Doing business in the Bucking the global slowdown, building for the future April 2019 Foreword

I would like to laud the efforts of Navarro Amper & Co.—one of the leading professional services firms in the country and a part of Deloitte's global network—for creating this investment guide to show investors that now is the best time to partner with the Philippines.

The Philippines is on an economic breakout: it is the second fastest growing economy in Southeast Asia, with a GDP growth of 6.2 percent in 2018. The economy is projected to grow by 7 to 8 percent in the medium term. The main drivers for this growth are manufacturing and construction due to the influx of foreign investments in the country, and the government’s massive Build, Build, Build infrastructure program.

Our Board of Investments (BOI) has registered record-breaking investment approvals for the past two consecutive years. In fact, the BOI approved Php915 billion worth of investments in 2018, with many of these in Mindanao, CALABARZON, and Central . These investments are set to bring more decent jobs and employment Ramon M. Lopez for Filipinos throughout the country. To ensure that these regions DTI Secretary become more accessible, the government is pushing its centerpiece infrastructure program to build more roads, ports, airports, and other structures to better link our country.

The Duterte administration also put forward several legislative reforms including the Ease of Doing Business Law, the Rice Tarrification Law, the revision of the Corporation Code, and the proposed TRABAHO The Philippines: An overview 06 Bill. Likewise, the Department of Trade and Industry (DTI) is lobbying for more reforms to improve the Public Service Act, the Retail Trade Economic overview 08 Liberalization Act, and the Foreign Investment Negative List.

Sector in focus: E-commerce 22 With the collaboration of the private sector, your government is Mergers & Acquisitions 30 determined to make the Philippines more competitive and more conducive to business. That's why on behalf of the DTI, I wish to thank Foreign investment 38 Navarro Amper & Co. for helping attract more investments in the country and doing its part in creating inclusive growth and shared Public-Private Partnerships 44 prosperity for all our countrymen. Taxation 47 Mabuhay! About Deloitte Philippines 50 Preface

In recent years, the Philippines has been one of the better performers in the Asian region and, while we experienced a bump in 2018 due to inflation, forecasts remain positive on the back of strong macroeconomic fundamentals. In fact, the Philippines is expected to be the second fastest growing emerging market in the world in the next 10 years.

The country, nonetheless, is not resting on its laurels. The government, in partnership with the private sector, has embarked on a massive infrastructure program that will serve as the backbone of further growth. Legislative efforts to improve the ease of doing business in the country, to further liberalize foreign participation, to rationalize the tax structure, and to improve competition are in place. The Revised Corporation Code of the Philippines, for one, revamped the decades-old Corporation Code, making way for the existence of the one-person corporation, shifting to perpetual corporate term, and removing the subscribed and paid-up capital requirement. This new law has made it relatively simple to set up a legal entity in the Philippines.

There is also much anticipation surrounding efforts to improve the country’s internet and digital infrastructure, with a new telco player coming in to break the current duopoly in the market. This will further boost the incredible growth of the e-commerce sector, which in turn has fueled the expansion of related industries such as mobile payments and logistics.

We expect these welcome developments to make the Philippine M&A environment a more vibrant space, especially in the technology, consumer, financial services, and life sciences sectors.

I am proud to present our Doing Business in the Philippines 2019 edition, where we focus on why now is the best time to invest in the Philippines. This is Deloitte Philippines’ way of making an impact that matters to our clients, to society, and to our people.

Eric Landicho Country Managing Partner & CEO The Philippines: An overview

Republic of the Philippines an archipelago with over 7,000 islands and a land area that spans 300,000 square kilometers

Currency Philippine Peso (US$1=Php52.66, 2018 average) Language Filipino, English, many local dialects/languages Religion Roman Catholic: 80.6% Islam: 5.6% Evangelicals: 2.7% Iglesia Ni Cristo: 2.4% Others: 8.7% Real GDP per capita Labor force Bank lending rate Major exports (2018) (2018) (2018 average) 43.5 million Semiconductors, Php86,334 6.1% electronic data processing, metal components, control Working age population Inflation rate Time deposit rate instrumentation (2018 average) (61-90 days, 2018 average) 66.4 million 5.2% 3.1% Major imports (2018) Population Politics Real GDP Unemployment rate (2018) Form of government: (2018) Electronic products, (as of 2018) Unitary Presidential mineral fuels, 106.6 Constitutional Republic transport equipment, Php9.2T 5.3% President: machinery and (US$174,760M) million Rodrigo Roa Duterte mechanical (June 2016 - June 2022) appliances Presidential term length: 6.2% 6 years growth rate

06 07 Doing business in the Philippines | Economic overview

The global economy is projected to slow down in 2019, but optimism regarding the Philippines’ ability to buck this trend remains high. The country 01 continues to be an attractive investment option amidst an uncertain global environment and other external headwinds due to its strong growth, increased competitiveness, and commitment to inclusive reforms. Economic overview

The Philippine economy is still one of the region’s faster growth performers, with real Gross Domestic Product 56th World Economic Forum's (GDP) growing by 6.2 percent in 2018, albeit slower than out of 140 Global Competitiveness economies the 6.7 percent growth in 2017 due to the dampening Index (2018) impact of inflationary pressures on consumer spending. This growth performance translates to a 4.5 percent increase in per capita GDP to Php86,334 (c. US$1,639).

Aligned with the country’s back of higher excise taxes, food Investment grade credit ratings (2018) development objectives of supply bottlenecks, global oil price driving rapid but inclusive hikes, and a weaker peso. But the economic growth, accelerating Bangko Sentral ng Pilipinas (BSP) employment on a massive expects inflation to rapidly slow to scale, and reducing poverty, the 3.0 percent in 2019 and 2020, well On the production side, the Poor Good Poor Good Poor Good unemployment rate dropped within the 2 to 4 percent target services sector continues to to 5.3 percent in 2018 from band, as price pressures continue contribute the lion’s share of the 2017 rate of 5.7 percent. to ease.3 GDP, accounting for 57.7 percent BBB Baa2 BBB Fitch The poverty incidence among in 2018 in terms of gross value Moody's Standard & Poor's Filipinos declined to 21.0 percent Fixed investments, which added (GVA). It posted slower in H1 2018 from 27.6 in H1 accounted for 31.0 percent of growth, however, at 6.6 percent 2015,1 while the Gini coefficient, GDP, registered the highest compared to the previous year’s a statistical measure of income growth in 2018 at 13.9 percent 6.8 percent due to the slowdown Historical real GDP growth4 inequality, improved to 40.1 in owing to construction and of the automotive industry— 6.9% 2015 from 42.9 in 2006.2 intellectual property products. arising from the additional excise 6.7% This partly reflects the increase in taxes imposed on cars and The Philippines is heavily reliant infrastructure-related activities by fuel—and the real estate sector. 6.1% 6.1% 6.2% on household consumption, both the private (including build- The industry sector, meanwhile, which accounted for 68.5 operate-transfer projects) and recorded the fastest growth at percent of GDP in 2018. Private public sectors over the course of 6.8 percent year-on-year mainly consumption’s growth slowed the year. Meanwhile, government due to construction’s strong to 5.6 percent from the previous expenditure increased by 12.8 performance. Improving the year’s 5.9 percent, however, percent, representing the highest country’s agriculture sector due to inflation, which surged gain since 2012. remains a challenge. to 5.2 percent in 2018 on the

08 2014 2015 2016 2017 2018 09 Doing business in the Philippines | Economic overview Doing business in the Philippines | Economic overview

