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U.S. Department of State

Diplomacy in Action

2012 Investment Climate Statement - The Philippines


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Overview of Foreign Investment Climate

The Government of the Philippines (GPH) actively seeks foreign investment to promote economic development. The Philippine investment landscape has some noteworthy advantages, such as its free trade zones, including the Philippine Economic Zone Authority (PEZA). Certain industries have experienced impressive growth in recent years, especially those that leverage educated, English-speaking Philippine labor.

Despite these strengths, legal restrictions, regulatory inconsistency, and a lack of transparency hinder foreign investment. In many sectors of the economy, GPH regulatory authority remains ambiguous, and corruption is a significant factor. In addition, a complex and slow judicial system inhibits the timely and fair resolution of commercial disputes.


Measure

Year

Index/Ranking

TI Corruption Index

2011

129 of 182 (2.6)

Heritage Economic Freedom

2011

115 of 179 (56.2)

World Bank Doing Business

2012

136 of 183

MCC Gov’t Effectiveness

2012

83%

MCC Rule of Law

2012

38%

MCC Control of Corruption

2012

24%

MCC Fiscal Policy

2012

50%

MCC Trade Policy

2012

56%

MCC Regulatory Quality

2012

69%

MCC Business Start Up

2012

48%

MCC Land Rights Access

2012

50%

MCC Natural Resource Protection

2012

82%

Philippine law generally treats foreign investors the same as their domestic counterparts, with important exceptions outlined in the Foreign Investment Act (detailed below). Corporations or partnerships must register with the Securities and Exchange Commission (SEC) and sole proprietorships must be registered with the Bureau of Trade Regulation and Consumer Protection (BTRCP) in the Department of Trade and Industry (DTI). Investors generally report that the Philippine bureaucracy is nondiscriminatory but slow to process these requirements.

The Foreign Investment Negative List is actually two lists, which outline sectors that are restricted or limited in terms of foreign investment under the 1991 Foreign Investment Act. The Foreign Investment Act also requires the Philippine government to publish an updated negative list every two years to reflect changes in law; the eighth negative list was promulgated in February 2010 and release of the ninth is expected in early 2012. This relatively long list of foreign investment limitations contribute to the poor Philippine record in attracting foreign investment. List A enumerates investment sectors and activities for which foreign equity participation is restricted by mandate of the Constitution and specific laws. 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. The restrictions stem from a constitutional provision permitting Congress to reserve to Philippine citizens certain areas of investment and limit foreign participation in public utilities or their operation. No mechanism exists for a waiver under the negative lists.

Only Philippine citizens can practice licensed professions such as engineering, medicine, and allied professions; accountancy, architecture, interior design, chemistry, environmental planning, social work, teaching, and law. 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. Companies that register with the Board of Investments (BOI) may employ foreign nationals in supervisory, technical, or advisory positions for five years from registration, extendable for limited periods at the discretion of the BOI.

The 1987 Constitution prohibits foreign nationals from owning land in the Philippines. The Investors' Lease Act of 1994 allows foreign investors to lease a contiguous land parcel of up to 1000 hectares for 50 years, renewable once for 25 years. In mid-2003, the Dual-Citizenship Act allowed natural-born Filipinos who became naturalized citizens of a foreign country to re-acquire Philippine citizenship. Philippine dual citizens now have full rights of possession of land and property. Ownership deeds continue to be difficult to establish, poorly reported and poorly regulated. Furthermore, the court system is slow to resolve cases. Other investment areas reserved for Filipinos include: mass media (except recording); small-scale mining; private security; utilization of marine resources, including small-scale utilization of natural resources in rivers, lakes, and lagoons; and the manufacture of firecrackers and pyrotechnic devices.

The retail trade industry is highly restricted to foreign investment. Retail trade enterprises with paid-up capital of less than $2.5 million, or less than $250,000 for retailers of luxury goods, are reserved for Filipinos. Foreign ownership of retail trade enterprises with paid-up capital of $2.5 million and above is now allowed, with initial capitalization requirements. Enterprises engaged in financing and securities underwriting that are regulated by the SEC are limited to 60 percent foreign ownership.

Other specific limits on foreign investment include: private radio communications networks (20 percent); employee recruitment and locally-funded public works construction and repair (25 percent); advertising agencies (30 percent); natural resource exploration, development, and utilization (40 percent, with exceptions); education institutions (40 percent); operation and management of public utilities (40 percent); operation of commercial deep-sea fishing vessels (40 percent); Philippine government procurement contracts (40 percent for supply of goods and commodities; 25 percent for construction of locally-funded public works, with some exceptions); adjustment companies (40 percent); operations of BOT projects in public utilities (40 percent); ownership of private lands (40 percent); rice and corn processing (40 percent, with some exceptions).

The Philippines also limits foreign ownership for reasons of national security, defense, public health, safety, and morals, including explosives, firearms, military hardware, and massage clinics, which are all generally limited to 40 percent foreign equity. Foreign ownership in small- and medium-sized enterprises is also limited to 40 percent in non-export firms.

Although outside of the coverage of the Foreign Investment Act, foreign ownership restrictions also apply to the banking sector. In 1994, the banking liberalization law capped the number of new foreign banks that could open full-service branches in the Philippines; all 10 licenses have been issued and these foreign banks are limited to six branch offices each. In addition, four foreign banks that were operating in the Philippines prior to 1948 were allowed to open up to six branches each. Foreign banks that qualify under the law – publicly-listed and with national or global rankings – may own up to 60 percent in a locally-incorporated subsidiary. Foreign investors that do not meet these requirements are limited to a 40 percent stake. Since 1999, the Bangko Sentral ng Pilipinas (Central Bank) has imposed a moratorium on the issuance of new bank licenses, limiting investments to existing banks, although micro-finance institutions are exempt. Philippine law also requires that majority Filipino-owned banks must, at all times, control at least 70 percent of total banking system resources in the country.

The insurance industry is open to 100 percent foreign ownership, but with a sliding scale of minimum capital requirements depending on the degree of foreign ownership. As a general rule, only the state-owned Government Service Insurance System (GSIS) may provide coverage for government-funded projects and government corporations undergoing privatization process. Build-Operate-Transfer (BOT) projects may only secure insurance and bonds issued by the GSIS and/or surety or insurance companies duly accredited by the Office of the Insurance Commissioner.

