Yes to 100% FDI Shares Ownership Without Allowing Foreign Land Ownership in the Philippines

Philippine Star

Some time ago, I wrote about how many Filipinos don't understand what 100% FDI shares ownership means. As of now, I need to make my stance clear on my version of the economic charter change. Economist Andrew James Masigan pointed out in the Philippine Star the following:

Imbedded in the Constitution are industries in which foreigners are precluded. These include agriculture, public utilities, transportation, retail, construction, media, education, among others. Further, the Constitution limits foreigners from owning more than 40 percent equity in corporations. Foreigners are barred from owning land too. These provisions caused us to lose out on many investments which would have generated jobs, exports and taxes. Not too long ago, we lost a multibillion-dollar investment from an American auto manufacturing company that chose to invest in Thailand instead. We lost a multi-billion smartphone plant by Samsung, who located in Vietnam.

Masigan seems to be for foreigners owning land. However, I would like to disagree with Masigan even if I have a deep respect for the guy. I would like to stress that with ASEAN going on, we need to think of nations that have progressed through FDI, but continue to remain adamant that foreigners can't own any land. Vietnam is a Communist country under a one-party state. It's easy to understand that Vietnam doesn't allow land ownership for foreigners, due to its socialist policies. Indonesia remains a democratic country under the presidential system. 

Indonesia, despite being a democracy, uses the Hak Pakai principle. The Bali Business Consulting gives this rule that the Philippines, imitating the Indonesian example:

What Is Hak Pakai? 

In Indonesia, “Hak Pakai” or “Right to Use” is a type of land ownership that grants a person or an entity the right to use and benefit from a plot of land for a certain period of time, typically up to 25 or 30 years, with the possibility of extension.

The Hak Pakai can only be granted for certain purposes, such as for investment, business, or other activities that support national development.

Hak Pakai is one of several types of land ownership in Indonesia, including Hak Milik (Ownership Right), Hak Guna Bangunan (Right to Build), and Hak Guna Usaha (Right to Cultivate or Exploit).

Hak Pakai is the right for using and/or harvesting products of 

– land which is directly controlled by State, which the authority and obligations are given by the authorized officials, or

– land belongs to another person in an agreement with the owner of the land, which is not a lease agreement or land management agreement

Besides that, Hak Pakai can also be granted to land with the right to manage, which is granted by a decision of the Minister of Agrarian Affairs and Spatial Planning/National Land Agency or officials appointed based on the proposal of the holder of the right to manage.

The government of Indonesia is the ultimate owner of all land in the country, and all land ownership is subject to certain regulations and restrictions.

The right to manage itself is the right of state control, where the authority of implementation is partly delegated to the holder.

Hak Pakai on land of ownership is granted for a maximum period of 30 years and can be renewed by making a deed of granting of Hak Pakai on land with right of ownership in Land Deed Official (PPAT)

Hak Pakai on State Land and Right to manage land are granted for a maximum period of 30 years, can be extended for a maximum period of 20 years, and can be renewed for a maximum period of 30 years

According to the article 51 in Government Regulations PP 18/2021, the land that can be granted Right to use (Hak Pakai) are: 

• State land
• Land with Right to manage 
• Land with right of ownership 

Who Is Eligible To Obtain Hak Pakai In Indonesia? 

Indonesian citizens, ITAS holders (such as Second Home ITAS)*, legal entitles established under Indonesian law and having its address in Indonesia; foreign legal entitles that have representative in Indonesia.

*The maximum period of Hak Pakai for foreigners is usually 30 years and can be extended for an additional 20 years.

Individuals or organizations seeking to obtain Hak Pakai must meet certain requirements, such as proving that they have a legitimate business or development plan, and that their activities will benefit the local community and the country as a whole.

What's my logic behind yes to 100% FDI ownership but no to foreign land ownership? 

Some time ago, I wrote about how the 60-40 equity model is overpriced rent. People have the rationale that Filipinos must own the majority of the businesses. However, it's like saying that the owner of the shopping mall must own the majority of the businesses in the mall. Can you imagine if SM or Ayala presented a contract of lease that required the lessor to have a 60-40 ownership? The tenant would agree to give the tenant 60% ownership, meaning that the tenant gets 60% of the net profit of the company. It's not feasible in the long run because in accounting, rent is part of the ownership. 

However, land ownership for foreigners in the Philippines may not be the best either. The Philippines is actually smaller than Malaysia and Indonesia. Even the biggest archipelago in ASEAN, Indonesia, which is actually 1.904 million square kilometers, vs. the Philippines' 300K square kilometers, preferred the Hak Pakai model. I would say the Hak Pakai model is where the Philippines can benefit from 100% FDI. It's because:

1. The FDI gets to keep the net profits after taxes. The Philippines would collect VAT, quarterly withholding taxes, and yearly income tax. Consider the taxes to be the rent. An FDI that refuses to pay its rent is a bad tenant. An FDI that doesn't follow rules in any country it's in becomes a bad tenant, because it refuses to follow the rules. 
2. The Philippines still controls the land and/or buildings overall. The Filipino businessperson (or government) doesn't get the profit, but they have the right to collect rent. An FDI would have to think about their accounts payable, such as paying their suppliers, taxes, and the rental fees of the land and/or building. The lessor would be required to get the working VISA, proper identification (ex. passport of the foreigner), and the business registration of the tenant. If the FDI breaks the law, they are subjected to proper actions, such as eviction (ex. non-payment of rent or using the place for immoral purposes), or possible deportation

There's more reasonable control over FDIs than allowing land ownership. The Philippines can benefit from the FDIs, giving jobs, technology, and income. However, retaining control of lands is like the lessor. The lessor doesn't sell their space to the lessee. The lessee enters into a contract with the lessor. The lessee accepts the terms and conditions, such as paying rent, not using the space to conduct immoral activities, two months of delinquency equals eviction, and that enhancements are on their part. 

My stance will remain in this area. Foreigners can be allowed to operate without a Filipino partner. However, they should remain unable to operate without a Filipino lessor. It's like the mall doesn't require the tenant to operate in partnership with the mall owners. However, the tenant couldn't operate inside the mall without the consent of the mall owner.