Financing business made easier
Posted on November 24, 2016
Taxwise Or Otherwise By Faye Angela M. Pascua
http://www.bworldonline.com/content.php?section=Economy&title=Financing-business-made-easier&id=136825
The earliest set of rules governing the establishment and operation of a financing company in the Philippines — Republic Act No. 5980, otherwise known as “The Financing Company Act” — dates back to the ’70s. Since then, the law, including its rules and regulations, went through several amendments in a span of almost five decades.
The first instance occurred during the late ’70s through Presidential Decree (PD) No. 1454 and the second was during the early ’80s via PD No. 1793. The two decrees amended only a single provision, which is Section 5 of the law. PD No. 1454 replaced the Securities and Exchange Commission (SEC) with the Central Bank’s Monetary Board (CB-MB) as the government agency empowered to prescribe the maximum rate of purchase discounts, fees, service and other charges of a financing company, while PD No. 1793 expanded such power by authorizing the CB-MB to eliminate, grant exemptions from or suspend the effectivity of prevailing rates whenever warranted by economic or social conditions.
The first two amendments, though significant on their own, pale in comparison with the succeeding amendment that took place.
Two years before the close of the 20th century, the original law underwent a major makeover. Through Republic Act No. 8556, the former Financing Company Act was reborn as “The Financing Company Act of 1998” and introduced the following changes:
• Definition of Financing Company: Direct lending and financial leasing of immovable properties were included as modes of extending credit facilities under the revised definition of a financing company.
• Form of organization: Previously, a financing company could be organized as a stock corporation or a general partnership. Under the new law, it can only be established as a stock company with minimum capital requirements for compliance.
• Foreign participation: Foreign ownership restriction was tempered from 40% of capital to 60% of the voting stock. The relaxation of the limitation was coupled, however, by a reciprocity condition.
• Capitalization requirement: The former capital requirement was fixed at P500,000 paid-up capital. At present, paid-up capital is at a minimum of P10 million for financing companies located in Metro Manila and first class cities, P5 million for other cities, and P2.5 million for municipalities.
• Citizenship of Board Members: In the old law, two-thirds (2/3s) of the members of the board of directors must be Filipinos. This provision was removed from the new law.
• Definition of Leasing/Financial Leasing: While the terms “leasing” and “financial leasing” and their definitions were not provided for in the old law, they can be found in the implementing rules and regulations. In the new law, financial leasing was defined with a prescribed minimum lease period of two years.
• New provisions: The new law enumerated the specific rights and powers of a financing company which are in addition to those granted by other laws, those which are incidental to its activities/purpose and those which can be found in other provisions of the law itself. The new law further provided for a parity clause, a rule on the liability of the lessor, registry of the financial lease with the Register of Deeds and an increase in the penalty for violations of the new law.
Eighteen years after the last amendment, a new law was recently enacted to further liberalize foreign participation in financing companies. Republic Act No. 10881 was an instant newsmaker after it lapsed into law on July 17. Since it became effective on Aug. 16, financing companies, including investment houses and lending companies, are now allowed to be wholly owned by foreign nationals. In other words, the old threshold for foreign investments in these non-bank financial institutions (NBFIs) has been increased to 100%.
While the activities of these NBFIs have been taken out of the Foreign Investment Negative List, their right to acquire land remain restricted due to the constitutional restriction that only Filipinos may own land. Moreover, foreign investors still have to clarify with the SEC the infusion of higher capital when setting up a wholly owned financing company in municipalities, non-first class cities and those outside Metro Manila since the Foreign Investments Act of 1991 requires a capital investment of not less than the equivalent of $200,000 for non-Philippine nationals.
The recent liberalization of foreign investment in financing companies was followed shortly by a rationalization of SEC registration procedures for financing and lending companies in the country. The SEC has streamlined the process of securing a certificate to operate for financing and lending companies by revising its forms and consolidating superfluous documentary requirements that cause unnecessary delays in an otherwise simple process. The former requirements for a police clearance, certificate of good moral character for Filipino directors and officers, work permit from the Department of Labor and Employment for foreign directors and officers, location map and copy of the lease contract or title of the building or unit where the company is located, have been eliminated, reducing the number of documents to be submitted from 23 to 15.
The innovations introduced in the way financing companies do their business have created ripples, if not waves, particularly in the financing sector and in the Philippine economy in general. As of Dec. 31, 2014, there are an estimated 600 active financing companies registered with the SEC. Given the flexibility in the regulatory environment and the thrust of the current administration towards ease of doing business, further and faster growth in the financing industry may be expected in the very near future.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Faye Angela M. Pascua is a Senior Consultant belonging to the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
faye.angela.pascua@ph.pwc.com
