Cha-cha for economic revisions? A P15 billion piece of nonsense

Rigoberto Tiglao

Last of 2 parts

TO argue that we need to lift the remaining economic restrictions in the Constitution, Sen. Sherwin “Win” Gatchalian in the Senate subcommittee hearings on the issue the other day presented what on the surface is shocking data from the Overseas Economic Cooperation Fund (OECD).

The data showed that out of 84 countries, the Philippines was ranked third as having the most restrictive legal framework for foreign investments. Now hold on to your seat: the OECD ranked us below the Palestinian (now Israeli-devastated) Gaza Strip and West (and US-destroyed) Libya. This is absurd.

This should have alerted Gatchalian, if he just used common sense, that there was something wrong with the OECD study. Indeed, the OECD ranked Cambodia, Laos and Myanmar ahead of us. It also ranked countries such as Malaysia, Thailand and Indonesia just a few ranks better than the Philippines.

Senator Gatchalian shouldn’t believe everything he reads from Western organizations. Among many flaws in the OECD’s grading system — which is so simplistic and downright naïve — is that most of the data it uses are outdated, some even dating as far back as 2007. The so-called 2023 index ostensibly uses the latest 2020 data, but only in one item.

This means that the index had not taken into consideration the major liberalization of our foreign investment laws and regulations started during President Duterte’s administration.

Game-changing

Gatchalian perhaps forgot that Congress passed game-chaining laws starting in 2022, which make it unnecessary to amend the Constitution to lift the remaining economic restrictions. A plebiscite to ratify whatever amendments are thought needed would cost P15 billion. This is insane since the amendment ratified will lift restrictions only on three industries: advertising, educational institutions and five public utility subsectors, for example, telecoms and power generation.

We don’t need 100-percent foreign in these sectors, and after all, the oligarchs in these industries will throw as much funds as they can to retain the ban on foreigners from their fiefdoms. Hmm, maybe that’s really the plan here? Threaten these oligarchs with foreign competitors, and they’ll certainly be “cooperative” — especially for the 2025 elections.

Logically, shouldn’t we just wait for several years to see if these new restriction-lifting laws do attract foreign investments before wasting our time on a divisive Cha-cha?

So as to emphasize that I’m not fibbing that there has been a drastic change in the country’s legal framework for foreign investments, I am quoting at length an explanation of these recent laws by Alliott Global Alliance, a global association of independent professional services firms, including accounting firms, law firms and audit firms. The new laws were so earth-shaking that this independent group of professionals devoted a lengthy article to it.

The Alliott report dated Oct. 20, 2024, and written by its member firm, the Filipino firm Sky, Laws reads as follows:

“In the last few years, there have been significant changes to the Philippines’ foreign investment laws. These include the passage of the Public Service Act Amendatory Law (RA 11659), the Foreign Investments Act (FIA) Amendatory Law (RA 11647), the Retail Trade Liberalization Act RTACA) Amendatory Law (RA 11595), and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law (RA 11534). The overall objective of these laws is to attract more foreign investment and promote economic growth in the Philippines.

Public services

First, the PSA Amendatory Law, which was signed into law on March 2, 2022, removes restrictions on foreign ownership in public services, such as telecommunications, transportation and power generation. This means that foreign investors can now own 100 percent of businesses in these sectors, up from the previous limit of 40 percent.

Second, the FIA Amendatory Law, which was signed into law on July 11, 2022, also removed restrictions on foreign ownership in a number of sectors, including manufacturing, agriculture and health care.

Lastly, the Philippines has also passed a number of other laws that are making it easier for foreign investors to do business in the country. These include the RTLA Amendatory Law, which was signed into law on March 9, 2022, and the CREATE Law, which was signed into law on May 28, 2021.

These are all part of the government’s ongoing efforts to attract necessary capital and technology from foreigners looking for investment opportunities in the country.

Amendatory

1. The PSA Amendatory Law and its Implementing Rules and Regulations

The 1987 Philippine Constitution requires a public utility to obtain a franchise or any other form of authorization before it may operate in the Philippines, which may be granted only to Filipino citizens or to corporations organized under Philippine law with a maximum foreign ownership of 40 percent. However, the 1987 Philippine Constitution does not define the term “public utility.”

Under the PSA, the term “public utility” was used interchangeably with “public services,” but the PSA Amendatory Law and its Implementing Rules and Regulations (IRR) have now differentiated the two terms, providing an exhaustive list of public utilities such that there will be no foreign ownership restriction for those not classified as public utilities under said list.

