1. On March 2, 2022, President Rodrigo Duterte signed Republic Act No. 11647 (Act 11647), which amends the Foreign Investment Act (FIA), also known as Republic Act No. 7042. The amendments aim to promote and attract foreign investments by allowing, for the first time, international investors to set up and fully own domestic enterprises (including micro and small enterprises) in the Philippines.
2. Further, another amendment includes the establishment of an Inter-Agency Investment Promotion Coordination Committee (IIPCC) tasked with integrating the promotion activities to encourage foreign investment.
3. On December 10, 2021, the President of the Philippines approved the final amendments to the Retail Trade Liberalization Act (RTLA), or Republic Act No. 11595. The bill reduces the minimum paid-up capital requirements for foreign retail enterprises, removes the requirement for a certificate of pre-qualification to the Philippine Board of Investments (BOI), and lowers the investment requirements for each store owned by a foreign enterprise.
4. These measures are aimed at attracting greater foreign investment in the retail sector, which before the pandemic, accounted for 23 percent of the total services industry with a total gross value added of PHP 1 trillion (US$ 20 billion). Full recovery of the Philippines consumer and retail sector is expected to occur in 2022, with growth predicted in 2023.
AMENDMENTS TO THE FOREIGN INVESTMENT ACT
1. Foreign ownership of small and medium-sized enterprises - Under the FIA, micro, small, and medium-sized enterprises (MSME) with paid-in capital of less than US$200,000 are reserved for Philippine nationals. However, under the amendments, foreign nationals can own an MSME with a minimum paid-in capital of US$100,000 provided that the enterprises meet the following conditions:
- Utilize advanced technology (to be determined by the Department of Science and Technology);
- Are endorsed as startup enablers or as a startup in accordance with the Innovative Startup Act; or
- The company hires no less than 15 Filipino employees, a reduction from the previous requirement of 50.
2. The new Inter-Agency Investment Promotion Coordination Committee - Under the amended FIA, the government will create the Inter-Agency Investment Promotion Coordination Committee (IIPCC) which is a body that integrates all the promotion and facilitation efforts to encourage foreign investments. An inter-agency body will provide a uniform approach to foreign investment promotion, since various government agencies may have different strategies when it comes to foreign investment promotion and facilitation.
3. The President has the power to suspend, prohibit, or limit foreign investments - To safeguard national interests, the amened FIA gives the President of the Philippines power to order the IIPCC to review foreign investments that may threaten the safety, security, and well-being of Filipinos. Examples include foreign investments involving cyberinfrastructure, military-related industries, and pipeline transportation, among others.
4. Understudy or skills development program for foreign nationals - Foreign businesses employing foreign nationals and are enjoying fiscal incentives must devise an understudy or skills development program that benefits Filipino workers. This ensures that local workers receive the knowledge and skills from their foreign colleagues.
REASON FOR AMENDMENTS
1. The Philippines has long struggled to lure foreign investments and a 2019 Organization for Economic Cooperation and Development index shows the country had Asia’s most restrictive foreign investment laws. The Philippines is also plagued with issues such as policy uncertainty, corruption, red tape, and poor infrastructure. Moreover, its economy is dominated by conglomerates (many family-owned) who have spanned their industries to include telecommunications, real estate, and retail, and the tough foreign investment rules have acted as a form of protectionism to protect these local brands.
2. Foreign businesses usually undertake a joint venture with a local partner or franchise chains to enter the Philippine market and have complained over the protection local rivals receive and their lack of management control.
3. However, the onset of the COVID-19 pandemic has forced the government to enact reforms to encourage foreign investments into the country. GDP decreased by 9.5 percent in 2020, making it the worse drop since 1947 and foreign direct investment (FDI) dropped 24.6 percent in 2020, to US$6.5 billion, down from US$8.7 billion — the third consecutive year of decline.
4. Lockdowns and other restrictions have shattered the economy and the long-run costs of COVID could reach US$810 billion, twice the 2020 GDP. During the periods of lockdown, the Philippines saw only 29 percent of businesses able to operate and from this 29 percent, 78 percent were operating at half capacity or less whilst only four percent of businesses were operating at full capacity.
5. In addition to amendments to the FIA, the government has also approved Senate Bill (SB) 2094, which amends the Public Service Act by enabling 100 percent foreign ownership of public services and has made amendments to the Retail Trade Liberation Act that reduces the minimum paid-up capital for foreign retail enterprises.
AMENDMENT TO RETAIL TRADE LIBERALIZATION ACT
1. The Philippines’ retail industry was exclusively limited to Filipino citizens until the year 2,000 when the RTLA was first introduced. The RTLA allowed foreign investors to engage in the local retail industry but imposed high minimum paid-up capital requirements.
2. Under Republic Act No. 11595, a foreign-owned enterprise engaged in the Philippines retail trade now only requires PHP 25 million (US$500,000) as the minimum paid-up capital.
3. The minimum paid-up capital is subject to review every three years by the National Economic and Development Authority (NEDA), the Securities and Exchange Commission (SEC), and the Department of Trade and Industry (DTI).
4. Certification of pre-qualification is no longer required - There are also no pre-qualification requirements such as providing proof of the company’s track record in retailing which obligated the foreign business to obtain a certification of pre-qualification from the BOI. Republic Act No. 11595 has removed such requirements for foreign enterprises. They only need to have the minimum paid-up capital of PHP 25 million (US$500,000).
5. Reduction in the minimum investment required for each store - Foreign retailers that want to open more than one physical store must invest a minimum of PHP 10 million (US$200,000) per store. This is a reduction from the previous requirement of US$830,000 per store. (This minimum investment covers tangible and intangible assets, such as buildings, furniture, and storage facilities, among others.)
6. Removal of the requirement of the public offering of shares - Retail enterprises that are foreign-owned were required to offer a minimum of 30 percent equity through any stock exchange in the Philippines, within eight years from the start of their operations. This has now been removed under Republic Act No. 11595, meaning newly established foreign retail enterprises can remain privately owned.
7. Preferential use of Filipino labor - Republic Act No. 11595 mandates that foreign retail enterprises must hire Filipino workers before engaging the services of a foreign national.
8. Promotion of locally manufactured products - The act encourages foreign retailers to keep a stock inventory of locally manufactured products.
Source:
https://www.aseanbriefing.com/news/the-philippines-amends-its-foreign-investment-act/
https://www.aseanbriefing.com/news/philippines-amends-retail-trade-liberalization-act-to-attract-foreign-investment/
