AMID THE growth of the retail industry in
the Philippines, the strict legal guidelines imposed by the Retail Trade
Liberalization Act of 2000 (or Retail Law) severely restrict foreign
investors who have shown an interest in setting up retail businesses in
the Philippines. The Retail Law defines retail trade as “any act,
occupation or calling of habitually selling direct to the general public
merchandise, commodities or goods for consumption.”
Generally, under the Retail Law,
enterprises with a paid-up capital of less than $2.5 million are
exclusively reserved for Filipino citizens and corporations wholly owned
by Filipino citizens. As a rule, only enterprises with a minimum
paid-up capital of $2.5 million or more may be wholly owned by
foreigners. With such restrictions, some foreign investors have found
ways of going around the law -- aided by their Filipino wives or
business partners.
To this end, the Securities and Exchange Commission (SEC) recently
stated that a firm engaged in a service-related industry may, on certain
occasions, supply materials to the customer without being considered as
engaging in retail trade.
Yamaha Motor Philippines Inc., a subsidiary of Yamaha Motor Co. Ltd., is
a domestic enterprise duly licensed in the Philippines to manufacture,
assemble and distribute Yamaha motorcycles and other related products.
In 2009, Yamaha Philippines opened an outlet called 3S Shop which sells,
on wholesale, Yamaha motorcycles to dealers. The SEC in a previous
opinion has held that a business activity like this did not constitute
retail trade.
To support its business, Yamaha Philippines also intends to set up a
service/repair shop for the motorcycles bought by its customers. Through
the proposed service shop, Yamaha Philippines will be supplying spare
parts and other products needed for the repairs.
The SEC opined that since the service shop’s main activities will merely
involve routine maintenance, tune-up, repairs and other related
services, the incidental sale of parts is not considered retail of
goods. The SEC stated that there is no question that an entity that
renders services for hire or pay, or leases services, is not engaged in
the retail business because it does not sell goods to the general
public.
Moreover, the SEC said that a service enterprise may supply materials to
a client for the latter’s convenience or when the materials required
are produced exclusively by the same firm. In this instance, the client
has to separately pay the cost of these materials apart from the cost of
service. Even if there may be a sale arising from the activities of the
service shop, the sale is only incidental to the repair and is not an
independent business.
This legal rationale was used previously by the SEC in declaring that
the proposed sale and distribution by PLDT of wire-based telephone
handsets, accessories and other related telecommunication equipment
through its business offices nationwide cannot be considered retail
trade. The SEC said such products form an integral component of
providing telecommunications services in the Philippines.
Similarly, the SEC also said that the sale by Fitness First Philippines
of drinks, apparel and hygiene articles cannot be considered as retail
trade because the sale of these products are only incidental to the
primary purpose of a gym operator and is not an independent business of
Fitness First Philippines.
Although these SEC opinions only apply to Yamaha Philippines, PLDT and
Fitness First, the SEC’s interpretation of retail trade would have
certain implications on service enterprises and foreign investors.
Certain foreign investors who previously could not engage in retail
trade may opt to set up a service enterprise along with their retail
enterprise so they can sell their products in the Philippines.
Similarly, existing service enterprises may be invited by certain
foreign investors to form a partnership with them in order for the
foreign investors to distribute their products in the Philippines.
However, certain guidelines should be imposed on service enterprises
that sell products to their clients as an incidental part of their
business. For example, a service enterprise should only sell products
that it will personally install or maintain so that the Retail Law is
not circumvented. The questions now are: who will put these guidelines
in place, and how long will it take to come up with these guidelines?
(The author is an Associate of the Corporate and Special Projects
Department of the Angara Abello Concepcion Regala & Cruz Law
Offices. She may be contacted through mcsy@accralaw.com
or (632) 830-8000. The views and opinions expressed in this article are
those of the author. This article is for general informational and
educational purposes only and is not offered as and does not constitute
legal advice or legal opinion.)
source: Businessworld
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