Foreign investments

Philippines: Amendments to the Foreign Investment Act of 1991 are enacted

In short

On March 2, 2022, President Rodrigo Duterte signed into law Republic Act No. 11647 (RA 11647), also known as the “Foreign Investment Promotion Act, thereby amending Republic Act No. 7042, also known as the “Foreign Investments Act 1991 (FIA)”, as amended, and for other purposes”.

RA 11647 establishes the Inter-Agency Investment Promotion Coordinating Committee (IIPCC), which will promote and facilitate the government’s efforts to encourage foreign investment into the country, with the Department of Trade and Industry (DTI) acting in as lead agency of the IIPCC.

While RA 11647 still reserves investments in domestic micro and small enterprises (SMEs) with paid up share capital of less than USD 200,000 for Philippine nationals, foreign nationals can now invest in SMEs with a minimum paid up capital of USD 100,000. $000 if the business: (1) is involved in advanced technology, as determined by the Department of Science and Technology; (2) is approved as a startup or startup facilitator by major host agencies pursuant to Republic Act No. 11337, also known as the Startup Innovator Act (RA) 11337); or (3) has a majority of its direct employees as Filipinos, and the number of Filipino employees is not less than 15.

These changes make it easier for foreign companies to invest in the Philippine market. These investments should not only contribute to sustainable, inclusive, resilient and innovative economic growth, but also increase competition in the Philippine market, which should translate into lower prices and better products and services for consumers.

Along with this spurt of economic growth, RA 11647 also balances the need to strengthen the nation’s national security. Under this law, the IIPCC, in coordination with the National Security Council (NSC) and the National Economic Development Authority (NEDA), must review foreign investments involving industries related to the military, cyber infrastructure, transport by pipeline or other activities likely to threaten the territory. the integrity and safety, security and welfare of Philippine citizens in certain cases.

Recommended actions

Existing businesses should familiarize themselves with the new requirements and closely monitor the future development of regulations issued under RA 11647. Foreign investors can seize the enactment of RA 11647 as an opportunity to invest in SMEs and other liberalized industries in the Philippines. With RA 11647, start-ups or start-up facilitators looking to do business in the Philippines can enter the market with a paid-up capital of USD 100,000. Additionally, foreign investors can hire Filipinos for the majority of their direct employees and ensure that there are at least 15 Filipino employees in their company so that they can benefit from the lower contributed capital of only 100,000. usd. In addition, the creation of the IIPCC and the criminal anti-corruption provision in the law facilitate investing and doing business in the Philippines.

More in detail

Here are the main provisions of RA 11647:

1. Creation of the IPCC

  • The IIPCC will be responsible for promotion and facilitation efforts to encourage foreign investment in the Philippines.1 With the IIPCC spearheading these efforts, the government’s foreign investment promotion activities will be coherent and harmonized, and bureaucracy and paperwork can be minimized to facilitate the entry of foreign investors. It also reduces opportunities for bribery and corruption since the IIPCC will be the primary coordinating body for all government foreign investment promotions and plans.
  • The IIPCC will develop a comprehensive medium and long-term Foreign Investment Promotion and Marketing Plan (FIPMP) based on competitive advantages, natural resources, skills and education development and international market potential, and that is consistent with the strategic investment priorities under Title XIII of the National Internal Revenue Code (NIRC), as amended by Section 16 of the Business Recovery and Business Tax Incentives Act (“CREATE“).
  • The FIPMP, containing further details, including IIPCC procedures, contacts and schedules, among others, will be uploaded to an online portal. The database, which is part of the online portal, also aims to include a directory of local companies able and willing to partner with potential foreign investors. The DTI will promulgate rules relating to the implementation of this provision.

2. Changes to List B of Foreign Negative List

  • As a general rule, SMEs with a paid up registered capital of less than USD 200,000 are always reserved for Filipino nationals. Under RA 11647, this threshold is lowered to $100,000 if the company: (1) is involved in advanced technology, as determined by the Department of Science and Technology; (2) is approved as a start-up or start-up facilitator by major host agencies in accordance with RA 11337; or (3) has a majority of its direct Filipino employees, and where the number of Filipino employees is not less than 15. The lower threshold and more liberal criteria do not necessarily open the Filipino SME market to nationals strangers. The government still aims to balance the growth of local SMEs while inviting foreign investors to enter. The introduction of start-ups and start-up enablers as a condition aims to make the Philippines one of the leading centers for start-ups in Asia.
  • Previously, under the FIA, the manufacture or repair of items requiring prior authorization and authorization from the Department of National Defense (DND) could be authorized by the Secretary of National Defense if the company engaged in such activities has a substantial export production (“Substantial export requirementRA 11647 has removed the substantial export requirement and simply requires the authorization of the Secretary of National Defense for the company to engage in such activities. The activities here are defense related activities such as the manufacture, repair, storage and / or distribution of firearms, ammunition, lethal weapons, military ammunition, explosives, etc.
  • In addition, foreign companies employing foreign nationals and benefiting from tax incentives must implement a training or skills development program to ensure the transfer of technology or skills to Filipinos. Compliance with this requirement will be regularly monitored by the Department of Labor and Employment (DOLE).

3. Compliance with the CREATE Act

  • RA 11647 provides that exporting companies must register and comply with export requirements in accordance with Title XIII of the NIRC (as amended by the CREATE Act) in order to receive any tax incentive or benefit, which requires that the he company exports at least 70% of its production.

4. Foreign Investment Review

  • Under RA 11647, the IIPCC, in coordination with the NSC and NEDA, must review foreign investments involving industries related to the military, cyber infrastructure, pipeline transportation, or any other activity that may threaten the territorial integrity and the safety, security and welfare of Philippine Citizens, by order of the President, when such foreign investments fall into one of the following categories:
  1. Carried out by an entity controlled by a foreign government or public companies, with the exception of independent pension funds, sovereign wealth funds and multinational banks.
  2. Located in geographic areas critical to national security.
  • Any recommendations to suspend, prohibit or otherwise limit a foreign investment under review will be forwarded to the Office of the President for appropriate action. The president will still need to review and approve the IIPCC, NSC, and NEDA recommendation, and determine whether the investment will be suspended, prohibited, or limited. We expect more details on this to be provided in the implementing rules and regulations to be issued by NEDA.
  • Notably, this provision should be read together with Section 23 of RA 11659, which amended the Civil Service Act. This provides that the Chairman is also empowered to suspend or prohibit: (i) any proposed merger or acquisition operation; or (ii) any investment in a public utility that effectively results in the granting of control to a foreigner or a foreign corporation, in the interest of national security. However, the implementation of this provision remains subject to the rules and regulations that NEDA will promulgate.

5. Anti-Corruption Practices in Foreign Investment Promotion

  • To guard against bribery and corruption in dealings with foreign investors, RA 11647 also added a criminal provision for corrupt practices in relation to the promotion of foreign investment.
  • The law states that officials and employees involved in foreign investment promotion must uphold the highest standards of public service, accountability, and integrity. Consequently, any public official or employee involved in the promotion of foreign investments who commits one of the corrupt practices provided for by the anti-corruption and corrupt practices law2 will, in addition to the penalties provided for therein, be punished with fine of at least two million PHP. but no more than five million PHP.