Offshore companies not incorporated in the Philippines may underwrite Philippine issues for foreign markets, but not for the domestic market. The Lending Company Regulation Act of 2007 requires majority Philippine ownership for such enterprises, to establish a regulatory framework for credit enterprises that do not clearly fall under the scope of existing laws. Current law also restricts membership on boards of directors for mutual fund companies to Philippine citizens.

In addition to the restrictions detailed in the Foreign Investment Negative List, firms with more than 40 percent foreign equity that qualify for BOI incentives must divest to the 40 percent level within 30 years from registration date or within a longer period determined by the BOI. Foreign-controlled companies that export 100 percent of production are exempt from this requirement. Certain non-luxury retail establishments must offer at least 30 percent of their equity to the public within eight years from the start of operation.

The Philippine Mining Act of 1995 allows a foreign entity full ownership of a company involved in large-scale exploration, development, and utilization of mineral resources, as arranged through Financial and Technical Assistance Agreements with the Philippine government.

The Build-Operate-Transfer (BOT) Law provides the legal framework for private sector participation in large infrastructure projects and similar types of government contracts. Franchises in public utilities – railways or urban rail mass transit systems, electricity distribution, water distribution, and telephone systems – may only be awarded to enterprises with at least 60 percent Philippine ownership. U.S. firms have won contracts under the law and similar arrangements, mostly in the power generation sector. However, more active foreign participation under BOT and similar public-private arrangements can be frustrated by legal administration problems, including: weaknesses in planning, tendering, and executing private sector infrastructure projects; regulatory and legal challenges to collecting and/or increasing tolls and fees; and lingering ambiguities about the level of guarantees and other support provided by the government.

To attract investors to its Public-Private Partnership (PPP) infrastructure projects, the Aquino administration established the “PPP Center” to promote transparency and oversee project development and approval; allocated resources for right-of-way and land acquisition; and announced a relaxation in single borrower (SB) limits for Philippine banks that finance PPP arrangements, subject to risk management requirements. Addressing limitations on foreign investment will be critical to the Aquino administration’s stated goal of aggressively promoting PPPs/BOTs to supplement insufficient public sector resources for vital infrastructure.

Conversion and Transfer Policies

The Central Bank has worked since 2007 to relax and streamline the Philippine foreign exchange (forex) regulatory framework. There are no restrictions on the full and immediate transfer of funds associated with foreign investments, foreign debt servicing, or payment of royalties, lease payments, and similar fees.

Central Bank regulations spell out specific requirements for foreign exchange purchases from banks and their subsidiary foreign exchange corporations; and from non-bank foreign exchange dealers, money changers, and remittance agents. There is no mandatory foreign exchange surrender requirement imposed on export earners and other foreign exchange earners such as overseas workers. The Central Bank follows a market-determined exchange rate policy, with scope for intervention targeted mainly at smoothing excessive foreign exchange volatility.

Expropriation and Compensation

Philippine law allows for expropriation of private property for public use or in the interest of national welfare or defense. In such cases, the GPH offers compensation for the affected property. 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 no recent cases of actual expropriation involving U.S. companies in the Philippines. However, BOT contractors in the energy sector, including U.S. firms, have reported disputes on real property tax assessments with local government units (LGUs). In some cases, the LGUs have initiated auction and/or confiscation proceedings on the contractors’ assets, which the companies are challenging in the courts.

Dispute Settlement

Investment disputes can take years for parties to reach final settlement. A number of GPH actions in recent years have raised questions over the sanctity of contracts in the Philippines and have clouded the investment climate. In the past, high-profile cases include the GPH-initiated review and renegotiation of contracts with independent power producers, court decisions voiding allegedly tainted and disadvantageous BOT agreements, and challenges to the extent of foreign participation in large-scale natural resource exploration activities, such as mining.

Many foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive for investment. The judiciary is constitutionally independent of the executive and legislative branches and faces many problems, including understaffing and corruption. The GPH is pursuing judicial reform with foreign donor support, through projects such as the U.S. Country Assistance Strategy 2009-2013; the Asian Development Bank’s Governance in Justice Sector Reform Program, and the World Bank Judicial Reform Project.

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 Arbitral 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.

A long-awaited insolvency law designed to recognize creditor rights and respect the priority of claims replaced the century-old Insolvency Act in July 2010. Subject to certain conditions, rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings. The law also sets the conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation. The acts recognizes cross-border insolvency proceedings and the United Nations Center for International Trade and Development’s Model Law on Cross-Border Insolvency, allowing the courts to provide relief arising from insolvency or rehabilitation proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines. Regional trial courts designated by the Supreme Court as commercial courts have jurisdiction over insolvency and bankruptcy cases. Although enforcement remains key, the new law seeks to provide a clear, transparent, and predictable legal framework for the rehabilitation and liquidation of distressed enterprises, which used to be governed by outmoded legislation and a cacophony of sometimes ambiguous and inconsistent rulings, procedures, and other jurisprudence subject to challenges and protracted delays.

Performance Requirements and Incentives

Performance Requirements

Performance requirements are usually based on an approved project proposal, established by the BOI for those investors who are granted incentives. BOI-registered companies provide a projected yearly production schedule and export performance targets; registered projects must maintain at least 25 percent of total project cost in the form of equity and comply with the 25 percent local value-added sourcing requirement

Certain industries have been subject to more specific local sourcing requirements. However, provisions requiring foreign retailers to source locally lapsed in March 2010.

The Philippines is not a signatory to the WTO Agreement on Government Procurement. The Government Procurement Reform Act of 2003 requires 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. Although Philippine law outlines objective criteria for selection of a single portal electronic procurement system, U.S. and other foreign companies continue to raise concerns about irregularities in government procurement and inconsistent implementation.

Philippine law also gives preference to local products and/or Filipino-controlled enterprises in the bid evaluation process for public sector purchases of goods and supplies. When the lowest bid is from a supplier of imported goods and/or from a foreign-owned enterprise, the lowest domestic bidder can claim preference and match the offer, provided its original bid was no more than 15 percent higher than that of the foreign bidder or foreign entity.

