Exploring the Philippines’ Latest Economic Reforms: Unlocking Investment Potential
The Philippines has implemented key economic reforms over the last three years to improve the business climate and attract foreign investment.
These include reforming the corporate tax system, allowing the foreign ownership of small and medium-sized businesses, and opening up specific public services to foreign ownership.
Over the last three years, the Philippines has implemented several key reforms to improve the business climate for foreign investors. Under former President Duterte’s administration, the CREATE Act came into effect in 2021. The Act provided the largest fiscal stimulus for businesses in the country’s history by gradually reducing corporate income tax and providing income tax holidays.
Finally, under the current administration of President Ferdinand Marcos Jr, the Philippines has allowed full foreign ownership of renewable energy projects.
We provide an overview of these reforms and their key benefits for foreign investors in the following sections.
The Corporate Recovery and Tax Incentives for Enterprises Act
The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act) was passed into law in March 2021. The Act’s purpose is to grant tax relief for companies in financial need, provide transparent tax provisions, and further increase the competitiveness of the Philippines.
Reduction in the corporate income tax rate
The CREATE Act steadily reduced the corporate income tax rate (CIT). From July 2020 to 2022, foreign companies were eligible for a reduction in the CIT rate to 25 percent compared to the regular rate of 30 percent—the highest in ASEAN. From 2022 to 2027, the 25 percent CIT steadily declined by one percent per year, to finally reach 20 percent in 2027 for foreign companies.
Income tax incentives
There are also income tax holidays of between four to seven years for investments in certain locations and industries. This is followed by a special CIT rate of five percent based on gross income earned, as well as enhanced deductions for 10 years for exporters. Moreover, there are enhanced deductions for labor, power, R&D, and training expenses.
Greater flexibility to grant incentives
The CREATE Act has attributed more powers to the President and the Fiscal Incentives Review Board (FIRB) to facilitate the issuance of incentives. The FIRB will make recommendations for companies that add significant value to the economy, meaning companies undertaking “highly desirable projects” or “very specific industrial activities” (as specified by the Department of Finance).
The President can then choose to approve and grant these incentives for the activities mentioned above, which may last up to 40 years.
Foreign Investment Act
On March 2, 2022, Republic Act No. 11647 (Act 11647) was signed, which amends the Foreign Investment Act (FIA), also known as Republic Act No. 7042. The amendments aim to promote and attract foreign investments by allowing, for the first time, international investors to set up and fully own domestic enterprises (including micro and small enterprises) in the Philippines.
Foreign ownership of small and medium-sized enterprises
Under the FIA, micro, small, and medium-sized enterprises (MSME) with paid-in capital of less than US$200,000 are reserved for Philippine nationals. However, under the amendments, foreign nationals can own an MSME with a minimum paid-in capital of US$100,000 provided that the enterprises meet the following conditions:
- Utilize advanced technology (to be determined by the Department of Science and Technology);
- Are endorsed as startup enablers or as a startup in accordance with the Innovative Startup Act; or
- The company hires no less than 15 Filipino employees, a reduction from the previous requirement of 50.
The new Inter-Agency Investment Promotion Coordination Committee
Under the amended FIA, the government has created the Inter-Agency Investment Promotion Coordination Committee (IIPCC), which is a body that integrates all the promotion and facilitation efforts to encourage foreign investments.
The President has the power to suspend, prohibit, or limit foreign investments
To safeguard national interests, the amened FIA gives the President of the Philippines power to order the IIPCC to review foreign investments that may threaten the safety, security, and well-being of Filipinos. Examples include foreign investments involving cyberinfrastructure, military-related industries, and pipeline transportation, among others.
Understudy or skills development program for foreign nationals
Foreign businesses employing foreign nationals and that have access to fiscal incentives must devise an understudy or skills development program that benefits Filipino workers. This ensures that local workers receive the knowledge and skills from their foreign colleagues.
Foreign ownership of public services
The Philippines government issued the implementing rules and regulations to the Public Service Act in late March 2023, which is set to impact foreign ownership of public services in the Philippines.
The Act has since been revised again in March 2023, following extensive reviews with the public, legislators, and other key stakeholders.