The PSA Amendatory Law and its IRR narrows public utilities to just the following: distribution and transmission of electricity; petroleum pipeline transmission systems; water pipeline distribution systems and sewerage pipeline systems; seaports; and public utility vehicles.

Thus, starting April 1, 2023, select sectors such as railways, airports, expressways and telecommunications are now open to 100 percent foreign ownership, which were previously limited to 40 percent foreign ownership. With the narrowing down of what are considered public utilities, the country opens its doors for more foreign investment, possibly leading to increased competition and lower prices for consumers. It can also lead to innovation and improved services since foreign investors may bring new technologies and ideas to the Philippines.

FIA

2. The Foreign Investments Act Amendatory Law and its Implementing Rules and Regulations

To promote foreign investments, the FIA Amendatory Law was passed to finally allow foreign investors to set up and fully own domestic enterprises (including micro and small enterprises) in the Philippines.

The FIA Amendatory Law made procedures for foreign entry infinitely easier by creating the Inter-Agency Investment Promotion Coordination Committee (IIPCC) tasked to create a comprehensive and strategic Foreign Investment Promotion and Marketing Plan (FIPMP) and to spearhead the government’s promotion and facilitation efforts to encourage foreign investments into the country. The establishment of the IIPCC, combined with the anti-corruption penal provision in the law, makes the FIA Amendatory Law attractive to investors.

Under the FIA, micro, small and medium-sized enterprises (MSME) with paid-in capital of less than $200,000 are reserved for Philippine nationals. However, this threshold is lowered to $100,000, provided that the enterprises meet certain qualifications, such as their utilization of advanced technology (to be determined by the Department of Science and Technology).

Aside from this, the FIA Amendatory Law provides that foreign businesses employing foreign nationals and are enjoying fiscal incentives must come up with an understudy or skills development program that benefits Filipino workers to ensure that local workers receive the knowledge and skills from their foreign colleagues.

Retail Trade

3. The Retail Trade Liberalization Act Amendatory Law and its Implementing Rules and Regulations (IRR)

The RTLA Amendatory Law, which was signed into law on March 9, 2022, provides a uniform capital and per store investment requirement for all foreign retailers, which further opens up the retail sector to foreign investment.

While the RTLA provided several categories for the minimum paid-up capital requirement depending on which category an enterprise belongs in, the RTLA Amendatory Law allows foreign companies to own up to 100 percent of a single-brand retail store in the Philippines so long as the following requirements are met:

1. The foreign retailer shall have a minimum paid-up capital of P25 million (approximately $500,000);

2. The foreign retailer’s country of origin does not prohibit the entry of Filipino retailers; and

3. In case the foreign retailers engaged in retail trade through more than one physical store, the minimum investment per store must be at least P10 million (approximately $200,000).

Under its IRR, paid-up capital may be used to purchase assets for purposes of complying with the investment requirement per store.

Minimum

The RTLA Amendatory Law was clearly passed to attract foreign retailers to enter the country and offer their products to the Filipino market since it significantly decreased the paid-up capital required and the minimum investment per store, removed the requirement for a certificate of pre-qualification to the Philippine Board of Investments (BOI), and removed the requirement for foreign-owned retail enterprises to offer a minimum of 30 percent equity through any stock exchange in the Philippines within eight years of starting operations, allowing newly established foreign retail enterprises to remain privately owned.

4. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law

Complementing the abovementioned laws in increasing the country’s investment appeal, it provides significant tax incentives for foreign investors. Specifically, the CREATE Law reduces the corporate income tax rate from 30 percent to 25 percent to make the Philippines more competitive with other Asian countries. The corporate income tax rate will be reduced further by 1 percent annually in the next years and shall eventually reach 20 percent by 2027 onwards. The lower corporate income tax rates will inevitably make it more profitable for businesses to operate in the Philippines, leading to increased investment and job creation.

Corporate income tax incentives were also provided under the CREATE Law, and exporters and domestic enterprises engaged in strategic activities as defined under the Strategic Investment Priority Plan (SIPP) are to enjoy an income tax holiday (ITH) granted for a period of 4 to 7 years, followed by the special corporate income tax rate of 5 percent on gross income earned (GIE), in lieu of all national and local taxes, or enhanced deductions (ED) for 5 or 10 years (the incentive period varies depending on which area the registered project or activity will be located), and duty exemption on importation of capital equipment, raw materials, spare parts, or accessories.”

Sorry, this “economic restriction” excuse to amend the Constitution — most probably even for a diabolical maneuver to “fast-break” toward a parliamentary system that will only benefit you-know-who — falls flat on its face.

I can, from the top of my head, rattle off several projects that could be funded by that P15 billion, which would really attract foreign investments. That one is for Friday.

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