Filipino consultants also enjoy preferential treatment in government projects. If Filipino consultants work for foreigners on such projects due to technical need, the law requires that they are the lead consultants. Where foreign funding is indispensable, foreign consultants must enter into joint ventures with Filipinos. Multilateral donor agencies report that their implementing partners have thus far been able to comply with both donors' internal procurement guidelines and Philippine law. Foreign bidders may participate in foreign-funded development assistance projects, provided the foreign assistance agreement expressly provides for use of the foreign government or international financing institution’s procurement procedures and guidelines. The Official Development Assistance Act further authorizes the President to waive statutory preferences for local suppliers for foreign-funded projects.

The Government Procurement Reform Act does not cover projects under the BOT Law, which allows investors in qualifying projects to engage the services of Philippine and/or foreign firms for the construction of infrastructure projects. Procurement by government agencies and government-owned or controlled corporations is subject to a countertrade requirement entailing 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.

Incentives

Per the Senate Tax Study and Research Office, there are about 180 fiscal incentives laws and issuances in the Philippines as of June 10, 2010. President Benigno Aquino III has stated his support for fiscal incentives rationalization publicly and listed fiscal incentives reform as a priority legislative measure. A number of bills have been filed in the Philippine Congress but the scope and detail of reform remain contentious, including proposals by a key cabinet secretary to phase out income tax holidays in lieu of strategic subsidy programs.

Every year, the Investment Priorities Plan (IPP) outlines the list of investment areas entitled to incentives. The 2011 IPP retains priority investment areas such as: agriculture/agribusiness and fisheries; infrastructure; green projects; business process outsourcing; research and development; disaster prevention, mitigation and recovery; creative industries; and, strategic projects. The Aquino administration added the following to the 2011 Plan: PPP projects; shipbuilding; mass housing; energy; motor vehicles; and, tourism.

Screening for the legitimacy and regulatory compliance of companies seeking investment incentives appears to be nondiscriminatory, but the application process can be complicated since incentives granted by the BOI often depend on action by other agencies, such as the Department of Finance (DOF), including its Bureau of Customs (BOC). Among the significant incentives offered to BOI-registered companies include: 4-6 year income tax holiday; tax deductions for necessary and major infrastructure works for companies located in less-developed areas; tax and duty exemptions on importation of breeding stocks and imported supplies and spare parts; exemption from wharfage dues and any export tax, duty, impost, and fees on non-traditional export products for ten years; the ability to employ foreign nationals in supervisory, technical, or advisory positions for five years extendible at the discretion of the Board; and, the simplification of customs procedures.

To encourage wider distribution of industry across the Philippines, BOI-registered enterprises that locate in less-developed areas and the thirty poorest provinces are automatically entitled to so-called "pioneer" incentives. Such enterprises can deduct 100 percent of infrastructure outlays from taxable income. A company may also deduct 100 percent of incremental labor expenses for five years, which is double the rate allowed for BOI-registered projects not located in less-developed areas.

In addition to the general incentives available to BOI-registered companies, a number of incentives apply specifically to export-oriented firms. 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 IPP. These include: tax credit for taxes and duties paid on imported raw materials used in the processing of export products; exemption from taxes and duties on imported spare parts; and, access to customs bonded manufacturing warehouses.

The BOI is flexible with the enforcement of 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). BOI-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.

Export-oriented firms with at least 50 percent of their revenues derived from exports may register for additional incentives under the Export Development Act of 1994. Registered exporters may be eligible for both these and BOI incentives, provided the exporters are registered according to BOI rules and regulations and the exporter does not take advantage of the same or similar incentives twice. Specific export incentives include a tax credit ranging from 2.5 to 10 percent of annual incremental export revenue.

Philippine law also provides incentives for multinational enterprises to establish regional or area headquarters and regional operating headquarters in the Philippines. Regional headquarters are defined as branches of multinational companies that do not earn or derive income from the country, and which act as supervisory, communications, or coordinating centers. Incentives for 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 taxes, fees, or charges imposed by a local government unit (except real property taxes); 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 ten percent corporate income tax. Privileges extended to foreign executives working at these operations include tax and duty-free importation of personal and household effects, and immigration benefits for executives. 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.

Right to Private Ownership and Establishment

Philippine law recognizes the private right to acquire and dispose of property or business interests, subject to foreign nationality caps specified in the Philippine Constitution and other laws. The 1987 Constitution grants the government authority to regulate competition and prohibit monopoly, although there is no implementing law. The Aquino administration has described the enactment of an anti-trust law as a top legislative priority. Congress is currently considering several competition-themed bills. Pending passage of anti-trust legislation, President Benigno Aquino III issued an Executive Order in June 2011 designating the Department of Justice (DOJ) as the government’s competition authority.

A few sectors are closed to private enterprise, generally on grounds of security, health, or "public morals." For example, the Philippine government operates or licenses all casinos through the Philippine Amusement and Gaming Corporation (PAGCOR) and runs lottery operations through the Philippine Charity Sweepstakes Office (PCSO).

Only the state-owned GSIS may insure government-funded projects. BOT projects and partially privatized government corporations must meet insurance and bonding requirements from the government insurance system, in proportion to GPH interests. In addition, government funds, as a general rule, should be deposited in the Central Bank and government-owned banks.

Protection of Property Rights

Delays and uncertainty associated with a cumbersome court system continue to concern investors, even though the Philippines has established procedures and systems for registering claims on property. Questions regarding the general sanctity of contracts, and the property rights they support, have also clouded the investment climate.

Of particular concern in the Philippines is the challenge of intellectual property rights protection, for which the Philippines is listed on United States Trade Representative (USTR) Special 301 Watch List. U.S. distributors continue 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 of a variety of product lines is also widespread, with counterfeit merchandise openly available in all major cities.

The Intellectual Property (IP) Code provides the legal framework for intellectual property rights protection in the Philippines, especially in the key areas of patents, trademarks, and copyright. The Electronic Commerce Act extends the legal framework established by the IP Code to the Internet. Investor concerns include deficiencies in the IP Code and other IP laws that have 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.

