Openness to Foreign Investment
The Government of the Philippines (GRP) generally acknowledges the importance of foreign investment to economic development. The GRP established the Board of Investments (BOI) to assist foreign and domestic investors with regulatory requirements, incentives, and market guidance. Legal restrictions, regulatory inconsistency and lack of transparency, however, persist in many sectors. GRP regulatory authority remains weak or ambiguous. Foreign business representatives often cite corruption as a serious impediment to investment. Commercial disputes are often difficult to resolve quickly or satisfactorily in the understaffed, complex, and delay-prone judicial system. In addition, the GRP has not adequately addressed other key issues like inadequate public infrastructure and electric power rates. Despite these problems, many foreign investors in the Philippines maintain long-term commitments to the market and have prospered.
The GRP is receptive to suggestions and criticisms from the private sector. Many foreign and domestic businesses work through industry associations to support economic reform. The American Chamber of Commerce of the Philippines promotes a socio-economic and philanthropic agenda, identifying investment opportunities and barriers, and offering possible solutions to problems. Through its Investment Climate Improvement Project, The Chamber pinpoints problems in the Philippine investment environment, assesses their relative importance to the investment climate and works toward finding and implementing practical and effective solutions. The Chamber has continued to produce advocacy papers, sometime jointly with other foreign chambers, on economic and political issues.
-- GENERAL PROVISIONS FOR FOREIGN INVESTMENT:
The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 1996) liberalized the entry of foreign investment into the Philippines. Under the Act, foreign investors are generally treated like their domestic counterparts and must register with the Securities and Exchange Commission (SEC) (in the case of a corporation or partnership) or with the Department of Trade and Industry's Bureau of Trade Regulation and Consumer Protection (in the case of a sole proprietorship). Investors generally find this process to be slow, but nondiscriminatory. The GRP has some foreign investment incentive programs, which are described below in the section "Performance Requirements and Incentives." The Philippines does screen potential foreign investments.
-- RESTRICTIONS ON FOREIGN INVESTMENT:
The 1991 Foreign Investment Act provides for two "negative lists" (List A and list B), collectively called the “Foreign Investment Negative List,” enumerating areas where foreign investment is restricted or limited. The restrictions stem from a constitutional provision, Section 10 of Article XII, which permits Congress to reserve to Philippine citizens certain areas of investment and Section 11 of the same article which limits foreign participation in public utilities or their operation. The Foreign Investment Act requires the Philippine government to update and publish the negative list every two years. The Philippine Government is scheduled to release a new list (the eighth Negative List) in January 2009.. These restrictions are viewed as a significant factor in the Philippines' poor record of attracting foreign investment relative to neighboring economies. Waivers are not available under the Negative List.
List A enumerates investment sectors and activities for which foreign equity participation is restricted by mandate of the Constitution and specific laws. For example, the practice of licensed professions such as engineering, medicine, accountancy, environmental planning, and law are fully reserved for Philippine citizens. Other investment areas reserved for Filipinos include retail trade enterprises (with paid-up capital of less than $2.5 million, or less than $250,000 for retailers of luxury goods); mass media (except recording); small-scale mining; private security; utilization of marine resources, including small-scale utilization of natural resources in rivers/lakes/bays & lagoons; and, manufacture of firecrackers and pyrotechnic devices.
The Philippine Government allows up to 20 percent foreign equity participation in private radio communications networks. Up to 25 percent foreign ownership is allowed for enterprises engaged in employee recruitment and for public works construction and repair, with the exception of build-operate-transfer and foreign-funded or foreign-assisted projects (that is, projects that benefit from foreign aid, for which there is no upper limit on foreign ownership). Foreign ownership of 30 percent is allowed for advertising agencies, while 40 percent foreign participation is allowed in natural resource exploration, development, and utilization (although the President may authorize 100 percent foreign ownership for large scale projects).
Foreign investors are limited to 40 percent equity in educational institutions, public utilities operation and management, commercial deep-sea fishing, GRP procurement contracts, adjustment companies, operations of build-operate-transfer projects in public utilities, and ownership of private lands. For rice and corn processing, foreign equity is limited to 40 percent, with the exception that 100 percent foreign participation is allowed with the proviso that the foreign investor shall divest a minimum of 60 percent of their equity to Philippine nationals within a 30 year period from start of operation.
Foreign ownership of retail trade enterprises with paid-up capital of $2.5 million but less than $7.5 million is now allowed, provided that the initial investment to establish a store is more than $830,000, or specializing in high end or luxury products, provided that the paid up capital per store is not less than $250,000. Enterprises engaged in financing and investment activities that are regulated by the Securities and Exchange Commission, including securities underwriting, are limited to 60 percent foreign ownership.
List B enumerates areas where foreign ownership is restricted or limited (generally at 40 percent) for reasons of national security, defense, public health, safety, and morals. Sectors covered include explosives, firearms, military hardware, massage clinics, and gambling. This list also seeks to protect local small- and medium-sized firms by restricting foreign ownership to no more than 40 percent in non-export firms capitalized at less than $200,000 and for domestic market enterprises that involve advanced technology or employ at least 50 direct employees with paid-in equity capital of less than $100,000.
In addition to the restrictions noted in the "A" and "B" lists, firms with more than 40 percent foreign equity that qualify for Board of Investment incentives must divest to the 40 percent level within 30 years from registration date or within a longer period determined by the Board of Investments. Foreign-controlled companies that export 100 percent of production are exempt from this requirement. As a general policy, the Department of Labor and Employment allows the employment of foreigners provided there are no qualified Philippine citizens who can fill the position. Board of Investment-registered companies may employ foreign nationals in supervisory, technical, or advisory positions for five years from registration, extendable for limited periods at the discretion of the Board of Investments. Top positions and elective officers of majority foreign-owned enterprises (i.e., president, general manager, and treasurer or their equivalents) are exempt from these restrictions.
-- FINANCIAL SERVICES:
The Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines (R.A. 7721, 1994) limited to ten the number of new foreign banks that could open full-service branches in the Philippines. All ten licenses have been issued. These foreign banks are limited to six branch offices each. The four foreign banks operating in the Philippines prior to 1948 were also allowed to open up to six branches. Subject to certain criteria, R.A. 7721 allows a foreign banking institution up to 60 percent ownership in a locally incorporated subsidiary. As a general rule, a non-bank foreign investor or foreign bank that does not meet the criteria stipulated in R.A. 7721 and its implementing regulations, is limited to 40 percent ownership. For rural banks, only foreign banks that meet the criteria stipulated in R.A. 7721 may invest; otherwise, foreign ownership is prohibited.
A seven-year window under the General Banking Act (R..A. 8791, signed in May 2000) allowing foreign banks to acquire up to 100 percent of one locally incorporated commercial or thrift bank (with no obligation to divest later) closed in June 2007. The Bangko Sentral ng Pilipinas (the central bank) imposed a moratorium on new bank licenses in September 1999 which remains in effect. Micro-finance institutions are exempted. Another limitation on foreign ownership is a requirement that majority Filipino-owned banks should, at all times, control at least 70 percent of total banking system resources. Cooperative banking remains completely closed to foreigners.
The insurance industry was opened up to 100 percent foreign ownership in 1994. However, minimum capital requirements increase with the degree of foreign ownership. As a general rule, only the state-owned Government Service Insurance System may provide coverage for government-funded projects. Administrative Order 141, issued in August 1994, also required proponents and implementers of build-operate-transfer projects and privatized government corporations to secure their insurance and bonding requirements from the Government Service Insurance System, at least to the extent of the government’s interests.
Membership in the Philippine Stock Exchange is open to foreign-controlled stock brokerages incorporated under Philippine law. Securities underwriting companies not established under Philippine law may underwrite Philippine issues for foreign markets, but not for the domestic market. The Lending Company Regulation Act – signed into law in May 2007 to establish a regulatory framework for credit enterprises that do not clearly fall under the scope of existing laws – requires majority Philippine ownership for such enterprises.
Although there are no foreign ownership restrictions regarding the acquisition of shares of mutual funds, current law restricts membership on boards of directors to Philippine citizens.
-- LAND OWNERSHIP:
The 1987 Constitution bans foreigners from owning land in the Philippines. The Investors' Lease Act (R.A. 7652, 1994) allows foreign companies investing in the Philippines to lease a contiguous land parcel of up to 1000 hectares for 50 years, renewable once for another 25 years, for a maximum 75 years.
In mid-2003, Republic Act 9225 (Citizenship Retention and Re-Acquisition Act of 2003 or the Dual-Citizenship Act) allowed natural-born Filipinos who had undergone naturalization as citizens of a foreign country to re-acquire Philippine citizenship. The dual-citizenship holder is entitled to full rights of possession of land and property as a Philippine citizen.
