5 October 2021
Philippines

The Philippine Congress has approved the bill seeking to amend the Foreign Investments Act (Republic Act No. 7042 or the “FIA”). The bill introduces several amendments to the FIA with the overarching theme of fostering global competitiveness and innovative economic growth that is consistent with the protection of national security. The following are the salient points of the bill:

  • Foreign online business (i.e., business entities, regardless of registry and incorporation, conducting economic activities and consummating business transactions in the Philippines, through online, digital, or electronic commerce) may be considered as domestic market enterprises. Under the implementing rules and regulations of the current FIA, a domestic market enterprise is an enterprise which produces goods for sale, renders service, or otherwise engages in any business in the Philippines. It is contradistinguished from an export enterprise, which exports at least 60% of its output. Under the existing negative list, a domestic market enterprise may be 100% foreign owned provided that its paid-up capital is at least the equivalent of USD200,000. Otherwise, it would be subject to 60-40 foreign equity restriction. An export enterprise, on the other hand, could be 100% foreign owned regardless of capital.
  • Foreign business entities engaged in e-commerce shall not fall under the prohibitions on mass media and education unless the greater part of their business transacted is conducted in the Philippines. Under the Philippine Constitution, no foreign equity is allowed in mass media while educational institutions are subject to 60-40 foreign equity restriction.
  • Direct hire threshold is to be reduced from 50 to 15. Under the existing FIA and negative list, a domestic market enterprise may be 100% foreign owned provided that its paid-up capital is at least the equivalent of USD200,000. This capital requirement is reduced to USD100,000 for domestic market enterprises which involve advanced technology or employ at least 50 direct employees. The bill seeks to reduce the direct hire threshold from 50 employees to 15 employees.
  • Definition of doing business includes practicing multi-level marketing. Under the bill, engaging in multi-level marketing is considered doing business in the Philippines. However, it bears noting that the bill did not particularly define what constitutes “multi-level marketing”.
  • The bill mandates the creation of an investments promotion council tasked to set up a one-stop shop to assist foreign investors, among others. The one-stop shop would respond to specific investors’ queries and assign such investor to an investment specialist.
  • The bill also seeks to impose penalties for graft and corrupt practices in foreign investment promotions. Public officials and employees involved in foreign investment promotions may be penalised with fine and/or imprisonment for commission of specific punishable acts such as failure to render government services within the prescribed processing time without due cause, imposition of additional requirements or costs other than those provided by law. Heavier sanctions are imposed for graft and corrupt practices such as requesting or receiving bribes or any benefit, and for violating confidentiality obligations.

The bill is pending consideration and approval of the Conference Committee composed of members from both the upper and lower house of the Congress. Once approved, the bill will be transmitted to the President of the Philippines for final action before it becomes a law. The President may either sign the bill or exercise his veto power. The bill may also lapse into law after the expiration of 30 days from receipt thereof without any action from the President.

Implications for Business in the Philippines

Worthy of particular attention is the provision seeking to categorically exclude foreign online business from the definition of mass media and educational institutions, and consequently, from foreign equity restrictions appertaining to those business activities. What constitutes mass media has long been a grey area in the Philippine legal system. This issue has increasingly gained significance in light of emerging technologies and innovative business models, which significantly veer away from traditional mass media platforms of radio, print, and television. Various regulatory opinions and discussions on this issue seem to point that the distinctive feature of mass media is the dissemination of information and ideas to the public where such information is designed to affect and influence the public’s way of thinking and lifestyle. In various opinions, the Securities and Exchange Commission (SEC) has consistently opined that certain online and digital platforms are considered platforms for information dissemination and thus mass media. These include a digital platform with the purpose of increasing the sales of a particular product or service,[1] leased digital space from media owners and the subleasing of the same to clients who will in turn use it for advertising[2] and, under certain parameters, an online or mobile app platform.[3] Considering the seemingly overbroad definition of mass media, would social media platforms, online video streaming websites, e-commerce platforms, and the like, be considered mass media?

The current negative list excludes from mass media internet access providers that merely serve as carriers for transmitting messages. The bill intends to extend the exception to foreign e-commerce businesses by stating that such foreign investment engaged in e-commerce shall not fall under the prohibitions on mass media and education unless the greater part of their business transacted is conducted in the Philippines.” However, what constitutes greater part of their businessand what would be considered as conducted in the Philippines were not defined, especially in the context of online transactions. Unless clarified in a subsequent or implementing legislation, this provision may add more to the uncertainty rather than work to the advantage of online businesses.

To emphasise, no foreign equity is allowed for mass media. Thus, a finely delineated definition of mass media could make or break foreign investments in the Philippines, especially in this era of digitalisation. 

If you have any questions or require any additional information, please contact Felix Sy or Aubbrey Lim 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] SEC-OGC Opinion No. 14-06 dated 8 May 2014

[2] SEC-OGC Opinion No. 16-21 dated 31 August 2016

[3] SEC-OGC Opinion No. 18-21 dated 28 November 2018