Tailwinds Headwinds Forecasts

••As with previous elections, the midterm ••The slower global growth, exacerbated The Philippine economy is poised to grow at a faster elections in May 2019 is expected to drive by the US-China trade war and increasingly pace in 2019 as inflation cools. The World Bank and the additional public spending and private protectionist stance of trading partners, Asian Development Bank expect 2019 real GDP growth consumption that would help accelerate may dampen exports and widen the current growth for the year. account deficit, although the country’s of 6.4 percent, while the International Monetary Fund domestic demand-driven economy should ••The 11th Foreign Investment Negative List limit the impact. The Economist believes that pegs it at 6.5 percent. These rates reflect downgraded (FINL) further liberalizes foreign participation the Philippines will not be among the Asian growth projections due to the impact of the El Niño and encourages investment. Refer to pages “winners” in the US-China trade war when the 40-41 for details of the additional foreign phenomenon on the agricultural sector and the BSP's world supply chain shifts due to the “country’s ownership allowance. decision to hike policy rates by 175 basis points in 2018 weak regulatory and business environment” following surging inflation, capacity constraints, and ••The ambitious infrastructure program of and its underdeveloped digital ecosystem,7 the government has been met with much currency pressures. The outlook, however, remains although there have been reports that enthusiasm and is expected to reinforce Chinese manufacturing companies are decidedly positive. the foundation of long-term economic considering the Philippines in order to avoid development. US tariffs.8 This is due to the country’s sound Oxford Economics, on the other ••Several legislative priorities designed ••While the TRABAHO Bill aims to bolster macroeconomic fundamentals, hand, expects the Philippines to to encourage a more vibrant business investments in the country by gradually vibrant labor market and young be the second fastest growing environment are being pushed. Refer to reducing the corporate tax rate, the provisions population, continued investment emerging market, next only to pages 12-13 for a discussion on some relevant on the rationalization of key tax incentives in infrastructure, and commitment India, between 2019 and 2028 legislative developments. has created uncertainty among potential to investment-friendly legislation, with GDP projected to grow by ••The proposed free trade agreement investors. Pledges with the Philippine including the liberalization of an annual average of 5.3 percent.6 involving the 10 ASEAN member states plus Economic Zone Authority (PEZA), a beneficiary foreign ownership, tax reforms, Australia, China, India, Japan, South Korea, of current tax incentives, fell 41 percent in 9 and improving ease of doing and New Zealand, dubbed as the Regional 2018. business. Comprehensive Economic Partnership ••Delays in the infrastructure program (RCEP), which is close to being finalized, is arising from lengthy bureaucratic processes, Long-term projections are expected to improve the country’s export inefficient procurement, right of way issues, similarly bullish. The Organization performance and inflow of foreign investments, and coordination failures, coupled with the for Economic Cooperation and and to reduce commodity prices in the region. legislative bottleneck in passing the 2019 Development (OECD) forecasts ••The commitment to raise corporate governance budget, are preventing the government from real GDP to grow by 6.6 percent, standards, which is reflected in the signing of ushering in a Golden Age of Infrastructure. on average, between 2019 the Revised Code of Corporate Governance, ••The administration’s push for a federalist and 2023. This represents the will promote more transparency to protect the form of government creates worries around highest growth among the financial backbone of the economy. the local government’s ability to manage fiscal ASEAN-5 countries, i.e., Indonesia, ••The Philippines is becoming a fintech, resources and stanch corruption, especially Malaysia, Thailand, Vietnam, and blockchain, and cryptocurrency hub since Congress appears disinclined to pass the Philippines. OECD expects especially with the grant of accommodating a bill that limits political dynasties. The overseas remittances and robust policies to foreign cryptocurrency exchanges transitional costs may also pose short-term public budgetary spending to operating within the Cagayan Economic Zone risks, while the long-term economic impact 5 primarily buoy the economy. Authority (CEZA). is uncertain: international experience of decentralization is mixed.10

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Significant legislative updates Tax revenue13

Ease of Doing Business Act Comprehensive tax reform program Signed into law in mid-2018, R.A. No. The Tax Reform for Acceleration and 2016 41.7 13.7% 11032, also known as the Ease of Doing Inclusion (TRAIN) Law is the first package Business and Efficient Government Service of the comprehensive tax reform program Delivery Act of 2018 (EODB), hopes to (CTRP) currently being implemented. The further address bureaucratic red tape by first tranche of the TRAIN Law, which took 2017 44.7 14.2% improving the efficiency and transparency effect on 1 January 2018, lowered personal of government procedures at all levels . The income taxes, simplified transfer taxes, law is an amendment of the Anti-Red Tape expanded the value-added tax base, and Act of 2007. adjusted/introduced different forms of H1 24.2 excise taxes. Finance Secretary Carlos 2018 15.2% Features (non-exhaustive):11 Dominguez III is counting on the TRAIN Law to ensure a steady revenue flow for ••Standardization of deadlines for Tax revenue (US$ billion) % of GDP the government’s aggressive infrastructure government transactions program, while the lower personal income (Amounts are converted in US$ based on average exchange rates from BSP during the respective ••Streamlining of business application tax is expected to boost consumer periods –Php47.49, Php50.40, and Php52.00 in 2016, 2017, and H1 2018, respectively.) procedures by requiring a unified spending and spur economic activity.12 business application form, set up of a There are worries, however, regarding the “one-stop shop” that puts several offices tax law’s contributing impact on price hikes in one location, and automation of of goods and commodities. permits and licenses Revised Corporation Code Features (non-exhaustive):15 •• Electronic filing of reportorial •• Automatic approval of any business The proposed second package of the CTRP, The Revised Corporation Code of requirements application that the agency fails to called by the House of Representatives as ••One-person corporations (lifting the Philippines, which amends the approve or disapprove within the the Tax Reform for Attracting Better and of the five-person requirement) •• Strengthening of corporate country’s 38-year-old Corporation prescribed processing time High-Quality Opportunities (TRABAHO) Bill, governance standards and Code, aims to create a more •• Removal of the minimum capital intends to gradually lower the corporate provision of protection for •• Zero-contact policy that prevents business-friendly environment requirement income tax rate and overhaul fiscal minority stockholders government officers from interfering with incentives. Refer to Page 47 for the other and improve the ease of doing •• Perpetual existence of business applications or requests proposed packages of the CTRP. business. The Code is one effort corporations to reverse the Philippines’ slide in •• Set up of a central business portal to •• Stockholders’ and directors’ receive and capture application data, and the World Bank’s Doing Business Report – from a rank of 113 in remote participation in meetings establishment of the Philippine Business and elections Databank as a source of information on all 2018 to 124 in 2019 among 190 14 registered businesses in the country economies.

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Corporate Governance Women in leadership

The Philippine Securities and respondents stated that enhancing The Philippines has made significant Global gender gap Exchange Commission (SEC) released the quality, availability, and timeliness strides in managing cybersecurity index a new Code of Corporate Governance of risk data was a main priority, while risk, primarily due to the passage of for Publicly-Listed Companies in late 68 percent cited enhancing risk Cybercrime and Data Privacy Laws, 2016, with the intent of raising the information systems and technology as well as the crafting of the National 1st corporate governance standards infrastructure. This affirms the Cybersecurity Plan 2022, which 13th Educational of Philippine corporations. As a growing threat of online attacks, outlines appropriate responses to 14th attainment Economic Political whole, the Code aims to expand and highlights the importance of cyber threats, how to secure data, empowerment the responsibilities and ensure the digital risk management in corporate and how to educate the public about 42nd participation competence and commitment of the governance. cybersecurity.17 Health and and board, strengthen safeguards that 8th survival opportunity protect shareholders, and promote full disclosure and transparency. World Economic Forum’s Global Gender Gap Report (out of 149 economies)19 The World Economic Forum’s 2018 Global Competitiveness Report 18 The revised Corporation Code breaks down corporate governance into three aspects: will also strengthen and simplify corporate governance standards Strength of auditing and reporting The Philippines has long been a Five percent of the companies Expanded Maternity Leave Bill and provide protection to minority standards leader in the Asian region when analyzed have women board was signed into law in early stockholders. Specifically, the code it comes to gender parity. In chairs, and 2.9 percent have 2019, 23 extending the paid deters corporate abuse and fraud, 2018, it was among the 10 best women CEOs. maternity leave from 60 days strengthens the regulatory authority to 105 days, with an option to of the SEC, and encourages the 43rd countries to be a woman – the only one from Asia – based on Another Deloitte study22 extend for 30 days without inclusion of independent directors in out of 140 economies the board. the World Economic Forum’s finds that the presence pay. This allows women the Global Gender Gap Index. of women in leadership opportunity to care for their One corporate governance issue positions correlates with families without sacrificing their Conflict of interest regulation that boards across industries have While women are fairly higher financial performance, career or present leadership been grappling with is cybersecurity. represented in managerial better team dynamics, and tracks. This refers to the practice of positions (e.g., women occupy higher productivity. Gender implementing policies and strategies 121st 30 percent of the top executive diversity also leads to improved In the public sector, although the that defend and protect the integrity out of 140 economies and privacy of computers, servers, positions in the Philippine operational performance, better Philippines has had two female systems, and data from malicious Stock Exchange’s 200 highest problem solving, and increased heads of state, women remain attacks. market-capitalized companies, innovation, among others. underrepresented: only 21.5 Shareholder governance usually as treasurers, corporate percent of elective positions that In a recent Deloitte global survey,16 secretaries, and finance Several initiatives exist to are currently occupied are held 67 percent of respondents managers20), there is still room strengthen the presence by women. Cabinet posts have identified cybersecurity as a major for improvement as female of female leadership in the also historically been dominated factor to consider in the near 106th out of 140 economies representation at the C-suite country. In the SEC’s Revised by men. It is an imbalance that future. Meanwhile, 79 percent of level remains limited. According Code of Corporate Governance, needs to be addressed in order to a Deloitte report,21 only 10.4 the commission recommends to give women equal voice in percent of board seats in the establishing a policy on board crafting and deciding on key Philippines are held by women. diversity that covers gender policies.24 diversity. Furthermore, the