Deeds of ownership are difficult to establish, poorly reported, and poorly regulated. The court system is not able to settle cases in a timely manner.
Foreigners are allowed 100 percent ownership of companies involved in large-scale exploration, development, and utilization of mineral resources. Total mineral production up to the third quarter of 2008, was valued at $1.1 billion, fell by about 27% from the same period in 2007 due mainly to flagging nickel prices. Some $500 million in investments were registered in 2007, which is about 60% of the capital invested in new mining projects since 2004.
-- TRENDS AND PROBLEM AREAS:
Philippine gross capital formation, estimated at between 15 and 16 percent of Gross Domestic Product, ranks among the lowest in Asia. Net foreign direct investment improved yearly from less than $500 million in 2003 to $2.9 billion in 2007, but contracted by more than 50 percent year-on-year in 2008. Overall, net FDI flows have averaged less than $1.6 billion annually since 2000, trailing many of the Philippines’ neighbors. The country captured less than 5 percent of total net investment flows to Southeast Asia over the past eight years and accounts for less than 3.5 percent of the foreign investment stock in the region. The Philippines will need to compete more aggressively for risk-averse capital and investments during a period of global economic uncertainty, but has recorded sliding global competitiveness and anti-corruption rankings. The American and other foreign chambers in the country also continue to urge the Philippine Government to review legal barriers to trade and investment and further open up the Philippine economy.
Trade infrastructure urgently needs attention, including Bureau of Customs operations, the nation's inter-island shipping, and port facilities. Infrastructure spending remains subject to corrupt practices in allocation, procurement, contracting, and implementation, with a significant portion of the budget wasted. Anti-corruption vigilance and enforcement has been weak. Congestion and pollution in the country's major cities persist, most notably in Manila.
Investors cite high electricity costs in the Philippines and power shortages as areas of concern. The GRP follows a policy of liberalizing the power sector through the sale of government generation and distribution assets and through support for alternative energy sources to reduce dependence on imported fuels.
-- SANCTITY OF CONTRACTS:
Questions over the general sanctity of contracts in the Philippines have clouded the investment climate. The judicial system has a weak track record in this area. A more detailed discussion of this issue is found in the section entitled "Dispute Settlement."
-- STOCK EXCHANGE:
The Philippines is generally open to foreign portfolio capital investment. A more detailed discussion is provided in the section entitled "Efficient Capital Markets and Portfolio Investment."
The Privatization Management Office, under the Department of Finance, is the technical and implementing agency tasked to carry out the day-to-day government responsibilities of the privatization program. The Office serves as the marketing arm of the GRP for privatized assets, as well as government-owned and controlled corporations assigned for disposition, and is responsible for implementing the actual marketing/disposition program for government corporations, assets and idle properties. Apart from restrictions under the Foreign Investment Negative List (detailed above), there are no separate regulations that discriminate against foreign buyers. The bidding process appears to be transparent, though the Supreme Court has twice overturned high profile privatization transactions to foreign buyers.
The Power Sector Assets and Liabilities Management Corporation is mandated to sell 70% of the government-owned National Power Corporation’s generating assets. Eight years after the signing of the Electric Power Industry Reform Act, the Philippine Government will close the year 2008 having privatized more than 70% of the generation assets, one of the three necessary conditions needed to trigger the implementation of the open access and retail competition provisions of the electricity reform law.
-- PUBLIC INFRASTRUCTURE:
The Build-Operate-Transfer Law provides the legal framework for large infrastructure projects and other types of government contracts. Consistent with constitutional limitations on foreign investment in public utilities, franchises in railways/urban rail mass transit systems, electricity distribution, water distribution, and telephone systems must be awarded to enterprises that are at least 60 percent Philippine-owned. American firms have won contracts under the law and similar arrangements, mostly in the power generation sector. However, because of weaknesses in planning, preparing, tendering, and executing private sector infrastructure projects, lingering ambiguities about the level of guarantees and other support provided by the government, and other uncertainties pertaining to the general enabling framework for private sector participation in infrastructure, there is relatively low interest by foreign firms in pursuing projects in the Philippines at present.
Conversion And Transfer Policies
There are generally no restrictions on the full and immediate transfer of funds associated with foreign investments, foreign debt servicing, and the payment of royalties, lease payments, and similar fees. To obtain foreign exchange from the banking system for debt servicing, repatriation of capital, or remittance of profits, the foreign loans and foreign investment must be registered with the central bank. There are no restrictions on obtaining foreign exchange, and foreign exchange can be bought and sold outside the banking system. There is no mandatory foreign exchange surrender requirement imposed on export earners and other foreign exchange earners such as overseas workers. The exchange rate is not fixed and varies daily in response to market forces. Central bank intervention is targeted mainly at smoothing volatility.
To curb foreign exchange speculation and volatility, the central bank requires a 90-day minimum holding period for foreign investments in peso time deposits to be eligible for registration. Pre-termination before the prescribed period would result in the cancellation of the registration and the investor will not be allowed to purchase foreign exchange from banks for repatriation and remittance purposes. However, the peso proceeds from the pre-terminated time deposits may be invested in other instruments and registered anew.
Expropriation And Compensation
Philippine law allows expropriation for public use or in the interest of national welfare or defense. In such cases, the GRP offers compensation for the affected property. Most expropriation cases involve acquisition for major public sector infrastructure projects. In the event of expropriation, foreign investors have the right under Philippine law to remit sums received as compensation in the currency in which the investment was originally made and at the exchange rate at the time of remittance. However, agreeing on a mutually acceptable price can be a protracted process.
There are laws that mandate divestment (to 40 percent foreign equity) by foreign investors. The Omnibus Investment Code specifies a 30-year divestment period for non-pioneer foreign-owned companies that accept investment incentives. Pioneer enterprises are registered enterprises engaged in the manufacture and processing of products or raw materials that are not yet produced in the Philippines in large volume. Non-pioneer enterprises refer to all registered producer enterprises not included in the pioneer enterprise list. Companies that export 100 percent of production are exempt from the divestiture requirement. The Retail Trade Liberalization Act (R.A. 8762, 2000) requires retail establishments that are capitalized at $2.5 million or more and/or that do not specialize in luxury products to offer at least 30 percent of their equity to the public within eight years from the start of operations.
Dispute Settlement - Investment Disputes
Investment disputes are infrequent, but when they occur it can take years for parties to reach final settlement. A number of GRP actions in recent years have raised questions over the sanctity of contracts in the Philippines and have clouded the investment climate. Recent high-profile cases include the GRP-initiated review and renegotiation of contracts with independent power producers, court decisions voiding allegedly tainted and disadvantageous build-operate-transfer agreements and challenging the extent of foreign participation in large-scale natural resource exploration activities (such as mining).
-- LEGAL SYSTEM:
Many, perhaps most, foreign investors view the inefficiency and uncertainty of the judicial system as a significant disincentive for investment. Although the judiciary is constitutionally independent of the executive and legislative branches, it faces many problems, including understaffing and corruption. Critics also charge that judges rarely have a background in or thorough understanding of market economics or business, and that their decisions stray from the interpretation of law into policymaking. The GRP is pursuing judicial reform with support from foreign donors, including the U.S. Government, the Asian Development Bank, and the World Bank.
The Philippines is a member of the International Center for the Settlement of Investment Disputes and of the Convention on the Recognition and Enforcement of Foreign Arbitrage Awards. However, Philippine courts have, in several cases involving U.S. and other foreign firms, shown a reluctance to abide by the arbitral process or its resulting decisions. Enforcing an arbitral award in the Philippines can take years.
-- BANKRUPTCY LAW:
The Securities Regulation Code of 2000 assigned jurisdiction over debt payment suspension and corporate rehabilitation cases to regional trial courts designated by the Supreme Court as commercial courts. The Supreme Court’s “Interim Rules of Procedure on Corporate Rehabilitation,” which took effect in December 2000, provided for specific periods and deadlines for compliance with procedural requirements (including court approval/disapproval of a rehabilitation plan). However, in some cases judges reportedly have not enforced the deadlines stipulated in the rules. Investors have also expressed concern over a "cram down" provision that allows the courts to approve a rehabilitation plan despite opposition from majority creditors "if, in [the court's] judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors manifestly unreasonable." In December 2008, the Supreme Court approved revised “Rules of Procedure on Corporate Rehabilitation,” which succeeded the 2000 “interim” rules effective January 16, 2009 (http://sc.judiciary.gov.ph/rulesofcourt/2008/dec/A.M.NO.00-8-10-SC.pdf). The more significant improvements include new provisions covering petitions for the approval of pre-negotiated rehabilitation plans carrying the endorsement of creditors holding at least two-thirds of the total liabilities of the debtor (including secured creditors holding more than 50 percent of the total secured claims and unsecured creditors holding more than 50 percent of unsecured claims); as well as the inclusion of provisions on the recognition of foreign proceedings.
