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PHILIPPINES: An Introduction to Corporate/M&A

Contributors:

Raoul R Angangco

Kristin Charisse C. Siao

Ma. Carla P. Mapalo

Amber Shawn A. Gagajena

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The Philippine government has been steadfast in its efforts to enact legislation aimed at opening up the economy and encouraging foreign investments in the country. Through the strategic implementation of several key legislative measures, the government continues to dismantle investment barriers. The initiatives include lifting restrictions on foreign participation in certain industries and amending the tax regime to enhance incentives to foreign investors. By creating a more attractive and accessible investment climate, the Philippines is positioning itself as an attractive destination for strategic investments. These sustained legislative efforts highlight the government’s dedication to driving substantial economic progress and global competitiveness.

Lifting of Foreign Equity Restrictions

In recent years, significant legislative reforms have been enacted to ease foreign equity restrictions across various industries. These key legislations are set out below.

Foreign Investments Act (FIA) Amendment

The FIA was recently amended through RA No 11647, which provided a lower capitalisation threshold of USD100,000 for non-Filipino enterprises if any of the following requirements are met:

  • the foreign enterprise utilises advanced technology as determined by the Department of Science and Technology;
  • the foreign enterprise is endorsed as a start-up or start-up enabler in accordance with the Innovative Start-up Act; or
  • the foreign enterprise employs no less than 15 Filipino employees who represent a majority of the direct employees of the enterprise.

Retail Trade Liberalisation Act (RTLA) Amendment

The RTLA Amendment relaxed the basic requirements for a foreign retailer to engage in retail business in the Philippines. It reduced the minimum paid-up capital for foreign retailers from USD2.5 million to approximately USD500,000. For foreign retailers with more than one physical store, the Amendment decreased the minimum investment per store from USD250,000 to USD200,000. The Amendment also removed certain pre-qualification requirements which foreign retailers must secure from the Board of Investments.

Public Service Act (PSA) Amendment 

Through the passage of RA No 11659 (the “PSA Amendment”), the Philippine government relaxed the stringent foreign equity restrictions under the 86-year-old PSA. The Amendment enabled the liberalisation of key public services.

The Philippine Constitution limits the ownership and operation of public utilities to Filipino citizens and corporations, at least 60% of which are owned by Filipinos. However, with the enactment of the PSA Amendment, public utilities have been exclusively narrowed to the following activities:

  • distribution of electricity;
  • transmission of electricity;
  • petroleum and petroleum products pipeline transmission system;
  • water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline system;
  • seaports; and
  • public utility vehicles.

Consequently, all other public services have been liberalised from the 40% foreign equity cap previously applied pursuant to the provisions of the Philippine Constitution. Sectors which have been liberalised from public utility restrictions include:

  • airports;
  • railways and subways;
  • telecommunications;
  • logistics and freight forwarding;
  • shipping;
  • air carriers;
  • expressways and toll ways; and
  • transport network companies.

However, critical infrastructure enterprises, such as telecommunications, remain subject to foreign equity restrictions. The PSA Amendment provides that foreign nationals are not allowed to own more than 50% of the capital of entities engaged in the operation and management of critical infrastructure, unless the country of such foreign national accords reciprocity to Philippine nationals as may be provided by foreign law, treaty or international agreement.

Foreign renewable energy developers

Foreign investors may now engage in the exploration, development and utilisation of the Philippines’s renewable energy (RE) resources after the Department of Energy (DOE) amended a section of the Implementing Rules and Regulations (IRR) of the Renewable Energy Act of 2008, with the promulgation of Department Circular No 2022-11-0034 (the “DOE Circular”). Prior to the amendment coming into effect, a Renewable Energy Service/Operating Contract (“RE Contract”) may be awarded only to Filipinos, or corporations which are at least 60% Filipino-owned. Now, foreign investors may hold up to 100% equity in RE projects, particularly for the wind and solar investment areas. However, the ownership of water rights/permits, which are required for appropriation of water direct from the source for hydropower generation, remains subject to the nationality limitations.

Enhancing Tax Incentives

In addition to liberalising a number of industries, the Philippine government continues to prioritise reforms to modernise and simplify its tax system, encouraging compliance and enhancing the overall taxpayer experience. Recent legislative efforts include  the following.

The Ease of Paying Taxes Act (EPTA)

In an effort to streamline the process of payment of national taxes, the EPTA was enacted on 5 January 2024. Through the EPTA, taxpayers now have the flexibility to file and pay their taxes through authorised agent banks, revenue district offices (RDO) and the eagerly awaited online platforms offered by Authorised Software Providers. This positive adjustment acknowledges the recent trend of increased reliance on online payment platforms, offering taxpayers a more streamlined and convenient method for settling their tax obligations.

Aside from the foregoing, the EPTA has also introduced several key developments such as:

  • the removal of the requirement to pay annual registration fees;
  • the clarification on the process of cancelling or transferring an entity’s Bureau of Internal Revenue (BIR) registration;
  • uniformity in the issuance of sales invoices for both the sale of goods or services, harmonising the rules on VAT; and
  • an increase in the threshold for the mandatory issuance of invoices from PHP100 to PHP500, except for VAT-registered taxpayers.

The CREATE MORE Act

In October 2024, RA No 12066 (the “CREATE MORE Act”) was enacted, which made the Philippines’ tax incentives regime more globally competitive and investment friendly. Its salient features are:

  • lowering of the corporate income tax (CIT) rate to 20% for Registered Business Enterprises (RBEs) under the Enhanced Deductions Regime (EDR);
  • expanding the additional deductions under the EDR for export enterprises and domestic market enterprises;
  • broadening the eligibility of RBEs for tax incentives;
  • extending the period of tax incentives to 27 years;
  • clarifying the ambiguities in the CREATE MORE Act’s provisions relating to VAT exemptions and VAT zero-rating;
  • introducing new incentives for high-value domestic market enterprises (HVDME) such as 0% VAT on local purchases and VAT exemptions on imports; and
  • imposing a local tax of up to 2% of gross income for RBEs during the Income Tax Holiday (ITH) period or the EDR period.

Overcoming Future Challenges

Although the Philippine economy is expected to grow due to recent foreign investment-driven legislative initiatives, there are still several factors which make M&A transactions more challenging. Foreign investors in the Philippines often encounter challenges such as bureaucratic red tape, inconsistent regulations, political instability and foreign equity restrictions embodied in the Philippine Constitution. Addressing these hurdles requires comprehensive regulatory reforms, including streamlining administrative processes and requirements.

However, until any potential alterations to the Philippine legal framework materialise, investors need to proactively address challenges by adopting strategic measures to mitigate the risks associated with legal, political and economic factors. This includes engaging local legal experts who can assist clients in navigating complex regulations and conducting thorough market research and due diligence to understand local regulations, potential risks and market conditions.