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27 Build, Build, Build Infrastructure flagship projects by area

The Philippine government’s massive US$180-billion Area No. of projects infrastructure program is expected to alleviate the Luzon 45 country’s traffic woes, which ratchet up opportunity losses estimated at US$66.5 million per day by the Japan International Cooperation Agency. It is also Visayas 10 set to modernize provincial areas, reduce poverty incidence to 13-15 percent by 2022, and create 1.1 Mindanao 17 million jobs annually until 2022. Nationwide 3

The ambitious program includes The ongoing expansion of Clark Total 75 the construction of railways, roads International Airport is expected and highways, airports, and the to decongest the country’s country’s first ever subway, as well main international airport and as energy facilities, water resource turn Central Luzon into a major projects, irrigation systems, and economic hub. For one, it will flood control facilities. The plan serve as the gateway to New has drawn near unanimous Clark City, a 9,450-hectare 28 praise and support with hopes metropolis that is currently Target infrastructure spending, in percent of GDP that it will translate to a stronger under development to be the development backbone, economic country’s first smart city, a “hub opportunities, and overall of agro-industrial activities, competitiveness. home to cutting-edge technology 2022 and logistics companies, and Of the 75 flagship projects, 44 host to well-equipped backup 7.3% are already in implementation government centers and world- (i.e., budgeting, procurement, class sports facilities.”25 design, and construction) as of 30 November 2018. Some of the Two of the flagship projects have 2021 bigger ticket projects include completed construction, while 6.9% the US$6.8-billion nine have on-going construction. Subway (Phase 1), which is set Thirty-one projects are expected to be completed by 2022, and to be completed in 2022 when the the Philippine National Railways’ term of President 6.9% 746.2-km railway system, which ends.26 2020 will run from the north of Manila (Clark and New Clark City) to the south (Laguna and Bicol). 6.8% 2019

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The comprehensive New Clark City master plan was The Philippines' first smart city rises outside the capital, developed by the Bases giving shape to the future of urbanization today Conversion and Development Authority (BCDA) in partnership with the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN), U.S. engineering design firm AECOM, and Japanese engineering firm NIPPON KOEI.

The National Multi-Sports Training Park will include a 20,000-seating capacity Athletics Stadium, a 2,000-seating capacity Aquatics Stadium, and an Athletes Perhaps one of the most to typhoons; and the smart city’s disaster and risk recovery center, Village that will ambitious infrastructure projects lowest elevation (58 meters above is expected to be completed by house currently in full swing is the sea level) and highest elevation (800 November 2019, in time for the delegates to Philippines’ first smart city – New masl) make flooding an unlikely country’s hosting of the 30th the SEA Clark City in the Clark Special problem. Southeast Asian (SEA) Games. Games. Economic Zone. The green metropolis will feature, among The smart city is set to offer Other developments in the others, mixed-use real estate the lowest water and power pipeline for New Clark City are a developments for housing, distribution rates in the country 288-hectare mixed-use industrial Singapore’s Surbana a business continuity center through joint venture agreements area for BPOs (business processing Jurong was tapped for that would also house national with two major consortia. It is outsourcing), KPOs (knowledge development government agencies and a sports targeting a 10 percent renewable process outsourcing), light management services, complex, and an agro-industrial energy share after the first year of industries, residential, commercial, including the design of a park that will provide a platform for commercial operation, increasing and educational spaces, and a framework that research and development. annually until it achieves its food processing terminal and harmonizes sustainability renewable energy target of 35 international food market that and smart city concepts. The location for the 9,450-hectare percent share by 2030. would facilitate the exchange of city in Central Luzon, some 100 fresh agricultural produce and According to the BCDA, kilometers north of Metro Manila, Construction of Phase 1A of the processed products within the the scale and planning for was chosen for its disaster-resilient 200-hectare National Government country and with neighboring New Clark City makes it features: Unlike the capital, it Administrative Center (NGAC), countries in Asia. comparable to other does not sit on a fault line; nearby which is designed to serve as the modern cities in Asia, such mountain ranges serve as barriers government’s continuity hub and as Sejong City in South Korea, Zhuzhou in China, and Iskandar in Malaysia. 18 Information and photos appearing in this section are from the Bases Conversion and Development Authority (BCDA). 19 Doing business in the Philippines | Economic overview Doing business in the Philippines | Economic overview

Foreign trade with ASEAN36 Year-on-year growth % of global of ASEAN trade trade

ASEAN integration 9.2 2014 11.0% 19.5% 15.7 The establishment of the Association of Southeast Asian Nations Economic Community (AEC) was a 8.8 2015 7.4% 20.6% breakthrough for ASEAN integration. The AEC is 18.0 designed to be a single market and production 8.6 2016 15.0% 21.7% base where there is free flow of capital and skills, 22.1 and open access to travel, education, healthcare, 9.7 and other social services. 2017 11.2% 20.7% 24.5 A Deloitte study found that biggest market in terms of visitor Another key component of the H1 5.2 ASEAN has immensely helped arrivals, behind the US and East ASEAN market liberalization is 11.2% 21.5% 2018 13.0 its member states achieve Asia. the ASEAN Single Aviation Market economic growth and regional (ASAM), which aims to liberalize stability, with the region posting Negotiations on the RCEP air service (passenger and an annual growth rate of 5.2 are close to being finalized. cargo), and facilitate trade and Exports to ASEAN (US$ billion) Imports from ASEAN (US$ billion) percent between 2007 and 2015. Studies indicate that upon investments in the region. This is Meanwhile, the poverty rate has implementation of the trade particularly important at a time dropped from 33 percent in 2000 agreement, Philippine exports when e-commerce is expanding 29 to 15.3 percent in 2015. In 2019, to RCEP members and real rapidly. ASAM is expected to Tourism from ASEAN37 the AEC as a whole is expected to household income will rise, while support 2.5 million jobs across Twenty-six pilot cities have remain resilient to external shocks commodity prices will decline. An ASEAN by 2030, with Indonesia 2014 2015 2016 2017 Jan-Oct 2018 and maintain steady growth, estimated US$2.4 billion worth of and the Philippines benefiting been identified for the bolstered by growing intra- foreign direct investments (FDI) the most, given the size of their network, including three regional trade and foreign direct will also funnel into the Philippine domestic market.34 from the Philippines: Manila, investment linkages. Forecasted market between 2014 and 2023.32 , and . As 488,346 444,213 461,486 481,567 461,698 GDP growth for the region is 5.2 These developments are the various member states percent for 2019.30 With the establishment of expected to trigger a mass begin implementing their own the AEC, the ASEAN Banking migration of an estimated 90 city-specific plans for urban 9.5% 10.1% The Philippines benefits from Integration Framework was also million people to the region’s development, the ASCN will 9.3% 9.0% the ASEAN integration through launched to make it easier for cities by 2030. To prepare for this complement and harmonize 7.7% 7.4% 7.6% a variety of factors, including member states to provide cross- influx, the ASEAN Smart Cities these efforts, driving sustainable 5.8% foreign trade and investments, border banking services, and give Network (ASCN) was launched growth at a regional level. 4.4% and heightened tourism. In H1 certain qualified banks within at the 32nd ASEAN Summit in 2018, leading exports to ASEAN the region greater market access 2018. 35 It will serve as a platform were electronic products and and operational flexibility while to facilitate cooperation between (4.1)% other manufactured goods, promoting intra-regional trade. member states with regard to while top imports were transport The framework uses reciprocal using technology and digital equipment, electronic products, agreements among member infrastructure to transform cities and mineral fuels and lubricants.31 states: so far, the Philippines into smart cities. Year-on-year growth of ASEAN arrivals Arrivals from ASEAN Meanwhile, ASEAN was the third has signed bilateral agreements with Malaysia, Thailand, and % of global arrivals Indonesia.33