Investors nevertheless strongly believe that reforms should go beyond procedural improvements and continue to push for comprehensive legislation to rationalize and update the Philippine bankruptcy/insolvency system. The current legal framework is a mixture of outdated and sometimes inconsistent laws and judicial pronouncements.
Performance Requirements And Incentives
Book I, Investment with Incentives, of the Omnibus Investment Code (1987) prescribes incentives available to qualified firms engaged in preferred sectors and geographic areas included in the annual Investment Priorities Plan, administered by the Board of Investments. The 2008 Investment Priorities Plan presents a list of priority investment areas entitled to incentives into the following classes: preferred activities; mandatory inclusions; export activities; and the Autonomous Region in Muslim Mindanao List.
Preferred activities include projects in agriculture/agribusiness and fishery, infrastructure, tourism, research and development, engineered products, and strategic activities. Export activities cover the production and manufacture of non-traditional export products and services as identified under the Medium Term Philippine Development Plan. Mandatory inclusions are activities that require inclusion in the Investment Priorities Plan as provided for under existing laws. The Autonomous Region in Muslim Mindanao List covers priority activities independently identified by the Autonomous Region of Muslim Mindanao.
Screening mechanisms for companies seeking investment incentives appear to be routine and nondiscriminatory, but the application process can be complicated. Incentives granted by the Board often depend on actions by other agencies, such as the Department of Finance.
The basic incentives offered to all Board of Investment-registered companies include:
Detailed information and guidelines on the Philippines’ 2008 Investment Priorities Plan can be obtained from the Board of Investments website, www.boi.gov.ph.
-- INCENTIVES FOR EXPORTERS:
An enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may still be entitled to incentives even if the activity is not listed in the Investment Priorities Plan.
In addition to the general incentives available to Board of Investment-registered companies, a number of incentives provided under Book I of the Omnibus Investment Code apply specifically to registered export-oriented firms. These include:
The Board of Investments has been flexible in enforcing individual export targets, provided that exports as a percentage of total production do not fall below the minimum requirement (50 percent for local firms and 70 percent for foreign firms) needed to qualify for incentives. Board of Investment-registered foreign controlled firms that qualify for export incentives are subject to a 30 year divestment period, at the end of which at least 60 percent of equity must be Filipino-controlled. Foreign firms that export 100 percent of production are exempt from this divestment requirement.
-- PERFORMANCE AND LOCAL SOURCING REQUIREMENTS:
Performance requirements, usually based on an applicant's approved project proposal, are established for investors who are granted incentives, and vary from project to project. In general, the Board of Investments and the investor agree on yearly production schedules and, for export-oriented firms, export performance targets. The Board requires registered projects to maintain at least 25 percent of total project cost in the form of equity.
The Board generally sets a 20 percent local value-added benchmark when screening applications. The Board is flexible in enforcing local value-added ratios to which registrants commit in their approved project proposal, as long as actual performance does not deviate significantly from other participants in the same activity.
There are no local content requirements for cars, commercial vehicles, and motorcycles. However, to apply for registration with the Board of Investments and to qualify for incentives, new domestic and foreign assemblers must have a technical licensing agreement with the overseas completely knocked-down suppliers to provide technical assistance and are required to invest at least $10 million in assembly operations and associated parts manufacture within one year to produce cars, $8 million for commercial vehicles, and $2 million for motorcycles.
Certain industries are subject to specific laws that require local sourcing:
-- INCENTIVES FOR REGIONAL HEADQUARTERS, REGIONAL OPERATING HEADQUARTERS, AND REGIONAL WAREHOUSES: Book III of the Omnibus Investment Code (1987, amended by R.A. 8756, 1999) provides incentives for multinational enterprises to establish regional or area headquarters and regional operating headquarters in the Philippines. Regional headquarters are branches of multinational companies headquartered outside the Philippines that do not earn or derive income in the Philippines that act as supervisory, communications, or coordinating centers for their subsidiaries, affiliates, and branches in the region. The capital requirement for a regional headquarters is $50,000 annually to cover operating expenses. Regional operating headquarters are branches established in the Philippines by multinational companies that may derive income from their affiliates in the region and in the Philippines by providing services such as general administration and planning; business planning and coordination; sourcing/procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistics services; research and development services, and product development; technical support and maintenance; data processing and communication; and business development.
Incentives to regional headquarters include exemption from income tax; exemption from branch profits remittance tax; exemption from value-added tax; sale or lease of goods and property and rendition of services to the regional headquarters subject to zero percent value-added tax; exemption from all kinds of local taxes, fees, or charges imposed by a local government unit (except real property taxes on land improvement and equipment); and value-added tax and duty-free importation of training and conference materials and equipment solely used for the headquarters functions. Regional operating headquarters enjoy many of the same incentives as regional headquarters but, being income generating, are subject to the standard 12 percent value-added tax, applicable branch profits remittance tax, and a preferential 10 percent corporate income tax. Privileges extended to foreign executives working at these operationsinclude tax and duty-free importation of personal and household effects, multiple entry visas for the executive and his/her family, travel tax exemption, as well as exemption from various types of government-required clearances and from fees under immigration and alien registration laws. Eligible multinationals establishing regional operating headquarters must spend at least $200,000 yearly to cover operations.
Multinationals establishing regional warehouses for the supply of spare parts, manufactured components, or raw materials for their foreign markets also enjoy incentives on imports that are re-exported. Re-exported imports are exempt from customs duties, internal revenue taxes, and local taxes. Imported merchandise intended for the Philippine market is subject to applicable duties and taxes.
-- GOVERNMENT PROCUREMENT
The 2003 Government Procurement Reform Act consolidated various procurement laws and issuances and called for simplified and standardized guidelines, procedures and forms across Philippine Government agencies, government-controlled corporations, and local government units. The Act provided for simpler prequalification procedures; more objective, nondiscretionary criteria in the selection process; the establishment of an electronic procurement system to serve as the single portal for government procurement activities; and other reforms to improve monitoring and transparency in public sector procurement. However, implementation has been uneven and inconsistent and U.S. and other foreign companies continue to raise concerns about irregularities in government procurement.
Philippine regulations require the public sector to procure goods, supplies, and consulting services from enterprises that are at least 60 percent Filipino-owned and infrastructure services from enterprises with at least 75 percent Filipino interest, for locally funded projects. The Official Development Assistance Act authorizes the President to waive statutory preferences for local suppliers for foreign-funded projects/programs. Foreign donors have usually been able to implement their own procurement regulations under the provisions of the Act. The Build-Operate-Transfer Law (R.A. 6957 of July 1990, as amended in May 1994 by R.A. 7718) allows investors in projects and similar arrangements to engage the services of Philippine and/or foreign firms for the construction of infrastructure projects.
Executive Order 278 provides preferential treatment for Filipino consultants, stipulating that, as much as possible, the GRP should fund consultancy services for its infrastructure projects with its own resources and use local expertise. When Filipino capability is determined to be insufficient, Filipino consultants may hire or work with foreigners but should be the lead consultants. Where foreign funding is indispensable, foreign consultants must enter into joint ventures with Filipinos. In packaging public sector infrastructure projects, Executive Order 278 also provides that financial and technical capabilities of Filipino contractors be taken into account. Multilateral donor agencies report that their implementing partners have thus far been able to comply with donors' internal procurement guidelines, despite Executive Order 278. However, because an executive order has the force of law, the specter of problems arising in the future remains.
Executive Order 120, issued in August 1993, mandates a countertrade requirement for procurement by government agencies and government-owned or controlled corporations that entails the payment of at least $1 million in foreign currency. Implementing regulations set the level of countertrade obligations at a minimum of 50 percent of the import price and set penalties for nonperformance of countertrade obligations.
The Philippines is not a signatory to the WTO Agreement on Government Procurement.
-- PROPOSED CHANGES TO INVESTMENT INCENTIVES
There are currently more than 140 laws involving incentives offered by various investment promotion agencies, special incentive laws targeted at specific sectors and industry groups, and those granted to government-owned and controlled corporations under their charters. The government has supported incentives rationalization and a number of bills have been filed in the Philippine Congress toward this end. However, the scope and details of reform remain contentious. Proposals to phase out income tax holidays have been especially controversial and are opposed by business.
Right To Private Ownership And Establishment
The GRP respects the private sector's right to acquire and dispose of properties or business interests, although acquisitions, mergers, and other combinations of business interests involving foreign equity must comply with foreign nationality caps specified in the Constitution and other laws.
There are a few sectors closed to private enterprise, generally on grounds of security, health, or "public morals." The GRP controls and operates the country's casinos through the Philippine Amusement and Gaming Corporation and runs lotto/sweepstake operations through the Philippine Charity Sweepstakes Office.