What are the implementing rules and regulations?
100 percent foreign ownership of select public services
Starting April 1, 2023, select sectors, such as railways, airports, expressways, and telecommunications, are now open to 100 percent foreign ownership. Previously, these sectors were limited to 40 percent foreign ownership.
Restrictions on public utilities
The following public utilities have foreign ownership limited to 40 percent:
- Electricity distribution;
- Electricity transmission;
- Water pipeline distribution and sewerage; and
- Public utility vehicles.
These systems are deemed vital and would have a debilitating impact on national security if they were incapacitated or destroyed.
Safeguarding national security
The government has placed several safeguards to guard national security. Among them is providing the President with the power to prohibit or suspend any foreign investments in public service upon the recommendation and review of a state agency.
There are also restrictions on foreign state-owned enterprises owning capital stock in a public utility or critical infrastructure. Moreover, there is a reciprocal clause in the Act that prevents foreign nationals from owning a majority share in critical infrastructure unless their country accords the same to the Philippines.
Another safeguard is for businesses engaging in the telecommunications sector. They are obligated to meet the relevant ISO standards. Companies operating in the public services domain will be mandated to perform annual audits to assess the company’s costs and quality of services.
Retail Trade Liberalization Act
In December 2021, the Retail Trade Liberalization Act (RTLA), or Republic Act No. 11595, was amended. The Act reduces the minimum paid-up capital requirements for foreign retail enterprises, removes the requirement for a certificate of pre-qualification to the Philippine Board of Investments (BOI), and lowers the investment requirements for each store owned by a foreign enterprise.
Reduction in the minimum paid-up capital requirements
The Philippines’ retail industry was exclusively limited to Filipino citizens until 2000 when the RTLA was first introduced. The RTLA allowed foreign investors to engage in the local retail industry but imposed high minimum paid-up capital requirements.
Under Republic Act No. 11595, a foreign-owned enterprise engaged in the Philippines retail trade now only requires PHP 25 million (US$500,000) as the minimum paid-up capital.
Reduction in the minimum investment required for each store
Foreign retailers that want to open more than one physical store must invest a minimum of PHP 10 million (US$200,000) per store. This is a reduction from the previous requirement of US$830,000 per store.
This minimum investment covers tangible and intangible assets, such as buildings, furniture, and storage facilities, among others.
Removal of the requirement of the public offering of shares
Retail enterprises that are foreign-owned were previously required to offer a minimum of 30 percent equity through any stock exchange in the Philippines, within eight years from the start of their operations. This has now been removed under Republic Act No. 11595, meaning newly established foreign retail enterprises can remain privately owned.
Preferential use of Filipino labor
Republic Act No. 11595 mandates that foreign retail enterprises must hire Filipino workers before engaging the services of a foreign national.
Promotion of locally manufactured products
The Act encourages foreign retailers to keep a stock inventory of locally manufactured products.
Foreign ownership of renewable energy projects
In November 2022, the Philippines’ Department of Energy (DOE) issued Circular No. 2022-11-0034. The circular amended 2008’s Renewable Energy Act to remove stipulations that required Filipino ownership of certain renewable energy resources.
With the change, foreign investors can now hold 100 percent equity in the exploration, development, and utilization of solar, wind, hydro, and ocean or tidal energy resources.
The policy change comes as the Philippines seeks to attract foreign investment to boost its renewable energy sector and meet its long-term climate targets. Further, with foreign investors now able to own 100 percent equity in these projects, those currently operating in a joint venture with a Filipino partner may also now take a controlling stake in such ventures.
Foreign investors can benefit from the Philippines’ improved business climate, tax incentives, and the opportunity to fully own enterprises in various sectors, including renewable energy.
However, it is essential to adhere to regulations and safeguards in critical sectors and prioritize the use of local labor and products to foster positive relationships within the Filipino market.
ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in Singapore, Hanoi, Ho Chi Minh City, and Da Nang in Vietnam, in addition to Jakarta, in Indonesia. We also have partner firms in Malaysia, the Philippines, and Thailand as well as our practices in China and India. Please contact us at email@example.com or visit our website at www.dezshira.com.