The Philippines has generally strong patent and trademark laws. Its first-to-file patent system grants patents valid for 20 years from the date of filing; the holder of a patent is guaranteed an additional right of exclusive importation of his invention. However, the Cheaper Medicines Act of 2008 limits patent protection for pharmaceuticals, and significantly liberalizes the grounds for the compulsory licensing of pharmaceuticals, although this provision has not been implemented to date. Trademark law protects well-known marks, which do not need to be in actual use or registered to be protected under the law, and prior use of a trademark in the Philippines is not required to file a trademark application. The GPH is working its accession to the Madrid Protocol, an agreement that facilitates the protection of trademarks in a large number of countries by obtaining an international registration.

In the area of copyright law, the Philippines has not enacted necessary amendments to its IP Code that would fully implement the World Intellectual Property Organization (WIPO) Copyright and Performances and Phonograms treaties, despite being a WIPO member and having acceded to the treaties. However, Philippine law does protect computer software as a literary work, and exclusive rental rights may be offered in several categories of works and sound recordings. Terms of protection for sound recordings, audiovisual works, and newspapers, and periodicals are compatible with the Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS). The enactment of the Anti-Camcording Act in 2010 provided stringent penalties for illegal camcording of motion pictures in theaters but the long-term effect of the law remains uncertain.

The IP Code also recognizes industrial designs, performers' rights, and trade secrets. The registration of a qualifying industrial design is for a period of five years and may be renewed for two consecutive five-year periods. While Philippine law recognizes performers' rights for 50 years after death, the exercise of exclusive rights for copyright owners over broadcast and retransmission is ambiguous. While there are no codified rules on the protection of trade secrets, Philippine officials assert that existing civil and criminal statutes protect trade secrets and confidential information. Other important laws defining intellectual property rights are the Plant Variety Protection Act, 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, providing WTO-consistent protection for the layout designs of integrated circuits.

Generally, the Philippine government enforcement agencies are most responsive to those copyright owners who actively work with them to target infringement. Agencies will not proactively target infringement unless the copyright owner brings it to their attention and works with them on surveillance and enforcement actions. The Intellectual Property Office (IPO) has jurisdiction to resolve certain disputes concerning alleged infringement and licensing. In June 2011, IPO launched its IPR Arbitration Center to receive and facilitate IP disputes presented to the center for review, resolution, and settlement through arbitral proceedings. Although intellectual property owners have sometimes used the IPO's administrative complaint system as an alternative to the judicial court system, the process can be slow-moving due to limited resources. Joint efforts between the private sector and the National Bureau of Investigation (NBI), Philippine National Police (PNP), Bureau of Customs (BOC), Optical Media Board (OMB), and several local government units have resulted in some successful enforcement actions.

Enforcement actions are not often followed by successful prosecutions. Intellectual property infringement is not considered a major crime within the Philippine judicial system and takes a lower precedence in court proceedings. In October 2011, the Philippine Supreme Court approved Rules of Procedure for Intellectual Property Rights Cases, a key judicial reform identified in several recent Special 301 reports. The special rules include: streamlined procedures to expedite cases and rules of evidence for IPR cases; provisions for the speedy, summary destruction of seized goods; designation of four courts with national jurisdiction to issue search warrants; and regional IP commercial courts. The special rules have the potential to improve IPR-related convictions as it shortens lengthy court action that led many cases to be settled out of court. Since 2001, there have been sixty-four convictions for IP violations with no convictions in 2009 or 2010, while data for 2011 is not yet available as of the reporting period. Convicted intellectual property violators rarely spend time in jail, since the six year penalty enables them to apply for probation immediately under Philippine law.

Transparency of the Regulatory System

Philippine national agencies are required by law to develop regulations via a public consultation process, often involving public hearings. In most cases, this ensures some transparency in the rulemaking process. New regulations must be published in national newspapers of general circulation or in the GPH's official gazette before taking effect.

On the enforcement side, however, regulatory action is often weak, inconsistent, and unpredictable. Regulatory agencies in the Philippines are generally not statutorily independent, but are attached to cabinet departments or the Office of the President and, therefore, subject to political pressure. Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and a source of frustration. To counter this, some agencies, such as the SEC, BOI, and the Department of Foreign Affairs (DFA), 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 generally open to foreign portfolio capital investment. Non-residents may purchase domestically-issued securities and invest in money market instruments, as well as peso-denominated time deposits, though foreign exchange purchases face some restrictions. The securities market is growing but remains relatively small and underdeveloped, with a limited range of choices. The securities/bond market is dominated by government bills/bonds. Although growing, long-term bonds and commercial paper are not yet major sources of private financing, except for a few large firms.

Philippine Stock Exchange

Membership in the Philippine Stock Exchange (PSE) is open to foreign-controlled stock brokerages incorporated under Philippine law. Although growing, the Philippine stock market lags many of its neighbors in size, product offerings, and trading activity. Investments in any publicly-listed firm on the PSE are governed by foreign ownership ceilings stipulated in the Constitution and other laws.

The market is highly concentrated. There are less than 260 listed firms and the ten most actively-traded companies account for between 40-50 percent of trading value and domestic market capitalization. To encourage publicly-listed companies to widen their investor base, the PSE introduced reforms in 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. In October 2010, the PSE reinstated a policy for listed companies to maintain at least 10 percent public ownership of their issued and outstanding shares to promote greater market liquidity and fairer and more transparent stock pricing.

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 Securities Regulation Code of 2000 strengthened investor protection by requiring full disclosure in the regulation of public offerings, and implementing stricter rules on insider trading, mandatory tender offer requirements, and the segregation of broker-dealer functions. The Code also significantly increased sanctions for securities violations, and mandated steps to improve the internal management of the stock exchange and future securities exchanges. Moreover, the Code expressly prohibits any one industry group (including brokers) from controlling more than 20 percent of the stock exchange’s voting rights, though the PSE has yet to fully comply.

The enforcement of these strengthened laws is mixed. While there has been some progress from the creation of special commercial courts, the prosecution of stock market irregularities can be subject to delays and uncertainties of the Philippine legal system.

