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U.S. Department of State

Diplomacy in Action

2013 Investment Climate Statement - The Philippines


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
March 2013
Report
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Openness To, and Restrictions Upon, Foreign Investment

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) (http://www.peza.gov.ph/). 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, inadequate public investment in social and physical infrastructure, 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

2012

105 of 176 (34)

Heritage Economic Freedom

2013

97 of 177 (58.2)

World Bank Doing Business

2013

138 of 185

MCC Gov’t Effectiveness

2013

91%

MCC Rule of Law

2013

41%

MCC Control of Corruption

2013

19%

MCC Fiscal Policy

2013

73%

MCC Trade Policy

2013

52%

MCC Regulatory Quality

2013

63%

MCC Business Start Up

2013

50%

MCC Land Rights Access

2013

61%

MCC Natural Resource Protection

2013

66%

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) (http://www.sec.gov.ph/) and sole proprietorships must be registered with the Bureau of Trade Regulation and Consumer Protection (BTRCP) in the Department of Trade and Industry (DTI) (http://www.dti.gov.ph/). Investors generally report that the Philippine bureaucracy is nondiscriminatory but slow to process these requirements. To streamline business registration process, the GPH is implementing the Philippine Business Registry (PBR), a single, web-based business registration system that integrates business registration processes now handled by five government agencies.

The 1991 Foreign Investment Act (FIA) requires the GPH to publish the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted or limited. The GPH is required by the FIA to update the FINL every two years. The ninth FINL was published in October 2012. The broad scope of the FINL contributes to the poor Philippine record in attracting foreign investment, particularly compared to its ASEAN counterparts. The FINL is comprised of two parts. Part A details sectors in which foreign equity participation is restricted by the Constitution or laws. Part B lists areas in which foreign ownership is limited (generally to 40%) for reasons of national security, defense, public health, morals, and the protection of small and medium enterprises (SMEs). There is no procedural mechanism to request a waiver from the negative lists.

The 1987 Constitution prohibits foreign nationals from owning land in the Philippines. The Investors' Lease Act of 1994 (ILA) allows foreign investors to lease a contiguous parcel up to 1000 hectares for 50 years, renewable once for 25 additional years. The 2003 Dual-Citizenship Act, which allows natural-born Filipinos who became naturalized citizens of a foreign country to re-acquire Philippine citizenship, gave Philippine dual citizens full rights to possess land. Ownership deeds continue to be difficult to establish and are poorly reported and regulated. The court system is slow to resolve land disputes.

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, real estate services, respiratory therapy, and psychology. Companies that register with the Board of Investments (BOI) (http://www.boi.gov.ph/) may employ foreign nationals in supervisory, technical, or advisory positions for five years from the date of registration, extendable by BOI upon request. Top positions and elective officers of majority foreign-owned BOI-registered enterprises (i.e., president, general manager, and treasurer, or their equivalents) are exempt from the five-year limitation. 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.

Foreign investment is highly restricted in the retail trade industry. Retail trade enterprises with paid-up capital of less than US$2.5 million, or less than US$250,000 for retailers of luxury goods, are reserved for Filipinos. Foreign investors are prohibited from owning stock in lending, financing or investment companies unless the investor’s home country affords the same reciprocal rights to Filipino investors. Foreign ownership in enterprises engaged in financing and securities underwriting that are regulated by the SEC is limited to 60%. Changes in the ninth FINL cap foreign ownership at 49% for lending companies.

Other specific limits on foreign investment include: private radio communications networks (20%); employee recruitment and locally-funded public works construction and repair (25%); advertising agencies (30%); natural resource exploration, development, and utilization (40%, with exceptions); educational institutions (40%); operation and management of public utilities (40%); operation of commercial deep sea fishing vessels (40%); Philippine government procurement contracts (40% for supply of goods and commodities; 25% for construction of locally-funded public works, with some exceptions); adjustment companies (40%); operations of Build-Operate-Transfer (BOT) projects in public utilities (40%); ownership of private lands (40%); rice and corn processing (40%, with some exceptions); financing companies and investment houses (60%).

