Foreign Investment in the Philippines – to be or not to be?

Tom Platts & Emma Nicholls

Posted: 26th June 2015 11:50

The Bangko Sentral ng Pilipinas ("BSP"), the central bank of the Philippines, reported earlier this year that inflows from foreign direct investment ("FDI") surged to an all-time high in 2014 to US$6.201 billion, up 66% annually, reflecting strong investor confidence in the jurisdiction.  The 2014 result also topped the upwardly revised $4.4 billion forecast of the BSP for that year. 
 
Notwithstanding this, recent reports from the National Statistical Coordination Board, the policy-making and co-ordinating agency on statistical matters in the Philippines, show that, whilst total foreign investments approved in the first quarter of 2015 by the seven investment promotion agencies(namely the Board of Investments ("BOI"), Clark Development Corporation, Philippine Economic Zone Authority ("PEZA"), Subic Bay Metropolitan Authority as well as the Authority of the Freeport Area of Bataan, BOI-Autonomous Region of Muslim Mindanao, and Cagayan Economic Zone Authority) amounted to PhP 21.8 billion ($481.1 million), this was 41.7% lower compared to PhP 37.4bn ($825.4m) approved in the same period in 2014.
 
The reasons behind this sudden fall have provoked much speculation.  Of course, the sudden decline in FDI in Q1 2015 is not necessarily the result of just one or two factors.  Perhaps, in actual fact, 2014 was just a "freak" year; total FDI for 2013 was recorded at $3.7bn.  The impending 2016 elections may also be having an effect, as foreign investors wait to assess the impact on the Philippines' existing policies on foreign investment.
 
In the following article, we take a brief look at the current landscape for foreign investment from a legal and regulatory perspective, along with a few thoughts on why historically, and still today, the Philippines has lagged behind many of its Southeast Asian neighbours in terms of FDI.
 
How to operate in the Philippines: some legal considerations
The Negative List

 
Under the Foreign Investments Act of 1991 (Republic Act 7042, as amended), foreign investors are allowed to invest 100% equity in companies engaged in the majority of business activities in the Philippines, subject to certain restrictions as prescribed in the Foreign Investments Negative List ("FINL"), the latest of which was issued on 29 May 2015.  The FINL is a list of areas of economic activity in respect of which foreign investors are limited to a certain percentage or which are reserved for Philippines nationals.  The FINL is classified as follows:
 
· List A -consists of areas of activity reserved to Philippines nationals where foreign equity participation in any domestic or export enterprise engaged in any activity listed therein shall be limited to a maximum of 40% as prescribed by the Constitution and other specific laws; and
 
· List B - consists of areas of activity where foreign ownership is limited pursuant to law such as defence or law enforcement-related activities, which have negative implications on public health and morals, and small and medium-scale enterprises.
 
In essence, a foreign investor may invest up to 100% equity into the Philippines provided that: (i) the proposed activity is not among those listed on the FINL; and (ii) the paid-up capital for investing in a domestic market enterprise (being an enterprise which produces goods for sale or renders service or otherwise engages in any business inside the Philippines) must be at least $200,000 (which may be lowered to $100,000 if the business involves the introduction of advanced technology as determined by the Philippine Department of Science and Technology, or employment of at least 50 direct employees).  If the investment is into an export enterprise, the minimum paid-up capital requirement is only PhP 5,000. 
 
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Some of the activities included in the Tenth Negative List (which took effect on 29 May 2015) are as follows:
 
No Foreign Equity
·         The practice of professions (including, but not limited to pharmacy, forestry and law)
·         Retail trade enterprises with paid-up capital of less than $2,500,000
·         Small-scale mining
Up to 20% Foreign Equity
·         Private radio communications network
Up to 25% Foreign Equity
·         Private recruitment, whether for local or overseas employment
·         Save as provided by law, contracts for the construction and repair of locally-funded public works
Up to 30% Foreign Equity
·         Advertising
Up to 40% Foreign Equity
·         Save as provided by law, exploration, development and utilisation of natural resources
·         Ownership of private lands
·         Ownership of condominium units
 
Anti-Dummy law
 
The Philippines has an Anti-Dummy Law (Commonwealth Act No. 108, as amended) which punishes the evasion of the laws on nationalisation of certain rights, franchises or privileges.  The Anti-Dummy Law punishes any citizen of the Philippines or of any other specific country who allows his name or citizenship to be used for the purpose of evading such provision (and any alien or foreigner profiting thereby), or allowsa foreigner to intervene in the management, operation, administration or control of a nationalised business or corporation, except technical personnel whose employment may be specifically authorised by the Secretary of Justice or foreigners who are elected as directors in proportion to the allowable foreign ownership, by imprisonment for not less than five nor more than fifteen years, and by a fine of not less than the value of the right, franchise or privilege, which is enjoyed or acquired in violation of the Anti-Dummy Law.  As a result, we strongly recommend that any foreign investor seeks appropriate legal advice prior to embarking on any investment activity in the Philippines, particularly in any area contained in the FINL.
 
Key advantages at a glance
 
Investors registering with the investment promotion agenciesare guaranteed certain rights relating to the protection of their investment including, among other things, the right to repatriate the entire proceeds of the liquidation of the investment, the right to remit earnings, freedom from expropriation by the government without just compensation and to equal treatment with local investors (to the extent permitted by law).
 
