- News & Insights
- Asia & Beyond
Recent economic and legislative developments in the Philippines point to a unique window of opportunity as regards inbound Foreign Direct Investments (FDI). As with any astute foreign direct investor, there will be a need to wisely structure modes of entry for maximum efficiencies and return on investment.
With a market size of 110 million, which has a median age of 25.71World Economics, as reported by the Philippine Department of Trade and Industry (DTI), the Philippines is home to a pool of 49 million technology savvy and adaptable talent who are proficient in English.
From 2017 to 2021, the Philippines’ annual FDI average grew to USD9.2B, where Singapore was the top FDI source at USD761M. Singapore investments were mostly in telecommunications towers and fiber optics and renewable energy.2As reported by the Bangko Sentral ng Pilipinas and DTI
In 2021, Philippine start-ups raised over $1B in funding, with an increase in deal activity averaging at 15.33 deals per quarter and Fintech and e-commerce startups driving majority of deals, according to the Philippine Venture Capital Report 20223Published by Foxmont Capital Partners and Boston Consulting Group. The pandemic was catalytic towards transforming the Philippine startup ecosystem, with a purported increase in total early-stage funding from $101M to $292M in 20224Startup Genome Global Startup Ecosystem Report 2022, as cited by DTI. Investors on the ground, have likewise given feedback that Philippine valuations are among, if not the most attractive in ASEAN.
In Q2 of 2022, amidst a political regime transition, the Philippines experienced a real GDP growth rate of 7.4%5As reported by the Philippine National Economic Development Authority (NEDA) – the second highest in ASEAN.
The recent passage of landmark legislation transformed the country’s previously protectionist foreign direct investment (“FDI”) economic stance to be more investor friendly. These come in the form of the Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) Law (effective 11 April 2021) and amendments to the Retail Trade Liberalization Act (“RTLA”), Foreign Investments Act (“FIA”) and Public Services Act (“PSA”), which took effect in 2022, respectively on 21 January, 17 March and 9 April.
The CREATE rationalizes a menu of fiscal incentives, which include a 4 to 7 year Income Tax Holiday, a 5% Special Corporate Income Tax rate based on gross income for a limited period, duty exemption on importation of capital equipment, and VAT exemption on importation and VAT zero-rating on local purchases, as well as enhanced deductions. The President can also grant incentives for up to 40 years if projects are “highly desirable” and have a minimum investment of US$1B or could generate at least 10,000 jobs. Prior to passage of CREATE, the Tax Reform for Acceleration and Inclusion (TRAIN), reduced the corporate income tax rate from 30% for all enterprises to 20% for domestic SMEs, 25% for large domestic corporations and 25% for resident foreign corporations.
The Amended RTLA, subject to reciprocity requirements, now allows foreign retailers to enter the Philippine retail market through physical or online stores with a minimum paid-up capital requirement of USD500,000. For foreign retailers with multiple branches, a USD200,000 minimum investment per store applies. Notably, the previous investment requirement was USD2,500,000.
Through the Amended FIA, setting up in the Philippines is allowed for a foreign startup in advanced technology, provided 15 local employees are employed, capitalization of at least USD100,000 is infused, and it is endorsed as a start-up or start-up enabler under the Innovative Startup Act.
Meanwhile, the Amended PSA now allows, subject to reciprocity requirements, 100% foreign equity in telecommunications, shipping, air carriers, railways, subways, airports, and toll roads. However, entities controlled by or acting on behalf of the foreign government or foreign state-owned enterprises are prohibited from owning capital in a public utility or critical infrastructure after 7 April 2022. “Critical infrastructure” is defined as “any public service which owns, uses, or operates systems and assets, whether physical or virtual, so vital to the Republic of the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security”. The PSA Amendment also specifically identifies telecommunications (with the exclusion of passive telecommunications tower infrastructure and components) as critical infrastructure. Under the PSA, the President is also empowered to declare vital services as critical infrastructure, just as he may, in the interest of national security, suspend or prohibit any proposed merger or acquisition, or any investment in a public service that effectively results in the grant of direct or indirect control to a foreigner or a foreign corporation.