The Philippines limits foreign ownership for reasons of national security, defense, and public health. Industries such as the manufacturing of explosives, firearms, and military hardware, as well as the operation of massage clinics, are generally limited to 40% foreign equity. Foreign ownership in SMEs is also limited to 40% in non-export firms. The SEC expects to release implementing rules and regulations in 2013 that will enable it to monitor, investigate, and impose penalties on corporations that do not comply with foreign ownership equity requirements of sectors covered by the FINL.

Foreign ownership in the banking sector is restricted by the 1994 Foreign Bank Liberalization Act. The Act limits at 10 the number of new foreign banks that could open full-service branches in the Philippines, and those licenses have already been issued. The banks are limited to six branch offices, each. In addition, each of the four foreign banks operating in the Philippines prior to 1948 is allowed to open up to six branches each. Publicly-listed foreign banks with national or global rankings may own up to 60% of a locally-incorporated subsidiary. Foreign banks that do not meet these requirements are limited to a 40% stake. Since 1999, the Bangko Sentral ng Pilipinas (Philippine Central Bank) (http://www.bsp.gov.ph/) has imposed a moratorium on the issuance of new bank licenses. Micro-finance institutions are exempt. Philippine law also requires that majority Filipino-owned banks must control at least 70% of the total banking resources in the country.

The insurance industry is open to 100% foreign ownership, subject to a sliding scale of minimum capital requirements depending on the level of foreign equity. As a general rule, government agencies, including government-owned and controlled corporations, must secure insurance protection from the state-owned Government Service Insurance System (GSIS) (http://www.gsis.gov.ph/). This policy extends to the government’s interests in projects implemented under the BOT law, but BOT regulations also allow proponents/operators to secure bid security and performance bonds from surety or insurance companies accredited by the Philippine Insurance Commission.

Offshore companies not incorporated in the Philippines may underwrite Philippine issues for foreign markets but not the domestic market. Current law also restricts membership on boards of directors for mutual fund companies to Philippine citizens.

The Lending Company Regulation Act of 2007, which established a regulatory framework for credit enterprises that do not clearly fall under the scope of existing laws, requires majority Philippine ownership for such enterprises.

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

In July 2012, President Benigno Aquino III issued an executive order closing 78 areas to new mining. The order imposes a moratorium on the new mining agreements until the Philippine Congress defines a revenue-sharing scheme. It additionally confines small-scale mining to designated areas, requires the government to review and renegotiate existing contracts, requires reserves to be rewarded through a public bidding process, provides state ownership of mine wastes upon the expiration of a contract, creates the Mining Industry Coordinating Council to implement reforms, and bans the use of mercury in small-scale mining.

The BOT Law provides the legal framework for private sector participation in large infrastructure projects. Franchises in public utilities – railways, urban rail mass transit systems, electricity and water distribution, and telephone systems – may only be awarded to enterprises with at least 60% Philippine ownership. While U.S. firms have won contracts under the law, mostly in the power generation sector, more active foreign participation under BOT is often frustrated by legal and administrative 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 guarantees and other support provided by the government.

The Aquino administration has established the “Public Private Partnership (PPP) Center” (http://ppp.gov.ph/) to promote transparency and oversee project development and approval. Resources for right-of-way and land acquisition have been allocated and single borrower (SB) limits for Philippine banks that finance PPP arrangements have been relaxed. PPP infrastructure projects costing more than PhP1 billion (about US$25 million) undertaken through contractual arrangements authorized under the BOT Law may register with BOI to be entitled to incentives under the Omnibus Investment Code.

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 provide 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 or other foreign currency 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. To curb foreign exchange speculation and temper the Peso’s rapid appreciation from surges in foreign portfolio capital, the monetary authority announced in late 2012 that it would impose ceilings on non-deliverable forward transactions relative to bank’s capital.

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 Philippine government 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. Since the implementation of the BOT law in 1990, some BOT contractors in the energy sector, including U.S. firms, have reported disputes with local government units (LGUs) on real property tax assessments. Some LGUs initiated auction and/or confiscation proceedings on the contractors’ assets, which the companies have challenged in the courts.

