Ground handling grounded

Republic Act No. 7042, otherwise known as the Foreign Investments Act, was enacted in 1991 pursuant to a public policy “to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socio-economic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws.” After the enactment of R.A. No. 7042, foreigners have been allowed to invest in all activities or enterprises in the Philippines, save those areas of activities which are reserved to Philippine nationals by mandate of the Constitution and specific laws, or otherwise expressly covered by what is known as the “Negative Lists.” Consequently, foreign equity in various businesses and economic activities of corporations in the Philippines, including those considered as public utilities, has since been regulated or limited in varying degrees.

The Supreme Court, in JG Summit Holdings Inc. v. Court of Appeals, defined a “public utility” as a business or service engaged in regularly supplying the public with some commodity or service of public consequence. The term essentially implies public use or service. Moreover, it is “the service to, or readiness to serve, an indefinite public or portion of the public as such which has a legal right to demand and receive its services and commodities,” that is considered the determinative characteristic of any public utility. Under the current Constitutional and statutory parameters, foreign equity for public utilities is limited to 40 percent. No foreign individual may, therefore, operate such public utilities, and any partnership or corporation must have at least 60 percent Filipino equity.

The Securities and Exchange Commission (SEC) recently issued SEC-OGC Opinion No. 15-14, dated Nov. 3, 2015, pertaining to a query on foreign equity limitations on corporations engaged in ground handling services in airports. The proposed services pertain to the towing-in or pushing back of aircrafts using tractors, and preparing and delivering of baggage to and from aircrafts; with the subject of query being premised on the possible limitations or ramifications of airport authorities contracting these services out to 100 percent foreign owned domestic corporations. Although ground handling services is not explicitly included in the Foreign Investment Negative List, 100 percent foreign owned domestic corporations may not engage in the business of airport ground handling services, as “it is the nature, not the name, of the activity which determines whether or not the business activity is covered by the Negative List.” The SEC is of the opinion that it is the character of the service (i.e., having a public consequence) that determines whether
a certain entity should be considered to be a public utility.

The SEC further opined that services pertaining to “passenger handling and other services related to the movement of passengers, baggage and goods, as well as the care conveniences and security of passengers, visitors and other airport users are necessarily part and parcel of airport operations.” Therefore, if ground handling services are not carried out by the airport authority concerned, but are instead contracted out to corporations or firms, they are “essentially aiding the public utility to provide the services incidental to its airport operations,” ultimately placing the latter under the category of public utility themselves.

The issuance of SEC-OGC Opinion No. 15-14 creates an opportunity to test the concept of what a public utility is vis-à-vis the extent of what may or may not be deemed included, as contemplated by the existing Foreign Investment Negative List. On one hand, there is indeed merit in saying the nature of the activity determines whether an activity should be covered by the Negative List. On the other hand, the same interpretation may also be considered potentially dangerous if it can expand the coverage of the items included in an otherwise exclusive Negative List, as currently contemplated by both the law and the courts. In either case, a possible categorical ruling from the Supreme Court will create an interesting development in foreign investments, not only to those involved with operation of public utilities here in the Philippines, but also to those whose activities involve services to be rendered to public utilities.

Arik Aaron C. Abu is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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