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02 Mobile payments

The growing demand for financial technology (fintech) has reshaped the finance industry. In 2018, fintech in the Philippines Sector in focus: had a transaction value estimated at US$5.7 billion and it is E-commerce pushing boundaries expected to grow at an annual rate of 16.4 percent, settling at of payment and logistics systems an estimated value of US$10.5 billion by 2022.41

Mobile payment lies at the heart startups in the country include allow individuals to perform Innovations are disrupting traditional business models of the country’s fintech landscape. Citadax, BuyBitcoin.ph, and mobile fund transfers between at a faster and larger scale than ever before. In the A report42 indicates that 33 MergeCommit. different banks or other financial retail sector, perhaps no development has changed the percent of all fintech startups in institutions. the Philippines operate under the In its goal to make the country’s landscape as much as e-commerce. With its promise ‘mobile wallet’ or ‘digital payments’ economy cash-lite by promoting With the immense growth of of around-the-clock availability, speed of access, and sector. Other dominant sectors in online and mobile financial e-commerce and the enabling international reach, online shopping has given rise to fintech include alternative finance transactions, the BSP launched initiatives of the BSP—by “Everywhere commerce,” allowing consumers to shop firms such as Acudeen, BanKo, two automated clearing houses 2020, it wants 20 percent of all Cropital, First Circle, and Lendr; under the National Retail Payment transactions to be digital43 38 — however, wherever, and whenever they want. and blockchain technology and System—i.e., the Philippine digital payment businesses are cryptocurrency, which are riding Electronic Fund Transfer System set for a good ride. Here are some on efforts to turn CEZA into an and Operations Network of the major players in the sector. E-commerce in the Philippines Retail disruptions such as emerging cryptocurrency hub. (PESONet) and InstaPay—that is growing exponentially due to e-commerce tilt the power Blockchain and cryptocurrency an expanding middle class with balance in favor of consumers, stronger purchasing power and a but as businesses adjust to keep young and tech-savvy population. up with the new rules of the Revenue in 2018, considering game, consumer expectations only the sale of physical goods only increase, emphasizing the via a digital channel to a private need for a supply chain that end user in a B2C transaction, is more efficient, predictable, amounted to US$840 million. convenient, and secure. Not Between 2019 and 2023, surprisingly, these expectations revenue is expected to expand are also transforming the at a compounded annual growth payment and logistics sectors. rate (CAGR) of 9.5 percent.39 Top e-commerce sites in terms of average search interest on Google and the number of downloads on IOS and Google Play include Lazada (which maintains a wide lead over its competitors), Shopee, Zalora, and eBay.40

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GCash PayMaya Coins.ph GrabPay PesoPay Dragonpay

Launched in 2004 as a regular PayMaya is a mobile wallet and Established in 2014 by Ron Hose, GrabPay is a mobile wallet Owned by AsiaPay, one of the Founded in 2010 by Robertson remittance service, GCash has payment application that has the Coins.ph operates as a mobile payment solution that is used largest payment service Chiang, Dragonpay can operate evolved into a complete online distinction of being the first wallet, allowing users to pay hand in hand with Grab, a major providers in Asia, PesoPay acts as a mobile wallet through the wallet and mobile money service non-financial institution in bills, buy load, and send or transport-hailing service in as a payment gateway that use of prepaid Dragonpay that allows users to buy load, Southeast Asia to be granted an receive money. Coins.ph is also Southeast Asia. Launched in the allows merchants to receive Credits. However, its main pay bills, and send money, issuing and acquiring license by the first virtual currency Philippines in 2018, GrabPay can payments from a variety of service is acting as a digital among other features. Visa. This, along with its provider in the Philippines to be be used for different Grab payment methods, including platform that allows merchants partnership with Mastercard, licensed by the BSP, and services, such as ride payment, credit cards, debit cards, and to accept payments from allows users of PayMaya to have possesses a Virtual Currency delivery payment, and mobile wallets. Founded in 2006 customers without using ••Operator: Globe Fintech their own virtual Visa or Exchange license. This allows it peer-to-peer fund transfers. It as AsiaPay Philippines and traditional channels, such as Innovations, Inc., also known as Mastercard products. to fulfill a unique niche wherein can also be used to pay bills and rebranded as PesoPay in 2008, credit cards. Dragonpay is a Mynt users of Coins.ph can easily purchase from retail stores. the payment gateway is one of Platinum PayPal Partner, and has •• Owners: , Ant convert money into the oldest players in the Japan’s biggest online payment •• Operator: PayMaya Philippines, Financial (affiliate of the Alibaba cryptocurrency, including Bitcoin In 2018, Grab acquired industry.47 gateway, GMO Payment Inc. Group), and Ethereum. competitor Uber’s ride-sharing Gateway, as its investor through •• Owner: Voyager Innovations, and food delivery operations in PesoPay offers several services, the Global Payment Gateway •• Some brands: GCash the digital innovations Southeast Asia, with Uber including PayCash, which allows Fund managed by GMO Venture PowerPay+, GCash Remit Indonesian multi-service company of major receiving a 27.5 percent stake in merchants to sell online and Partners, Inc. Service, GCash American platform Go-Jek recently telecommunications service Grab in return. The deal receive cash, and eVoucher, Express Virtual Card, GCash announced that it will be making provider PLDT Inc., with strengthens GrabPay’s position which enables merchants to Dragonpay has emerged as a beep Mastercard, GCash-Alipay a substantial investment in investments from KKR, Tencent in the market, with 20 percent of create, distribute, and track major player in the market, in QR (a partnership with Alipay, Coins.ph. In line with this, the Holdings Ltd., and International Grab riders using GrabPay to electronic vouchers. large part due to its partnership an online payment platform fintech startup will be partnering Finance Corporation pay for the company’s services.45 with several government offices, also owned by Ant Financial with Go-Pay, Go-Jek’s payment In 2017, Grab also acquired including the National Bureau of and The Island Group), •• Some brands: PayMaya platform and the leading digital Indonesian e-commerce Investigation, the Philippine GSave (digital savings wallet Business, PayMaya Enterprise, payments service provider in platform Kudo and payments Overseas Employment partnership with CIMB Bank Smart Padala Indonesia. The two services will service PayTren to expand its Administration, and the Philippines, Inc.) work together to expand access to cashless transactions and digital payments services in the Intellectual Property Office. banking services.44 region.46

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Logistics

The Philippines jumped 11 notches in the World Bank Logistics Performance Index to land at 60th place out of 160 countries in 2018, from 71 in 2016. The biennial report ranks countries based on six key logistics performance dimensions including efficiency of the clearance process, quality of trade and transport related infrastructure, ease of arranging competitively priced shipments, competence and quality of logistics services, ability to track and trace consignments, and timeliness of shipments.

A study48 expects the Philippine SM Investments Corporation logistics and warehousing (SMIC), the owner of the country’s market to grow by a CAGR of largest chain of shopping malls 8.8 percent from 2018 to 2023 and the only Philippine company driven by expanding industrial on Deloitte’s list of 50 fastest activities, growing e-commerce growing retailers in the world,49 Udenna Corporation is now a Metro Pacific Investments The Ayala Group, meanwhile, sector, upcoming infrastructure acquired a stake in Negros major player in the logistics space Corporation (MPIC) has also entered the e-commerce projects including those specific Navigation Company in 2017 for with its major acquisition in 2016 been among the active buyers of business in 2017 by acquiring to the development of the US$125 million to give it access to of Chelsea Logistics Holdings logistics companies. It invested in Zalora Philippines, one of the country’s logistics framework, and the latter’s 2GO Group, Inc., which Corporation, a shipping company Ace Logistics Inc., Basic Logistics channels under online fashion consistent economic growth. provides shipping and logistics engaged in the conveyance/ Corporation, A1Move Logistics, retailer Global Fashion Group, services in the Philippines and carriage of petroleum products Inc., Philflash Logistics, Inc., and which, in turn, is a brainchild Of late, several conglomerates abroad. This transaction gives and other liquid cargo. Chelsea BasicLog Trading and Marketing of Rocket Internet. Aside from have been aggressively acquiring SMIC another growth platform Logistics Holdings Corporation, in Enterprises. These acquisitions its warehouse and delivery logistics companies in order for its retail business, while turn, made several acquisitions in will create synergy and expand hubs, Zalora Philippines has to take advantage of the cementing a partnership with 2017 including Trans-Asia Shipping MPIC’s diversified business its own delivery system called opportunities in the sector. Udenna Corporation, another Lines, Inc. (passengers and cargo portfolio in view of strong Zalora Express, operated via its major stockholder of Negros within territorial waters and/or in demand in the logistics sector. logistics platform Entrego, which Navigation Company that has the high seas); , Inc. To further its goal of becoming handles about 75 percent of the recently been in an acquisition (ferry operations); and Worklink a leading player in the space, company’s deliveries and serves 50 spree to diversify its business. Just Services, Inc. (courier, forwarding, MPIC’s wholly-owned logistics arm 90 cities across the country. recently, 2GO Group, Inc. invested trucking, and logistics services). Metropac Movers acquired a 12 in Mober Technology PTE, a start- percent stake in Air21 in August up that offers an online platform 2018, with the option to raise for booking delivery vans in the the ownership to as high as 100 Philippines. percent.