Dispute Settlement

Many foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive for investment. Investment disputes can take years to resolve. While the judiciary is constitutionally independent of the executive and legislative branches, it faces many problems including understaffing and corruption. In addition, a number of Philippine government actions in recent years have raised questions over the sanctity of contracts in the Philippines. High-profile cases include the government-initiated review and renegotiation of contracts with independent power producers, court decisions voiding disadvantageous and allegedly tainted BOT agreements, and challenges to foreign participation in large-scale natural resource exploration activities. The GPH has received foreign donor support for judicial reform projects through the Asian Development Bank, the World Bank, and USAID.

In July 2012, President Aquino signed an executive order requiring all government contracts involving PPP, BOT, and joint ventures with the private sector, to include provisions for alternative dispute resolution. According to the order, the goal is to make resolving disputes less expensive, tedious, and time-consuming, particularly for large-scale capital-intensive infrastructure and development contracts.

The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). However, Philippine courts have shown a reluctance to abide by the arbitral process or its resulting decisions. Enforcing an arbitral award in the Philippines can take years.

In July 2010, the Philippine Congress passed a new bankruptcy and insolvency law that provides a more predictable framework for the rehabilitation and liquidation of distressed companies. 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 law recognizes cross-border insolvency proceedings in accordance with the United Nations Center for International Trade and Development’s Model Law on Cross-Border Insolvency, allowing the courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines. Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases. According to the International Finance Corporation’s 2013 Ease of Doing Business report, the Philippines ranks 65th of the 85 economies studied in resolving insolvency and bankruptcy cases.

Performance Requirements and Incentives

Performance Requirements

Performance requirements are established by the BOI for investors who are granted incentives and are usually based on the approved project proposal. BOI-registered companies provide a projected yearly production schedule and export performance targets. Registered projects must maintain at least 25% of total project cost in the form of equity and comply with the 25% local value-added sourcing requirement. As of March 2010, foreign retailers are no longer subject to local sourcing requirements.

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% Filipino-owned and infrastructure services from enterprises with at least 75% 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% 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 US$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

According to the Senate Tax Study and Research Office, there are about 180 fiscal incentives laws and issuances in the Philippines as of December 2012. President Aquino 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.

Every year, the Investment Priorities Plan (IPP) outlines the list of investment areas entitled to incentives. The 2012 IPP retains priority investment areas such as agriculture/agribusiness and fisheries; infrastructure (includes PPP projects); motor vehicles; green projects; research and development; disaster prevention, mitigation and recovery; creative industries (includes business process outsourcing and IT and IT-enabled services); shipbuilding; mass housing; energy; and strategic projects. Iron and steel and hospital/medical services were newly added to the 2012 plan.

Screening for the legitimacy and regulatory compliance of companies seeking investment incentives appears to be nondiscriminatory, but the application process can be complicated. Incentives granted by the BOI often depend on action by other agencies such as the Department of Finance (DOF) (http://www.dof.gov.ph/), including its Bureau of Customs (BOC) (http://customs.gov.ph/). Significant incentives offered to BOI-registered companies currently include a 4-6 year income tax holiday (ITH) (depending on whether the project is non-pioneer or pioneer), which may be extended for another three years upon compliance of certain criteria, with the aggregate benefit not to exceed eight years; additional deduction from taxable income of 50% of the wages corresponding to the increment in number of direct labor as against the previous year for the first five years from date of registration, but not simultaneously with ITH; duty-free importation of capital equipment, spare parts, and accessories for five years from date of registration; tax and duty exemptions on imported breeding stocks and genetic materials for ten years; 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; and the simplification of customs procedures. A project study is required when applying for BOI registration and enterprises must adhere with the representations they submitted to the Board during its application. Registered projects must maintain the 75/25 debt-equity ratio.

To encourage wider distribution of industry across the Philippines, BOI-registered enterprises that locate in less-developed areas are entitled to "pioneer" incentives. Such enterprises can deduct from taxable income 100% of the cost of the necessary and major infrastructure works. BOI-registered enterprises may also deduct from its taxable income 100% of its incremental labor expenses for five years, which is double the rate that is allowed for BOI-registered projects not located in less-developed areas.