Banking

As of September 2011, the five largest commercial banks in the Philippines represented nearly 53 percent of total commercial banking system resources, with estimated total assets the equivalent of about US$159 billion. The Central Bank has worked to strengthen banks' capital bases, reporting requirements, corporate governance, and risk management systems.

Commercial banks' published average capital adequacy ratio was 17.4 percent on a consolidated basis as of March 2011, above the ten percent statutory limit and the eight percent internationally-accepted benchmark. Time-bound fiscal and regulatory incentives to encourage the sale of non-performing assets to private asset management companies promoted a resilient post-Asian crisis banking sector in the Philippines. Philippine banks also had limited direct exposure during the global financial crisis to investment products issued by troubled financial institutions overseas. As of September 2011, non-performing loans and non-performing asset ratios of commercial banks were estimated at 2.6 percent and 3.0 percent.

The General Banking Law of 2000 paved the way for the Philippine banking system to phase in these internationally accepted, risk-based capital adequacy standards. In 2007, the Philippines adopted the Basel 2 capital adequacy framework, expanding coverage from credit and market risks to include operational risks and enhancing the risk-weighting framework. The Central Bank began the staggered adoption of Basel 3 capital adequacy rules in January 2011. Other important provisions of the General Banking Law strengthened transparency, bank supervision, and bank management. However, some impediments remain to more effective bank supervision and prompt corrective action, including: stringent bank deposit secrecy laws; the need to secure the affirmative vote of at least five Monetary Board members before a bank can be examined within a period of less than 12 months from last examination; and, inadequate liability protection for Central Bank officials and bank examiners.

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. According to the Agri-Agra Law, banks must set aside 25 percent of loanable funds for agricultural credit, with at least ten percent earmarked for agrarian reform programs and beneficiaries. In early 2010, a new law tightened alternative modes of compliance – which used to include low-cost housing, educational, and medical developmental loans – to those directly targeting the agricultural sectors. Recent investor experience with agri-agra eligible bonds raise questions about implied guarantees by the Philippine government, and investors are cautioned to exercise due diligence.

Banks are also required to set aside ten percent of their loans for micro-, small- and medium-sized borrowers, 80 percent of which should be earmarked for micro and small enterprises. While most domestic banks are able to comply with these mandatory lending requirements, operating and branching restrictions make it more difficult for foreign banks to comply.

Direct lending by non-financial government agencies is limited to the Department of Social Welfare and Development, focusing on the poorest areas not being served by micro-finance institutions.

Anti-Money Laundering and Information Exchange

The Paris-based Financial Action Task Force (FATF) continues to monitor implementation of the Philippine Anti-Money Laundering Act through the Anti-Money Laundering Council. Covered institutions include foreign exchange dealers and remittance agents, which are required to register with the Central Bank and must comply with various Central Bank regulations and requirements related to the implementation of the Philippines' anti-money laundering law. The Philippines is a member of the Egmont Group, the international network of financial intelligence units and the Asia Pacific Group on Money Laundering.

The Asia Pacific Group on Money Laundering conducted a comprehensive peer review of the Philippines in September 2008. In October 2010, FATF included the Philippines in a list of jurisdictions with “strategic deficiencies” that posed potential risks to the international financial system. FATF’s International Cooperation Review Group and the Philippine government agreed on an action plan to address these deficiencies, which was presented during FATF’s October Plenary. Legislation to address remaining major deficiencies is pending before the Philippine Congress.

Following the signing into law of the Exchange of Information on Tax Matters Act in March 2010 and the issuance of implementing rules and regulations in September 2010, the Organization for Economic Cooperation and Development (OECD) upgraded the Philippines from its tax standards “blacklist” to the list of jurisdictions that “have substantially implemented the internationally agreed tax standard” for the exchange of information.

Accounting Standards

In 2005, the Philippines adopted accounting and financial reporting standards, with limited exceptions, patterned after International Financial Reporting and Accounting Standards issued by the International Accounting Standards Board (IASB). Effective January 1, 2010, the Philippines also adopted the International Financial Reporting Standards for Small- and Medium-sized Entities which, except for limited circumstances, apply to enterprises which do not have public accountability and with total assets from 3 million to 350 million pesos or liabilities from 3 million to 250 million pesos. Philippine auditing standards are based mainly on the International Standards on Auditing issued by the International Auditing and Assurance Standards Board.

The Philippine SEC requires an entity’s Chairman of the Board, Chief Executive Officer, and Chief Financial Officer to assume management responsibility and accountability for financial statements. The SEC reviews and revises guidelines, as necessary, on the accreditation of auditing firms and external auditors to promote quality control and discipline in the financial reporting environment. Certain regulatory agencies, such as the Central Bank, Insurance Commission, and Bureau of Internal Revenue, enforce separate accreditation rules. The SEC requires listed companies to disclose to the SEC any material external audit findings within five days of receipt. Material findings include fraud or error, losses or potential losses aggregating 10 percent or more of company assets, indications of company insolvency, and internal control weaknesses that could result in financial reporting problems.

A number of local accountancy firms are affiliated with the “Big Four” international accounting firms, namely KPMG, PricewaterhouseCoopers, Ernst & Young, and Deloitte Touche.

Outward Investments

Outward capital investments from the Philippines do not require prior approval from the Central Bank under the following conditions: 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 foreign exchange corporations that are subsidiaries of banks; or, the funds to be invested do not exceed $60 million per investor or per fund per year (if sourced from the banking system or bank-affiliated foreign exchange corporations).

Outward investments exceeding $60 million that are funded with foreign exchange purchases from banks and their subsidiary foreign exchange corporations are subject to prior Central Bank approval. Qualified investors, such as mutual funds, pension or retirement funds, investment trust funds, and insurance companies may apply for a higher annual outward investment limit. All outward investments of banks in subsidiaries and affiliates abroad require prior Central Bank approval.

Revised regulations approved in November 2011 lifted a requirement for residents to inwardly remit and sell for pesos earnings from profits/dividends or divestment proceeds from outward investments which were funded with foreign exchange purchased from banks or their subsidiary foreign exchange corporations.

