The Philippines seeks foreign investment to generate employment, promote economic development, and contribute to inclusive and sustained growth. The Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA) are the country’s lead investment promotion agencies (IPAs). They provide incentives and special investment packages to investors. Noteworthy advantages of the Philippine investment landscape include free trade zones, including economic zones, and a large, educated, English-speaking, and relatively low-cost Filipino workforce. Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and the Foreign Investment Act (see details under Limits on Foreign Control section). Additional information regarding investment policies and incentives are available on the BOI (http://boi.gov.ph) and PEZA (http://www.peza.gov.ph) websites.

Restrictions on foreign ownership, inadequate public investment in infrastructure, and lack of transparency in procurement tenders hinder foreign investment. The Philippines’ regulatory regime remains ambiguous in many sectors of the economy, and corruption is a significant problem. Large, family-owned conglomerates, including San Miguel, Ayala, Aboitiz Equity Ventures, and SM Investments, dominate the economic landscape, crowding out other smaller businesses.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares (2,471 acres) for a maximum of 75 years. Dual citizens are permitted to own land.

The 1991 Foreign Investment Act (FIA) requires the publishing every two years of the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted. The latest FINL was released in October 2018. The FINL bans foreign ownership/participation in the following investment activities: mass media (except recording and internet businesses); small-scale mining; private security agencies; utilization of marine resources, including the small-scale use of natural resources in rivers, lakes, and lagoons; cooperatives; cockpits; manufacturing of firecrackers and pyrotechnic devices; and manufacturing, repair, stockpiling and/or distribution of nuclear, biological, chemical and radiological weapons, and anti-personnel mines. With the exception of the practices of law, radiologic and x-ray technology, and marine deck and marine engine officers, other laws and regulations on professions allow foreigners to practice in the Philippines if their country permits reciprocity for Philippine citizens, these include medicine, pharmacy, nursing, dentistry, accountancy, architecture, engineering, criminology, teaching, chemistry, environmental planning, geology, forestry, interior design, landscape architecture, and customs brokerage. In practice, however, language exams, onerous registration processes, and other barriers prevent this from taking place.

The Philippines limits foreign ownership to 40 percent in the manufacturing of explosives, firearms, and military hardware. Other areas that carry varying foreign ownership ceilings include the following: private radio communication networks (40 percent); private employee recruitment firms (25 percent); advertising agencies (30 percent); natural resource exploration, development, and utilization (40 percent, with exceptions); educational institutions (40 percent, with some exceptions); 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); contracts for the construction and repair of locally funded public works (40 percent with some exceptions); ownership of private lands (40 percent); and rice and corn production and processing (40 percent, with some exceptions).

Retail trade enterprises with capital of less than USD 2.5 million, or less than USD 250,000, for retailers of luxury goods, are reserved for Filipinos. The Philippines allows up to full foreign ownership of insurance adjustment, lending, financing, or investment companies; however, foreign investors are prohibited from owning stock in such enterprises, unless the investor’s home country affords the same reciprocal rights to Filipino investors.

Foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries if they can meet certain requirements. However, a foreign bank cannot open more than six branches in the Philippines. A minimum of 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks. Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank.

Other Investment Policy Reviews

The World Trade Organization (WTO) and the Organization for Economic Co-operation and Development (OECD) conducted a Trade Policy Review of the Philippines in March 2018 and an Investment Policy Review of the Philippines in 2016, respectively. The reviews are available online at the WTO website (https://www.wto.org/english/tratop_e/tpr_e/tp468_e.htm) and OECD website (http://www.oecd.org/daf/oecd-investment-policy-reviews-philippines-2016-9789264254510-en.htm ).

Business Facilitation

Business registration in the Philippines is cumbersome due to multiple agencies involved in the process. It takes an average of 33 days to start a business in Quezon City in Metro Manila, according to the 2020 World Bank’s Ease of Doing Business report. Touted as one of the Duterte Administrations’ landmark laws, the Republic Act No. 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act amends the Anti-Red Tape Act of 2007, and legislates standardized deadlines for government transactions, a single business application form, a one-stop-shop, automation of business permits processing, a zero contact policy, and a central business databank.

The law was passed in May 2018, and it creates an Anti-Red Tape Authority (ARTA – http://arta.gov.ph/) under the Office of the President to carry out the mandate of business facilitation. ARTA is governed by a council that includes the Secretaries of Trade and Industry, Finance, Interior and Local Governments, and Information and Communications Technology. The Department of Trade and Industry serves as interim Secretariat for ARTA. The implementing rules and regulations were issued in late 2019 and are expected to provide more compliance and increased transparency (http://arta.gov.ph/pages/IRR.html).

The Revised Corporation Code, a business-friendly amendment that encourages entrepreneurship, improves the ease of business and promotes good corporate governance. This new law amends part of the four-decade-old Corporation Code and allows for existing and future companies to hold a perpetual status of incorporation, compared to the previous 50-year term limit which required renewal. More importantly, the amendments allow for the formation of one-person corporations, providing more flexibility to conduct business; the old code required all incorporation to have at least five stockholders and provided less protection from liabilities.

