Opinion No. 18-10 Re: Retail Trade.

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

04 June 2018

SEC OGC Opinion No. 18-10 Re: Retail Trade

FCI Corporate Center, 1814 Philip Street, Metro Manila, Philippines 1708 Multinational Village Paranaque City, FIRST ASSOCIATED MEDICAL DISTRIBUTION CO., INC.

Attention: Ricarte R. Padilla

President

Sr:

foreign company engaged in business in the Philippines, and whether it is allowed to engage opinion on whether or not Medtronic Philippines, Inc. (Medtronic-PH) can be classified as a in direct selling its products to end-users. This refers to your letter dated 15 February 2017, requesting the Commission's

capitalization of P8,940,000.00, by owning at least 99.99% of the outstanding capital stock of the said corporation with the primary purpose, to wit: Medtronic-US formed|a domestic corporation here in the country, Medtronic-PH, with a total technologies products in the Philippines. However, sometime on 10 January 2014, distributor on a noh-exclusive basis of Medtronic Inc. ("Medtronic-US"), a US based manufacturing company with regional office in Singapore, of its coronary and surgical In your letter,you stated that First Associated Medical Distribution Co., Inc. is the

affairs of the businesses of affiliated or sister companies engaged in similar business."[emphasis ours]. labels, patents, inventions, formulas or processed for such products and to manage the obtain, register, purchase, lease or assign, grant licenses or territorial rights in respect of, or otherwise to turn to account or dispose of, any trademarks, trade names, brands, limited_to medical equipment, devices and supplies, scientific apparatus, and physicians and hospital equipment, devices and supplies, and likewise to apply for, "To import, export, manufacture, conduct research and development, prepare for market, buy, sell at wholesale, distribute, transport and promote general merchandise, goods and wares of all kinds and descriptions_particularly but not

end-users here in the Philippines. You further stated that Medtronic-PH sells directly on retail basis its products to the

Thus, you request the Commission's opinion on the following:

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2. Whether or not Medtronic-PH is allowed to engage in direct selling of its products to the 1. Whether or not Medtronic-PH can be classified as a foreign company engaged in end-users, who are mostly customers of its distributors (i.e., First Associated Medical Distribution Co. Inc.) here in the Philippines without violating any trade laws of the business here in the Philippines, considering that 99.99% of its authorized capital stock is owned by Medtronic-US; and country.

FIRST QUERY

corporation is the incorporation test, wherein a corporation is considered a national of the country under whose laws it was incorporated, viz- The primary test under Philippine jurisdiction in determining the nationality of a

laws it has been created. A corporation organized under the laws of a foreign country, irrespective of the nationality of the persons who control it is necessarily a foreign Test since weadhere to the doctrine that a corporation is a creature of the State whose "Under Philippine jurisdiction, the primary test is always the Place of Incorporation corporation.1

laws of the Philippines. corporation, but a domestic corporation, having been registered and incorporated under the Thus, under the incorporation test, Medtronic-PH is not considered as a foreign

to determine the eligibility of a corporation, which has foreign equity participation in its ownership structure, to engage in nationalized or partly nationalized activities.3 areas of investment and business activities are reserved to Filipinos. The control test is used jurisdiction, other tests such as the control test must be used to determine compliance with the provisions of the Constitution and of other laws on nationality requirements.2 Certain However, while the incorporation test serves as the primary test under Philippine

prescribes varying degrees of Filipino ownership which apply to nationalized or partly- the controlling stockholders4. This is embodied in Republic Act (RA) No. 7042 (RA 7042), otherwise known as the Foreign Investment Act (FIA), as amended by RA 8179, which nationalized corporations. Under the control test, the nationality of the corporation depends on the nationality of

of the said law's Implementing Rules and Regulations (IRR) provides that: To be considered a "Philippine national" under Section 3(a) of the FIA, Section 1, Rule 1

domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the b. "Philippine national" shall mean a citizen of the Philippines or a

4 SEC-OGC Opinion No. 08-03 addressed to Attys. Ruby Rose J. Yusi & Rudyard S. Arbolado, dated 15 January 2008. 1 SEC-OGC Opinion No. 12-02 addressed to Ms. Carlota Christina G. Laino-Santiago, dated 02 February 2012. 2 SEC-OGC Opinion No. 11-42 addressed to Mr. James B. Yee, dated 12 October 2011. 3 (bid.

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Philippine national. The control test shall be applied for this its non-Filipino stockholders own stocks in a Securities and Exchange Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that the corporations shall be considered a purpose. Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the

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qualifications are considered as non-Philippine nationals. Individuals or juridical entities not meeting the aforementioned (Emphasis ours)

corporation. Thus, under theFIA, Medtronic-PH is not a Philippine national, but a foreign-owned

jurisdiction), it is a foreign-owned corporation based on its ownership structure. SECOND QUERY In sum, while Medtronic-PH is a domestic corporation (having been incorporated in this

In a previous opinion, the Commission pronounced, that:

in the articles. The primary purpose of the corporation, as stated in its articles of incorporation, is the first business to be undertaken by the corporation. Hence, the primary purpose determines its classification.5" which a corporation may exercise and the character of a corporation is usually determined by the objects of its formation and the nature of its business as stated "It is the corporation's purpose clause which confers, as well as limits, the powers

primary purpose clause, it can only sell at wholesale. its products to the endusers, such sale/s on retail would be considered an ultra vires act, or an act beyond the corporate powers conferred to it by the State. Under Medtronic-PH's PH as stated in its Articles of Incorporation, it is empowered to sell its products at wholesale. not retail. If it is true, as stated in your letter, that Medtronic-PH sells directly on retail basis Based on the foregoing, and upon careful perusal of the primary purpose of Medtronic-

