Business reforms in 2022: Foreign investors given 100% ownership of public services and updates to CREATE and RTLA acts
Foreign investment has received a substantial update thanks to the Philippines Senate releasing the final reading of Senate Bill (SB) 2094, which amends the Public Service Act, allowing one hundred (100) percent (%) foreign ownership of public services. This Senate Bill clarifies the difference between the definition of public services and public utilities. This is because the 1987 Constitution only firms that services that are at least 60% owned by Filipinos are given the authorization, certificate, and franchise to operate as a public utility.
The Senate bill specifies which public utilities are considered for full ownership:
- Electricity transmission
- Electricity distribution
- Water pipeline distribution and sewage
- Tollways and expressways
- Seaports
- Airports
- Public utility vehicles.
The SB states that industrial undertakings that are not classified as public utilities will no longer have restrictions on foreign ownership.
Effects on critical infrastructure
The SB also contains safeguards to protect national security by limiting foreign ownership in public services classified as critical infrastructure; these are defined as highly vital systems and assets. They would have a debilitating impact on national security if they were destroyed or incapacitated.
It also states which public services qualify as critical infrastructure; these foreign businesses can now own 40% of critical infrastructure but only if the country of the foreign national accord's reciprocity to Philippine nationals under a treaty:
- Telecommunications
- Airlines
- Domestic shipping
- Railways
- Railways
- Subways
The SB states that entities that manage or operate critical infrastructure must act on complaints or service interruptions within one day from receiving the complaint. Furthermore, they must submit a monthly report detailing the interruptions and the actions to resolve them.
With these developments, the Philippine government aims for local industries to attract more investment and knowledge on improving the public infrastructure since reports show that our economy is among the most negatively impacted in ASEAN, with our GDP decreasing by 9.5% in 2020 and the national debt rising to PHP 10.3 trillion (US$201 billion (about $620 per person in the US)).
The government attempts to liberalise the economy to gain similar traction to those of foreign investments received by other ASEAN states. Out of the US$137 billion (about $420 per person in the US) in foreign direct investment received by ASEAN in 2020, only US$6.5 billion (about $20 per person in the US) went to the Philippines.
Even though the Philippines may face a long road to recovery than its ASEAN neighbours, it still imposed harsher and longer-lasting lockdowns and stimulus packages issued by the government have been more conservative compared to other ASEAN members.
The continuing business forms in the Philippines
The government have implemented several economic measures to make doing business in the Philippines easier and help ensure a consistent recovery from the Covid-19 pandemic. Two of the most updated reforms have been listed down below.
- CREATE Act The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act) was among the most important reforms added and was passed into law in March 2021. The CREATE act allows foreign companies to receive a reduction in the corporate income tax rate (CIT) to 25% from 30% (the highest in ASEAN) until 2022. The act states that from 2023 onwards, the CIT rate will be reduced by 1% until it reaches 20% by 2027. The CREATE act explains that domestic corporations with taxable income of PHP 5 million (US$97,000) or below can benefit from a 20% CIT rate, and those earning more than PHP 5 million (US$97,000) can avail 25% CIT rate. The CREATE Act also implemented an incentive system considered to be performance-based, targeted, and time-bound. This allows for longer incentives that are provided to sophisticated sectors found in less developed regions nationwide.
- Retail Trade Liberalization Act (RTLA) The RTLA was amended by the Republic Act (RA) 11595 law in May 2021 at the behest of the Philippine government. These changes reduced the paid-up capital requirements needed for foreign retail enterprises from US$2.5 million to US$500,000. An added requirement was given to foreign retailers who wish to establish more than one physical store, they all must invest at least PHP 10 million (US$200,000) per store, which was done to protect small and micro enterprises that comprise 96% of businesses in the Philippines. This amount is much lower than the US$830,000, which was imposed before the amendments to the RTLA. The RTLA amendments also removed certain pre-qualification requirements that required foreign retailers to obtain a certification of pre-qualification from the Board of Investments. It also added a significant proposal in the amended RTLA, which was the removal of Section 7, which required retail trade enterprises that have more than 80% foreign ownership to offer within eight years, a minimum of 30% equity to the public through any stock exchange in the Philippines. With this amendment, foreign-owned retail enterprises can remain privately-owned businesses.