Philippines Senate Passes Bill Allowing 100 Percent Foreign Ownership of Public Services

Posted by Written by Ayman Falak Medina Reading Time: 4 minutes

The Philippines Senate has passed the third and final reading of Senate Bill (SB) 2094, which amends the Public Service Act by enabling 100 percent foreign ownership of public services.

SB 2094 makes a clear distinction between the definition of public services and public utilities since under the 1987 Constitution, only firms that are at least 60 percent owned by Filipinos are given the authorization, certificate, and franchise to operate as a public utility.

SB 2094 narrows public utilities to just the following:

  • Electricity distribution;
  • Electricity transmission;
  • Airports;
  • Seaports;
  • Water pipeline distribution and sewerage;
  • Tollways and expressways; and
  • Public utility vehicles.

This means that there will be no restriction on foreign ownership for industrial undertakings not classified as public utilities.

Critical infrastructure

However, to protect national security, SB 2094 contains safeguards that limit foreign ownership in public services classified as critical infrastructure. 

Critical infrastructure is defined as systems and assets that are so vital, they would have a debilitating impact on national security if they were destroyed or incapacitated. 

The following public services are considered as critical infrastructure:

  • Telecommunications;
  • Airlines;
  • Domestic shipping;
  • Railways;
  • Railways; and
  • Subways.

Foreign businesses can own up to 40 percent of critical infrastructure only if the country of the foreign national accords reciprocity to Philippine nationals under a treaty.

Entities managing or operating critical infrastructure are now mandated to act on complaints or service interruptions within one day from receiving the complaint. They are also required to submit a monthly report detailing the interruptions that occurred and the actions to have them resolved.

The Philippine government hopes this will spur local industries to attract more investment and know-how for the improvement of public infrastructure. The Philippines economy is among the most negatively impacted in ASEAN, with GDP decreasing 9.5 percent in 2020 and national debt rising to PHP 10.3 trillion (US$201 billion).

Liberalizing the economy will enable the Philippines to attain similar traction in foreign investment as received by other ASEAN states. Out of the US$137 billion in foreign direct investment received by ASEAN in 2020, only US$6.5 billion went to the Philippines.

Further, the Philippines may face a long road to recovery than its ASEAN neighbors. It imposed harsher and longer-lasting lockdowns and stimulus packages issued by the government have been more conservative compared to other ASEAN members.

The Philippines to continue business reforms

To ensure a resilient recovery from the pandemic, the Philippines has enacted several measures to ease doing business in the country.

CREATE Act

One of the most important reforms was through the  Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), which was passed into law in March 2021. Under the CREATE Act, foreign companies are eligible for a reduction in the corporate income tax rate (CIT) to 25 percent from 30 percent (the highest in ASEAN) until 2022. From 2023 onwards, the CIT rate will be reduced by one percent until it reaches 20 percent by 2027.

Domestic corporations with taxable income of PHP 5 million (US$97,000) or below can benefit from a CIT rate of 20 percent, and those earning more than PHP 5 million (US$97,000) are eligible for a 25 percent CIT rate.

The CREATE Act has also implemented an incentive system that is performance-based, targeted, and time-bound. As such, longer incentives are given to more sophisticated sectors located in less developed regions of the country.

This includes income tax holidays of between four to seven years followed by a special CIT rate of five percent. CREATE also offers value-added tax (VAT) exemptions on imports and VAT zero-rating on local purchases for goods and services in a registered project or activity.

Further, the Fiscal Incentives Review Board (FIRB) — a government agency responsible for supervising tax breaks — has been given the power to recommend fiscal and non-fiscal incentives to registered businesses.  By giving such powers to the FIRB, the CREATE Act can provide measures that best fit the specific needs of businesses operating in the Philippines.

Amendments to the Retail Trade Liberalization Act

Another reform the government is looking to enact is the amendment to the Retail Trade Liberalization Act (RTLA) in May 2021, which aims to lower the paid-up capital requirements for foreign retail enterprises from US$2.5 million to US$500,000.

To protect small and micro enterprises, which make up 96 percent of businesses in the Philippines, foreign retailers who wish to establish more than one physical store must invest at least PHP 10 million (US$200,000) per store. This amount is much lower than the US$830,000, which was imposed before the amendments to the RTLA.

The amended RTLA also removes the pre-qualification requirements that obligated a foreign retailer to obtain a certification of pre-qualification from the Board of Investments.

A key proposal in the amended RTLA is the deletion of Section 7, which requires retail trade enterprises with more than 80 percent foreign ownership to offer within eight years, a minimum of 30 percent equity to the public through any stock exchange in the Philippines. With this amendment, foreign-owned retail enterprises can remain privately-owned businesses.

This article was originally published on January 7, 2022, and has been amended on February 22, 2022, with the latest updates.

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