Written by Clifford Sandler and Morgan Clune.
Have there been any recent changes to the Foreign Investment rules in the Philippines?
The Philippine rules and regulations covering inbound FDI have been largely unchanged since November 2018 when the Eleventh Foreign Investment Negative List (formulated pursuant to the Foreign Investments Act of 1991) took effect. This is the most recent iteration of the Filipino government's list of business sectors that foreigners are either banned outright from owning equity in or are subject to a cap on permitted ownership levels. It is possible that the government may consider amendments to the Negative List as a tool to assist the Filipino economy's recovery from the depressive effects of COVID-19.
In recent years, the Filipino government has also passed legislation aimed at making the Filipino business environment more conducive to doing business, including the legislation which we examine below.
If yes, please provide a brief summary of the changes
There has been only one change potentially bearing upon FDI in the Philippines since the onset of COVID-19. Economic measures implemented by the Filipino government in response to COVID-19 have had supporting small and medium sized Filipino enterprises as their chief concern. The key change is that in response to COVID-19 the Filipino central bank has relaxed its documentary and reporting rules for foreign exchange operations.
An important piece of legislative reform, the Ease of Doing Business and Efficient Government Service Delivery Act (EDB Act), has introduced a series of facilitative and commercially practical reforms such as:
- introduction of standardised deadlines for government transactions;
- creation of a single business application form;
- automation of business permits processing; and
- establishment of a central business databank.
The EDB Act also established the Anti-Red Tape Authority (ARTA). ARTA sits under the auspices of the Office of the President and has a targeted mandate to increase the ease of doing business in the Philippines. ARTA is governed by a council that includes senior officials from key government portfolios such as the secretaries of the departments of Trade and Industry, Finance and Information and Communications Technology.
The Philippines also updated and modernised its Corporation Code in 2019. The Revised Corporation Code contains a series of amendments geared towards encouraging entrepreneurship, increasing the ease of doing business and promoting good corporate governance. These changes include allowing for existing and future companies to have perpetual corporate terms rather than the previous 50-year limit which then required a company to go through a cumbersome renewal process. Flexibility in business structuring has also increased as the amendments allow for incorporation of one person companies whereas the old Corporation Code mandated that a company had to have at least five shareholders.
What was the rationale for the changes?
The changes in FDI regulation reflect a concerted effort on the part of the Filipino government to simplify business regulation, boost growth in the Filipino economy and position the Philippines as an increasingly relevant player in the broader Asian economy.
Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?
These changes are not considered temporary. However, see below with respect to future cuts to the company tax rate.
Are there any particular sectors that are affected the most?
What is the outlook for foreign investment in the Philippines?
The Philippines has made material improvements to its FDI climate over the past decade and these incremental improvements look set to continue in the coming years based on the current government's focus on boosting the Filipino economy. On the back of the changes set out above and others, such as strengthened protections for minority investors, the Philippines climbed 29 rankings in the World Bank's 'Doing Business 2020' report from the 2019 rankings.
The business environment within the dedicated special economic zones is notably better than the rest of the nation, especially those special economic zones available for export businesses operated by the Philippine Economic Zone Authority (PEZA). PEZA has forged a reputation for high levels of transparency and a one-stop shop for investors with a no red-tape policy. Plans to spend around USD 180 billion on infrastructure improvements will also make the Philippines a more appealing destination for FDI. The FDI landscape in the Philippines has the noteworthy competitive advantages of dedicated free trade zones and a workforce that is well educated, English speaking and low-cost compared to the more developed Asian labour forces. The government's focus on leveraging that workforce and opening it up to engagement by foreign investors as part of its economic reform agenda is also a step in the right direction for attracting greater volumes of FDI. That reform agenda complements the numerous free trade agreements that the Philippines is a party to with its Asian neighbours and trade partners further afield.
It may also be of note that recently, the lower chamber of Congress has passed two bills which, if signed into law, will further ease restrictions on the industries in which foreigners may participate in. Particularly, in 2019, a bill was passed which would allow foreigners to practice their professions in the country (where no foreign participation was permitted for certain professions under the Eleventh Foreign Investment Negative List) and which would allow foreigners to invest in small and medium-sized domestic market enterprises with paid-in equity less than the equivalent $100,000 if they employ at least 15 direct employees (currently, the minimum requirement is to hire 50 direct employees).