Outward Investment

There are no restrictions on outward portfolio investments for Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year; foreign-controlled entities organized under Philippine laws; and branches, subsidiaries, or affiliates of foreign enterprises organized under foreign laws operating in the country. However, outward investments funded by foreign exchange purchases above USD 60 million or its equivalent per investor per year require prior notification to the Central Bank.

Transparency of the Regulatory System

Proposed Philippine laws must undergo public comment and review. Government agencies are required to craft implementing rules and regulations (IRRs) through public consultation meetings within the government and with private sector representatives after laws are passed. New regulations must be published in newspapers or in the government’s official gazette, available online, before taking effect (https://www.gov.ph/). The 2016 Executive Order on Freedom of Information (FOI) mandates full public disclosure and transparency of government operations, with certain exceptions. The public may request copies of official records through the FOI website (https://www.foi.gov.ph/). Government offices in the Executive Branch are expected to come up with their respective agencies’ implementation guidelines. The order is criticized for its long list of exceptions, rendering the policy less effective.

Stakeholders report regulatory enforcement in the Philippines is generally weak, inconsistent, and unpredictable. Many U.S. investors describe business registration, customs, immigration, and visa procedures as burdensome and frustrating. Regulatory agencies are generally not statutorily independent but are attached to cabinet departments or the Office of the President and, therefore, are subject to political pressure. Issues in the judicial system also affect regulatory enforcement.

International Regulatory Considerations

The Philippines is a member of the World Trade Organization (WTO) and provides notice of draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). (http://tbtims.wto.org/en/Notifications/Search?ProductsCoveredHSCodes=&ProductsCoveredICSCodes=&DoSearch=True&ExpandSearchMoreFields=False&NotifyingMember=Philippines&DocumentSymbol=&DistributionDateFrom=&DistributionDateTo=&SearchTerm=&ProductsCovered=&DescriptionOfContent=&CommentPeriod=&FinalDateForCommentsFrom=&FinalDateForCommentsTo=&ProposedDateOfAdoptionFrom=&ProposedDateOfAdoptionTo=&ProposedDateOfEntryIntoForceFrom=&ProposedDateOfEntryIntoForceTo= ).

The Philippines continues to fulfill required regulatory reforms under the ASEAN Economic Community (AEC). The Philippines officially joined live operations of the ASEAN Single Window (ASW) on December 30, 2019. The country’s National Single Window (NSW) now issues an electronic Certificate of Origin via the TRADENET.gov.ph platform, and the NSW is connected to the ASW, allowing for customs efficiencies and better transparency.

The Philippines passed the Customs Modernization and Tariff Act in 2016, which enables the country to largely comply with the WTO Agreement on Trade Facilitation. The various implementing rules and regulations to execute specific provisions, however, have not been completed by the Department of Finance and the Bureau of Customs as of April 2020.

Legal System and Judicial Independence

The Philippines has a mixed legal system of civil, common, Islamic, and customary laws, along with commercial and contractual laws.

The Philippine judicial system is a separate and largely independent branch of the government, made up of the Supreme Court and lower courts. The Supreme Court is the highest court and sole constitutional body. More information is available on the court’s website  (http://sc.judiciary.gov.ph/). The lower courts consist of: (a) trial courts with limited jurisdictions (i.e. Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Court of Appeals (appellate courts). Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals. Several RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide. In addition, nearly any case can be appealed to appellate courts, including the Supreme Court, increasing caseloads and further clogging the judicial system.

Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment. Many investors decline to file dispute cases in court because of slow and complex litigation processes and perceived corruption among some personnel. The courts are not considered impartial or fair. Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, and intellectual property cases. The Philippines ranked 152nd out of 190 economies, and 18th among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of enforcing contracts.

Laws and Regulations on Foreign Direct Investment

The BOI regulates and promotes investment into the Philippines. The Investment Priorities Plan (IPP), administered by the BOI, identifies preferred economic activities approved by the President. Government agencies are encouraged to adopt policies and implement programs consistent with the IPP.

The Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL) that outlines sectors in which foreign investment is restricted. The FINL consists of two parts: Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws; and Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs).

The 1995 Special Economic Zone Act allows PEZA to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.

Further information about investing in the Philippines is available at BOI website (http://boi.gov.ph/) and PEZA website (http://www.peza.gov.ph/ ).

Competition and Anti-Trust Laws

The 2015 Philippine competition law established the Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, to stop mergers that would restrict competition. More information is available on PCC website (http://phcc.gov.ph/#content). The Department of Justice (https://www.doj.gov.ph/) prosecutes criminal offenses involving violations of competition laws.

Expropriation and Compensation

Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense in return for fair market value compensation. In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate. However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts. No recent cases of expropriation involve U.S. companies in the Philippines.

