PHILIPPINES: An Introduction to Corporate/M&A

The Philippines continues to open up its economy through its strategic enactment of several legislative measures designed to dismantle investment barriers and bureaucratic hurdles. With the implementation of these key legislative measures, the country has made significant strides in fostering an attractive investment climate. The progressive moves, such as lifting limitations on foreign participation in certain industries and streamlining regulatory complexities, are steering the country towards substantial economic growth and progress. These sustained efforts underscore the government’s commitment to fostering a business environment that is conducive to investment, making the Philippines a compelling destination for M&A transactions.

Foreign Investments Act (FIA) 

Under the FIA, micro and small domestic market enterprises with paid-in equity capital of less than USD200,000 are generally reserved for Filipinos and corporations that are at least 60% owned by Filipinos. The FIA was recently amended through RA No 11647 (the “FIA Amendment”), which provided a lower capitalisation threshold of USD100,000 for non-Filipino enterprises if any of the following requirements are met: (i) the foreign enterprise utilises advanced technology as determined by the Department of Science and Technology; (ii) the foreign enterprise is endorsed as a start-up or start-up enabler in accordance with the Innovative Start-up Act; or (iii) the foreign enterprise employs no fewer than 15 Filipino employees who represent the majority of the direct employees of the enterprise.

Retail Trade Liberalisation Act (RTLA) Amendment

At the behest of the Philippine government, RA No 11595 was passed, amending the RTLA and relaxing the basic requirements for a foreign retailer to engage in retail business in the Philippines. Prior to the amendment of the RTLA, a foreign retailer could only engage in retail business if it had minimum paid-up capital of USD2.5 million. With the amendment, the prescribed minimum paid-up capital for retail trade enterprises with foreign equity has been lowered to PHP25 million (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 previously had to 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 has enabled the liberalisation of key public services.

The Philippine Constitution limits the ownership and operation of public utilities to Filipino citizens and corporations that are at least 60% 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; the petroleum and petroleum products pipeline transmission system; water pipeline distribution systems and wastewater pipeline systems, including the 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.

Ease of Bank Mergers, Consolidations and Acquisitions

On 27 May 2022, the Implementing Guidelines for Mergers, Consolidations and Acquisitions (MCAs) of Banks (the “Guidelines”) was issued. It provided the harmonised forms, documentary requirements, and processes among and between the different agencies. The Guidelines streamlined banks’ MCAs, making the processes more efficient.

Ease of Paying Taxes 

In an effort to streamline the process of paying national taxes, the Ease of Paying Taxes Act (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 (RDOs), 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.

In addition, the EPTA has also introduced several key developments, such as:

• removal of the requirement to pay annual registration fees;

• 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;

• increasing the threshold for the mandatory issuance of invoices from PHP100 to PHP500, except for VAT-registered taxpayers;

• classification of taxpayers based on gross sales, with special concessions being granted to those classified as micro and small taxpayers;

• classification of VAT refunds into low, medium and high-risk claims based on several factors, including the amount claimed, taxpayer compliance history, and frequency of filing claims; and

• reiteration of the rules and guidelines previously addressed by case law or BIR circulars, ensuring clarity and consistency in implementation.

New Public-Private Partnership Code 

Public-private partnership (PPP) projects in the Philippines were previously governed by Republic Act No 6957, outlining potential contractual arrangements between the public and private sectors for the implementation of government projects and recognising the potential role of the private sector in delivering basic government services to the populace. Since Republic Act No 6957 became effective, several amendments and rules have been introduced, including local laws promulgated by local government units (LGUs) which provide additional guidelines or procedures for their own projects that are not in conflict with the law.

In an effort to centralise and consolidate the various laws and rules governing PPP projects in the Philippines, the new PPP Code was passed into law on 5 December 2023. The new PPP Code encompasses all contractual arrangements between a government implementing agency, including LGUs, and a private partner. These arrangements involve the financing, design, construction, operation and maintenance, or any combination or variation thereof, of infrastructure or development projects and services which are typically provided by the public sector, where each party shares in the associated risks. Notably, the new PPP Code extends its coverage to include joint ventures, whether solicited or unsolicited, among others. In general, the new PPP Code outlines the identification, bidding, approval qualifications and processes of, and implementation of PPP projects, both national and local, as well as the share structure and obligations of both the private partner and the implementing agency in the PPP. Furthermore, the new PPP Code provides specific stipulations to be mandatorily included in PPP contracts between the private and public partner.

Foreign Renewable Energy Developers 

Foreign investors may now engage in the exploration, development and utilisation of the Philippines’ renewable energy (RE) resources since 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 effectiveness of the amendment, a Renewable Energy Service/Operating Contract (“RE Contract”) could only be awarded to Filipinos, or corporations which were at least 60% Filipino-owned. Now, foreign investors may hold up to 100% equity in renewable energy projects, particularly in wind and solar investment. However, 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.

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 in the Philippines. 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 will require comprehensive regulatory reforms, including streamlining administrative processes and requirements.

A recent positive sign was a movement by the Philippine legislature to amend the Philippine Constitution, with the aim of liberalising its economic provisions to attract more foreign investment and provide more opportunities to foster the country’s economic growth. Pursuant to this movement, a bill by the House of Representatives was approved last March 2023, accompanying a resolution from both houses of Congress that calls for a hybrid constitutional convention to initialise the proposed amendment. Any prospective amendment of the Philippine Constitution, which has remained unchanged for 37 years, would mark a significant event in Philippine legal history, potentially having a substantial impact on both the legal and economic landscapes.

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.