26 27 Doing business in the Philippines | Sector in focus: E-commerce Doing business in the Philippines | Sector in focus: E-commerce

Delivery services Warehousing or distribution centers

On-demand delivery service is expanding include Grab’s GrabFood, Honestbee, Newly listed real estate company Deloitte55 believes that the warehousing, in the Philippines as a number of start-up Foodpanda, LalaFood Philippines, Zomato DoubleDragon Properties, Inc. is or more aptly called "distribution centers" tech companies enter the market, such as (through acquiring Quick Delivery, a capitalizing on the industrial warehouse since they are no longer treated as cost Transportify, Lalamove, Mober, GoMoto, Philippine-based pioneer in food delivery space leasing sector with its CentralHub centers but rather as strategic facilities Xend Mobile, and Grab’s GrabExpress. and takeout services), Mangan.ph, brand, which has a pilot development in that provide competitive advantage, can Delivery Guy, and MetroMart (partners Tarlac and succeeding sites planned in also leverage on Industry 4.0 or, simply With food being the major retail good in with big and convenience Iloilo and Cebu in Central Visayas. The put, the marriage of digital and physical the Philippines, food-focused delivery stores, such as Robinsons, S&R, and company plans to develop a total of eight systems, to adapt to changing global applications are also on the rise. Players FamilyMart). sites by 2020 with at least 100,000 square demands. Notable Industry 4.0 meters of leasable warehouse space.53 technologies that may soon make distribution centers “smart” include: Meanwhile, the country’s biggest e-commerce business, Alibaba’s Lazada, Ride hailing ••Vision picking as an extension of voice is planning to build a bigger facility in picking via augmented reality Clark, Pampanga and four more •• Adaptive robots and connected The Philippine ride hailing segment has On 4 February 2019, the House of warehouses in different regions in the automated guided vehicles been virtually monopolized by Grab after Representatives approved on final country in the next three to five years, it acquired Uber’s Southeast Asian reading a bill that allows motorcycle taxis with smarter algorithm for process •• Semiautonomous, flexible machines for operation, a deal that raised red flags and to operate as a commuter vehicle, taking optimization to support its immense value-added services growth. later prompted competition watchdogs in an initial step to amend the Land •• Fully automated picking and quality the region to impose fines on these Transportation and Traffic Code, which With the occupancy rate of operating assurance to adjust to rapid changes in companies. While the Land limits public utility vehicles to demand Transportation Franchising and four-wheeled vehicles. When passed into warehousing districts in Metro Manila at 54 Regulatory Board accredited six start-up law, the amendment would allow the likes an average of 98 percent, a study •• Next-generation distribution operation ride-hailing companies­­—MiCab, Hirna, of Angkas, a motorcycle ride-hailing and believes that further growth in the sector systems will be driven in Northern and Central Hype, Owto, GoLag, and ePickMeUp— logistics app that began operating in the •• Smart, automated facility management Luzon over the medium term, especially wresting market share away from the country in 2017, to legally ply Philippine for greater efficiency giant is proving to be challenging. roads and serve commuters. Considering with the ongoing expansion of the Clark •• Safety enhancements and modularity the long legislative process, the International Airport and the Indonesia’s Go-Jek has the potential to Department of Transportation (DOTr), in construction of the Subic-Clark cargo make a dent on Grab’s monopoly, the meantime, allowed a six-month pilot railway. especially if reports51 of an Ayala operation of motorcycle taxis beginning Corporation investment materialize. The May 2019 as part of the DOTr technical ride-hailing service is currently in talks working group’s study on the legalization with relevant Philippine authorities. of the service.

The estimated gross revenue of Philippine ride-hailing businesses was close to US$500 million in 2018. Long-term forecasts are similarly optimistic with projected revenue growing by a CAGR of 25 percent from 2019 to 2023.52

28 29 Doing business in the Philippines | Mergers & Acquisitions

Top deals based on disclosed deal value Philippine deal trends (2016–2018)*

2018 Based on deal volume Based on deal value (in US$ millions)§

Announcement date 26 September 03 85 87 AA Thermal, Inc. (49% 78 5,451 Target company stake) 10,995 Bidder company Corporation 1,433 58 Deal value US$579.2 million 50 Mergers & 1,122 42 2,416 Announcement date 23 March * 28 528 Acquisitions Target company Rustan Supercenters, Inc. 17 18 Robinsons Retail Holdings, 614 Bidder company Inc. 17 370 Increased cross-border deal-making 11 Deal value US$344.4 million 9 1,360 activities (i.e., inbound and outbound 2016 2017 2018 deals) on the back of a vibrant economy 2017 have kept the Philippine M&A space active in 2018 with 87 announced deals, slightly Announcement date 18 December Total Domestic Inbound Outbound 2016 2017 2018

Masinloc Power Partners § higher than the 85 deals recorded in 2017. Target company Based on disclosed deal values in Mergermarket; 46% of the total number of deals in 2018 have undisclosed deal value, 41% in 2017 and 37% in 2016 Disclosed deal values, however, plunged Co. Ltd. SMC Global Power Holdings in 2018 as megadeals slid. Globally, private Bidder company Corp. Investments in the Philippines based on deal volume (inbound and domestic) companies have been gaining attention for Deal value US$2,400 million their value, prompting big corporate buyers 11 2016 56 22 2017 to focus on small takeovers. Announcement date 3 November Financial Services 19 2018 San Miguel Food and Target company 27 Inbound Beverage, Inc. (71.8% stake) Consumer 20 Inbound deals grew year-on-year Bidder company 19 by 55.6 percent in 2018, in terms Deal value US$6,478 million of deal volume, after a lackluster 7 Technology, growth in 2017. Five of the 28 10 2016 Media & Telecom inbound transactions involve 12 private equity buyers and venture Announcement date 4 November 19 capitalists, which are expected to Energy, Resources & Industrials 20 be highly active across Asia given GNPower Mariveles Coal 11 Plant Ltd. Co. (66.1% stake); the strong consumer spending in Target company GNPower Dinginin Ltd Co. 2 the region matched by their high Life Sciences & (40% stake) 2 level of unallocated capital or dry Health Care Bidder company Aboitiz Power Corporation 7 powder.57 Globally, corporates Deal value 1 also reported increased cash US$1,200 million Government & reserves and intentions to use the Public Services 2 cash in M&A deals.58 2 Announcement date 30 May 67 Target company Vega Telecom, Inc. Total investments 76 Globe Telecom, Inc.; PLDT, *Based on announced deals in Mergermarket excluding lapsed bids, and including Bidder company 70 minority stake deals and deals below US$5 million, as of 15 February 2019 Inc.

Deal value US$1,484 million 30 31 Doing business in the Philippines | Mergers & Acquisitions Doing business in the Philippines | Mergers & Acquisitions

Top 5 bidder geography based on deal volume It is not surprising that the & Co. L.P., and Tencent Holdings Ltd. (2018, inbound and domestic) Technology, Media and for US$175 million; the acquisition Telecommunications sector of consumer financial website C88 is one of the most active Financial Technologies Pte Ltd., which 42 deals for inbound investments as also owns eCompareMo.com, by a e-commerce gains traction in the group of private equity and strategic Philippines 5 deals country. Related deals include investors; and the acquisition of web 4 deals the minority stake acquisition of and app-based restaurant and travel Japan digital payments, digital finance discovery Looloo by London-listed Hong Kong and marketing technologies BigDish Plc. developer Voyager Innovations 3 deals 3 deals Inc. by Kohlberg Kravis Roberts USA Singapore

There is also increased the list of the most number of investment in the Consumer acquisitions in the Philippines space with the acquisitions of in 2018. Deals in the sector two automotive companies - also include the acquisition of Mitsubishi Motors Philippines an undisclosed stake in Monde Corporation (49 percent stake) Nissin Corporation by financial and Toyota Autoparts Philippines investors CVC Capital Partners Inc. (27 percent stake) by listed Limited and GIC Private Limited, Japan-based Mitsubishi Motors and the acquisition of Puregold Corporation and Aisin Seiki Price Club, Inc.’s 70 percent stake Co., Ltd., respectively. Japan led in PG Lawson Inc. by Lawson, Inc.

