A new era for foreign investments

The foreign chambers of commerce in the Philippines are abuzz with excitement after President Duterte signed into law this month two pieces of legislation that would open the door wider for foreign investments to enter the country.

The first is Republic Act 11647 amending the 85-year-old Public Service Act which excluded telecommunications, domestic shipping, railways and subways, airlines, expressways and tollways, and airports from the definition of a public utility.

Under the 1987 Constitution, no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under our laws, at least 60 percent of whose capital is owned by such citizens.

This 60 percent capital, as held by the Supreme Court in the case of 2011 case of Gamboa vs Teves involving PLDT, refers only to shares of stock entitled to vote in the election of directors, and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

The Supreme Court said that mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the Constitution. Full beneficial ownership of the 60 percent coupled with 60 percent of the voting rights is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals. Otherwise, the corporation is considered as a non-Philippine national.

But while RA 11647 no longer included telecommunications in the list of public utilities, telco was classified as critical infrastructure. And under the new law, entities controlled or acting on behalf of a foreign government of foreign state-owned enterprises shall be prohibited from owning capital in any public service classified as public utilities or critical infrastructure.

The prohibition will not apply to Dito Telecommunity, a telco joint venture between the group of Davao businessman Dennis Uy and state enterprise China Telecom, as well as to the National Grid Corporation of the Philippines, which is in the business of electricity transmission and is owned partly by the State Grid Corp. of China, since the rule applies prospectively. Electricity transmission is classified as a public utility business under the new law.

The term telecommunications, however, excludes passive telco infrastructure and components such as poles, fiber ducts, dark fiber cables, and other passive telco tower infrastructure, as well as value-added services, which may be owned by foreigners, even entities controlled by foreign states and state-owned enterprises.

Under RA 11647, those which carry passengers and or cargo for a fee and offering services to the public such as trucks for hire, UV express service, public utility buses and jeepneys, tricycles, filcabs, and taxis with internal combustion engine vehicles, are considered as public utility vehicles. Transport vehicles accredited with and operating through transport network corporations shall not be considered as PUVs.

Another key business legislation signed into law by President Duterte is RA 11647 amending RA 7042 or the Foreign Investments Act of 1991 last March 2.

Except as otherwise provided under the Retail Trade Liberalization Act and other laws, micro and small domestic market enterprises with paid-in equity capital of less than $200,000 is now reserved to Philippine nationals. The threshold is lowered to $100,000 if it involves advanced technology as determined by the DOST, or they are endorsed as start up or start up enablers by the lead host agencies pursuant to the Innovative Startup Act, or majority of their direct employees are Filipinos but in no case less than 15.

Under the old law, “small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of $500,00 are reserved to Philippine nationals, unless they involve advanced technology as determined by the Department of Science and Technology. Export enterprises which utilize raw materials from depleting natural resources, with paid-in equity capital of less than the equivalent of $500,000 are likewise reserved to Philippine nationals.”

RA 11647 now defines “investment” as equity participation in any enterprise organized or existing under Philippines laws and duly recorded in the enterprise’s stock and transfer book, or any equivalent registry of ownership.

The old law defines the term “investment” as equity participation in any enterprise organized or existing under the laws of the Philippines.

RA 7042 as previously amended by RA 8179 provides that former natural born citizens of the Philippines shall have the same investment rights of a Philippine citizen in cooperatives, rural bank, thrift banks and private development banks, as well as financing companies. These rights shall not extend to activities reserved by the Constitution, including the exercise of profession.

The new FIA now defines the term “practice of a profession” as an activity or undertaking rendered and performed by a registered and duly licensed professional or holder of a special temporary permit as defined in the scope of practice of a professional regulatory law. The term was not previously defined.

RA 11647 is made specifically inapplicable to practice of professions that are covered by specific laws and fall under the jurisdiction of various professional regulatory boards or any other regulating body, or those subject to reciprocity agreements with other countries.

The FIA under its latest amendments is also made inapplicable to banks and other financial institutions under the supervision of the Bangko Sentral ng Pilipinas.

Does this mean that investments in rural banks, thrift banks, and private development banks by former natural born citizens who have acquired foreign citizenship will now be classified as foreign investment? Under present laws, rural banks and thrift banks are now allowed to be owned by non-Filipino citizens up to the extent of 60 percent of the voting stock.

A new section is also included regarding anti-graft practices in foreign investment promotions.

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