Incentives also apply specifically to export-oriented firms. An enterprise with more than 40% foreign equity that exports at least 70% of its production may be entitled to incentives even if the activity is not listed in the IPP. Aside from ITH and duty-free importation of capital equipment, registered enterprises may also be entitled to tax credit for taxes and duties paid on imported raw materials used in the processing of export products for ten years and may have exemption from taxes and duties on imported spare parts, and access to customs bonded manufacturing warehouses.

Generally, the export commitment for export-oriented BOI-registered enterprises is 50% of total production if Filipino-owned (i.e. with 60% or more Filipino equity) and 70% if foreign-owned (i.e. less than 60% Filipino equity). BOI-registered, foreign-owned firms must divest to the 40% level within 30 years from registration date or within a longer period determined by BOI. BOI-registered, foreign-owned firms that export 100% of production are exempt from this requirement.

Export-oriented firms with at least 50% 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% 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 centers for supervision, communications, or coordination. Incentives 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); 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 are subject to the standard 12% value-added tax, applicable branch profits remittance tax, and 10% corporate income tax. Foreign executives working at regional operating headquarters may import personal and household effects duty free and may obtain immigration benefits. Eligible multinationals establishing regional operating headquarters must spend at least US$200,000 yearly to cover operations.

Multinationals entities that establish regional warehouses for the supply of spare parts, manufactured components, or raw materials for foreign markets also enjoy incentives on imports that are re-exported, including exemption 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, but there is no implementing law. The Aquino administration has prioritized the enactment of an anti-trust law. Congress is considering several anti-trust bills. In June 2011, President Aquino issued an executive order designating the Department of Justice (DOJ) as the government’s competition authority until anti-trust legislation is passed.

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) (http://www.pagcor.ph/) and runs lottery operations through the Philippine Charity Sweepstakes Office (PCSO) (http://www.pcso.gov.ph/).

Generally, only the state-owned GSIS may insure government-funded projects. BOT projects and partially privatized government corporations must meet GSIS insurance and bonding requirements in proportion to Philippine government interests. In addition, government funds are usually deposited in the Central Bank or in government-owned banks.

Protection of Property Rights

The Philippines has established procedures for registering claims on property, but delays and uncertainty caused by the judicial system remain a problem. 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 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. Furthermore, trademark infringement of a variety of product lines remains prevalent.

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. The United States announced its Patent Prosecution Highway (PPH) partnership with the Philippines starting in January 2013. The PPH is a global program that streamlines the examination process for patent applications filed in participating countries. However, the Cheaper Medicines Act limits patent protection for pharmaceuticals and significantly liberalizes the grounds for the compulsory licensing of pharmaceuticals. The Philippine Intellectual Property Office (IPOPHL) (http://www.ipophil.gov.ph/) reported it has not received any application for licensing since the law passed in 2008.

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. In July 2012, the Philippines acceded 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, legislation that would fully implement the World Intellectual Property Organization (WIPO) Copyright and Performances and Phonograms treaties has been ratified by the Philippine Congress after being pending for more than a decade. Once enacted, a copyright bureau will be created under the IPOPHL to handle copyright matters. Philippine law also protects computer software as 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, newspapers, and periodicals are compatible with the Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS). Further, the enactment of the Anti-Camcording Act in 2010 provided stringent penalties for illegal camcording of motion pictures in theaters. The Act has reportedly helped to significantly reduce unlawful camcording incidents in the Philippines.

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 IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing. In June 2011, IPOPHL launched its IPR Arbitration and Mediation Center to receive and facilitate IP disputes presented to the center for review, resolution, and settlement through mediation and arbitral proceedings. Although intellectual property owners have sometimes used the IPOPHL's administrative complaint system as an alternative to the judicial 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) (http://www.omb.gov.ph/), and several LGUs have resulted in 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. Convicted intellectual property violators rarely spend time in jail, since the six-year penalty enables them to apply for probation immediately under Philippine law. As of November 2012, IPOPHL reported that 161 out of 231 IP violations cases filed in their office since 2001 have been dismissed, while the latest statistics on court convictions on IP violations are not yet available as of the reporting period.

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) (http://www.dfa.gov.ph/), 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 equities and money market instruments. They may also invest in bank deposits, although foreign exchange purchases from banks to remit profits and repatriate capital for Peso time deposits with maturities of under 90 days face some restrictions.