Private and government-owned firms generally compete equally, although there are exceptions. The National Food Authority, a GRP agency, has at times been the sole importer of rice, though in 2008, the GRP ceded about half of all rice importation to the private sector. In some cases, GRP procurement guidelines favor Philippine over foreign-controlled firms. As a general rule, only the state-owned Government Service Insurance System may provide insurance for government-funded projects and government funds are kept in government-owned banks. Administrative Order 141 requires proponents and implementers of build-operate-transfer projects, as well as partially privatized government corporations, to meet insurance and bonding requirements from the government insurance system, at least to the extent of the GRP's interests.
The 1987 Constitution gives the GRP the authority to regulate or prohibit monopolies, and it also bans combinations in restraint of trade and unfair competition. However, there is no comprehensive competition law to implement this constitutional provision.
Protection of Intellectual Property Rights
Although the Philippines has established procedures and systems for registering claims on property (including intellectual property and chattel/mortgages), delays and uncertainty associated with a cumbersome court system continue to concern investors.
-- INTELLECTUAL PROPERTY RIGHTS:
The Philippines has made progress in recent years in protecting intellectual property rights, but enforcement continues to be problematic. U.S. manufacturers and suppliers should register their copyrights, trademarks, and patents with:
The Intellectual Property Office (IPO)
351 Sen. Gil J. Puyat Avenue
fax: (63-2) 897-1724 / 752.5450 to 65 local 201 / 207
email: email@example.com; firstname.lastname@example.org
Manufacturers and importers are also encouraged to register copyrights, trademarks, and patents with the Bureau of Customs to facilitate enforcement of rights. A list of Philippine lawyers and law firms specializing in intellectual property law is available from the U.S. Embassy Foreign Commercial Service (email@example.com ).
In addition to its commitments under the World Trade Organization agreement on the Trade-Related Aspects of Intellectual Property Rights, the Philippines is a party to the following international intellectual property agreements: the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure, the Patent Cooperation Treaty; and the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations. Although the Philippines is a member of the World Intellectual Property Organization, and has acceded to the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty (known collectively as the WIPO Internet Treaties), which took effect in October 2002, the Philippine Government has not yet enacted necessary amendments to its Intellectual Property Code that would fully implement the two Internet Treaties into domestic law.
The Intellectual Property Code (R.A. 8293, 1997) provides the legal framework for intellectual property rights protection in the Philippines. Key provisions of the Intellectual Property Code are:
--Patents: the Philippines uses a first-to-file system, with a patent term of 20 years from date of filing, and provides for the patentability of microorganisms and non-biological and microbiological processes. The holder of a patent is guaranteed an additional right of exclusive importation of his invention. A compulsory license may be granted in some circumstances, including if the patented invention is not being used in the Philippines without satisfactory reason, although importation of the patented article constitutes using the patent;
The Electronic Commerce Act (R.A. 8792, 2000) extends the legal framework established by the Intellectual Property Code to the internet. Other important laws defining intellectual property rights in the Philippines are the Plant Variety Protection Act (R.A. 9168, 2002), which provides plant breeders intellectual property rights consistent with the 1991 Union for the Protection of New Varieties of Plants Convention, and the Integrated Circuit Act (R.A. 9150, 2001), which provides WTO-consistent protection for the layout designs of integrated circuits.
In 2008, the Philippine Congress passed the Cheaper Medicines Act (RA 9502), which includes amendments to the Intellectual Property Code with respect to patent registration for pharmaceutical products. The Act places limitations on patent protection for pharmaceuticals, and significantly liberalizes the grounds for the compulsory licensing of pharmaceuticals.
Deficiencies in the Intellectual Property Code and other IP laws remain a source of concern. Weaknesses include unclear provisions relating to the rights of copyright owners over broadcast, rebroadcast, cable retransmission, or satellite retransmission of their works; and, burdensome restrictions affecting contracts to license software and other technology.
-- STATUS OF IPR ENFORCEMENT:
Significant problems remain in ensuring the consistent and effective protection of intellectual property rights. There are serious concerns regarding lack of consistent, effective and sustained IP enforcement in the Philippines. U.S. distributors continued to report high levels of pirated optical discs of cinematographic, musical works, computer games, and business software as well as widespread unauthorized transmissions of motion pictures and other programming on cable television systems. Trademark infringement in a variety of product lines is also widespread, with counterfeit merchandise openly available.
The Optical Media Act (Republic Act No. 9239 of 2004) regulates the manufacture, mastering, replication, importation and exportation of optical media. The implementing rules and regulations were signed in February 2005, establishing the Optical Media Board (formerly the Videogram Regulatory Board). The Board spearheads enforcement of the Optical Media Act and has jurisdiction over all optical media, regardless of content.
Although the Philippines deserves credit for passing the Optical Media Act, creating the Optical Media Board and stepping up raids, the Philippine Government continues to lack aggressive prosecution of intellectual property rights violators, owing largely to problems that affect the judicial system as a whole. In general, Philippine Government enforcement agencies are most responsive to those copyright owners who actively work with them to target infringement. Enforcement agencies generally will not proactively target infringement unless the copyright owner brings it to their attention and works with them on surveillance and enforcement actions. Joint efforts between the private sector and the National Bureau of Investigation and the Optical Media Board have resulted in some successful enforcement actions. The Philippine Government has tried several different judicial approaches to handling intellectual property cases, but none have worked well due to lack of resources and heavy non-IP workloads. In addition, intellectual property cases are not considered major crimes and take a lower precedence in court proceedings. Because of the prospect that court action will be lengthy, many cases are settled out of court. There were three convictions in 2008, only one in 2007, nineteen convictions in 2006, and twenty in 2005. Since 2001, there have been sixty-four convictions for IP violations. Convicted intellectual property violators rarely spend time in jail, since the six year penalty enables them to apply for probation immediately under Philippine law.
Under the IP Code, the Intellectual Property Office has jurisdiction to resolve certain disputes concerning alleged infringement and licensing. However, the Intellectual Property Office’s administrative complaint mechanisms appear to be no faster at resolving cases than the judicial system. Other agencies with IP enforcement responsibilities include: the Department of Justice; National Bureau of Investigation; Optical Media Board (for piracy involving any form of media on optical discs); the Bureau of Customs; and the National Telecommunications Commission (for piracy involving satellite signals and cable programming).
In 2006, the United States moved the Philippines from the Special 301 “Priority Watch List” (where it had been listed for 5 consecutive years) to the “Watch List” under Section 301 of U.S. trade law to acknowledge steps the Philippines has taken to strengthen its intellectual property regime. Following the announcement, the Philippine Government pledged continued momentum and increased effort on intellectual property rights initiatives. However, counterfeit goods such as brand name and designer clothing, handbags, cigarettes, and other consumer goods remain widely available. Optical media piracy, including piracy of digital video discs and compact discs, also continues to be a problem. In addition, there are widespread unauthorized transmissions of motion pictures and other programming on cable television systems. The clandestine recording of movies in cinemas, piracy of books, cable television, and computer software also remain significant.
Transparency Of The Regulatory System
Agencies are required to develop regulations via a public consultation process, often involving public hearings. In most cases, this ensures some transparency in the process of developing regulations. New regulations must be published in national newspapers of general circulation or in the GRP's Official Gazette before taking effect. Enforcement of regulations is often weak and inconsistent. Regulatory agencies in the Philippines are generally not statutorily independent, but are attached to cabinet departments or the Office of the President. Many U.S. investors find business registration, customs, immigration, and visa procedures burdensome and a source of frustration. Some agencies (such as the Securities and Exchange Commission, Board of Investment, and the Department of Foreign Affairs) have established express lanes or "one-stop shops" to reduce bureaucratic delays, with varying degrees of success.
Efficient Capital Markets And Portfolio Investment
The Philippines is open to foreign portfolio capital investment. Foreigners may purchase publicly or privately issued domestic securities, invest in money market instruments, and open peso-denominated savings and time deposits. Portfolio investments in publicly listed firms are, like direct equity investments, constrained by foreign ownership ceilings stipulated under the Constitution and other laws. Although growing, the securities market remains small and underdeveloped, and is not able to offer investors a wide range of choices. Except for a few large firms, long-term bonds and commercial paper are not yet major sources of capital. Secondary trading of publicly listed stocks is exempt from documentary stamp tax through March 2009.
Some firms classify their publicly listed shares as "A" (exclusively for Filipinos) and/or "B" (for foreigners and Filipinos). While the practice of classifying shares was common until the early 1990s, most newly listed companies no longer classify shares into "A" and/or "B," because the Foreign Investment Act has since lifted the 40 percent general ceiling previously imposed on foreign investments. However, listed firms engaged in activities where foreign investment caps still apply (i.e., banking, utilities, real estate, exploration of natural resources, etc.) find the classification convenient for compliance purposes.