In the Life Sciences and Health Intellicare Group and Ondarea, Care space, four completed Inc., respectively. Germany-based deals – compared to almost zero Optoflux GmbH, meanwhile, since 2016 – signal a growing acquired high-precision plastic interest among foreign investors. optical lenses manufacturer HPOI Singapore-based Fullerton Corporation, while Singapore’s Healthcare Corporation Limited Clearbridge Health Limited and Hong Kong-based Diamond acquired a 65 percent stake in Leaf Investment Limited have Marzan Health Care, Inc. acquired the remaining stake in

32 33 Doing business in the Philippines | Mergers & Acquisitions Doing business in the Philippines | Mergers & Acquisitions

Philippine competition environment

Outbound Domestic Poverty reduction in the Philippines crawled to an Transactions originating from the The Philippine M&A space average of 0.9 percentage points annually from Philippines to the rest of the world continues to be dominated by also increased to 17 deals from domestic investors although 2006 to 2015 despite rapid economic growth. The nine in 2017, valued at US$1.4 domestic deals are at their lowest World Bank links this dismal performance to the billion in 2018, with the following in a three-year period, closing at nexus of limited competition in the product market, significant deals: 42 deals. As in 2017, the Financial which in turn leads to weak competition in labor Services sector, which includes ••US$411 million went to New real estate, remains the most markets and lethargic wage growth. Zealand with the acquisition of attractive industry in 2018 in listed poultry producer Tegel terms of deal volume, taking 14 of In recent years, the government ••Size of Transaction Test. PCC is rolling out three Foods Ltd by Bounty Fresh Food the 42 domestic deals. has taken steps to facilitate The value of the transaction programs60 to reinforce its Inc. inclusive growth, including passing (aggregate value of assets in the efforts against cartels and •• The Ayala group completed In terms of disclosed deal value, the Philippine Competition Philippines being acquired or of anticompetitive practices: a strong year investing in Act (PCA) in 2015, a bill that the acquiring entity and revenue the Energy sector registered the ••A kind of whistleblower program real estate, and energy and languished in Congress for 24 generated in the Philippines by highest contribution at US$630 called the Leniency Program, resources sectors abroad with years. the acquired assets) exceeds million, led by the US$579-million which incentivizes cooperation several deals in Southeast Php2.2 billion. mega deal between Aboitiz from cartel participants who Asia and the United States, The law established the Power Corporation (buyer) and possess information necessary including MCT Bhd, Eastern Philippines Competition PCC revisits this threshold every AC Energy, Inc. (seller) for the for detection and investigation Water Resources Development Commission (PCC) as a quasi- year to accommodate inflation 49 percent stake in AA Thermal, of existing cartels and Management Public owner and operator of several judicial body authorized to and economic growth. Company Limited, The Blue coal plants. This deal, which allows review and prohibit mergers ••Rules on Forbearance that Circle Pte. Ltd., PT. Sarana Tirta both the buyer and the seller to and acquisitions that could To efficiently execute its function will allow PCC to carry out its Ungaran, Renewable Energy balance their portfolio and energy substantially prevent, restrict, or of competition enforcement, mandate more efficiently by Test Center, LLC and Merlin Solar source mix, is also the biggest lessen competition in the relevant PCC identified priority sectors allowing an entity or group Technologies, Inc. Philippine transaction for the year. market. In particular, PCC subjects for competition analysis of entities to be exempted parties involved in transactions including manufacturing, rice, from certain provisions of •• In keeping with its North that meet the following threshold pharmaceuticals, air and land the PCA under very specific American expansion plans, to compulsory notification:59 transport, logistics, e-commerce, circumstances and stringent Jollibee Foods Corporation retail or supermarkets, conditions acquired stakes in SJBF LLC ••Size of Person Test. The telecommunications, agricultural (owner and operator of franchise aggregate annual gross •• Rules on Inspection Orders credit, poultry and livestock, restaurant Smashburger) and revenues in, into or from the that will govern PCC’s conduct baked products, milk products, Frontera Foods, Inc. (operator of Philippines, or value of the of “dawn raids” as additional and fertilizers. In 2019, logistics Mexican restaurants) in 2018. assets in the Philippines of the arsenal of investigative tools supply chain, corn milling and ultimate parent entity (UPE) of trading, refined petroleum at least one of the acquiring PCC is also planning to create manufacturing and trading, sugar, or acquired entities, including a joint task force with other and pesticides sectors were that of all entities that the UPE agencies to investigate recent included. controls, directly or indirectly, news of bid rigging in the exceeds Php5.6 billion. government’s Build, Build, Build program to ensure fair participation among investors.

34 35 Doing business in the Philippines | Mergers & Acquisitions Doing business in the Philippines | Mergers & Acquisitions

Common M&A considerations

Quality and availability Related party Foreign ownership Tax compliance Tender offer rule Compulsory notification of information transactions restrictions

••For small- and mid-size ••Risks associated with ••In general, foreigners can ••The buyer should be familiar ••The buyer should comply ••Parties to M&A deals local private companies, related party transactions invest up to 100 percent with the country’s tax filing with the country’s tender that are within the PCC’s there are usually no refined in the Philippines include equity in corporations, requirements, applicable tax offer rule if the target is a threshold should provide due management reporting and difficulties in identifying partnerships, and other rate, and relevant information public company, such as one notification, as discussed in control procedures in place. related party relationships entities in the Philippines, on the different direct and listed on the Philippine Stock page 35. and transactions, terms except in areas included in the indirect taxes. Exchange (PSE), and the buyer •• Local private companies’ ••Should it be consummated in that are not at arm’s length, Foreign Investment Negative budget and business plans acquires at least 35 percent of violation of the notification corporate guarantees given to List (pp. 40-41). are usually not available such company’s outstanding requirements, the transaction related parties, transactions for review, or are often •• Land ownership is reserved voting shares in one or will be considered void and completed for the benefit of aggressive and/or do not for persons or entities more transactions within 12 parties of the agreement shall the group rather than stand- provide essential details. considered Philippine months. pay an administrative fine alone commercial reasons, nationals. For this purpose, a ••In December 2018, the equivalent to 1-5 percent of profits/losses manipulated corporation that is 60 percent PSE announced that it is the transaction value. to minimize taxes on a owned by Filipino citizens looking into the possibility of group basis, and related is treated as a Philippine tightening rules on fairness transactions not supported national. evaluation to minimize doubt by reasonable transfer pricing among the investing public methodologies. when it comes to the fairness of tender offer prices by selecting which independent fairness opinion evaluator can provide price valuation in a tender offer.61

36 37 Doing business in the Philippines | Foreign investment 04 Investing in the Philippines

Foreign investment Attracting foreign investments has been a government policy since the 1980s, and the Investor confidence in the Philippines remains Philippine Congress has passed several laws to strong on the back of strong macroeconomic attract foreign capital. Republic Act (R.A.) No. 7042, fundamentals and policy buffers, as well as low otherwise known as the Foreign Investments Act level of public debt and high level of foreign of 1991 (FIA), as amended by R.A. 8179, is the law reserves. This confidence has translated into that governs foreign investments in the Philippines, increased net FDI inflows year-on-year. except in banking and other financial institutions, which are governed and regulated by the BSP.

Various initiatives, including Foreign Direct Investment62 continuous foreign ownership The FIA declares that it is the liberalization with the changes policy of the State to attract, in the 11th FINL, the Revised promote, and welcome Corporation Code, and the EODB 3.2% productive investments from Act, are expected to further 3.1% foreign individuals, partnerships, bolster foreign investment in the corporations, and governments country. 2.7% 10.3 in activities that significantly 9.8 contribute to national industrialization and socio- 8.3 economic development to the 2.0% 1.9% extent that foreign investment is allowed by the Constitution and the relevant laws. 5.7 5.6 The FIA liberalized the entry of foreign investments into the country. In general, foreigners can invest up to 100 percent equity in corporations, partnerships, and other entities in the Philippines, except in areas included in the 2014 2015 2016 2017 2018 FINL.

