21 March 2022
Philippines

On 2 March 2022, President Rodrigo Duterte signed into law the well-anticipated amendments to the Foreign Investments Act (“FIA”) of 1991. The amended FIA forms part of three investment reform measures[1] that local and foreign business groups have been urging lawmakers to enact to attract the foreign capital needed to accelerate the country’s economic recovery from the adverse effects of the pandemic.[2] The amended FIA relaxes the longstanding foreign equity restrictions while putting in place stronger safeguards against possible threats to national interest in vital industries.

The amending law has the following salient points:

  • The creation of the Inter-Agency Investment Promotion Coordination Committee. The amending law mandates the creation of the Inter-Agency Investment Promotion Coordination Committee (“IIPCC”), which shall be composed of officials from different government agencies and headed by the Secretary of the Department of Trade and Industry (“DTI”). The IIPCC shall serve as an integrated body tasked to promote and facilitate efforts geared towards increasing foreign investments in the Philippines. One of its primary functions is to establish both a medium- and long-term comprehensive and strategic Foreign Investment Promotion and Marketing Plan (“FIPMP”) that would operate as the national framework for the promotion of foreign investments in the country.
  • The direct hire threshold for applying the reduced capital requirement of USD 100,000 has been modified. For a domestic market enterprise[3] to have more than 40% foreign equity, it needs to have a paid-up capital of at least USD 200,000. Previously, this capital requirement may be reduced to USD 100,000 if the domestic market enterprise employs at least 50 direct employees. The amending law has modified this requirement by reducing the threshold and imposing a citizenship criterion. Under the amended FIA, the reduced capital requirement now applies to domestic market enterprises that directly employ at least 15 Filipino employees. In addition, the new rule necessitates that a majority of the total direct hires of the enterprise should be Filipinos for the reduced capital requirement to apply.
  • The reduced capital requirement of USD 100,000 also applies if the domestic market enterprise is a startup or startup enabler. Under the amended law, the reduced capital requirement of USD 100,000 now also applies to startups[4] or startup enablers[5] as defined under the Innovative Startup Act (“ISA”), provided that they are endorsed by a lead host agency.[6] In other words, startups or startup enablers may be 100% foreign owned as long as their paid-up capital is at least USD 100,000 and they meet the conditions and requirements under ISA.
  • Foreign enterprises employing foreign nationals and enjoying fiscal incentives are required to implement an understudy or skills development program. In line with the government’s goal to enhance the knowledge and skills of Filipino workers, the amended FIA requires foreign enterprises employing foreign nationals and enjoying fiscal incentives to devise and implement an understudy or skills development program that will be closely monitored by the Department of Labor and Employment (“DOLE”). This is set to ensure that foreign knowledge, talents and skills are beneficially transferred to Filipinos.
  • The President has the power to suspend, prohibit or limit foreign investments involving activities that may threaten national interest or security. To safeguard national interest, the amended FIA bestows upon the President the power to order the IIPCC to review foreign investments involving military-related industries, cyber infrastructure, pipeline transportation, or such other activities which may threaten territorial integrity and the safety, security and well-being of Filipino citizens. In case of adverse findings, the President may suspend, prohibit or limit such foreign investment accordingly.
  • Public officials and employees involved in foreign investment promotions who commit graft and corrupt practices will be meted with additional penalties. In addition to the penalties of imprisonment and disqualification from office, public officials and employees involved in foreign investment promotions who commit graft and corrupt practices are now meted with heavy fines ranging from PHP 2 million to PHP 5 million (approximately USD 40,000 to USD 100,000).

Implications for business in the Philippines

Startups have been reported to be key drivers of economic growth, job creation and innovation.[7] In recognition of the importance of startups, the Philippine government designed the FIA amendments in such a manner as to grant startups and startup enablers with the most benefit. The reduction of the minimum capital requirement will undoubtedly attract more startups to set up shop in the Philippines. With this, lawmakers hope that the country’s bid to be a leading startup hub in Southeast Asia will be accelerated.

In addition, it is also expected to pave the way for the development of a more globally competitive domestic workforce. The entry of foreign investors and companies will inevitably bring with it desirable foreign knowledge, skills, and talents, which will have to be passed on to local hires through understudy or skills development programs as required by the amended FIA.

Conclusion

Together with the recently enacted amendments to the Retail Trade Liberalization Act (“RTLA”) and the pending passage of the amendments to the Public Service Act (“PSA”), the implementation of the amended FIA could result in an arrival of new investments in the coming future. This increase in investments can lead to the creation of more jobs, the diversification of the economy, the advancement of technological capabilities, and an increase in competition, which would all contribute significantly to the economic recovery and growth of the country.[8]

If you have any questions or require any additional information, please contact Felix Sy, Reeneth B. Santos and Dane M. Estepa of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.

[1] The two other investment reform measures include the recently passed amendments to the Retail Trade Liberalization Act (“RTLA”) and the pending amendments to the Public Service Act (“PSA”).

[2] Revin Ochave & Russel Ku, PHL, foreign business groups urge Congress to prioritize economic reform bills, available at https://www.bworldonline.com/phl-foreign-business-groups-urge-congress-to-prioritize-economic-reform-bills/ (last accessed 11 March 2021).

[3] A domestic market enterprise refers to an enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output, fails to consistently export at least 60% or more of such purchases.

[4] Startups refer to persons or registered entities in the Philippines that aim to develop an innovative product, process or business model.

[5] Startup enablers refer to persons or registered entites 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 (“DTI”) in consultation with Department of Science and Technology (“DOST”), Department of Information and Communications Technology (“DICT”), and pertinent government and nongovernmental organisations.

[6] This includes the DOST, DTI, DICT, or other national government agency, local government unit, or public academic institution that provides programs, benefits and incentives to startups or startup enablers as defined in the ISA subject to an application or selection process.

[7] Flavio Calvino, Chiara Criscuolo & Rudy Verlhac, Start-ups in the time of COVID-19: Facing the challenges seizing the opportunities, available at https://voxeu.org/article/challenges-and-opportunities-start-ups-time-covid-19  (last accessed 11 March 2021).

[8] Argyll Geducous, Duterte signs law amending Foreign Investments Act, available at https://mb.com.ph/2022/03/04/duterte-signs-law-amending-foreign-investments-act/ (last accessed 11 March 2021).