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LIBERALIZING FOREIGN OWNERSHIP IN RETAIL TRADE BUSINESS

By: Aziza Hannah Bacay on July 11,2019

Our present government has been pushing to liberalize foreign ownership restrictions to drive growth.

Among the sectors the government is looking at to liberalize is the retail trade. It is also looking at introducing amendment to the Public Service Act (Commonwealth Act No. 146) and the Foreign Investment Act (Republic Act [RA] No. 7042) in this regard.

For today’s article, we will discuss the proposed amendments to liberalize the retail trade sector.

Retail Trade Nationalization Law

For many years, our retail trade sector has been subjected to stringent foreign ownership restrictions to protect Filipino retailers. Until 2000, the conduct of retail trade business was limited only to Filipino citizens and/or corporations wholly-owned by citizens of the Philippines. This was the rule set out in RA No. 1180, known as “Retail Trade Nationalization Law” enacted on June 19, 1954, the first law regulating retail trade in the country. The restrictions, however, did not apply to: a) sales of a manufacturer, processor, laborer, or worker selling to the general public the products he or she manufactured, processed, or produced if his capital does not exceed 5,000 pesos; or b) sales of a farmer or agriculturist selling the products of his or her farm (exempted retail transactions).

The Supreme Court, in Inchong v. Hernandez, 101 Phil. 1155 (1957), upheld RA 1180’s validity and declared that nationalization of the retail trade is a valid exercise of police power under the Constitution.

Retail Trade Liberalization Act

Upon the enactment of RA No. 8762, known as the Retail Trade Liberalization Act (RTLA), in 2000, the stringent rules on retail businesses were relaxed “to promote consumer welfare in attracting and welcoming productive investment […] and to become globally competitive through the liberalization of the retail sector.”

Under RTLA, foreign-owned entities are now allowed to engage and invest in the retail trade business, provided they register with the Securities and Exchange Commission (SEC) and Department of Trade and Industry (DTI), subject to the rules providing four categories to determine who are qualified to engage in retail trade, as follows:

Reserved exclusively to Filipinos: Enterprises with paid-up capital of peso equivalent of less than $2.5 million (category A);

May be wholly owned by foreign partnerships, associations, and corporations: a) Enterprises with minimum paid up capital of peso equivalent of $2.5 million, but less than $7.5 million (category B); b) enterprises with paid-up capital of peso equivalent of $7.5 million (category C); and c) enterprises specializing in high-end or luxury products with paid-up capital of pesos equivalent of $250,000 per store (category D).

For categories B and C, the foreign-owned enterprises may not engage in retail trade if the investment in establishing the store is less than the peso equivalent of $30,000 .

RTLA maintained the same exempted retail transactions, but it increased the capital threshold to P100,000 and added: a) sales of a manufacturer of his or her products in a single outlet, irrespective of capitalization; and b) sales in restaurant operations incidental to hotel business.

In the recent SEC Opinion 19-21 dated May 21, 2019, the SEC was faced with an inquiry on whether a foreign national planning to incorporate a 100 percent foreign-owned corporation which shall locate within Clark Freeport Zone is exempt from the requirements of RTLA.

In addressing the matter, SEC cited its previous SEC Opinion 08-06—which answers a similar question—and held that “unless [the] case falls within any of the exceptions enumerated under Section 3 [exempted retail transactions] of the RTLA, the fact that a retail enterprise is PEZA-registered does not mean that said business entity is exempt from the application of RTLA vis-à-vis the FIA.” Thus, entities registered in special economic zones are not exempt from the RTLA foreign ownership thresholds or requirements.

House Bill 9057

In a move to liberalize further the strict rules of RTLA and to attract more foreign investors in the retail trade sector, the House of Representatives of the 17th Congress passed House Bill (HB) 9057 to reduce the minimum capital for foreign enterprises from the current $2.5 million to $200,000. This amendment of lowering the capital threshold will definitely eliminate the barrier to market access of foreign investors and may achieve the intended goal of the law to provide Filipino consumers lower prices, higher quality goods, better services, and wider choices. Of course, if this proposed amendment is passed, our local retailers should gear up to be able to compete with foreign retailers.

It is expected that HB No. 9057 or its equivalent will be refiled with the 18th Congress, when their session resumes this July.

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