24 August 2015
The Bangko Sentral ng Pilipinas (“BSP”), the central bank of the Philippines, reported earlier this year that inflows from foreign direct in- vestment (“FDI”) surged to an all- time high in 2014 to US$6.201 billion, up 66% annually, reflecting strong in- vestor confidence in the jurisdiction. The 2014 result also topped the up- wardly revised $4.4 billion forecast of the BSP for that year.
Notwithstanding this, recent reports from the National Statistical Coor- dination Board, the policy-making and co-ordinating agency on statisti- cal 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 Eco- nomic 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 elec- tions 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 amend- ed), 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 activ- ity reserved to Philippines nationals where foreign equity participation in any domestic or export enterprise engaged in any activity listed there- in shall be limited to a maximum of 40% as prescribed by the Constitu- tion and other specific laws; and
- List B – consists of areas of activity where foreign ownership is limited for reasons of security, defence, risk to health and morals and for the pro- tection of 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 enter- prise which produces goods for sale or renders service or otherwise en- gages in any business inside the Phil- ippines) must be at least $200,000 (which may be lowered to $100,000 if the business involves the introduc- tion of advanced technology as de- termined by the Philippine Depart- ment 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:
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No Foreign Equity
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Up to 20% Foreign Equity • Private radio communications network |
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Up to 25% Foreign Equity • Private recruitment, whether for local or overseas employment funded public works |
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Up to 30% Foreign Equity • Advertising |
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Up to 40% Foreign Equity
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Anti-Dummy law
The Philippines has an Anti-Dummy Law (Commonwealth Act No. 108, as amended) which punishes the eva- sion of the laws on nationalisation of certain rights, franchises or privi- leges. The Anti-Dummy Law pun- ishes 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 allows a for- eigner to intervene in the manage- ment, operation, administration or control of a nationalised business or corporation, except technical per- sonnel whose employment may be specifically authorised by the Secre- tary 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 for- eign investor seeks appropriate legal advice prior to embarking on any in- vestment activity in the Philippines, particularly in any area contained in the FINL.
Key advantages at a glance Investors registering with the invest- ment promotion agencies are guaranteed certain rights relating to the protection of their investment includ- ing, 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 govern- ment without just compensation and to equal treatment with local inves- tors (to the extent permitted by law).
The Philippines’ government also of- fers 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, among others, income tax holidays or ex- emptions from corporate income tax for four years (for “Non-Pioneer” projects) or six years (for “Pioneer” projects), extendible to a maximum of eight years, duty-free importa- tion of capital equipment, permit- ted deductions for labour expenses, permitted employment of foreign nationals in supervisory, technical or advisory positions and simplified customs procedures for the importa- tion 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 stream- lined permit process for foreign in- vestors. These economic zones of- fer 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-own- ership 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 ana- lysts feel that there are still so many limitations built into the Philippines Constitution that significant open- ing up to FDI is, in reality, probably not politically possible, at least right now. One major limitation is in re- lation 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 cumula- tive underinvestment and delays in implementing public capital expen- ditures 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-corrup- tion having been a high political pri- ority under the current President’s administration), bribery and corrup- tion, particularly at government au- thority level, are still perceived as rife. This also feeds into concerns of foreign investors over the enforce- ment of their rights, notwithstanding that the Philippines is seen as having a relatively sophisticated legal infra- structure (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 infra- structure 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 prom- ised with only less than ten projects being awarded to private propo- nents. A lack of capacity on the part of the various implementing agen- cies 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 reg- ulatory frameworks will be assured by the succeeding administration. In the Philippines, presidents are limited to a single six-year term and suc- ceeding 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, Presi- dent of the Philippine Institute for De- velopment Studies, reports “a rising middle class empowered by continu- ing cash remittances and returning overseas Filipino workers (who have experienced living in functioning so- cieties abroad) could constitute the swing vote for a leader with the best interest of the country in mind. We can only hope”.
For further information, please contact:
Tom Platts, Partner, Stephenson Harwood
tom.platts@shlegal.com