The equities market is thin (less than 250 listed firms), concentrated, and prone to volatility. During 2008, the ten most actively traded companies accounted for more than 50 percent of trading value and about 40 percent of domestic market capitalization. To encourage publicly listed companies to widen their investor base, the Philippine Stock Exchange (PSE) introduced reforms in April 2006 to include trading activity and free float criteria in the selection of companies comprising the stock exchange index. The 30 companies included in the benchmark index are subject to review every six months. Hostile takeovers are not common, because most company shares are not publicly listed and controlling interest tends to remain with a small group of parties. Cross-ownership and interlocking directorates among listed companies also lessen the likelihood of hostile takeovers.
The July 2000 passage of the Securities Regulation Code strengthened investor protection by codifying the full disclosure approach to the regulation of public offerings, tightening rules on insider trading, segregating broker-dealer functions, outlining rules on mandatory tender offer requirements, significantly increasing sanctions for violations of securities laws and regulations, and mandating steps to improve the internal management of the stock exchange and future securities exchanges. However, prosecution of stock market irregularities is subject to the usual delays and uncertainties of the Philippine legal system. To improve transparency and minimize conflict of interest, the Code also prohibits any one industry group (including brokers) from controlling more than 20 percent of the stock exchange’s voting rights. The Philippine Stock Exchange has yet to fully comply with the 20 percent industry limit, although it has taken steps to reduce brokers’ ownership from 100 percent to 41 percent of the stock exchange.
-- CREDIT POLICIES:
Credit is generally granted on market terms and foreign firms are able to obtain credit from the domestic market. However, some laws require financial institutions to set aside loans for certain preferred sectors, which may translate into increased costs and/or credit risks. The Agri-Agra Law (P.D. 717, as amended) requires banks to set aside 25 percent of loanable funds for agricultural credit in general, with at least 10 percent earmarked for programs such as improving the productivity of farmers to whom land has been distributed under agrarian reform programs. To facilitate compliance, alternative modes of meeting the agri-agra lending requirement include low-cost housing, educational and medical developmental loans, and investments in eligible government securities. R.A. 9501, the Magna Carta for Micro, Small, and Medium Enterprises requires banks to set aside ten percent of their loans for small-business borrowers. While most domestic banks are able to comply with these targeted-lending requirements, foreign banks find mandatory policies more burdensome for a number of reasons, including their lack of knowledge and experience with these sectors, their constrained branch networks, and constitutional restrictions on ownership of land by foreigners which impede their ability to enforce security rights over land accepted as collateral.
In August 2006, President Arroyo signed Executive Order 558 (further expounded by E.O. 558-A), which allows all government agencies to provide credit services regardless of their mandated functions. E.O. 558 repealed E.O. 138 (issued in August 1999), which rationalized and limited the government’s role in credit extension activities to make way for a more market-driven, private sector role in micro-finance. The Asian Development Bank, the World Bank, and Philippine micro-finance industry players have expressed serious concern that direct lending by non-financial agencies could lead to government losses caused by corruption and unsound lending decisions. Although E.O. 558 has not been repealed, implementation appears to have been limited thus far to micro-finance lending programs of the Department of Social Welfare and Development targeted to the country’s ten poorest provinces.
-- BANKING SYSTEM:
The Philippine banking system is dominated by 38 commercial banks that account for nearly 90 percent of total banking system resources. As of the end of September 2008, the five largest commercial banks had estimated total assets of PHP 2,442 billion (equivalent to about $52 billion), representing 52 percent of total commercial banking system resources. The central bank has worked to strengthen banks' capital base, reporting requirements, corporate governance, and risk management systems. Central bank-mandated phased increases in minimum capitalization requirements and regulatory incentives for mergers have prompted several banks to seek partners. All entities under Central bank supervision are required to adopt Philippine Financial Reporting and Accounting Standards – patterned after International Financial Reporting and Accounting Standards.
There has been progress in disposing of non-performing assets since President Arroyo signed the Special Purpose Vehicle law in January 2003, which provided fiscal and regulatory incentives to encourage the resolution of non-performing assets through their sale to private asset management companies. Banks were given until May 2008 to conclude notarized agreements to sell their non-performing loans and foreclosed assets to qualify for incentives under the second phase of the law. Total banking sector non-performing assets sold under the Special Purpose Vehicle law amounted to PHP 152.9 billion ($3.1 billion),, equivalent to almost 30 percent of eligible mid-2002 non-performing assets. Non-performing loans accounted for almost 70 percent of total assets sold. Non-performing loan and non-performing asset ratios of commercial banks - which peaked in October 2001 at 18.3 percent and 14.6 percent respectively - were estimated at 4.0 percent and 4.9 percent, as of the end of September 2008, back to their pre-Asian crisis levels.
Commercial banks' published average capital adequacy ratio (15.5 percent on consolidated basis as of end-June 2008, computed according to the Basel 2 Risk-based Capital Adequacy framework) remains above the central bank’s 10 percent statutory limit and the 8 percent internationally accepted benchmark. Philippine banks have limited direct exposure to investment products issued by troubled financial institutions overseas (estimated at less than 2 percent of total banking system resources).
The General Banking Law of 2000 paved the way for the Philippine banking system to phase in internationally accepted, risk-based capital adequacy standards. In 2007 a revised capital adequacy framework (Basel 2) was adopted. It expands coverage from credit and market risks to operational risks and enhances the risk-weighting framework. Other important provisions of the General Banking Law are geared towards strengthening transparency, bank supervision, and bank management. Remaining impediments to more effective bank supervision and timely intervention include stringent bank secrecy laws, obstacles preventing regulators from examining banks at will, and inadequate liability protection for central bank officials and bank examiners.
The Paris-based Financial Action Task Force continues to monitor implementation of the Philippines' Anti-Money Laundering Act through the Anti-Money Laundering Council to ensure that the Philippines sustains progress. Foreign exchange dealers and remittance agents are required to register with the central bank in order to operate and must comply with various central bank regulations and requirements related to the implementation of the Philippines' anti-money laundering law. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The Financial Action Task Force Asia Pacific Group conducted a comprehensive peer review of the Philippines in September 2008. Some of the more important Asia Pacific Group concerns include the exclusion of casinos from the scope of current anti-money laundering legislation and 2008 court rulings that inhibit and complicate investigations of fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts due to bank privacy laws. The Philippine legislature is considering amendments to the Anti-Money Laundering Act of 2001 to address these issues.
-- ACCOUNTING STANDARDS:
The Philippine Securities and Exchange Commission and the Bangko Sentral ng Pilipinas agreed to the full adoption of International Accounting Standards Board-prescribed standards starting in 2005. These standards are now embodied in the Philippine Financial Reporting Standards and Philippine Accounting Standards. However, some companies/industries have been granted temporary exceptions. For example, a central bank circular to implement the Special Purpose Vehicle Act deviates from generally accepted accounting principles by allowing banks to book losses arising from the sale of non-performing assets on a staggered basis. To encourage consolidation, the central bank has also allowed merging institutions to stagger provisions for bad debts. “Non-publicly accountable entities” (i.e., small and medium enterprises and firms that are not publicly listed, that are not debt/securities issuers, that are not engaged in fiduciary activities, or that are not public utilities or essential public service providers) are exempt from the new accounting and financial reporting standards, pending issuance by the International Accounting Standards Board of a separate accounting standard for small and medium enterprises.
The Philippine Financial Reporting Standards Council approved the immediate adoption of amendments issued by the International Accounting Standards Board in October 2008 covering the accounting treatment and disclosure of financial assets. The Board amendments provided guidelines for the reclassification of certain non-derivative financial assets from categories recorded at fair market value to categories recorded at amortized cost, purposely to help promote confidence in financial markets by tempering the potentially sharp deterioration in balance sheets and incomes from the current global financial turbulence. The Philippine Securities and Exchange Commission and the central bank have issued circulars to implement the amendments. As additional regulatory relief, the central bank also allowed the reclassification, until mid-November 2008, of credit link notes and similar products backed by Republic of the Philippines bonds.
The Philippine Securities and Exchange Commission requires a firm’s Chairman of the Board, Chief Executive Officer, and Chief Financial Officer to assume management responsibility and accountability for financial statements. Current rules also require the rotation and accreditation of external auditors of companies imbued with public interest (i.e., publicly listed firms, investment houses, stock brokerages, and other secondary licensees of the Securities and Exchange Commission). The Securities and Exchange Commission’s “Guidelines on Accreditation and Reportorial Requirements of External Auditors of Public Companies" instituted a system of accreditation for external auditors of firms that issue securities to the investing public. It also requires client-companies to disclose to the Securities and Exchange Commission any material findings (i.e., fraud or error, losses or potential losses aggregating 10 percent or more of company assets, and indications of company insolvency) within five days of receipt of the external-audit findings. The external auditor is required to make the disclosure to the Securities and Exchange Commission within 30 business days from submitting its audit report to the client-company should the latter fail to comply with this reporting requirement. The regulations require client-auditor contracts to contain a specific provision protecting the external auditor from civil, criminal, or disciplinary proceedings for disclosing material findings to the Securities and Exchange Commission. They also require accredited external auditors to accumulate continuing education credits and to comply with certain operational requirements such as quality assurance procedures and the communication of critical and alternative accounting policies and practices. In 2007, the Auditing and Assurance Standards Council issued new standards on quality control, auditing, review, assurance, and related services which outline additional measures and policies for compliance by external auditors to improve independence, objectivity, and completeness of audit work.