Net FDI inflows (US$ billion) % of nominal GDP

38 39 Doing business in the Philippines | Foreign investment Doing business in the Philippines | Foreign investment

11th Foreign Investment Negative List

List A: Foreign ownership is limited by mandate of the Constitution and specific laws List B: Foreign ownership is limited for reasons of The 11th FINL, signed in late security, defense, risk to health and morals, and 2018, further liberalized foreign protection of small- and medium-scale enterprises no foreign equity participation and opened more sectors of foreign investment. Mass media, except recording Ownership, operation, and Cooperatives Specifically, 100 percent foreign and internet businesses management of cockpits up to 40% foreign equity ownership is now allowed for the Private detective, following enterprises:63 Practice of professions Manufacture, repair, watchmen, or security Manufacture, repair, storage, and/or distribution subject to the Annex of stockpiling, and/or distribution guard agencies of products and/or ingredients requiring ••internet businesses Professions (see link on p.41), of nuclear, biological, chemical Philippine National Police (PNP) or Department of although foreigners may and radiological weapons, and National Defense (DND) clearance •• teaching at higher education anti-personnel mines teach non-professional Small-scale mining levels (provided the subject subjects at higher education levels being taught is not a Manufacture of firecrackers Manufacture and distribution of dangerous drugs professional subject) Retail trade enterprises and other pyrotechnic devices Utilization of marine with paid-up capital below resources •• training centers that are US$2.5m Sauna and steam bathhouses, massage clinics, engaged in short-term high- and other like activities regulated by law level skills development that do not form part of the formal up to 25% foreign equity up to 30% foreign equity All forms of gambling, except those covered by education system investment agreements with PAGCOR •• adjustment companies, lending Contracts for the Private recruitment Advertising companies, financing companies, construction of defense- related structures Domestic market enterprises with paid-in equity investment houses capital of less than the equivalent of US$200,000; ••wellness centers and those that involve advanced technology or employ at least 50 direct employees with paid-in up to 40% foreign equity equity capital of less than the equivalent of The government believes that the US$100,000 new FINL will allow the country Educational institutions, Operations of deep sea Formerly 25% excluding those established to benefit from foreign investors’ commercial fishing vessels Contracts for the by religious groups and construction and repair of advanced technology and mission boards, or for locally-funded public works, innovation. foreign temporary residents, Ownership of condominium with certain exceptions (see or for short-term high- link on p.41) This represents a partial list of the 11th regular foreign level skills development units investment negative list. For the complete list, please refer Exploration, development, Rice and corn and the by- and utilization of natural to Executive Order No. 65. Formerly 20% products thereof, except resources Private radio retailing communications network Ownership of private lands Contracts for the supply of goods to government-owned Operation of public utilities or controlled corporations

Insurance adjustment companies and facility operators of an infrastructure or a development facility requiring a public utility franchise are removed from the negative list and therefore open to 100 percent foreign equity (both formerly limited to 40 percent).

40 41 Doing business in the Philippines | Foreign investment Doing business in the Philippines | Foreign investment

2017–2019 IPP preferred list of activities

Investor incentives Infrastructure and All qualified Agriculture, fishery, logistics manufacturing and forestry activities including ¤ To encourage investments in preferred sectors •• Establishment and operation agro-processing •• Commercial production of of vital physical infrastructure •• Manufacture of industrial agricultural, fishery and of the economy, the Philippines offers various to include airports; seaports, goods forestry products incentives to qualified enterprises, including income air, land and water transport; •• Production of seeds ad tax holidays, tax and duty-free importation of raw LNG storage and regasification •• Processing of agricultural and fishery products seedlings materials and equipment, and simplification of facilities; pipeline projects for oil and gas; bulk water •• Establishment of nurseries customs procedures, among others. •• Manufacture of modular treatment and supply; training housing components, and and hatcheries, and support facilities; testing laboratories; machinery and equipment services and infrastructure and domestic industrial zones The Board of Investments and transportation. In particular, (BOI), an agency attached to the IPP for 2017 to 2019, with •• Public-private partnership ¤ Mass housing the Department of Trade and the theme “Scaling Up and projects including those Strategic services Industry, is the lead government Dispersing Opportunities”, aims to initiated and/or implemented agency responsible for the expand investment opportunities by local government units •• Integrated circuits design •• Development of mass housing promotion of investments in in the countryside to create units and in-city low-cost •• Creative industries/knowledge- the Philippines. An investor may employment opportunities housing projects for lease based services register with the BOI to enjoy outside of congested city centers. Innovation drivers fiscal and non-fiscal incentives, •• Maintenance, repair and provided that the investment Other significant incentive overhaul of aircraft Inclusive business •• Research and development is in an area specified in the programs are those provided models (R&D) activities, conduct •• Charging/refueling stations for Investment Priorities Plan (IPP). to enterprises registered with of clinical trials, and alternative energy vehicles • Business activities of medium The extent of entitlement to economic and freeport zone • establishment of centers of and larger enterprises in the incentives is based on the authorities, including the PEZA, •• Industrial waste treatment excellence, innovation centers, agribusiness and tourism project’s net value-added, job the Subic Bay Metropolitan • Telecommunications business incubation hubs and • sectors that provide business generation, multiplier effect, and Authority, and the Clark fabrication laboratories/co- opportunities to micro and measured capacity. Development Corporation. •• State-of-the-art engineering, working spaces procurement, and construction small enterprises as part of their value chains The IPP seeks to modernize the •• Commercialization of new and country’s economy, generate emerging technologies and Environment or more jobs, and help solve societal products of the Department climate change-related Energy issues on employment, housing, of Science and Technology or projects government-funded R&D •• Manufacture/assembly of goods and establishment •• Power generation projects Healthcare services of energy efficiency-related utilizing conventional fuels, including drug facilities waste heat and other wastes rehabilitation centers •• Green ship recycling •• Establishment of battery •• Establishment and operation energy storage systems •• Establishment of privately- of general and specialty owned materials recovery hospitals, and other medical/ facility ¤ Subject to the criteria on the qualification for healthcare facilities including registration of projects to be defined and clarified drug rehabilitation centers by the BOI in the implementing guidelines 42 43 Doing business in the Philippines | Public-Private Partnerships

PPP projects by status65

Status National government Local government Total projects projects 05 Under development ◊ 8 2 10 Under negotiation 1 4 5 For approval of relevant 13 1 14 Public-Private government bodies‡ Under procurement∆ 2 3 5 Awarded (under pre-construction/ 15 6 21 Partnerships construction) Awarded (operational/completed) 61 22 83 Total 100 38 138 Recognizing the important role of the private sector in driving national development, the government is encouraging investors to be PPP projects by sector66 partners in bridging the public infrastructure gap through public-private partnerships (PPP). Transportation 42 PPP projects by area67 Besides being a source of financing for flagship infrastructure projects, the private sector also Power 38 brings to the table innovation and expertise that the government can no doubt benefit from. Water 19

Nine projects under the Build, Luzon Property Development 17 89 Build, Build program are PPPs and have already been awarded to private sector partners. Some of Information Technology 12 Visayas these, such as the Mactan-Cebu 20 International Airport Passenger Terminal Building (95 percent Environmental 4 complete), Integrated Terminal Exchange, and the NLEX- Mindanao 19 SLEX Connector Road Project are Education 2 expected to decongest traffic, National 10 improve passenger convenience, Energy 1 and generate more jobs during Total 138 construction.64 Government Services 1

Hospitals and Health care 1

Recreation and Culture 1 ◊Completed or undergoing studies (pre-feasibility and feasibility) ‡Currently undergoing evaluation by the appropriate government body/ies ∆Prospective bidders conduct due diligence in preparing their TOTAL 138 prequalification or bidding documents; government’s evaluation of bids submitted by the qualified bidder(s).