Trade Liberalization Act of 2000 (RA 8762), unless it falls under the exceptions6. Further, an entity engaged in retail business must be a Filipino national under the Retail

5 SEC-OGC Opinion No. 11-33 dated 29 July 2011 addressed to Mr. Jesus B. Lapuz. 6 Section 5 of RA 8762 provides: Foreign Equity Participation. - xxx

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of sale (i.e., whether they are coronary and surgical technologies products, or any other to whom they are being sold (e.g., to hospitals, clinics, and the like), which are necessary in order to determine whether the conditions or restrictions under RA 8762 apply to Medtronic- PH. general merchandise, goods or wares, as allowed by the purpose clause of Medtronic-PH) and Unfortunately,your letter does not expressly and clearly state facts, such as the objects

Opinion7, that: Nevertheless,for purposes of information, the Commission had held in a previous

"Under Section3 of RA 8762, 'retail trade' shall mean any act, occupation or calling for consumption. of habitually selling direct to the general public merchandise, commodities or goods

For sales transaction to be considered as 'retail' the following elements should concur:

2. The sale must be direct to the general public; .. The seller should be habitually engaged in selling;

may be wholly owned by foreigners. Category D- Enterprises specializing in high-end or luxury products with a paid-up capital of the equivalent in Philippine Pesos of Two Hundred Fifty Thousand US Dollars (US$250,000.00) per store Provided, however, that in no case shall the investments for establishing a store in Categories B and c be less than the equivalent in Philippine pesos of Eight Hundred Thirty Thousand US Dollars (U$830,000.00) first two (2) years after the effectivity of this Act wherein foreign participation shall be limited to not more than sixty percent (60%) of total equity. Five Hundred ThousandUS Dollars (US$7,500,000.00), or more may be wholly owned by foreigners; Million Five Hundred Thousand US Dollar (US$2,500,000.00) but less than the Seven Million Five Hundred Thousand US Dollars (US$7,500,000.00) may be wholly owned by foreigners except for the Category C- Enterprises with a paid-up capital of the equivalent in Philippine Pesos of Seven Million Category B -- Enterprise$ with a minimum paid-up capital of the equivalent in Philippine Pesos of Two Million Five Hundred Thousand US Dollars (US$2,500,000.00) shall be reserved exclusively for Filipino Category A- Enterprise$ with paid-up capital of the equivalent in Philippine Peso of less than Two citizens and corporations wholly owned by Filipino citizens

Section 2 of the Implementing Rules and Regulations of R.A. 8762 also provides: assembled in the Philippines, irrespective of capitalization; e. Sales to industrial and commercial users or consumers who use the products bought by them to f. Sales to the government and/or its agencies and government-owned and controlled corporations. b. Sales by a farmer or agriculturist selling the products of his farm, regardless of capital; c.Sales arising from restaurant operations by a hotel owner or inn-keeper irrespective of the amount of capital, provided, that the restaurant is incidental to the hotel business d.Sales through a single outlet owned by a manufacturer of products manufactured, processed or render service to the general public and/or produce or manufacture of goods which are in turn sold Section 2. Sales Not Considered as Retail- The following sales are not considered as retail: a. Sales of a manufacturer, processor, laborer, or worker of products, manufactured, processed or produced by him to the general public whose capital does not exceed One hundred thousand pesos by them; or (100,000.00):

7 SEC-OGC Opinion No. 16-25 dated 14 October 2016 addressed to Meer, Meer & Meer Attorneys-At-Law.

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3. The object of the sale is limited to merchandise, commodities or goods for consumption.

are not intended for resale or further use in the production of other products. Consumer goods, as defined by the Supreme Court, are 'goods which are used or brought for use primarily for personal, family or household purposes. Such goods One of the elements of a retail sale is that the products sold are consumer goods.

as retail, to wit: ('IRR') of the RTLA enumerates certain sales transactions which are not considered Furthermore, Section 2(e), Rule I, of the Implementing Rules and Regulations

Section 2. Sales Not Considered as Retail. - The following sales are not considered as retail:

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manufacture of goods which are in turn sold by them; xxx. e. Sales to industrial and commercial users or consumers who use the products bought by them to render services to the general public and/or produce or

chemical reagents, equipment and instruments directly to hospitals and laboratories render service to the general public. cannot be considered as retail trade because the buyers will use the products to In a more closely-related matter, the Commission also opined that the sale of

and healthcare equipment used for storing, protecting handling and analyzing substances, hazardous chemicals and other related materials. xxx. As presented in your letter, the products of EPI include laboratory, medical

IRR." (emphasis ours) Furthermore, it appears from the circumstance that the buyers (i.e., produce goods to the general public. In this regard, the sale activities of EPI fit well within the activities enumerated in the above-mentioned Section 2 of the laboratories, hospitals and commercial enterprises, schools and government agencies) of EPI's products will use the equipment to render service or

further inquiry and investigation, it will be disclosed that the facts relied upon are different, in other cases or upon the courts whether similar or dissimilar circumstances. If, upon this opinion shall be rendered void.8 on the facts and circumstances disclosed and relevant solely to the particular issue raised therein and shall not be used in the nature of a standing rule binding upon the Commission It shall be understood, however, that the foregoing opinion is rendered based solely.

Please be guided accordingly.

LAMIOASACORREA Very truly yours. General Counsel

8 SEC Memorandum Circular No.15, Series of 2003