Further, in early 2020, a bill was passed which redefines and limits the definition of "public utility" to an entity which operates, manages, or controls for public use the distribution of electricity, transmission of electricity, water pipeline distribution, and sewerage pipeline, and thus, if signed into law, will allow full ownership by foreigners of current public utilities such as transportation, communication, and power (the Philippine Constitution reserves the ownership, operation, control, and management of public utilities to Filipino citizens or to corporations or associations, and at least 60% of its capital stock should be owned by Filipinos).
From a taxation perspective, the government's plan to reduce the company tax rate immediately by 5% in 2020 followed by a further 1% every year starting on 1 January 2021 until it reaches 20% (from the current rate of 30%) should also be appealing for investors and conducive to increased inbound FDI volumes. The Philippines also has tax treaties with influential developed economies including Australia, Canada, Singapore, the United Kingdom and the USA.
While the above demonstrates that the Philippines is making progress in becoming a more conducive jurisdiction for FDI, entrenched restrictions on foreign ownership in sectors for FDI with large upside potential (such as construction and natural resources), chronic underfunding of public infrastructure and opaque procurement tender processes continue to hinder FDI. Foreigners investing in the Philippines are also exposed to issues relating to political instability in certain regions and a judicial system which is perceived to be inefficient and uncertain for commercial matters.
While those drawbacks remain, the current leading Asian jurisdictions for FDI such as Singapore will not face a serious competitive challenge from the Philippines.
What it is your advice to foreign investors in the Philippines?
The Philippines remains an emerging market for FDI. Major improvements over the last few years to the regulatory landscape have increased the attractiveness of the Philippines as a destination to deploy capital. Those improvements combined with a continued governmental focus on reducing red tape, increasing public funding of infrastructure, potential easing of certain foreign ownership restrictions and an opening up of the Philippines as a gateway into the wider Asian market, bode well for FDI in the coming years.
Despite these improvements, doing business in the Philippines remains challenging for foreign investors. Large family-owned conglomerates still dominate many lucrative business sectors and crowd out smaller businesses and new entrants. While there appear to be important steps towards an easing of foreign ownership restrictions, the implementation of these steps has yet to take place, and the potential enactment of otherwise business-friendly policies is uncertain. Crucial to a successful investment into the Philippines is early engagement with local counsel and advisors to ensure that the process of navigating engagement with regulators is as smooth as possible. Early long-term planning is also recommended when considering investments into industries that are subject to FDI caps. It is important to address the many corporate regulatory requirements as early in the investment process as possible with guidance from local advisors to avoid delays at more crucial stages of any transaction. For example, the Philippines has an Anti-Dummy Law (ADL), which applies to corporations engaged in partially nationalised activities that are subject to Filipino ownership requirements of at least 60% of the capital of the corporation. A violation of the ADL is punishable by imprisonment of not less than five but not more than 15 years and by a fine of not less than the value of the right, franchise or privilege, but in no case less than PHP 5,000.
Does the Philippines' FDI organisation coordinate with other government agencies, including the antitrust regulator?
No. Further, while several regulators may be involved in a transaction or business operation, there may be inconsistencies in approach between them.
 Including, for example, mass media (except for recording and internet businesses), retail trade enterprises with a paid-up capital of less than USD 2.5 million and small-scale mining.
 For example, there is a 25% foreign equity cap on contracts for the construction of defence-related structures, a 30% foreign equity cap on advertising and a 40% foreign equity cap on ownership of private land and Exploration, development and utilization of natural resources.
 See the international Monetary Fund website that catalogues worldwide policy responses to COVID-19 (https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#P).
This publication is intended to provide a high level overview of FDI trends and regulation in the Philippines. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice Philippine law, and works closely with local lawyers to support our clients' needs in the Philippines. We are grateful to SyCip Salazar Hernandez & Gatmaitan for their co-operation on this publication.