Philippines – Lower Barriers To Entry In The Retail Industry.

Based on the latest Foreign Direct Investment (FDI) regulatory restrictiveness index of the Organization for Economic Cooperation and Development (OECD), the Philippines obtained a score of 0.374 on a scale of 0 (open) to 1 (closed). In terms of ranking, the Philippines has the third most restrictive FDI rules out of 83 countries included in the OECD’s study.

This perhaps comes as no surprise given that the Philippines has a largely protectionist policy on national economy. In fact, this economic nationalism is built into the Philippine Constitution, which enshrines the Filipino First Policy and nationalizes key sectors in our society. However, it appears that the attitude has shifted in favor of FDIs.

On 10 December 2021, President Rodrigo Duterte signed into law Republic Act No. 11595 otherwise known as ‘An Act amending Republic Act No. 8762 or the “Retail Trade Liberalization Act of 2000”, by lowering the required paid-up capital for foreign retail enterprises, and for other purposes’. Under the Retail Trade Liberalization Act of 2000, retail trade refers to any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption which does not cover the following:

1. Sales by a manufacturer, processor, laborer, or worker, to the general public the products manufactured, processed, or products by him if his capital does not exceed PhP100,000 (approximately USD1,900);
2. Sales by a farmer or agriculturist selling the products of his farm;
3. Sales in restaurant operations by a hotel owner or innkeeper irrespective of the amount capital: Provided, that the restaurant is incidental to the hotel business; and
4. Sales which are limited only to products manufactured, processed or assembled by a manufacturer through a single outlet, irrespective of capitalization.

Despite its nomenclature, the Retail Trade Liberalization Act of 2000, as amended, did not completely liberalize retail trade and retained a clear demarcation line between Filipino and foreign retailers in the Philippines, in terms of economic rights and investment privileges. However, it did ease the requirements for foreign retailers to invest in or engage in retail trade in the Philippines. Notably, its predecessor was Republic Act No. 1180 which effectively nationalized retail trade and prohibited aliens and corporations not wholly-owned by citizens of the Philippines from engaging in retail trade. Republic Act No. 11595 further lowered the barriers to entry in the retail industry by (a) removing the investment categories or classifications under the Retail Trade Liberalization Act of 2000; and (b) lowering the minimum capitalization requirements for all foreign retailers to PhP25 million (approximately USD488,000) from a minimum paid-up capital of (i) USD2.5 million (approximately PhP128 million); or (ii) USD250,000 (approximately PhP13 million) per store if the enterprise specializes in high-end or luxury products. The new minimum paid-up capital requirement will nevertheless be subject to review by the Department of Trade and Industry (DTI), Securities and Exchange Commission (SEC), and the National Economic and Development Authority (NEDA) every three (3) years from the effectivity of Republic Act No. 11595.

In addition, Republic Act No. 11595 lowered the minimum investment requirement per store from USD830,000 (approximately PhP43 million) per store to at least PhP10 million (approximately USD200,000). Under Republic Act No. 11595, minimum investment per store is defined as the value of the gross assets, tangible or intangible, including but not limited to buildings, leaseholds, furniture, equipment, inventory, and common use investments and facilities such as administrative offices, warehouses, preparation or storage facilities. The investment for common use and facilities, as reflected in the financial statements following the accounting standards adopted by the SEC or the DTI, whichever is applicable, shall be prorated among the number of stores being served.

Other significant changes brought about by Republic Act No. 11595 are (a) the removal of the requirement for foreign retailers to obtain a Certificate of Prequalification from the Board of Investments and to show proof of compliance with the prequalification requirements; and (b) the deletion of the requirement for retail enterprises with foreign ownership of more than eighty percent (80%) to offer a minimum of thirty percent (30%) of their equity to the public through any stock exchange in the Philippines within eight (8) years from their start of operations.

However, Republic Act No. 11595 retained the reciprocity requirement such that the foreign retailer’s country of origin should not prohibit the entry of Filipino retailers to be allowed to register in the Philippines.

Finally, Republic Act No. 11595 reduced the penalties provided in the Retail Trade Liberalization Act for violation of its provisions from imprisonment of six (6) to eight (8) years to four (4) to six (6) years, and a fine from PhP1 million (approximately USD20,000) to PhP20 million (approximately USD390,000) to PhP1 million (approximately USD20,000) to PhP5 million (approximately USD98,000).

With the passage of Republic Act No. 11595, market entry barriers in the retail industry, particularly for foreign retailers, have eased. We will likely see more players in the domestic market, whose investments will in turn hopefully boost the economy’s recovery from the effects of the pandemic.

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