44 45 Doing business in the Philippines |Public-Private Partnerships

Eligible projects for PPP arrangement

The Build-Operate-Transfer Law Any individual, partnership, 06 authorizes the private sector to corporation or firm, whether finance, construct, operate, and local or foreign, including maintain infrastructure projects, consortia of local and foreign and provides the legal and firms, may participate in the pre- Taxation regulatory framework for the qualification and bidding for PPP 68 PPP program. projects. As the duly recognized lifeblood of the nation, taxes are needed to run the government. And with the current administration’s vision of having a more interconnected country through the Highways, including expressway, roads, bridges, interchanges, tunnels, and related Education and health infrastructure Build, Build, Build program to ensure the continued growth and facilities development of the Philippine economy, Congress passed the Industrial and tourism estates or TRAIN Law. Railways or rail-based projects that may or townships, including ecotourism projects may not be packaged with commercial such as terrestrial and coastal/marine development opportunities nature parks, among others, and related On 14 February 2019, the Here are the other packages infrastructure facilities and utilities President also signed into law the of the CTRP in the pipeline, as Non-rail based mass transit facilities, Tax Amnesty Act, which grants proposed by the Department of navigable inland waterways and related Land reclamation, dredging, and other tax amnesty on delinquencies for Finance: facilities related development facilities taxable year 2017 and prior years, and on estate taxes that have Port infrastructures like piers, wharves, Government buildings, housing projects remain unpaid or have accrued as quays, storage, handling, ferry services and of 31 December 2017. related facilities Markets, slaughterhouses, and related Airports, air navigation, and related facilities facilities Comprehesive Tax Reform Features Program69 Power generation, transmission, Warehouses and post-harvest facilities sub-transmission, distribution, and related Package 2 Lower corporate income tax; simpler tax rules; fair facilities Public fish ports and fishponds, including and accountable tax incentives system; and provision Corporate income tax and of incentives to attract industries consistent with storage and processing facilities Telecommunications, backbone network, incentives reform development priorities terrestrial and satellite facilities and related Environmental and solid waste service facilities Package 2+ Impose a uniform fiscal regime on mining contractors; and management related facilities such as, but increase excise tax and indexation rates on alcohol and not limited to, collection equipment, Excise tax reform IT and database infrastructure, including tobacco products composting plants, landfill and tidal modernization of IT, geospatial resource barriers, among others mapping and cadastral survey for resource Establish single valuation base for taxation and Package 3 comprehensive database to support valuation function; accounting and planning Climate change mitigation and adaptation Property valuation reform promote development of a just, equitable, and efficient infrastructure projects and related facilities real property valuation system Irrigation and related facilities

Other infrastructure and development Package 4 Review taxes imposed on financial intermediaries and Water supply, sewerage, drainage, and their products – i.e., savings and investments, and debt projects as may be authorized by the Capital income and financial and equity instruments – to simplify taxation of the capital related facilities appropriate agencies taxes reforms income and financial services sector

46 47 Doing business in the Philippines | Taxation Doing business in the Philippines | Taxation

The basic source of Philippine and warehouse receipts. The For domestic and resident Withholding tax tax law is the National Internal rate of the stamp tax is either foreign corporations, a minimum The following payments, among Revenue Code (NIRC) of 1997, as fixed or based on the value of corporate income tax (MCIT) others, are subject to withholding Tax treaties amended. Laws relating to tax the document. of 2 percent of gross income is tax: imposed beginning on the fourth The Philippines has a broad tax treaty network, the aim incentives are generally contained ••Real estate tax – A property ••Dividends – Dividends paid by taxable year following the year of of which is to eliminate double taxation and provide for in the Omnibus Investment tax is levied on real property a domestic corporation to its commencement of operations. reduced rates of withholding tax on dividends, interest, Code (OIC) or in the statute at a rate that depends on the foreign parent are generally and royalties. The MCIT will be due when it is governing the relevant investment location of the property. The tax taxed at 30 percent. However, greater than the tax computed incentives. Cities, municipalities, should not exceed 3 percent of if the home country of the using the regular rate. Any excess and barangays where the the assessed value per the tax recipient allows an additional of MCIT over the normal income Philippine tax treaty network company is located also have declaration. credit of 15 percent as tax tax may be carried forward and the authority to impose certain deemed paid in the Philippines, Australia Malaysia ••Transfer tax – A local transfer credited against the normal taxes pursuant to the Local the tax is reduced to 15 percent. Austria Netherlands tax on real property is levied at income tax for the following three Government Code of 1991. The 30 percent rate may also be Bahrain New Zealand a rate of 50 percent of 1 percent taxable years. reduced under a tax treaty. Bangladesh Nigeria of the gross sales price or fair Indirect taxes Belgium Norway market value of the property, ••Interest – Interest paid to non- Certain types of income are Brazil Pakistan ••Value added tax (VAT) – VAT is whichever is higher, on the resident corporations is subject subject to special tax rates. Canada Poland levied on the supply of goods transfer or sale of real property. to a withholding tax of 20 These include interest, royalties, People’s Republic of China Qatar and the provision of services, percent on interest for foreign dividends, branch profit Czech Republic Romania and on importation. The VAT Corporate tax loans unless the rate is reduced remittances, sale of land (capital Denmark Russia rate is 12 percent while a A corporation is a resident if it is under a tax treaty. assets), and net capital gains from Finland Singapore number of transactions are incorporated in the Philippines sale of shares of stocks not traded ••Royalties – Royalties paid to France Spain exempt. A zero percent VAT rate or, in the case of a foreign in the stock exchange. In addition, non-resident corporations are Germany Sweden generally applies to the export corporation, if it is issued a certain types of industries are subject to a withholding tax of Hungary Switzerland of goods and services related to license to operate a branch, also subject to different rates. 30 percent unless the rate is India Thailand processing, manufacturing, or representative office, regional or These include proprietary reduced under a tax treaty. Indonesia Turkey repackaging goods for export. area headquarters, or regional educational institutions and Israel United Arab Emirates Taxpayers engaged in zero- operating headquarters in the ••Branch remittance tax – A hospitals, international carriers Italy United Kingdom rated transactions are entitled Philippines. branch profit remittance tax doing business in the Philippines, Japan United States to refunds or tax credits for at the rate of 15 percent is non-resident owners of vessels Korea Vietnam VAT paid (input tax) on their The corporate tax rate is 30 imposed on profits remitted for lease or charter, non-resident Kuwait purchases of goods, properties percent. A Philippine (domestic) lessors of aircraft, machinery and by a Philippine branch of a and services. VAT-exempt corporation is taxed on its net other equipment, and offshore foreign corporation to its head status is also granted to certain income (gross income less banking units (OBUs) on income office abroad, subject to certain transactions and entities. allowable deductions) from derived from foreign currency exceptions. ••Stamp duty – A documentary all sources. A resident foreign transactions. stamp tax is imposed on corporation is taxed on its net instruments such as bonds and income derived from sources The Philippines has a broad tax certificates of indebtedness, within the Philippines; a non- treaty network, the aim of which share certificates, sales resident foreign corporation is is to eliminate double taxation agreements, bank drafts, bills subject to final withholding tax and provide for reduced rates of exchange, letters of credit, on its gross income derived from of withholding tax on dividends, insurance policies, bills of lading, sources within the Philippines. interest, and royalties, among lease agreements, mortgages others.

48 49 Doing business in the Philippines | Taxation

About Deloitte Philippines Deloitte Southeast Asia Deloitte has a unique geographical Navarro Amper & Co. (Deloitte Philippines) is the footprint in Southeast Asia as we over 8,800 operate as one for the 11 countries personnel local practice of Deloitte Southeast Asia Ltd and of the region – Brunei, Cambodia, is recognized as one of the leading professional Guam, Indonesia, Lao PDR, services firms in the Philippines, providing Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. audit, tax, business process, risk advisory, and over With the full mobility of specialists 300 financial advisory services. We employ over 750 partners and resources, our Southeast Asia professionals in two cities – Bonifacio Global City structure allows us to leverage our (BGC) in Taguig and Cebu – offering an array of combined size, scale, and expertise professional services and serving a wide range of to the benefit of our clients. clients from various industries.

Deloitte core services Audit & Assurance

Risk Advisory Audit Assurance

Strategic and Reputation Risk Consulting Regulatory Risk Financial Risk office locations Operational Risk 25 Cyber Risk across Human Capital 11 countries Strategy and Operations Technology

Financial Advisory Tax

Mergers and Acquisitions Financial Crisis: Global Business Tax Services Restructuring Global Employer Services Forensics Crisis Management Transfer Pricing Business Process Solutions Indirect Tax 50 51 Endnotes

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Metro Manila 19th Floor Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City Contacts Offices Taguig 1634, Philippines Tel: +63 2 581 9000 Fax: +63 2 869 3676 www.deloitte.com/ph To know more about how Deloitte Philippines can help you with your business concerns, please contact:

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