A number of the larger local accountancy firms are affiliated with international accounting firms, including KPMG, PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, BDO Seidman, and Grant Thornton.
Terrorist groups and criminal gangs operate in some regions of the country. The Department of State publishes a consular information sheet on the internet at htttp://travel.state.gov and advises all Americans living in or visiting the Philippines to review this information periodically. The Department of State has issued a travel warning to U.S. citizens contemplating travel to the Philippines. The full current text of the warning is available at http://travel.state.gov/travel/cis_pa_tw/tw/tw_2190.html. The Department strongly encourages Americans in the Philippines to register with the Consular Section of the U.S. Embassy in Manila through the State Department's travel registration website, https://travelregistration.state.gov/.
Arbitrary, unlawful, and extrajudicial killings by a variety of actors continue to be a problem. Following increased domestic and international scrutiny, the number of killings and disappearances continue to drop significantly from a peak in 2006. Despite government efforts to investigate and prosecute these cases, many have gone unsolved and unpunished. The 2007 congressional and local elections were generally free and fair but were marred by violence and allegations of vote buying and electoral fraud. On August 11, more than 1.31 million of the 1.52 million registered voters from the six provinces comprising the Autonomous Region in Muslim Mindanao elected a Regional Governor, a Regional Vice Governor, and Regional Legislative District Assemblymen. The Asian Network for Free Elections Foundation noted the government’s commitment to make the elections as free and fair as possible. However, election monitors documented allegations of fraud and irregularities in some localities.
Members of the insurgent group Moro Islamic Liberation Front attacked villages in central Mindanao and killed dozens of civilians in August 2008 after the Supreme Court placed a temporary restraining order on the signing of a preliminary peace accord. The ensuing fighting between government and insurgent forces has led to both combat and civilian deaths and the displacement of thousands of people. While the parties have not yet agreed on a new roadmap for future negotiations, the government has announced its commitment to resume talks.
The New People's Army, the military arm of the Communist Party of the Philippines, remains a threat to the long-term stability of the country. It has not targeted foreigners in recent years, but could threaten U.S. citizens engaged in business or property management activities. It is responsible for general civil disturbance through assassinations of public officials, bombings, and other tactics. It frequently demands "revolutionary taxes" from local and, at times, foreign businesses and business people, and sometimes attacks infrastructure such as power facilities, telecommunications towers, and bridges to enforce its demands. The National Democratic Front, the Communist Party's political arm, has engaged in intermittent but generally non-productive peace talks with the Philippine Government.
Other terrorist groups, including the Abu Sayaaf Group and Jema’ah Islamiyah, periodically attack civilian targets in Mindanao or kidnap civilians for ransom.
The Philippines faces no major external threat and enjoys strong relations with the United States. The United States and the Philippines are allies under the 1951 Mutual Defense Treaty, and the U.S. designated the Philippines as a major non-North Atlantic Treaty Organization ally in 2003. The Visiting Forces Agreement, ratified in 1999, provides a framework for U.S.-Philippine military cooperation, including exercises, ship visits, and counterterrorism cooperation.
Corruption is a pervasive and longstanding problem in the Philippines. The Philippines is not a signatory of the Organization for Economic Cooperation and Development Convention on Combating Bribery. The Philippines signed the UN Convention against Corruption in 2003, which the Senate ratified in November 2006.
There are a number of laws and mechanisms directed at combating corruption and related anti-competitive business practices. These include the Philippine Revised Penal Code, Anti-Graft and Corrupt Practices Act, and Code of Ethical Conduct for Public Officials. The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials. The Sandiganbayan (anti-graft court) prosecutes and adjudicates cases filed by the Ombudsman. There is also a Presidential Anti-Graft Commission to assist the President in coordinating, monitoring, and enhancing the government’s anti-corruption efforts and to investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting/accepting and offering/giving a bribe are criminal offenses, punishable with imprisonment (6-15 years), a fine, and/or disqualification from public office or business dealings with the government. However, enforcement of anti-corruption laws has been weak and inconsistent.
The Philippine Government has worked in recent years to reinvigorate its anti-corruption drive. However, worsening corruption rankings suggest that efforts have been inconsistent; reforms have not reached a critical mass to improve public perception; are being overshadowed by high-profile cases intermittently reported in the Philippine media; and that other countries have pursued anti-corruption programs more aggressively.
Bilateral Investment Agreements
As of December 2008, the Philippines had signed bilateral investment agreements with Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium and Luxembourg, Canada, Cambodia, Chile, China, the Czech Republic, Denmark, Equatorial Guinea, Finland, France, Germany, India, Indonesia, Iran, Italy, Japan, Republic of Korea, Kuwait, Laos, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Romania, Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, Venezuela, and Vietnam. The general provisions of the bilateral investment agreements include: the promotion and reciprocal protection of investments; nondiscrimination; the free transfer of capital, payments and earnings; freedom from expropriation and nationalization; and, recognition of the principle of subrogation.
Taxation: the Philippines has a tax treaty with the United States for the purpose of avoiding double taxation, providing procedures for resolving interpretative disputes, and enforcing taxes of both countries. The treaty also seeks to encourage bilateral trade and investments by allowing the exchange of capital, goods and services under clearly defined tax rules and, in some cases, preferential tax rates or tax exemptions.
Most Favored Nation Clause (royalties): Pursuant to the most favored nation clause of the Philippine-U.S. tax treaty, U.S. recipients of royalty income may avail of the preferential rate provided in the Philippine-China tax treaty, which went into effect in January 2002. That treaty allows a lower rate of 10 percent with respect to royalties arising from: the use of (or right to use) any patent, trademark, design, model, plan, secret formula, or process; or, the use (or right to use) industrial, commercial, and scientific equipment, or information concerning industrial, commercial, or scientific experience.
Permanent establishments: A foreign company that renders services to Philippine clients without setting-up a branch office is considered a "permanent establishment" liable to pay Philippine taxes if the services rendered to a Philippine client requires its personnel stay in the country for more than 183 days (for the same or a connected project) in a twelve-month period. Bureau of Internal Revenue rulings on the taxation of permanent establishments have been inconsistent. In some rulings, the Philippine Government has applied the corporate income tax rate on net taxable income, a treatment that applies to resident foreign corporations. In others, it has applied the corporate income tax rate on gross income, a treatment that applies to non-resident foreign corporations.
Tax Treaty Relief Rulings: To use preferential tax treaty rates and treatment, a tax treaty relief ruling must be secured from the Bureau of Internal Revenue’s International Trade Affairs Department. According to tax lawyers, the process can be subject to delay, with some tax treaty relief applications reportedly pending for from several months to over a year.
Inter-Company Transfer Pricing: The Tax Code authorizes the Bureau to allocate income or deductions among related organizations or businesses, whether or not organized in the Philippines, if such allocation is necessary to prevent tax evasion. The Bureau has yet to finalize draft regulations on transfer pricing, a contentious issue between multinational companies and the Bureau, but declared in early 2008 that, as a matter of policy, it subscribes to the Organization for Economic Cooperation and Development’s transfer pricing guidelines. In anticipation of the release of the final Bureau regulations, multinational companies have undertaken, or are preparing, transfer pricing studies and/or benchmarking for their related-party transactions.
Value Added Tax: The GRP implemented an expanded value added tax law in November 2005 to increase revenues. The amendments to the Tax Code reduced the list of VAT-exempt goods and services (including exemptions previously enjoyed by the fuel and electricity sectors). A 12 percent tax rate applies on domestic sales of goods and services and on imports. The 2005 amendments to the Tax Code also temporarily raised the corporate income tax rate from 32 percent to 35 percent until the end of 2008. A lower 30 percent corporate income tax rate took effect in January 2009.
Optional Standard Deduction: Republic Act 9504 -- issued in June 2008 mainly to provide tax relief to minimum wage earners and individual taxpayers -- included a provision allowing domestic and foreign resident companies subject to the regular corporate income tax to opt for a 40 percent standard deduction against gross sales/receipts. Prior to R.A. 9504, the optional standard deduction (previously set at 10 percent) applied only to the self-employed and those engaged in the practice of professions.
