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5 September, 2017
“The department store is online now.” – Warren Buffett on the transformation of retail as we know it.
The Internet has revolutionized the way of doing business. It has expanded the reach of businesses beyond territorial jurisdictions and created a seemingly borderless world. The mode by which commercial transactions are conducted has drastically changed – allowing businesses and individuals all over the world to instantaneously interact across state boundaries without need of face to face interaction and physical spaces.
Early this year, the Securities and Exchange Commission (“SEC”) issued an opinion stating that an online gaming system with absolutely no physical presence in the Philippines, shall be considered as “doing business” in the Philippines and was thus required to obtain a license to do business from the SEC. It did not matter that the Company had no physical office, no employees and no physical servers located within the Philippines. Anyone from the Philippines who has access to the Internet could access the website, open an account and purchase online gaming content. There is no physical delivery of any product to the Philippines, as the content is offered, sold and accessed exclusively online.
The hallmark twin-characterization test for determining whether an entity is doing business in the Philippines was laid down in the case of Mentholatum Co. Inc. v. Mangiliman. It provides that for a foreign corporation to be deemed doing business in the Philippines, there must be a showing that first, the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized; and second, the foreign corporation is engaged in activities which implies a continuity of commercial dealings, and contemplates the progressive prosecution of the purpose and object of its organization. This definition has been codified in the
Foreign Investments Act which defines “doing business” as “soliciting orders, service contracts, opening offices, whether called "’liaison’ offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.”
Given the above definition, the question remains – is mere online activity sufficient to constitute “doing business” within the Philippines? The SEC seems to answer in the affirmative. The SEC cited several factors to justify that the corporation was doing business in the Philippines: 1) creation of the online account takes place in the Philippines; 2) access is made by users located in the Philippines; 3) payment of the content is made from within the Philippines using local credit cards; and 4) delivery of the online content is made in the Philippines. The IP address located in the Philippines receives the offer of services, sends the acceptance of the offer to the virtual plane and finally, the content or service is delivered through said virtual plane to the account holder’s IP address in the Philippines. Clearly, says the SEC, “the transactions will be consummated in the Philippines.”
Under existing laws, a foreign corporation deemed “doing business” in the Philippines is required to obtain a license to do so from the SEC. The failure to obtain such license will prevent the foreign corporation from having the personality to take refuge in Philippine courts and from invoking Philippine law, if aggrieved. However, despite the inability to maintain any suit or proceeding, such corporation may be proceeded against before Philippine courts. In short, it can be sued, but it cannot sue.
The Opinion of the SEC, however, has far-reaching implications beyond the requirement to obtain a license to do business, which may prove problematic for all other entities similarly situated operating solely via the Internet.
What could be the impact to online retail stores like Amazon and eBay; online social platforms like Facebook; online news portals like The New York Times and all other entities that have not established physical presence within the Philippines and yet derive business and online traffic from within the Philippines – will all such entities now be required to obtain licenses from the SEC? If so, how will Philippine regulatory agencies regulate these activities and impose sanctions, if needed? If these entities will be considered doing business in the Philippines, are nationality requirements applicable to them? And if so, how could the same be enforced against them? This is particularly significant given the recent controversial pronouncements of the SEC defining “mass media”, which must be 100% Filipino owned, to include “any medium of communication deigned to reach the masses.” To this end, the SEC has classified even billboards as mass media, which must therefore be 100% Filipino owned. Given this, will online media such as The New York Times and even Facebook now be prohibited from making its content accessible in the Philippines? The implications to business and investment are endless and it may take a bit longer than a fortnight before we get some clarity.
For further information, please contact:
Jacquelyn Ann Marie G. Anzures, Angara Abello Concepcion Regala & Cruz (ACCRALAW)
jganzures@accralaw.com