The Philippines' government also offers many fiscal and non-fiscal incentives for foreign investors.  Projects outside of the economic zones may register with the BOI to qualify for certain incentives including, without limitation, income tax holidays or exemptions from corporate income tax for four years (for "Non-Pioneer" projects) or six years (for "Pioneer" projects (projects ), extendible to a maximum of eight years, duty-free importation of capital equipment, permitted deductions for labour expenses, permitted employment of foreign nationals in supervisory, technical or advisory positions and simplified customs procedures for the importation of equipment, spare parts, raw materials and supplies and exports of processed products.
 
Many of the projects and potential projects we have recently advised on have involved foreign investment into the Philippines through various of the special economic zones.  The Philippines has won praise for its “PEZA” zones, which offer a streamlined permit process for foreign investors.  These economic zones offer further incentives under various laws such as the Special Economic Zone Act of 1995 (implemented by PEZA) and the Bases Conversion and Development Act of 1992.
 
Still some challenges remain?
 
Notwithstanding the 2014 statistics for foreign investment, local news reports from earlier this year reveal that the government is concerned foreign investment is still lagging.
 
40% ownership rule
 
Many argue that foreign investors are put-off by the 40% foreign-ownership rule in relation to certain business activities.  Whilst there has been some further opening up to foreign investors, for example, the passing into law of Republic Act No. 10641 in July 2014, which permits, among other things, qualified foreign banks to own 100% of a Philippine bank and to invest up to 100% equity in a new banking subsidiary, many analysts feel that there are still so many limitations built into the Philippines Constitution that modification is, in reality, probably not politically possible, at least right now.  One major limitation is in relation to land ownership by foreign investors, which is still restricted to 40% under the latest FINL, issued on 29 May 2015.
 
Infrastructure, and bribery and corruption
 
Further challenges faced by investors include major gaps in the country's infrastructure as a result of cumulative underinvestment and delays in implementing public capital expenditures and other fiscal constraints.  Then there is the overriding issue of corruption.  Whilst corruption levels have reportedly declined slightly over the past few years (with anti-corruption having been a high political priority under the current President's administration), bribery and corruption, particularly at government authority level, are still perceived as rife.  This also feeds into concerns of foreign investors over the enforcement of rights, notwithstanding that the Philippines is seen as having a relatively sophisticated legal infrastructure (at least compared to many of its neighbours).
 
Slow government spending has also resulted in bringing down the growth forecast of the general economy.  More government spending in infrastructure projects, health and education is imperative for the economy to continue to grow.  Moreover, the flagship PPP program of the current President has not taken off as promised with only less than ten projects being awarded to private proponents.  A lack of capacity on the part of the various implementing agencies has been seen to be the cause of the slow pace of the implementation of these projects.
 
The impending 2016 elections
 
One major influencing factor as to what the future holds for FDI in the Philippines is the issue of who succeeds the current president, Benigo Aquino III, who will end his term of office in the middle of 2016.  The Constitution prevents an incumbent president from seeking re-election.  Whilst the Philippines appears to have responded favourably to President Aquino’s ambitions for the elimination of corruption, transparency and good governance, there is much anticipation as to whether the same (if not stronger) commitment to good governance, policy and regulatory frameworks will be assured by the succeeding administration.  In the Philippines, presidents are limited to a single six-year term and succeeding administrations have been known to repeal their predecessors’ work.
 
It shall be interesting to see how the rest of 2015 pans out for the Philippines, both in terms of FDI, and in terms of the economy as a whole (which grew by a slowed 5.2% in Q1 of 2015) as the 2016 elections draw closer.  As Gilberto M. Llanto, President of the Philippine Institute for Development Studies, reports "a rising middle class empowered by continuing cash remittances and returning overseas Filipino workers (who have experienced living in functioning societies abroad) could constitute the swing vote for a leader with the best interest of the country in mind.  We can only hope".
 
Stephenson Harwoodis a full service international law firm, with over 130 partners and 800 staff worldwide. 
 
We offer clients an integrated service in multi-jurisdictional matters and regularly advise, alongside top domestic firms including ACCRA Law, a range of clients including individuals, corporations and financial institutions on transactions relating to their activities in the Philippines. 
 
Members of our team have previously advised the likes of, among others, Diageo, British American Tobacco, GDF Suez, Stella International Holdings, DVB Bank and Genii Telecommunications across a variety of sectors in the Philippines.
 
The Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW is a full service law firm in the Philippines with over 150 lawyers of which 44 are partners.  Our lawyers are assisted by paralegals and a full complement of non-legal staff.  Our main office is located in Bonifacio Global City, Taguig, Metro Manila.  We have branch offices in Cebu City and Davao City.  The contact details of ACCRALAW are as follows:

Head Office Address:

22/F ACCRALAW Tower
2nd Ave. cor. 30th St.
Crescent Park West
Bonifacio Global City, 0399 Taguig
Metro Manila, Philippines

Tel. No. (632) 830 8000
Fax Nos. (632) 403 7007; (632) 403 7009

E-mail: accra@accralaw.com
Website: www.accralaw.com
 
Disclaimer: Stephenson Harwood LLP is unable to advise on the laws of the Philippines.
The information contained in this document does not purport to be comprehensive, should not be taken as legal advice or relied upon. 
 



 
 

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