Competition from State-Owned Enterprises

Private and state-owned enterprises (SOEs) generally compete equally, with some clear exceptions. The governmental National Food Authority (NFA) has, at times, been the sole legal importer of rice, though in 2011 the GPH ceded about 77 percent of all rice importation to the private sector. In the insurance sector, only the state-owned GSIS may provide coverage for the government’s insurance risks and interests, although the industry was opened up to 100 percent foreign ownership in 1994. All BOT projects and privatized government corporations must fulfill all insurance and bonding requirements from the GSIS, at least in proportion to GPH holdings.

The GPH has also intervened to directly cap or control pricing in some additional private markets. In the wake of the 2009 typhoons, the Philippine government imposed temporary price controls on gasoline and a basket of basic goods and services. Under Philippine law, the President may freeze prices on basic goods and services for a period of 90 days under a state of emergency.

The Philippine government's privatization program is managed by the Privatization Management Office under the Department of Finance. Apart from restrictions under the Foreign Investment Negative List, there are no 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 percent of the government-owned National Power Corporation’s (NPC) generating assets and transfer 70 percent of NPC-Independent Power Producer contracts to private companies.

The Philippine government has opened access and retail competition through several measures, including: the unbundling of rates; removal of cross-subsidies; establishment of the Wholesale Electricity Spot Market; and, privatization of 92 percent of NPC’s generation assets (as of mid-2010).

Corporate Social Responsibility

Corporate social responsibility (CSR) constitutes a basic aspect of most significant business operations in the Philippines. U.S. companies report strong and favorable response to CSR programs among employees and within local communities. Many CSR programs focus on poverty alleviation efforts, promotion of the environment, health initiatives, and education. Under the 2011 IPP, registered enterprises with pioneer incentives must undertake CSR activities in accordance with the development plans of the community where the project is located. Said enterprises must submit proof of their CSR program to be eligible for their last two years of income tax holiday grant. In some cases, the GPH has compelled its own entities to engage in CSR. For example, the Philippine Bases Conversion and Development Authority is mandated to declare portions of its property in Fort Bonifacio and surrounding areas as low-cost housing sites.

Political Violence

Terrorist groups and criminal gangs operate in some regions of the country. The Department of State publishes a consular information sheet at http://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 at: http://travel.state.gov/travel/cis_pa_tw/tw/tw_2190.html. The Department strongly encourages visiting and resident 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: http://travelregistration.state.gov/.

Arbitrary, unlawful, and extrajudicial killings by national, provincial, and local government actors continue to be serious problems. The justice system is constrained by limited resources and staffing that result in limited investigations, few prosecutions, and lengthy trials. Corruption, impunity, and abuse of power remain endemic.

On May 10, 2010, approximately 75 percent of registered citizens voted in elections for president, both houses of congress, and provincial and local governments. The election was generally free and fair, but was marked by some violence and allegations of vote buying and electoral fraud.

Peace talks between the government and the Mindanao-based insurgent group Moro Islamic Liberation Front (MILF) are ongoing. The peace process had stalled in August 2008 after the Supreme Court placed a temporary restraining order on the signing of a preliminary peace accord and some MILF members attacked villages in central Mindanao and killed dozens of civilians in response. The ensuing fighting between government and insurgent forces caused both combat and civilian deaths and the displacement of hundreds of thousands of people. In 2009, both sides instituted ceasefires and resumed formal peace talks.

The New People's Army (NPA), the military arm of the Communist Party of the Philippines, 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. To enforce its demands, the NPA sometimes attacks infrastructure such as power facilities, telecommunications towers, and bridges, mostly in Mindanao. In October 2011, the NPA launched significant attacks on mining facilities in Mindanao, causing millions of U.S. dollars’ worth of damage. The National Democratic Front, an umbrella organization that includes the Communist Party and its allies, has engaged in intermittent peace talks with the Philippine government. It has not targeted foreigners in recent years, but could threaten U.S. citizens engaged in business or property management activities.

Terrorist groups, including the Abu Sayaaf Group and Jema’ah Islamiyah, periodically attack civilian targets in Mindanao, kidnap civilians for ransom, and engage in armed skirmishes with the security forces.

Corruption

Corruption is a pervasive and longstanding problem in the Philippines. In his first 18 months in office, President Aquino’s good governance program has resulted in the filing of corruption cases against several high-profile public officials. The “2012-2016 Good Governance and Anti-Corruption Cluster Plan,” further identifies specific measures to curb corruption through greater transparency and accountability in government transactions. Efforts to reign in corruption have, in general, improved public perception though achieving successful prosecutions remains to be a serious challenge to the Aquino administration.

The Philippines is not a signatory of the Organization for Economic Cooperation and Development Convention on Combating Bribery. It has ratified the UN Convention against Corruption in 2003. The Philippine Revised Penal Code, Anti-Graft and Corrupt Practices Act, and Code of Ethical Conduct for Public Officials aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman investigates and prosecutes cases of alleged graft and corruption involving public officials, with the "Sandiganbayan," or anti-graft court, prosecuting and adjudicating those cases.

In view of streamlining government bureaucracy, President Aquino abolished the Presidential Anti-Graft Commission in November 2010 and transferred its investigative, adjudicatory, and recommendatory functions directly under his office. This enabled the Office of the President to directly 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 by imprisonment (6-15 years), a fine, and/or disqualification from public office or business dealings with the government.

Bilateral Investment Agreements

As of September 2011, the Philippines had signed bilateral investment agreements with Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium and Luxembourg, Burma, Cambodia, Canada, Chile, China, the Czech Republic, Denmark, Equatorial Guinea, Finland, France, Germany, India, Indonesia, Iran, Italy, Japan, Republic of Korea, Kuwait, Laos, Mongolia, Netherlands, Pakistan, Portugal, Romania, Russian Federation, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, and Vietnam. The Philippines does not have a bilateral investment agreement with the United States.

Taxes/Bilateral Tax Treaty

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 encourages 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.

Pursuant to the most favored nation clause of the Philippine-United States tax treaty, U.S. recipients of royalty income qualify for the preferential rate provided in the Philippine-China tax treaty. Accordingly, a ten percent tax rate applies with respect to most royalties. A 15 percent tax applies on the remittance of profits by Philippine branches of U.S. companies to their head office and dividends remitted by Philippine subsidiaries of U.S. companies to their parent companies.

