While the Philippines "service contract" has been widely accepted, political instability and fears over the future of the government continue to act as headwinds to investment.
June 16, 2021
Asia - Pacific
South eastern Asia, archipelago between the Philippine Sea and the South China Sea, east of Vietnam
The upstream terms in the Philippines are called service contracts. Unlike service contracts in other countries, where the contractor receives a fee from the national oil company but has no rights to production, the Philippine system is, in practise, a simple production sharing contract. There is no royalty, a fixed cost recovery ceiling and production sharing splits. Corporate income tax is paid on behalf of the contractor by the Government.
Foreign ownership limitations in many sectors of the economy constrain investments. Poor infrastructure, high power costs, slow broadband connections, regulatory inconsistencies, and corruption are major disincentives to investment. The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. Investors often describe the business registration process as slow and burdensome. Traffic in major cities and congestion in the ports remain a regular cost of business. Proposed tax reform legislation (Corporate Income Tax and Incentives Rationalization Act — CITIRA) to reduce the corporate income tax from ASEAN’s highest rate of 30% could be positive for business investment, although some foreign investors have concerns about the possible reduction of investment incentives proposed in the measure. The Philippines continues to address investment constraints. In late 2018, President Rodrigo Duterte updated the Foreign Investment Negative List (FINL), which enumerates investment areas where foreign ownership or investment is banned or limited. The most significant changes permit foreign companies to have a 100% investment in internet businesses (not a part of mass media), insurance adjustment firms, investment houses, lending and finance companies, and wellness centres. It also allows foreigners to teach higher educational levels, provided the subject is not professional nor requires bar examination/government certification. The latest FINL allows 40% foreign participation in construction and repair of locally funded public works, up from 25%. The FINL, however, is limited in scope since it cannot change prior laws relating to foreign investments, such as Constitutional provisions which bar investment in mass media, utilities, and natural resource extraction.
Source: ESRI, Heritage Index, HMG Foreign & Commonwealth Office, US Department of State, International Trade Administration, International Law Review, Ernst & Young, Wood Makenzie & OGA data.
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