The securities market is growing but remains dominated by government bills/bonds. Nevertheless, private sector issuances have been steadily increasing and now constitute an important source of financing for major Philippine enterprises. Between June 2011 and October 2012, Fitch, Standard & Poor’s, and Moody’s upgraded the Philippines’ sovereign credit ratings to one notch below investment grade, contributing to robust expansion of the Philippine capital market.

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.

There are less than 260 listed firms and the ten most actively-traded companies account for nearly 40% of trading value and about 35% of 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 November 2010, the PSE reinstated a policy for listed companies to maintain at least 10% public ownership of their issued and outstanding shares to promote greater market liquidity and fairer and more transparent stock pricing. Listed firms were given up to the end of 2012 to comply with the minimum public float rule or face delisting/suspension and higher taxes.

Hostile takeovers are not common because most companies’ 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% 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 2012, the five largest commercial banks in the Philippines represented 47% of total commercial banking system resources, with estimated total assets the equivalent of about US$162 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 18.4% on a consolidated basis as of March 2012, well above the 10% statutory limit and the 8% internationally-accepted benchmark. Time-bound fiscal and regulatory incentives to encourage the sale of non-performing assets to private special purpose vehicles and 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 2012, non-performing loans and non-performing asset ratios of commercial banks were estimated at 2.1% and 2.6%, respectively.

The General Banking Law of 2000 paved the way for the Philippine banking system to phase in internationally accepted, risk-based capital adequacy standards. Since 2011, the Central Bank has broadly revised its risk-based capital framework in step with adjustments in the Basel capital adequacy rules. In July 2007, the Philippines adopted the Basel 2 capital adequacy framework for commercial banks and their bank/quasi-bank subsidiaries, expanding coverage from credit and market risks to include operational risks and enhancing the risk-weighting framework and disclosure of capital adequacy and risk management systems. The Central Bank began the staggered adoption of Basel 3 capital adequacy rules for commercial banks in January 2011. Full implementation is scheduled for January 2014 – four years ahead of the timeline provided by the Basel Committee on Banking Supervision.

Thrift, rural, and cooperative banks that are not subsidiaries of commercial banks are covered by a modified, risk-based capital framework consisting of Basel 1 with some elements of Basel 2, such as new capital adequacy requirements for operational risks and enhanced disclosure.

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 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. Banks must set aside 25% of loanable funds for agricultural credit, with at least 10% 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 10% of their loans for micro-, small- and medium-sized (MSME) borrowers, 80% 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 bank branches to comply. To help incentivize lending to MSMEs with limited or non-existing collateral to guarantee their lending, the Philippine government seeks to enhance MSME access to finance through the Central Credit Information Corporation (CCIC). It would operationalize a system that collects and disseminates fair and accurate information about the track record of borrowers, as well as the credit activities of all entities participating in the financial system. The legal and regulatory framework for a centralized credit information system is in place but not yet operational. The Credit Information System Act was adopted in October 2008 (Republic Act No. 9510). The implementing rules and regulations were adopted in May 2009.

Direct lending by non-financial government agencies is limited to the Department of Social Welfare and Development (DSWD), 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 Philippine government has been working to address “strategic deficiencies” that pose potential risks to the international financial system, as identified by the Asia Pacific Group on Money Laundering. In June 2012, the FATF moved the Philippines from its “dark gray” to “gray” list following the enactment of key laws allowing ex parte inquiry into bank deposits/investments and making terrorist financing a stand-alone crime. Legislation to address remaining major deficiencies is pending before the Philippine Congress. Bills include broadening the definition of the crime of money laundering and expanding predicate crimes and covered institutions. President Aquino has certified the matter as urgent.

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 started to fully adopt the Philippine Financial Reporting Standards patterned after the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). Effective January 1, 2010, the Philippines also adopted IASB-based 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 PhP3 million to PhP350 million (about US$75,000 to US$8.75 million) or liabilities from PhP3 million to PhP250 million (about US$75,000 to US$6.25 million).

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. Financial statements are examined by independent auditors in accordance with the Philippine Standards on Auditing, which are based on international auditing standards. 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 its actions on any material external audit findings within five days of receipt. Material findings include fraud or error, losses or potential losses aggregating 10% or more of a company’s consolidated 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.

