippines

The Philippines has seen an increase in economic activity this year as the country continues its slow but steady recovery from the effects of the pandemic, as supported by key legislative and regulatory reforms that are squarely aimed at invigorating a stagnating economy. These measures have been designed to attract capital and technology from overseas investors, with foreign direct investment (FDI) in the country primed to increase amid a more relaxed regulatory landscape.

RENEWABLE ENERGY

Through the Department of Energy (DOE) Circular No. 2022-11-0034, which took effect on 8 December 2022, certain limitations on foreign participation to engage in the exploration, development and utilisation of the Philippines’ renewable energy sector have been removed. Prior to its effectivity, a renewable energy service or operating contract could be awarded only to Filipinos or corporations that are at least 60% Filipino-owned. The DOE circular allows 100% foreign investment in certain renewable energy sectors such as solar and wind energy.

Hydropower generation, however, remains subject to nationality limitations, and certain aspects of business, such as land ownership, are still subject to foreign ownership restrictions. Any of the residual nationality restrictions affecting the business, however, may be addressed by structuring the business appropriately.

The amendment is a welcome development meant to help achieve the country’s ambitious target of a 35% renewable energy share in the power generation mix by 2030, and a 50% share by 2040. Considering the significant amount of time required to bring these capital-intensive projects from pre-development to commercial operation, the Philippines expects a significant influx of investment in renewable energy, which will prove critical in helping the country secure a future built on clean and sustainable energy.

Notably, the rationalisation of fiscal incentives under a recent tax reform law, the Corporate Recovery and Tax Incentives for Enterprise Act (CREATE Act), which imposes a uniform and time-bound package of incentives for qualified enterprises, did not revoke the fiscal and non-fiscal incentives available to the renewable energy sector. As such, renewable energy developers are assured of undiminished incentives under the Renewable Energy Act, such as a seven-year income tax holiday and a 10% corporate income tax rate after the tax holiday.

LIBERALISED PUBLIC SERVICES

Effective from 9 April 2022, the Philippine government relaxed the stringent foreign equity restrictions under the 86-year-old Public Service Act (PSA) through the passage of Republic Act No. 11659. This PSA amendment eases the nationality requirement for certain industries or activities historically covered by the constitutional restriction imposed on public utilities.

In particular, the Philippine Constitution limits the ownership and operation of public utilities to Filipino citizens and corporations to at least 60%-owned by Filipinos. However, with the effectivity of the PSA amendment, only the following remain as public utilities:

• Distribution of electricity;
• Transmission of electricity;
• Petroleum and petroleum products pipeline transmission systems;
• Water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems;
• Seaports; and
• Public utility vehicles.

Thus, all other public services have been liberalised from the 40% foreign equity limit previously applied in accordance with the constitution. Industries that have been liberalised from public utility restrictions include the following:

• Airports;
• Railways and subways;
• Telecommunications;
• Logistics and freight forwarding;
• Shipping;
• Air carriers;
• Expressways and tollways; and
• Transport network companies.

Nonetheless, enterprises that are considered critical infrastructure are still subject to foreign equity restrictions. Critical infrastructure refers to any public service that owns or operates systems and assets that are vital to the government, and that their incapacity or destruction would have a detrimental impact on national security.

Telecommunications are specifically classified as critical infrastructure, and the PSA amendment provides that foreign nationals are not allowed to own more than 50% of the capital of entities operating and managing critical infrastructure unless the country of such foreign national accords reciprocity to the Philippines as may be provided by foreign law, treaty or international agreement. Thus, in instances where reciprocity is not established, nationality restrictions continue to be applicable to enterprises that are considered critical infrastructure.

EASING BARRIERS

Congress recently passed RA No. 11595, which amends the Retail Trade Liberalisation Act (RTLA) and relaxes the basic requirements for a foreign retailer to engage in retail business in the Philippines. Prior to this, foreign retailers were only able to engage in a retail business if it had a minimum paid-up capital of USD2.5 million.

With the passage of RA No. 11595, the prescribed minimum paid-up capital for retail enterprises with foreign equity was lowered to PHP25 million (about USD500,000). Moreover, for foreign retailers having more than one physical store, the law decreased the minimum investment per store to about USD200,000 (from USD 250,000).

Likewise, under the Foreign Investments Act (FIA), micro and small domestic market enterprises with paid-in equity capital of less than USD200,000 are generally reserved for Filipinos and corporations at least 60% owned by Filipinos. The FIA was recently amended through RA No. 11647, which became effective on 17 March 2022 and provided that a lower capitalisation threshold of USD100,000 may be availed of by non-Filipino enterprises if any of the following requirements are met:

• Involve advanced technology as determined by the Department of Science and Technology;
• Endorsed as startups or startup enablers by the lead host agencies pursuant to RA No. 11337, also known as the Innovative Startup Act; or
• Employ at least 15 Filipinos, who represent a majority of the direct employees of the enterprise.

INVESTMENT PRIORITY PLAN

On 14 June 2022, the Strategic Investment Priority Plan (SIPP) became effective pursuant to Memorandum Order No. 61, dated 24 May 2022, approved by then president Rodrigo Duterte. By dividing activities into investment tiers, the SIPP was aimed at industries identified by the government as critical for the country’s continued economic and technological development, granting entities engaged in qualified activities the ability to avail of incentives under the CREATE Act. The available fiscal and non-fiscal incentives depend on the nature of the business, its location, and the government agency with which it will be registered.

The CREATE Act provides a uniform system of granting tax incentives to businesses to the extent of their approved registered projects or activities under the SIPP. The Fiscal Incentives Review Board or the investment promotion agencies (IPAs), with delegated authority from the board, are tasked to assess and grant the appropriate tax incentives.

IPAs refer to government entities created by law, executive order, decree or other issuance, in charge of promoting investments, granting and administering tax and non-tax incentives, and overseeing the operations of the different economic zones and freeports in accordance with their respective special laws.

All activities or projects which are part of the SIPP may be registered with any of the IPAs. Entities engaged in covered activities can avail of incentives in the SIPP, particularly in the form of: income tax holidays; duty exemption on importation of capital equipment, raw materials, spare parts or accessories; enhanced deductions; and a preferential 5% corporate income tax rate. The length of the incentive shall then be based on the tier under which the activity falls, such that a higher tier will consequently grant the qualifying entity a longer period of entitlement to the incentives.

Covered activities under the SIPP include, but are not limited to, green ecosystems, health-related activities, defence-related activities, research and development, and highly technical manufacturing and production of innovative products and services.

CONCLUSION

In summary, the recent amendments to the Philippine legal framework represent a significant milestone in the country’s efforts to attract more foreign investment and boost economic growth. With these new changes, foreign businesses can now operate more freely in the Philippines and engage in a wider range of economic activities.

These reforms are expected to bring increased competition, innovation and job opportunities in various sectors of the economy. Foreign investors should explore the potential that the Philippines offers as an investment destination, and seize the opportunities presented by these reforms.

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Metro Manila, Philippines
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