Philippine courts reportedly have denied a number of claims for refund of tax payments in excess of rates prescribed under applicable tax treaties for failure to secure tax treaty relief rulings. An entity must obtain a tax treaty relief ruling from the BIR in order to qualify for preferential tax treaty rates and treatment. However, according to several tax lawyers, the requirements for tax treaty relief applications are burdensome. Even stricter regulations issued in 2010 disqualify late filings from availing of the preferential tax rates. The volume of tax treaty relief applications also has resulted in processing delays, with most applications reportedly pending for over a year. Some publicly-listed companies reportedly have opted to withhold a final 30 percent withholding tax on dividend payments to foreign investors rather than go through the tedious process of securing tax treaty relief rulings for preferential tax rates.

The BIR appears to be altering its position on tax gains through liquidation. Previously, it had consistently applied Philippine-United States Tax Treaty provisions exempting foreign companies from capital gains and corporate income tax on profit from the redemption and sale of shares by Philippine affiliates/subsidiaries being liquidated. However, a 2009 ruling involving a foreign company held that such gains were subject to corporate income tax, but not to capital gains tax; in another case, the BIR ruled that the gains were subject to tax on dividends. The companies and other interested parties have filed position papers with the Department of Finance to contest these rulings. A number of transactions involving partial liquidations through shares redemption reportedly are on hold because of this unresolved issue. Tax lawyers maintain that any gains from liquidation should be exempt under the Philippines-Unites States Tax Treaty.

The BIR has issued rulings involving non-U.S. investors asserting that the stock transfer tax is an ad valorem, transactional tax – different from the capital gains tax – and therefore applies on the sale of publicly-listed shares in the stock exchange. These rulings contradicted previous exemptions from the stock transfer tax by virtue of bilateral tax treaty provisions exempting foreign nationals from tax on capital gains. This interpretation could complicate the processing and resolution of similar tax treaty relief applications by U.S. and other foreign investors.

A foreign company without a branch office that renders services to Philippine clients is considered a permanent establishment, and is liable to pay Philippine taxes if its personnel stay in the country for more than 183 days for the same or a connected project in a twelve-month period. However, BIR rulings on the taxation of permanent establishments have been inconsistent on whether to treat them as resident or non-resident foreign corporations.

The BIR has yet to finalize long-pending draft regulations on transfer pricing but declared its policy is to subscribe to the OECD's transfer pricing guidelines. Currently, the Tax Code authorizes the BIR 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.

Domestic and foreign resident companies subject to regular income tax may claim an optional standard deduction of up to 40 percent of gross income, in lieu of itemized deductions. Companies may opt for either the optional standard deduction or itemized deductions in filing their quarterly income tax returns. However, in the final consolidated return for the taxable year, companies must make a final choice between standard or itemized deductions for the purpose of determining final taxable income for the year.

BIR rules and regulations for tax accounting have not been fully harmonized with the Philippine Financial Reporting Standards, which are patterned after standards issued by the International Accounting Standards Board. The disparities between reports for financial accounting and tax accounting purposes are a common issue in tax assessments and an irritant between taxpayers and tax collectors. The BIR requires taxpayers to maintain records reconciling figures presented in financial statements and income tax returns.

OPIC and Other Investment Insurance Programs

The Philippine government 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 against risks of 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

Managers of U.S.-based companies widely report that Philippine labor is relatively low cost, motivated. In addition, the Philippine labor force possesses strong English language skills. As of October 2011, the Philippine labor force was estimated at 38.5 million, with an unemployment rate at 6.4 percent. This figure includes employment in the informal sector and does not capture the substantial underemployment in the country.

Multinational managers report that total compensation packages tend to be comparable with those in neighboring countries. In the call center industry, the 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, with the National Capital Board setting the national trend. During the reporting period, the non-agricultural daily minimum wage in the National Capital Region is 426 pesos (approximately $9.84), although some private sector workers receive less. Cost of living allowances are given across the board. Most other regions set their minimum wage significantly lower than Manila. The lowest minimum wage rates were in the Southern Tagalog Region, where daily agricultural wages were 199 pesos ($4.59). Regional Boards may grant various exceptions to the minimum wage, depending on the type of industry and number of employees at a given firm.

Literacy in both English and Filipino is relatively high, although there have been concerns in the business and education communities that English proficiency was on the decline. The Department of Education, under its National English Proficiency Program, continues its efforts to strengthen English language training, including school-based mentoring programs for public elementary and secondary school teachers aimed at improving their English language skills.

Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine 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 (DOLE) has responsibility for safety inspection, but a severe shortage of inspectors makes enforcement extremely difficult.

The Philippine 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; frequent plant closures have made many unions even more willing to accept productivity-based employment packages. The trend among firms of using temporary contract labor continues to grow. During the reporting period, DOLE reported two strikes involving 3,828 workers. The DOLE Secretary has the authority to end strikes and mandate a settlement between the parties in cases involving the national interest, which can include cases where companies face strong economic or competitive pressures in their industries. In 2011, there were 135 registered labor federations and 16,417 private sector unions. The 1.75 million union members represented approximately 4.7 percent of the total workforce of 37.1 million. Mainstream union federations typically enjoy good working relationships with employers.

Special Economic Zones (ecozones) often offer on-site labor centers to assist investors with recruitment. These centers coordinate with DOLE and Social Security Agency, and can offer services such as mediating labor disputes. Although labor laws apply equally to ecozones, unions have noted some difficulty organizing inside them.

There have been some reports of forced labor in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries.

The Philippines is a signatory to all International Labor Organization (ILO) conventions on worker rights, but has faced challenges enforcing them. Unions allege that companies or local officials use illegal tactics to prevent them from organizing workers. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities. In September 2009 the government cooperated with a high-level ILO mission to investigate labor rights violations in the country. The ILO mission noted issues relating to violence, intimidation, threat, and harassment of trade unionists and the absence of convictions in relation to those crimes. It also observed obstacles to the effective exercise in practice of trade union rights. In response to ILO mission recommendations, the government constituted the Tripartite Industrial Peace Council (TIPC) to monitor the application of international labor standards and has proposed several legislative measures to address weaknesses in the Labor Code.