Stock Transfer Tax: A February 2007 Bureau of Internal Revenue ruling involving a Singaporean investor contradicted previous rulings which exempted from stock transaction tax sales of shares in publicly listed companies in the stock exchange by virtue of tax treaty provisions granting exemption from capital gains tax. In 1994, amendments to the Tax Code replaced a capital gains tax imposed on shares sold through the stock exchange with a stock transfer tax. The February 2007 ruling concluded that a Singapore resident does not qualify for tax exemption under the Singapore-Philippines Tax Treaty for shares sold through the stock exchange because stock transfer tax, as an ad-valorem transaction tax and not an income tax, cannot be considered an identical or substantially similar tax on income in place of the capital gains tax imposed under the previous law. This recent interpretation could be used by the Bureau of Internal Revenue as a precedent for resolving future tax treaty relief applications by U.S. and other foreign investors.
International Financial Reporting Standards: Bureau of Internal Revenue rules/regulations for tax accounting purposes have not been fully harmonized with the recording and recognition of transactions for financial accounting and reporting purposes prescribed under Philippine Financial Reporting Standards (patterned after standards issued by the International Accounting Standards Board). The disparities between reports for financial accounting versus tax accounting purposes can be an irritant between taxpayers and tax collectors. The Bureau of Internal Revenue requires taxpayers to maintain records reconciling figures presented in financial statements and income tax returns.
OPIC And Other Investment Insurance Programs
The Philippines currently does not provide guarantees against losses due to inconvertibility of currency or damage caused by war. The Overseas Private Investment Corporation can provide U.S. investors with political risk insurance for expropriation, inconvertibility and transfer, and political violence, based on its agreement with the Philippines. The Philippines is a member of the Multilateral Investment Guaranty Agency.
Labor Force: American managers operating in the Philippines will find a large, highly motivated work force that is easy to recruit and train. The July 2008 labor force survey revealed that the labor force is estimated at 37.3 million. In 2008, the official unemployment rate increased to 7.4 percent from 6.3 percent in 2007. This figure includes employment in the informal sector and does not capture the substantial underemployment in the country.
Plant managers are generally pleased with Filipino workers and often cite productivity and receptivity to training as positive factors. The existence of Special Economic Zones and low wages are other positive factors for investors.
High Trainability: Literacy in both English and Filipino is relatively high. However, English proficiency appears to be declining. The Department of Education, under its National English Proficiency Program, continues its effort to strengthen English language training including through school-based mentoring programs for public elementary and secondary school teachers, aimed at improving public school teachers' English language skills and competence
High productivity: Employers find that Filipino workers generally respond well to productivity goals and wage incentives for increasing their output. Exceptions can often be attributed to lack of equipment, poor training, and job insecurity.
Special Economic Zones: Special Economic Zones continue to play a significant role in attracting new investors to the country. The zones normally include their own labor centers for assisting investors with recruitment, coordinating with the Department of Labor and Employment and Social Security Agency, and mediating labor disputes. The zones have helped produce rapid growth in new jobs as both Philippine and foreign firms seek the tax and other advantages of these areas devoted to fostering export industries. As of November 2008, an estimated 1.53 million employees were working in zones under the Philippine Economic Zone Authority (www.peza.gov.ph ).
Low Wages: Multinational managers report that their total compensation packages tend to be comparable with those in neighboring countries, a good value for their mid-level management and skilled staff in the Philippines. In the call center industry, average labor cost is between $1.60 and $1.90 per hour.
Regional Wage and Productivity Boards meet periodically in each of the country's 16 administrative regions to determine minimum wages. In recent years, the regional boards have adjusted the minimum wage rate about once annually. The National Capital Region Board sets the national trend. As of August 2008, the daily minimum wage in Metro Manila was pegged between PHP345 and PHP382 ($7 to $8). While the Philippine Government maintains a minimum wage of PHP382 per day for what it calls "non-agricultural workers," employees in agriculture, private hospitals, retail service, and manufacturing in fact receive PHP345. Cost of living allowances are given across the board. Most other regions set their minimum wage at about PHP62 to PHP149 less than Manila's. Some provinces in the Autonomous Region of Muslim Mindanao and Bicol region have daily minimum wages as low as PHP 196. The regional boards grant various exceptions, depending on the type of industry and number of employees at a given firm.
Labor-Management Relations: The Constitution enshrines the right of workers to form and join trade unions. The mainstream trade union movement recognizes that its members' welfare is tied to the productivity of the economy and competitiveness of firms. The impact of globalization and free trade continues to force unions to modify their bargaining and organizing approach. Frequent plant closures have made many unions more willing to accept productivity-based employment packages. The number of firms using temporary contract labor continues to grow.
The number of strikes has declined from 25 in 2004 to 5 strikes in 2008, through September. There are 17,105 recognized unions, with a membership of more than 1.9 million workers (about 5 percent of the workforce). As of June 2008, 1,437 unions have existing collective bargaining agreements that cover 218,639 workers. Mainstream union federations typically enjoy a good working relationship with employers, including those in Special Economic Zones.
In May 2007, a new labor law lowered the requirements for union registration. Under the new law, unions tied to federations are no longer required to maintain a minimum membership of 20 percent of the workers in a bargaining unit. However, independent unions are required to meet the 20 percent membership requirement. By the end of December 2008, however, the Department of Labor and Employment had not yet issued the required implementing rules and regulations for the new law to take effect.
Worker Rights: Although the Philippines is a signatory to all International Labor Organization conventions on worker rights, it is not in full compliance with all of their requirements. Illegal discovery tactics and dismissal of union members are alleged as barriers to organization. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities, although effectiveness of enforcement is reportedly questionable. In cases involving the national interest, which can include cases where companies face strong economic or competitive pressures, the Secretary of the Department of Labor and Employment has the authority to end strikes and mandate a settlement between the parties. Although labor laws apply equally to special economic zones, relatively few unions exist in them, to the consternation of many trade union leaders.
Violation of minimum wage standards is common. As of March 2008, 18 percent of the 13,147 commercial establishments inspected by the Philippine Department of Labor and Employment were not in compliance with the prevailing minimum wage. However, the Department estimates that the actual percentage of noncompliant businesses may be much higher. Non-payment of social security contributions, bonuses, and overtime is particularly common. The law provides for a comprehensive set of occupational safety and health standards, although workers do not have a legally protected right to remove themselves from dangerous work situations without risking loss of employment. The Department of Labor and Employment has responsibility for safety inspection, but a severe shortage of inspectors makes enforcement extremely difficult. There have been instances of forced labor in connection with human trafficking.
Foreign Trade Zones/Free Trade Zones
The Special Economic Zone Act (R.A. 7916, 1995) grants preferential tax treatment to enterprises located in special economic zones (also referred to as ecozones). Ecozones include export processing zones, free trade zones, and certain industrial estates. The Philippine Economic Zone Authority manages five government-owned export-processing zones and administers incentives available to firms located in more than 170 privately owned and operated zones, technology parks and buildings. Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export processing zone enterprise with the Authority. Enterprises located in ecozones that are designated export processing zones are considered to be outside the customs territory of the Philippines and are allowed to import capital equipment and raw material free from customs duties, taxes, and other import restrictions. Goods imported into free trade zones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties. Goods imported into both export processing zones and free trade zones are exempt from the GRP's Selective Preshipment Advance Classification Scheme. While some ecozones have been designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.
Incentives for firms in export processing and free trade zones include: income tax holiday or exemption from corporate income tax for four years, extendable to a maximum of eight years; after the expiration of the income tax exemption, a special five percent tax rate on gross income in lieu of all national and local income taxes (with the exception of land owned by developers, which is subject to real property tax); tax and duty-free importation of capital equipment, raw materials, spare parts, supplies, breeding stocks, and genetic materials; exemptions from wharfage dues, export taxes, imposts and other fees; a tax credit on domestic capital equipment; tax credits on domestic breeding stocks and genetic materials; additional deductions for incremental labor costs and training expenses; unrestricted use of consigned equipment; remittance of earnings without prior approval from the central bank; domestic sales allowance equivalent to 30 percent of total export sales; permanent resident status for foreign investors and immediate family members; permission to hire foreign nationals; exemption from local business taxes; and simplified import and export procedures.