Outward Investments

There are generally no restrictions on outward investments by Philippine residents, although foreign exchange purchases from banks and their foreign exchange subsidiaries/affiliates above US$60 million per investor or per fund per year require prior approval from the Central Bank. As part of the US$60 million ceiling, residents may also purchase foreign exchange from banks and their foreign exchange subsidiaries/affiliates to invest in foreign currency bonds/notes, as well as Peso-denominated securities for settlement in foreign currency, issued offshore by the Philippine government or resident entities.

Qualified investors, such as mutual funds, pension or retirement funds, investment trust funds, and insurance companies may apply with the Central Bank for higher annual outward investment limits. All outward investments of banks in subsidiaries and affiliates abroad require prior Central Bank approval.

Foreign exchange earnings and divestment proceeds from outward investments that were funded with foreign exchange purchased from banks or their subsidiary/affiliate foreign exchange corporations are not required to be inwardly remitted and sold for Pesos.

Competition from State-Owned Enterprises

Private and state-owned enterprises generally compete equally, with some clear exceptions. In 2002, the governmental National Food Authority (NFA) (http://www.nfa.gov.ph/) allowed the private sector to import rice. Though, in 2012, the GPH ceded about 83% of all rice importation to the private sector, including minimum access volume (MAV) and country specific quota (CSQ) imports. With limited exceptions, only the state-owned GSIS may provide coverage for the government’s insurance risks and interests, including those in BOT projects and privatized government corporations, at least in proportion to the Philippine government’s interest.

The government has also intervened to directly cap or control pricing in some additional private markets. During heavy typhoons and flooding, the Philippine government may impose 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 DOF. Apart from restrictions under the FINL, 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 required to sell 70% of the government-owned National Power Corporation’s (NPC) generating assets and to transfer 70% of NPC-Independent Power Producer contracts to private companies.

The Philippine government has opened access and retail competition through several measures, including unbundling rates, removing cross-subsidies, establishing the Wholesale Electricity Spot Market, and privatizing 92% of the NPC’s generation assets as of 2012.

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 responses to CSR programs among employees and within local communities. Many CSR programs focus on poverty alleviation efforts, promoting of the environment, health initiatives, and education. Under the 2012 IPP, registered enterprises are encouraged to undertake sustainable CSR projects in the locality where the projects are implemented. In some cases, the Philippine government 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. It has issued a travel warning at http://travel.state.gov/travel/cis_pa_tw/tw/tw_2190.html to U.S. citizens contemplating travel to the Philippines. 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 found at http://travelregistration.state.gov/.

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

On May 10, 2010, approximately 75% 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. After years of negotiations, during which both sides generally adhered to a cease-fire, the government and the MILF signed a Framework Agreement in October 2012 that appears to outline the basis for a durable solution to the longstanding conflict between the parties, though much work remains to be done. As of January 2013, the parties continued to negotiate the modalities for implementing a final peace accord.

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. The National Democratic Front (NDF), an umbrella organization that includes the Communist Party and its allies, has engaged in intermittent peace talks with the Philippine government. The NDF 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 long-standing problem in the Philippines. Recent government efforts have improved the country’s ranking in Transparency International’s Corruption Perceptions Index from 129 in 2011 to 105 (out of 176 economies) in 2012. Nevertheless, corruption was still ranked as the most problematic factor for doing business in the 2012-2013 Global Competitiveness Report.

The current administration continues to implement the anti-corruption reforms outlined in the Philippine Development Plan 2011-2016. Its 2012-2016 Good Governance and Anti-Corruption Cluster Plan further identifies specific measures to curb corruption through greater transparency and accountability in government transactions. Since President Aquino took office in 2010, corruption charges have been filed against several high-profile public officials. In May 2012, the Philippine Senate removed the Chief Justice of the Supreme Court after he was impeached on charges of failing to fulfill wealth disclosure obligations. Efforts to reign in corruption have, in general, improved public perception, though achieving tangible change remains a serious challenge to the Aquino administration.

