Philippines: Paving the Way for Foreign Investment and Growth enacting economic reforms aimed at enhancing the business environment
Over the past three years, the Philippines has enacted significant economic reforms aimed at enhancing the business environment and attracting foreign investment. These reforms encompass a range of measures, including the reform of the corporate tax system, the facilitation of foreign ownership in small and medium-sized enterprises (SMEs), the opening up of specific public services to foreign ownership, and the allowance of full foreign ownership in renewable energy projects.
The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act):
The CREATE Act, passed into law in March 2021, aims to provide tax relief for financially distressed companies, establish transparent tax provisions, and enhance the country’s competitiveness. Key provisions of the CREATE Act include:
- Reduction in Corporate Income Tax (CIT) Rate: The CIT rate was gradually reduced for foreign companies, dropping from 30% to 25% between 2020 and 2022. From 2022 to 2027, the rate decreases by one percentage point each year, ultimately reaching 20% in 2027.
- Income Tax Incentives: Certain investments are eligible for income tax holidays of four to seven years, followed by a special CIT rate of 5% based on gross income earned. Enhanced deductions for various expenses, such as labor, power, research and development (R&D), and training, are also available.
- Enhanced Flexibility in Incentive Granting: The President and the Fiscal Incentives Review Board (FIRB) have been empowered to grant incentives to companies that bring substantial value to the economy.
Foreign Investment Act Amendments:
The Foreign Investment Act was amended in 2022 to encourage foreign investments in the Philippines. Notable changes include:
- Foreign Ownership of SMEs: Foreign investors are now allowed to fully own micro, small, and medium-sized enterprises (MSMEs) with a minimum paid-in capital of US$100,000, under certain conditions related to technology utilization, startup endorsement, or local hiring.
- Inter-Agency Investment Promotion Coordination Committee (IIPCC): A committee was established to integrate efforts to promote and facilitate foreign investments.
- Presidential Authority for Safeguarding National Interests: The President can review and suspend foreign investments that may pose threats to national security.
Foreign Ownership of Public Services:
The Public Services Act, revised in 2023, permits 100% foreign ownership of select public services, including railways, airports, expressways, and telecommunications. However, restrictions on foreign ownership remain in place for certain public utilities deemed critical for national security.
Retail Trade Liberalization Act (RTLA) Amendments:
Amendments to the RTLA have reduced barriers to foreign participation in the retail sector:
- Minimum Paid-Up Capital Requirements: The minimum paid-up capital requirement for foreign-owned retail enterprises has been lowered to PHP 25 million (US$500,000).
- Minimum Investment for Each Store: Foreign retailers opening multiple physical stores now need to invest a minimum of PHP 10 million (US$200,000) per store, down from the previous requirement.
- Private Ownership of Shares: The obligation to publicly offer shares has been removed for newly established foreign retail enterprises.
Foreign Ownership of Renewable Energy Projects:
A circular issued by the Department of Energy in 2022 allows foreign investors to hold 100% equity in renewable energy projects, including solar, wind, hydro, and ocean or tidal energy resources. This change aims to attract foreign investment and promote the country’s renewable energy sector.
These comprehensive reforms collectively demonstrate the Philippines’ commitment to creating an attractive and conducive environment for foreign investors across various sectors, thereby fostering economic growth and development.
Source: ASEAN Briefing