Proposed Amendments to the Foreign Investments Act
By Euney Marie Mata-Perez on December 16, 2021
Foreign direct investment (FDI) inflows took a beating during the Covid-19 pandemic. Government-imposed travel bans and quarantines for foreign travelers likely contributed, so it is thus crucial that the government pass economic measures to promote FDIs.
Early this year, we saw the passage of the Corporate Recovery and Tax Incentives for Enterprises (Create) Act. Board of Investments Governor Angelica Cayas, at a speech delivered during the Medical Devices Industry Webinar held last November 25, 2021, called the law “a major game-changer for investors in the Philippines since it rationalizes, modernizes, and offers more incentives.”
Business groups have been pushing for the passage of other key economic bills as well to boost FDI inflows. These include proposed amendments to the Foreign Investment Act (Republic Act [RA] 7402, as amended by RA 8179 or the FIA), the Public Service Act (Commonwealth Act 146, as amended, or the PSA), and the Retail Trade Liberalization Act (RA 8762 or the RTLA).
A bicameral conference committee report on proposed FIA amendments, which harmonized Senate Bill 1156 and House Bill 300, was approve and ratified last December 9, 2021 by the Senate and the House of Representatives.
The proposed amendments adopted the same general rule embodied in the existing FIA: that foreigners can invest as much as 100 percent equity in domestic market enterprises, except in areas included in the negative list. It also reiterates the rule that there are no restrictions on the extent of foreign ownership in export enterprises.
Export enterprises are manufacturers, processors or service (including tourism) enterprises that export at least 60 percent of their output or, if traders, purchase products domestically and export at least 60 percent or more of such.
“Domestic market enterprises”, meanwhile, are those enterprises that produce goods for sale or render services to the domestic market entirely or, if exporting a portion of its output, does not consistently export at least 60 percent of its output.
The proposed FIA amendments seek to introduce changes to Section 8 of RA 7402, which currently states that small and medium-sized domestic market enterprises with paid-in equity capital of less than the equivalent $200,000 are reserved for Philippine nationals. The minimum paid-up capital requirement, however, will be reduced to $100,000 if the domestic enterprise is involved in advanced technology as determined by the Department of Science and Technology (DoST) or employs at least 50 direct employees.
The proposed FIA amendments will allow the reduced $100,000 minimum paid-up capital to domestic market enterprises endorsed as startups or startup enablers by lead host agencies pursuant to RA 11337, the Innovative Startup Act. Under the law, a “startup” is any person or registered entity in the Philippines that aims to develop an innovative product, process, or business model.
A startup enabler, meanwhile, is any person or registered entity in the Philippines registered under the Philippine Startup Development Program that provides goods, services, or capital identified to be crucial in supporting the operation and growth of startups by the Department of Trade and Industry in consultation with DoST, Department of Information and Communications Technology, and pertinent government and non-government organizations.
The engagement of 50 direct employees to qualify for the $100,000 paid-up capital was reduced to only 15 direct employees, provided that at least a majority of the employees are Filipinos.
The amendments also provide that registered foreign enterprises employing foreign nationals and enjoying fiscal incentives should implement an understudy or skills development program that will be monitored by the Department of Labor and Employment to ensure the transfer of technology or skills to Filipinos. This is expected to generate more employment and enhance the skills of Filipino workers.
Also proposed is the development of a medium-term and long-term comprehensive and strategic Foreign Investment Promotion and Marketing Plan (FIPMP). This should be based on competitive advantages, natural resources, skill and educational development, traditional linkages, and international market best practices. It also provides that an online portal containing the FIPMP should be established.
Other amendments proposed include the inclusion of the principle that public officials and employees involved in foreign investment promotions should uphold the highest standards of public service, accountability, and integrity and the imposition of fines and penalties for violations of such, with reference to provisions of RA 11032, the Ease of Doing Business Act, and RA 3019, the Anti-Graft and Corrupt Practices Act.
We look forward to the passage of these proposed FIA amendments, as well as to the proposed amendments to the PSA and the RTLA. The bill proposing amendments to the RTLA has already been passed by Congress and was transmitted to the President on November 10, 2021. Senate Bill 2094, or the amendment to the PSA, was approved on second reading on December 14, 2021.
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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by the Asia Business Law Journal.