The Philippines is not a signatory to the OECD Anti-Bribery Convention. It ratified the UN Convention against Corruption in 2003. The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman (http://www.ombudsman.gov.ph/) investigates and prosecutes cases of alleged graft and corruption involving public officials. Cases against high-ranking officials are brought before the special anti-corruption court, the "Sandiganbayan”. Cases against low-ranking officials are filed before regional trial courts. Several bills supporting anti-corruption efforts are currently filed in Congress, including freedom of information rights, whistle-blower protection, and strengthening the country’s witness protection program.

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 2012, the Philippines had signed bilateral investment agreements with 40 partner countries (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). It has four regional free trade agreements that include an investment chapter (ASEAN Comprehensive Investment Agreement; ASEAN-Australia-New Zealand Free Trade Agreement; Agreement on Investment under the Framework Agreement on Comprehensive Economic Cooperation among Governments of ASEAN and Republic of Korea; and Agreement on Investment under the Framework Agreement on Comprehensive Economic Cooperation among Governments of ASEAN and China).

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 purposes 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-United Arab Emirates tax treaty. Accordingly, a 10% tax rate applies with respect to most royalties. A 15% tax applies on the remittance of profits by Philippine branches of U.S. companies to their head offices and dividends remitted by Philippine subsidiaries of U.S. companies to their parent companies.

Philippine courts reportedly have denied the application of the preferential tax treaty rates on dividends, interests, and royalties paid or payable to U.S. residents. An entity must obtain a tax treaty relief ruling from the BIR 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% 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. 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 partial or full liquidation should be exempt under the Philippines-Unites States Tax Treaty.

A recent BIR ruling also states that a liquidating company and its shareholders are taxable upon distribution of residual assets, but the ruling does not clarify which taxes apply to the liquidation company.

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% 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 common issues in tax assessments and are 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 (OPIC) can provide U.S. investors with political risk insurance against risks of expropriation, inconvertibility and transfer, and political violence, pursuant to the U.S.-Philippines Investment Incentive Agreement that enables OPIC to support investment in the country. 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 and motivated. In addition, the Philippine labor force possesses strong English language skills. As of October 2012, the Philippine labor force was estimated at 40.4 million, with an unemployment rate at 7%. 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 US$2.22 and US$3.74 per hour (Source: Business Process Association of the Philippines). 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 PhP446 (approximately US$10.37), 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 PhP199 (US$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) (http://www.dole.gov.ph/) 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 one strike involving 20 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 2012, there were 135 registered labor federations and 16,647 private sector unions. The 1.38 million union members represented approximately 3.4% of the total workforce of 40.4 million. Mainstream union federations typically enjoy good working relationships with employers.

Special economic zones or 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.

As of December 2012, the Philippine House had passed legislation further strengthening workers’ right to self-organization, and a counterpart measure is pending in the Senate. Two other DOLE priority measures, the Mediation Conciliation Bill and the Tripartism Bill, are expected to obtain bicameral conference approval in January 2013. In January 2012, the DOLE issued the implementing rules and regulations for legislation which allows the employment of and gives protection to night workers, especially female night workers.

Congress passed the Kasambahay Bill in September 2012, which provides more benefits and protection to domestic workers. The bill is awaiting the President’s signature. This legislation came on the heels of the Senate ratification of the ILO Convention on Decent Work for Domestic Workers and the Maritime Labor Convention, the “bill of rights” for almost 2.5 million household workers and 400,000 seafarers worldwide.

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 an income tax holiday for a maximum of eight years; a 5% flat tax rate on gross income in lieu of all national and local taxes, after expiration of the income tax holiday; tax- and duty-free importation of capital equipment, raw materials, spare parts, and supplies; domestic sales allowance equivalent to 30% of total export sales; zero value added tax (VAT) rate on local purchases, including telecommunication, power, and water bills; employment of foreign nationals; special visas for foreign investors and immediate family members; exemption from local business taxes and fees; and simplified import and export procedures.

Philippine Economic Zone Authority (PEZA)

There are 273 operating ecozones in PEZA, composed primarily of manufacturing, IT parks and centers, tourism, medical tourism parks, and agro-industrial ecozones. Of these 273 operating ecozones, PEZA manages three government-owned export-processing zones (Mactan, Baguio, and Cavite) and administers incentives to enterprises located in the other 270 privately-owned and operated ecozones. Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-industrial enterprise with PEZA, provided that the enterprise physically locates its activity inside any of the proclaimed ecozones. PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority. As of October 2012, PEZA reported investments amounting to PhP137.9 billion (about US$3.39 billion), 10.30% higher than the PhP125.104 billion (about US$3.07 billion) for the same period in 2011.