Foreign Trade Zones/Free Ports

Enterprises enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or "ecozones." Enterprises located in ecozones are considered to be outside the customs territory 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 and are exempt from the GPH's Selective Pre-shipment 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.

Among the most compelling incentives for firms in export processing and free trade zones are: income tax holiday for a maximum of eight years; exemption from real estate taxes for certain machinery for the first three years of operation of such machinery; a five percent flat tax rate on gross income in lieu of all national and local income taxes, after expiration of the income tax holiday; tax- and duty-free importation of capital equipment, raw materials, spare parts, supplies, breeding stocks, and genetic materials; simplified import and export procedures; 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; exemption from local business taxes; and, simplified import and export procedures.

Philippine Economic Zone Authority

The Philippine Economic Zone Authority (PEZA) manages three government-owned export-processing zones (Mactan, Baguio, and Cavite) and administers incentives to firms in about 248 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 PEZA. PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority. PEZA reported an increase of 41 percent in investments in 2011, compared to the previous year (from 204.395 billion Php in 2010 to P288.34 billion Php in 2011

Information technology parks located in the National Capital Region may serve only as locations for service-type activities, with no manufacturing operations. PEZA defines information technology as a collective term for various technologies involved in processing and transmitting information, which include computing, multimedia, telecommunications, and microelectronics.

Bases Conversion Development Authority

The ecozones located inside former U.S. military bases are independent of PEZA and subject to the Bases Conversion Development Authority. The principal converted bases are the Subic Bay Freeport Zone (Subic Bay, Zambales) and the Clark Special Economic Zone (Angeles City, Pampanga). Other converted properties include John Hay Special Economic Zone; Poro Point Special Economic and Freeport Zone; and, Morong Special Economic Zone (Bataan).

These ecozones offer incentives comparable to those offered by PEZA. Additionally, both Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities.

Other Zones

The Phividec Industrial Estate (Misamis Oriental, Mindanao) is governed by the Phividec Industrial Authority, a government-owned and controlled corporation. Incentives available to investors are comparable to those offered by PEZA and also include special low rates for land lease.

Two lesser-known ecozones are the Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) and the Cagayan Special Economic Zone and Freeport (Santa Ana, Cagayan Province). The incentives available to investors in these zones are very similar to PEZA incentives but administered independently. In addition to offering export incentives, the Cagayan Economic Zone Authority is also authorized by law to grant gaming licenses.

Foreign Direct Investment Statistics

The Philippine SEC, BOI, National Economic and Development Authority (NEDA), and the Central Bank each generate direct investment statistics. SEC, BOI and NEDA record investment approvals. The Central Bank records actual investments based on the balance of payments methodology, readily available in U.S. dollar terms. Central Bank data are widely used as a reasonably reliable indicator of foreign investment stock and foreign investment flows.

The figures in Table 1 below refer to foreign direct investment (FDI) stock reported by the Central Bank, based on balance of payments methodology. Disaggregation of net FDI flows by country and by industry is presented in Tables 2 and 3, respectively. Table 4 provides a list of top foreign investors in the Philippines, using the latest available published information from the SEC. Some figures indicated in earlier Investment Climate Statement were revised to reflect updated Central Bank data.


Table 1: Foreign Direct Investment Stock (US Millions)

         
 

2007

2008

2009

2010

FDI Stock

20,463

21,746

22,931

26,319

FDI Stock as % of GDP

13.7

12.5

13.6

13.2

Source: Philippine Central Bank (Bangko Sentral ng Pilipinas)


Table 2: Net Foreign Direct Investment Flows By Investor Country (US Millions)*

         
 

2007

2008

2009

2010

Japan

824.37

59.39

626.09

243.38

Hong Kong

13.29

144.72

408.2

215.55

United States

655.91

220.07

714.90

205.51

Singapore

-2.39

130.57

16.42

41.74

Republic of Korea

14.46

31.20

14.48

7.24

Germany

16.03

18.30

2.87

7.03

Switzerland

1.95

1.17

2.00

6.69

Taiwan/ROC

0.09

6.51

1.34

0.40

Malaysia

5.96

0.99

2.22

0.28

Denmark

-0.01

0.36

0.17

0.12

China

-0.12

-0.16

-3.30

-0.05

United Kingdom

74.77

298.17

0.45

-25.56

Netherlands

-3.38

170.74

-21.75

-110.69

*Ranked by 2010 flows

Source: Bangko Sentral ng Pilipinas (Central Bank)


Table 3: Net Foreign Direct Investment Flows by Industry/Sector (US Millions)

         
 

2007

2008

2009

2010

Manufacturing

548.64

311.87

887.79

-2.04

Electricity, Gas, and Water

699.18

224.73

389.58

-14.82

Financial Intermediation

-22.61

215.70

237.45

46.61

Real Estate

137.66

158.27

89.13

181.52

Construction

50.36

171.85

79.15

-1.57

Services

42.33

-11.51

18.03

112.34

Hotels/Resto

2.60

5.65

14.86

105.67

Transport, Storage, and Communications

12.78

-27.02

7.26

106.31

Mining and Quarrying

154.56

154.88

6.19

277.50

Trade/Commerce

4.59

22.23

4.21

21.47

Agriculture

3.71

0.67

0.17

1.72

Source: Bangko Sentral ng Pilipinas (Central Bank)

Table 4: 2010 Top Foreign Investors in the Philippines

Name of Company

Country of Origin

Equity (est.) (US Millions)

The AES Corporation

United States

930.0

SunPower Philippines Manufacturing Ltd.

United States

837.23

Texas Instruments (Philippines), Inc.

United States

800.51

Amkor Technology Philippines, Inc.

United States

558.95

Coral Bay Nickel Corp.

Japan

514.3

Rohm Electronics Philippines, Inc.

Japan

453.38

Kepco Ilijan Corp.

South Korea

437.22

Republic Cement Corp.

France

422.3

Dole Philippines, Inc.

United States

359.46

TeaM Energy Corp.

Japan

347.49

Chevron Malampaya LLC

United States

332.41

Source of Data: Philippine Securities and Exchange Commission; Business World’s Top 1,000 Corporations in the Philippines, Volume 25 (BusinessWorld Publishing Corporation, 2011); Company reports



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