One of the most common inquiries we receive from foreign investors is about setting up subsidiaries in the Philippines and their concerns about minimum capital requirements in relation to the nature of their business or industry. Foreign ownership restrictions in certain industries certainly affect the flow of foreign investment into the country, with the Philippines notably being one of the strictest within the Asia-PaciFic in terms of foreign investment policy. For some time now, the law easing these restrictions has long been expected to boost foreign business investment.
Last week, President Rodrigo Duterte signed into law Republic Act (RA) 11647, “An Act to Encourage Foreign Investment, thereby amending Republic Act 7042 otherwise known as the Foreign Investment Act of 1991, as amended and for other purposes”. This was signed by the President nearly three months after the signing of RA 11595, an Act to amend the Retail Liberalization Act 2000 (RTLA). Both laws aim to attract foreign investors to the Philippines to make its industries more competitive with those of its ASEAN neighbors.
MAIN FEATURES OF THE MODIFIED RTLA
The recently amended RTLA removed business categorization and reduced the minimum paid-up capital of foreign retailers from $2.5 million to 25 million pesos. For foreign retailers engaged in retail business through more than one physical store, the minimum investment per store must be at least P10,000,000.
While the requirement for pre-qualification with the Board of Investments (BoI) has also been removed, overseas retailers must maintain the minimum paid-up capital required. Compliance with this requirement will be subject to review by the Department of Commerce and Industry (DTI), the Securities and Exchange Commission (SEC) and the National Economic Development Authority (NEDA) every three years.
Another notable requirement under this law is the submission of a certiFicate of the Bangko Sentral ng Pilipinas (BSP) from the inward transfer of funds from capital investment. Although the law also allows other evidence that the foreign retailer’s capital investment is deposited and held in a bank in the Philippines, it is best to secure a Bangko Sentral Registration Document (BSRD) to facilitate the repatriation of Foreign investments.
The relaxation of the RTLA is expected to generate foreign investment to help the economy recover from the devastating effects of the COVID-19 pandemic. I have personally experienced the influx of inquiries from foreign traders showing a clear interest in setting up businesses here.
KEY FEATURES OF MODIFIED FIA
With respect to the lowered minimum paid-up capital under the RTLA, Section 8 of the amended Foreign Investment Act (FIA) provides that, inter alia, micro and small enterprises in the domestic market whose paid-up capital is less than the equivalent of $200,000.00 are reserved for Filipino nationals. . However, under certain conditions, foreign nationals are entitled to a minimum registered capital of $100,000.00 provided that the companies: (1) use advanced technology as determined by the Department of Science and Technology (DoST ); (2) are approved as startups or startup facilitators by major host agencies pursuant to RA No. 11337 (Innovative Startup Act); or (3) consist of a majority of Filipino employees, in no event shall the number be less than 15, a reduction from the previous requirement of at least 50 direct Filipino employees. In addition, registered foreign companies employing foreign nationals and benefiting from Iftax incentives are needed to implement a training or skills development program to ensure the transfer of technology or skills to Filipinos.
The latest amendments to the FIA should generate more foreign investment to stimulate the economy in the long term. RA 11647 recognizes that increasing capital and technology benefits the Philippines and that global and regional economies affect the Philippine economy. Appropriately, the law allows foreign investors to invest up to 100% in a domestic company unless foreign ownership is limited or prohibited to a lower percentage. Likewise, foreign investment in exporting companies is allowed up to 100%, provided that the products and services are not on the Foreign Investment Negative List (FINL). Notably, the law requires that changes to the FINL be made at least once every two years. But then, foreign exporting companies are required to register with the BoI and submit reports to ensure compliance with BoI export requirements. Failure to comply with these requirements may result in the entity’s domestic sales being reduced by up to 40% as may be ordered by the BoI or the DTI.
To integrate all promotion and facilitation efforts aimed at encouraging foreign investment, the Inter-Agency Investment Promotion Coordinating Committee (IIPCC) has also been established and will be chaired by the Secretary of Trade and Industry. The IIPCC was established primarily to establish medium and long-term Foreign Investment Promotion and Marketing Plans (FIPMPs), among other functions.
Given the rising national debt due to the pandemic and the government’s efforts to stimulate economic growth, legislation easing requirements and easing restrictions on foreign investors will help the Philippines recover and support economic development. . We are one with the government to work to attract and welcome productive foreign investment for economic growth to provide more opportunities for our fellow Filipinos.
Let’s Talk Tax is a weekly column from P&A Grant Thornton that aims to keep the public informed of various tax developments. This article is not intended to be a substitute for competent professional advice.
Gemmalu Molleno-Placido is Head of Tax Advisory & Compliance at P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.