Information technology parks or centers house PEZA-registered enterprises that export IT-enabled activities such as software development, multimedia graphics, animation, engineering and architectural designs, IT research and development, data encoding, transcribing, call centers, and other business process outsourcing (BPO) and knowledge process outsourcing (KPO) activities. Information technology parks or centers are not allowed to host manufacturing activities.

Bases Conversion Development Authority

The ecozones located inside former U.S. military bases are independent of PEZA and subject to the Bases Conversion and Development Authority (BCDA) (http://www.bcda.gov.ph/). BCDA-administered zones include the Clark Freeport Zone (Angeles City, Pampanga), the John Hay Special Economic Zone (Baguio), the Poro Point Freeport Zone (La Union), and, the Bataan Technology Park (Morong, Bataan). The BCDA also oversees the Subic Bay Freeport Zone (Subic Bay, Zambales).

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 are administered independently. In addition to offering export incentives, the Cagayan Economic Zone Authority is authorized by law to grant gaming licenses.

Foreign Direct Investment Statistics

The Philippine SEC, BOI, National Economic and Development Authority (NEDA) (http://www.neda.gov.ph/), 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. 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)

 

2008

2009

2010

2011p

FDI Stock

21,746

22,931

25,896

28,230

FDI Stock as % of GDP

12.5

13.6

12.9

12.5

p – Preliminary

Source: Bangko Sentral ng Pilipinas (Central Bank)

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

 

2008

2009

2010

2011p

Japan

59.39

626.09

246.53

355.18

United States

220.07

714.90

233.51

230.74

Hong Kong

144.72

408.2

215.55

98.56

Malaysia

0.99

2.22

0.28

32.44

Republic of Korea

31.20

14.48

7.24

20.58

Singapore

130.57

16.42

41.74

15.63

Taiwan/ROC

6.51

1.34

17.40

11.20

Germany

18.30

2.87

17.95

6.57

Switzerland

1.17

2.00

16.04

3.16

Australia and New Zealand

1.20

0.11

1.21

1.55

China

-0.16

-3.30

-0.05

0.79

Denmark

0.36

0.17

0.12

0.01

United Kingdom

298.17

0.45

-20.98

-22.22

Netherlands

170.74

-21.75

-1,434.99

-294.36

*Ranked by 2011 flows

p – Preliminary

Source: Bangko Sentral ng Pilipinas (Central Bank)

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

 

2010

2011p

Manufacturing

-1275.19

102.33

Electricity, Gas, Steam and Air Conditioning Supply

-14.82

-22.55

Financial and Insurance Activities

59.62

211.61

Real Estate

181.53

111.64

Construction

-1.57

28.07

Wholesale and Retail Trade: Repair of Motor Vehicles and Motorcycles

32.39

30.64

Accommodation and Food Service Activities

105.67

2.88

Transportation and Storage

103.90

0.84

Mining and Quarrying

282.08

-240.43

Information and Communication

2.41

261.85

Agriculture, Forestry and Fishing

2.37

3.97

Water Supply: Sewerage, Waste Management and Remediation Activities

0.00

0.00

Professional, Scientific and Technical Activities

-0.10

20.91

Administrative and Support Service Activities

2.05

8.91

Public Administration and Defense: Compulsory Social Security

0.00

0.00

Education

0.68

1.07

Human Health and Social Work Activities

0.00

-14.85

Arts, Entertainment and Recreation

104.14

3.60

Other Service Activities

5.57

0.91

Activities of Households as Employers; Undifferentiated Goods and Services

0.00

0.00

Activities of Extraterritorial Organizations and Bodies

0.00

0.00

Others

13.27

1.59

p – Preliminary

Source: Bangko Sentral ng Pilipinas (Central Bank)

Source of Data: Philippine Securities and Exchange Commission; Business World’s Top 1,000 Corporations in the Philippines, Volume 26 (BusinessWorld Publishing Corporation, 2012); Company reports



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