Foreign Investments Act 101

Contributed by Joy Ivee O. Ong

 Foreign Direct Investments are a huge contributor to the Philippine’s rising economy, with posted net inflows of $5.5 billion from January to November 2015.1 It is even forecasted to rise up to $6 Billion this year according to BSP Department of Economic Statistics Director Zeno Abenoja.2 These figures show that foreign investors are now more confident in placing and growing their money in the country, which sets Philippines in an economic advantage. With these developments, it is only fair that we learn a thing or two of the law that regulates foreign investments, that is, Republic Act No. (RA) 7042, also known as the Foreign Investments Act of 1991 (FIA).


RA No. 7042 as amended by RA 8179 is the law that governs foreign investments in the Philippines. It is a landmark legislation as it liberalized the entry of foreign investments in the Philippines. It is characterized to be liberal as it generally does not restrict foreign ownership or equity in any type of business except for the enumerations found in the Foreign Investments Negative List (FINL). 3 The Foreign Investments Negative List (FINL) is a list of areas of economic activity where foreign ownership is either limited or wholly reserved to Filipino Nationals. The law covers all types of investments except for banking and other financial institutions which are governed and regulated by the General Banking Act and other pertinent laws of the Central Bank. What economic activities, then, does this law cover?


FIA covers foreign investments and foreign corporations. A foreign investment is defined as an “equity investment made by non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange”. 4 Meanwhile, Sec. 123 of the Corporation Code defines foreign corporations as those “formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state.” That is, corporations not incorporated under the Philippine Corporation Code. Under FIA, all foreign nationals who wish to invest or do business in the Philippines must register either with the Securities and Exchange Commission (SEC) if corporations, or with the Department of Trade and Industry (DTI) if single proprietorships.


Under the Rules and Regulations implementing FIA, a foreign corporation is required to submit the following documents to the SEC to secure a license to do business in the Philippines:

1. Name verification slip;
2. Certified copy of the board resolution authorizing the establishment of an office in the Philippines; designating the resident agent to whom summons and other legal processes may be served in behalf of the foreign corporation; and stipulating that in the absence of such agent or upon cessation of its business in the Philippines, the SEC shall receive any summons or legal processes as if the same is made upon the corporation at its home office;
3. Financial statements for the immediately preceding year at the time of filing of the application, certified by an independent certified public accountant of the home country;
4. Certified copies of the articles of incorporation/partnership in English;
5. Proof of inward remittance such as bank certificate of inward remittance of credit advises; and
6. Other documents which the SEC may require.

In addition to all these, a foreign corporation is required within sixty (60) days from the issuance of the license to do business to deposit with SEC, for the benefit of its present and future creditors in the Philippines, Philippine securities with actual market value of at least Php 100,000.00 subject to further deposit of additional securities within six months after each fiscal year equivalent in actual market value to 2% of the amount by which the foreign corporation’s gross income for that fiscal year exceeds Php5,000,000.00. 5


The registration is essential in order to regulate foreign entities and place them in equal footing with the domestic entities, subject them to inspection and protect the residents of the Philippines. 6 Furthermore, a foreign corporation needs to secure a license to do business in the Philippines otherwise it shall not be permitted to maintain or intervene in any action, suit or proceeding in any court, or administrative agency of the Philippines. It is important to note, however, that regardless of whether or not such foreign corporation is licensed to do business in the Philippines, it may still be sued or proceeded against on any valid cause of action recognized under Philippine laws.


As a general rule, foreign investors may own or control one-hundred percent (100%) of its business in the Philippines, including export enterprises. However, there are areas of activities where foreign investments are restricted or limited by the Constitution, FINL or other pertinent laws.


The 10th Regular Foreign Investments Negative List (E.O. 184) enumerates all investment areas limited or reserved to Philippine Nationals. It is divided into two lists, List A and List B. Those enumerated in List A are limits imposed by Constitutional mandate or special laws. The list found in List B on the other hand are imposed for reasons of security, defense, and risk to health, & morals and protection of small-and-medium scale enterprises.

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The following lists the restrictions or limitations under List A:
No Foreign Equity:

1. Mass Media except recording
2. Practice of all professions: Engineering, Medicine and Allied Profession, Accountancy, Architecture, Criminology, Chemistry, Customs Brokerage, Environmental Planning, Forestry, Geology, Interior Design Landscape Architecture, Law, Librarianship, Marine Deck and Engine Officers, Master Planning, Sugar Technology, Social Work, Teaching, Agriculture, Fisheries, Guidance Counseling, Real Estate Service, Respiratory Therapy, Psychology.
3. Retail Trade Enterprises with a paid-up capital of less than US $2.5 Million;
4. Cooperatives;
5. Private Security Agencies;
6. Small Scale Mining;
7. Utilization of marine resources in Archipelagic waters, territorial sea, and EEZ, and small-scale utilization of natural resources in rivers, lakes, bays and lagoons;
8. Ownership, operation, and management of cockpits;
9. Manufacture, repair, stockpiling, and/or distribution of nuclear weapons;
10. Manufacture, repair, stockpiling, and/or distribution of biological, chemical and radiological weapons.