Finally, the passage of the 2022 Strategic Investment Priorities Plan (“SIPP”) which took effect on 14 June 2022, expands the application of a tiered approach for the application of tax and fiscal incentives under the CREATE Act. In addition to 2020 IPP lists (which are under Tier 1), Tier 2 and 3 activities may now apply for incentives. Tier 2 activities include Green ecosystems (including Electric Vehicle assembly, manufacturing renewable energy, energy storage, recycling and the like), and activities which are related to health, defense, and food security, those which address industrial value chain gaps in steel, textiles, chemicals, green metals processing, crude oil refining and lab-scale wafer fabrication). Activities deemed as strategic in transforming the Philippine economy, are in Tier 3. These pertain to 4th industrial revolution digital production technologies (robotics, AI, additive manufacturing, data analytics, digital transformative technologies, nanotechnology, biotechnology, production and/or adoption of new hybrid seeds), highly technical manufacturing and production of innovative products (commercialization of IP R&D products / services, aerospace, medical devices, IOT devices and systems, and the like), and establishment of innovation support facilities.
Amidst the promising Philippine investment climate, there are a variety of factors to consider in optimizing investment structures of FDIs in the Philippines6Related Content:
– For a related read, you may refer to Villaraza & Angangco’s article on Trends and Developments in Doing Business in the Philippines. Villaraza & Angangco (V&A Law) is the Philippine member firm of the RHTLaw-led ASEAN Plus Group. V&A closely collaborates with RHTLaw’s Philippine desk.
– For more regulatory, commercial and legal perspectives on strategic investments in the Philippines, you may also view a related webinar on demand here..
Aside from foreign investment entry controls under the Amended FIA and Constitutional limitations, which pose nationality restrictions for some industries, there are certain challenges which can arise as regards investment structures. These pertain to subsequent capital repatriation, structuring of arrangements concerning use of Philippine real property and tedious processes of share transfers involving Philippine companies. These hurdles afford foreign direct investors with less flexibility in the event of future capital restructuring. Hence, for foreign investors, a more optimal corporate structure would involve the set-up of an operating company in the Philippines, which is wholly owned, where possible, by a holding company in a foreign jurisdiction.
An optimal foreign jurisdiction for such holding or parent companies, would be one where no foreign investment entry controls exist. Such jurisdiction should also have a robust regulatory framework that provides greater security and credibility to foreign direct investors, to attract fundraising both from debt and equity perspectives. An example of such jurisdiction would be Singapore, which also has a tested Double Tax Avoidance agreement with the Philippines and is likewise geographically and culturally proximate. With a Singapore holding company, foreign direct investors can alter their shareholdings at the holding company level in Singapore, where capital gains tax (“CGT”) on share transfers are not imposed (unlike the Philippines, wherein share transfers are taxed at 15% CGT on net gain, in addition to documentary stamp taxes). Further, to alter shareholding percentages, subsequent share transfers can also take place more expeditiously at the level of the Singapore holding company, where there will be less, if not no, tedious tax-related regulatory processes for share transfers, which can unnecessarily prolong the timeframe of a simple share transfer.
Beyond having a mere shell structure for a Singapore holding company, the latter can also be an R&D centre, which produces patentable technology, from which royalty income can be earned. This type of arrangement with respect to licensing of IP between related companies can also be more palatable from a transfer pricing perspective.
Investing strategically in the Philippines involves proper due diligence, understanding of local market nuances and good relationships with an ecosystem of strategic local partners, suppliers, and customer base. Astute navigation of the regulatory regime is likewise necessary, as there is no one single regulatory agency nor piece of legislation, which encompasses everything that a foreign investor should take cognizance of from legal and compliance angles. Further, best practice involves the set-up of optimal corporate structures from the get-go. These notwithstanding, various factors point to how there is an opportune timeframe for entry into the Philippine market, and that time is NOW.
Lorybeth is a Philippine-qualified CPA lawyer and a product of the Nanyang Fellows MBA program. She currently serves as RHTLaw Asia’s Business Development and Marketing Director and leads the firm’s Philippine desk. Now based in Singapore, she has 12 years of corporate and commercial practice, with focus on regional tax and trade to ensure tax-effective cross-border transactions and corporate and FDI structures.