The Philippine Economic Zone Authority’s Guidelines for the Establishment and Operation of Information Technology Parks defines information technology as a collective term for various technologies involved in processing and transmitting information, which include computing, multimedia, telecommunications, and microelectronics. Information technology parks located in the National Capital Region (Metropolitan Manila) may serve only as locations for service-type activities, with no manufacturing operations. As of December 2008, there were more than 170 economic zones operating in the country under the Authority, of which 5 are government-owned ecozones located in Mactan, Bataan, Baguio, Cavite, and Pampanga. Another 88 have been approved by the Authoeirt but are not yet operational. Moreover, there are 5 zones under the Bases Conversion Development Authority, namely: Subic Bay Freeport and Special Economic Zone; Clark Special Economic Zone; John Hay Special Economic Zone; Poro Point Special Economic and Freeport Zone; and, the Morog Special Economic Zone. Two other privately-owned ecozones are independent of Authority oversight: the Zamboanga City Economic Zone and Freeport, located in Zamboanga City, Mindanao; and the Cagayan Special Economic Zone and Freeport, covering the city of Santa Ana, Cagayan Province, and adjacent islands. The incentives available to investors in these zones are provided for by R.A. 7903 and 7922, respectively, and are very similar to those provided by the Philippine Economic Zone Authority under R.A. 7916.
The economic zones located inside the two principal former U.S. military bases in the Philippines are independent of the Philippine Economic Zone Authority and subject to separate legislation under the Bases Conversion Development Authority (created under R.A. 7227). These are the Subic Bay Freeport Zone in Subic Bay, Zambales, and the Clark Special Economic Zone in Angeles City, Pampanga. Firms operating inside the zones are exempt from import duties and national taxes on imports of capital equipment and raw materials needed for their operations within the zone. Both zones are managed as separate customs territories. Products imported into the zones are exempt from the GRP's Selective Preshipment Advance Classification Scheme, with the exception of products imported for sale at duty-free retail establishments within the zones. Firms operating in the zones are required to pay only a five percent tax based on their gross income. Both zones have their own international airports, power plants, telecom networks, housing complexes, and tourist facilities.
-- CAPITAL OUTFLOW POLICY:
Outward capital investments from the Philippines do not require prior central bank approval when the outward investments are funded by withdrawals from foreign currency deposit accounts; the funds to be invested are not purchased from the banking system; or, if sourced from the banking system, the funds to be invested do not exceed $30 million per investor per year.
Outward investments exceeding $30 million funded with foreign exchange purchases from the local banking system are subject to prior central bank approval and registration. Applications to purchase foreign exchange from the local banking system for overseas investments should be accompanied by supporting documents and a written undertaking to inwardly remit and sell for pesos to authorized agent banks the dividends, earnings, and divestment proceeds from the outward investments. Current regulations require that the foreign exchange proceeds from profits/dividends and capital divestments from such outward capital investments be remitted within 15 banking days from receipt overseas and sold for pesos to authorized banks within three banking days from receipt in the Philippines.
Foreign Direct Investment Statistics
The Securities & Exchange Commission, Board of Investments, National Economic and Development Authority, and the Bangko Sentral ng Pilipinas each generate their own respective direct investment statistics. Central bank data (which records actual rather than approved investments based on balance of payments concepts/methodologies, and which is readily available in US dollar terms) is widely used as a convenient and reasonably reliable indicator of foreign investment stock and foreign investment flows. The Central bank publishes annual data on net foreign direct investment flows broken down by country and by industry. The central bank is currently working to improve measurement of foreign direct investment stock.
The figures in Tables 1 below refer to foreign direct investment stock reported by the central bank using a balance of payments framework; however, disaggregration by country and by industry are not available. Tables 2 and 3 provide annual net foreign direct investments flows. Table 4 provides a list of major foreign investors in the Philippines as of 2007, using the latest available published information from the Securities and Exchange Commission.
Foreign Direct Investment Stock
Levels as of
FDI Stock as % of GDP a/
a/ Based on latest revised GDP levels.
Source: Bangko Sentral ng Pilipinas (BSP)
Net Foreign Direct Investment Flows a/
By Investor Country b/
|Total of which: b/||491.0||688.0||1,854.0||2,921.0||2,928.0|
|South Korea (ROK)||1.2||-0.1||0.0||3.0||14.5|
|Annual FDI Flow|
|As % of GDP||0.6||0.8||1.9||2.5||2.0|
a/ Balance of Payments Net Foreign Direct Investment (FDI) flows which refer to non-resident placements less non-resident withdrawals, plus reinvested earnings, plus net intercompany loans.
b/ Countries listed above posted the largest cumulative inflows for the five-year period 2003 – 2007.
Source: Bangko Sentral ng Pilipinas
Net Foreign Direct Investment Flows a/
By Industry/Sector b/
|Agriculture, Hunting, and Forestry||0.0||0.0||0.2||0.1||3.7|
|Mining and Quarrying||-7.2||0.2||0.4||32.4||154.6|
|Electricity, Gas, and Water||0.0||8.6||-6.3||200.4||699.2|
|Hotels and Restaurants||0.0||0.0||0.0||0.0||2.1|
|Transport, Storage, and Communications||0.0||1.6||-32.4||-8.5||13.1|
|Others, Not Elsewhere Classified||462.9||501.2||358.3||692.9||292.9|
|Total FDI Flow|
|As % of GDP||0.6||0.8||1.9||2.5||2.0|
a/ Balance of Payments Net Foreign Direct Investment (FDI) flows which refer to non-resident placements less non- Resident withdrawals, plus reinvested earnings, plus net intercompany loans.
b/ Covers non-residents investments in non-banks sourced from the Cross-Border Transactions survey; industry breakdown statistics are not available.
Source: Bangko Sentral ng Pilipinas
Major Foreign Investors
The United States is a top foreign investor in the Philippines. The SEC’s latest published listing of the “Top 1000” corporate revenue earners (based on 2007 data) included more than 420 multinational firms, of which there were 80 American firms. As of the end of 2007, the top 25 foreign investors in the Philippines were:
|Name of Philippine Operation||Nationality of Foreign Investor||
(US $ Million)
|1. Philippine Telecommunications Investment Corp.||HK-Chinese b/||1,997.1|
|2. Globe Telecom, Inc.||Singaporean c/||1,230.3|
|3. Petron Corp.||Saudi Arabian d/||869.5|
|4. Lafarge Holdings (Philippines), Inc.||French d/||858.7|
|5. Phil. American and General Insurance Co., The||American e/||846.3|
|6. Citibank N.A.||American f/||720.7|
|7. Intel Technology Philippines, Inc.||American g/||681.6|
|8. Team Sual Corp.||Japanese h/||584.7|
|9. Team Energy Corp.||Japanese h/||555.2|
|10. Pilipinas Shell Petroleum Corp.||British i/||510.8|
|11. TI (Philippines), Inc.||American j/||510.5|
|12. Rohm Electronics Philippines, Inc.||Japanese k/||481.7|
|13. NXP Semiconductors Philippines, Inc.||Dutch l/||479.8|
|14. American Power Conversion (A.P.C.) B.V.||French m/||464.5|
|15. Coral Bay Nickel Corp.||Japanese n/||410.7|
|16. Hongkong and Shanghai Banking Corp., Ltd., The||HK-Chinese o/||384.4|
|17. Kepco Ilijan Corp.||Korean p/||375.2|
|18. Sun Life of Canada (Philippines), Inc.||Canadian q/||371.3|
|19. Ayala DBS Holdings, Inc.||Singaporean r/||361.1|
|20. First Philippine Union Fenosa, Inc.||Spanish s/||361.0|
|21. Quezon Power, Inc.||American t/||355.7|
|22. Chevron Philippines, Inc.||American u/||355.5|
|23. Philip Morris Philippines Manufacturing, Inc.||American v/||316.9|
|24. CE Casecnan Water and Energy Co., Inc.||American w/||316.0|
|25. Republic Cement Corp.||Mexican x/||302.9|
a/ Refers to total book value of foreign and local equity as of 2007, unless otherwise specified. Original values expressed in pesos, and converted to US$ equivalents using end-2007 rate of 41.40 pesos/US$.
b/ First Pacific Co., Ltd.
c/ Singapore Telecom Int’l. Pte., Ltd.
d/ Aramco Overseas Company B.V.
e/ Financiere Lafarge S.A.S.
f/ American International Group, Inc.
g/ Intel Corp.
h/ Tokyo Electric Power Co. Int’l. B.V. and Marubeni Corp.
i/ Royal Dutch Shell plc
j/ Texas Instruments, Inc.
k/ Rohm Fukuoka Co., Ltd.
l/ Koninklijke Philips Electronic, N.V.
m/ Schneider Electric S.A.
n/ Sumitomo Metal Mining Co. Ltd
o/ Hongkong and Shanghai Banking Corp. Ltd., The
p/ Korea Electric Power Corp.
q/ Sun Life Financial, Inc.
r/ Development Bank of Singapore
s/ Union Fenosa Internacional, S.A.
t/ Covanta Energy Group, Inc.
u/ Chevron Corp.
v/ Altria Group, Inc.
w/ Berkshire Hathaway, Inc.
x/ Lafarge Holdings, Inc., Southeast Asia Cement Holdings, Inc. and South Western Cement Ventures, Inc.
Source of Basic Data: “Philippines Top 5000”
(SEC publication – Year 2007 edition)