Up to Twenty-Five Percent (25%) Foreign Equity  
1.  Private recruitment, whether for local or overseas employment
2.  Contracts for the construction and repair of locally-funded works except:
a.  Infrastructure/development projects covered in Republic Act No. 7718, also known as the Expanded BOT Law; and
b. Projects which are foreign-funded or assisted and required to undergo international competitive bidding.


Up to Thirty Percent (30%) Foreign Equity  
1.  Advertising


Up to Forty Percent (40%) Foreign Equity
1.  Exploration, development and utilization of natural resources
2.  Ownership of private lands
3.  Operation and management of public utilities
4.  Ownership/establishment and administration of educational institutions
5.  Engaging in the rice and corn administration
6.  Financing companies regulated by the Securities and Exchange Commission
7.  Contracts for the supply of materials, goods and commodities to government-owned or controlled corporation, company, agency or municipal corporation
8.  Contracts for the construction of defense-related structure [e.g.,land, air, sea and coastal defense, arsenals, barracks, depots, hangars, landing fields, quarters, hospitals]
9.  Project proponent and facility operator of a BOT project requiring a public utility franchise
10.  Private domestic and overseas construction contracts



LIST B:
Up to Forty Percent (40%) Foreign Equity
1.  Manufacture, repair, storage, and/or distribution of products and ingredients used in the manufacture thereof requiring Philippine National Police [PNP] clearance:
a. Firearms [handguns to shotguns], parts of firearms and ammunition therefor, instruments or implements used or intended to be used in the manufacture of firearms 
b. Gunpowder  
c.  Dynamite 
d.  Blasting supplies 
e.  Ingredients used in making explosive
f. Telescopic sights, sniperscope and other similar devices

2.  Manufacture, repair, storage and/or distribution of products requiring Department of National Defense [DND] clearance:
a. Guns and ammunition for warfare 
b.  Nuclear weapons and ordnance 
c.  Military ordnance and parts thereof [e.g., torpedoes, mines, depthcharger, bombs, grenades, missiles] 
d.  Gunnery, bombing and fire control systems and components 
e.  Guided missiles/missile systems and components 
f.   Tactical aircraft (fixed and rotary-winged), components and parts thereof 
g.  Space vehicles and component system 
h.  Combat vessels (air, land, naval) and auxiliaries 
i.   Weapons repair and maintenance equipment 
j.   Military communications equipment 
k.  Night vision equipment 
l.   Stimulated coherent radiation devices, components and accessories 
m. Biological warfare components 
n.  Armament training devices 

3.  Manufacture and distribution of dangerous drugs

4.  Sauna and steam bathhouses, massage clinics and other like activities regulated by law because of risks they may impose to public health and morals;

5.  Other forms of gambling, e.g., race track operation; racehorse ownership/importation

6.  Domestic market enterprises with paid-in equity of less than the equivalent of US$200,000.00 unless they involve advance technology or they employ at least fifty [50] direct employees, the minimum paid-in capital will be reduced to US $ 100,000.00.

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To reiterate, unless the business enterprise is restricted or limited by the Constitution, FINL, or other laws, then any non-Philippine national who wishes to do business or invest in the Philippines may do so up to 100% equity. So that one avoids exposing itself to fines and sanctions under the law, it must strictly comply with the FINL and other related laws. 7 


The passage of FIA opened up not just doors, but gates for the Philippines. It attracted a wide array of foreign investments from the BPO business to the fashion business. Indeed, the law has significantly helped the Philippines economy rise to a new level.


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Endnotes
1 Media Releases, Bangko Sentral ng Pilipinas. February 10, 2016. Retrieved at http://www.bsp.gov.ph/publications/media.asp?id=3991 on June 7, 2016.
2 Agcaolili, L.,(The Philippine Star), December 22, 2015. “BSP sees higher FDI inflow next year.”
3 Sec.2, RA No. 7042.
4 Ibid, Sec. 3 (c).
5 Sec.126 (2), Corporation Code of the Philippines
6 p. 754, De Leon, H., et.al. The Corporation Code of the Philippines. 2013. Rex Book Store; Manila, Philippines, p. 754.
7 Sec.14, RA 7024: Sanctions include fine not exceeding Php100,000 or in the case of a juridical entity, a fine in an amount not exceeding ½ of 1% of total paid in capital but not more than Php 5,000,000.00. The President and/or officials responsible therefore shall also be subject to a fine not exceeding Php200,000.00. In addition, any person, firm, or juridical entity involved shall be subject to forfeiture of all benefits granted under this Act. xxxx