The 2016 Right-of-Way Act facilitates acquisition of right-of-way sites for national government infrastructure projects and outlines procedures in providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.

Dispute Settlement

ICSID Convention and New York Convention

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, or the New York Convention.

Investor-State Dispute Settlement

The Philippines is signatory to various bilateral investment treaties that recognize international arbitration of investment disputes. Since 2002, the Philippines has been respondent to five investment dispute cases filed before the ICSID. Details of cases involving the Philippines are available on the ICSID website (https://icsid.worldbank.org/en/ ).

International Commercial Arbitration and Foreign Courts

Investment disputes can take years to resolve due to systemic problems in Philippine courts. Lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive. Several laws on alternative dispute resolution (ADR) mechanisms (i.e. arbitration, mediation, negotiation, and conciliation) were approved to decongest clogged court dockets. Public-Private Partnership (PPP) infrastructure contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming.

A separate action must be filed for foreign judgments to be recognized or enforced under Philippine law. Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customary practices. Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction. The petition may be filed any time after receipt of the award.

Bankruptcy Regulations

The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for rehabilitation and liquidation of distressed companies, although an examination of some reported cases suggests uneven implementation. Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings. The law sets conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation. It also recognizes cross-border insolvency proceedings in accordance with the United Nations Conference on Trade and Development (UNCTAD) Model Law on Cross-Border Insolvency, allowing 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. The Philippines ranked 65th out of 190 economies, and ninth among 25 economies from East Asia and the Pacific, in the World Bank’s 2020 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.

Investment Incentives

The Philippines’ Investment Priorities Plan (IPP) enumerates investment activities entitled to incentives facilitated by BOI, such as an income tax holiday. Non-fiscal incentives include the following: employment of foreign nationals, simplified customs procedures, duty exemption on imported capital equipment and spare parts, importation of consigned equipment, and operation of a bonded manufacturing warehouse.

The 2017 IPP, updated every three years, provides incentives to the following activities: manufacturing (e.g. agro-processing, modular housing components, machinery, and equipment); agriculture, fishery, and forestry; integrated circuit design, creative industries, and knowledge-based services (e.g. IT-Business Process Management services for the domestic market, repair/maintenance of aircraft, telecommunications, etc.); healthcare (e.g. hospitals and drug rehabilitation centers); mass housing; infrastructure and logistics (e.g. airports, seaports, and PPP projects); energy (development of energy sources, power generation plants, and ancillary services); innovation drivers (e.g. fabrication laboratories); and environment (e.g. climate change-related projects). Further details of the 2017 IPP are available on the BOI website (http://boi.gov.ph/ ). The BOI was tasked to update the investment priorities and formulate a Strategic Investment Priorities Plan to replace the IPP in light of the planned amendments in the tax incentive scheme of the Philippines under the Comprehensive Tax Reform Program (CITIRA).

In the current set-up, BOI-registered enterprises that locate in less-developed areas are entitled to pioneer incentives and can deduct 100 percent of the cost of necessary infrastructure work and labor expenses from taxable income. Pioneer status can be granted to enterprises producing new products or using new methods, goods deemed highly essential to the country’s agricultural self-sufficiency program, or goods utilizing non-conventional fuel sources. Furthermore, an enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may be entitled to incentives even if the activity is not listed in the IPP. Export-oriented firms with at least 50 percent of revenues derived from exports may register for additional incentives under the 1994 Export Development Act.

Multinational 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. The first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law which took effect January 1, 2018, removed the 15 percent special tax rate on gross income of employees of multinational enterprises’ regional headquarters (RHQ) and regional operating headquarters (ROHQ) located in the Philippines. RHQ and ROHQ employees are now subjected to regular income tax rates, usually at higher and less competitive rates.

Foreign Trade Zones/Free Ports/Trade Facilitation

Export-related businesses enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or ecozones. Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions. Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Bureau of Customs’ Selective Pre-shipment Advance Classification Scheme. While some ecozones are designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.

PEZA operates 379 ecozones, primarily in manufacturing, IT, tourism, medical tourism, logistics/warehousing, and agro-industrial sectors. PEZA manages four government-owned export-processing zones (Mactan, Baguio, Cavite, and Pampanga) and administers incentives to enterprises in other 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 the enterprise physically locates its activity inside any of the ecozones. PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority (http://www.peza.gov.ph/index.php/economic-zones/list-of-economic-zones/operating-economic-zones ).

The ecozones located inside former U.S. military bases were established under the 1992 Bases Conversion and Development Act. The BCDA (http://www.bcda.gov.ph/ ) operates Clark Freeport Zone (Angeles City, Pampanga), John Hay Special Economic Zone (Baguio), Poro Point Freeport Zone (La Union), and Bataan Technology Park (Morong, Bataan). The SBMA operates the Subic Bay Freeport Zone (Subic Bay, Zambales). Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities. These ecozones offer comparable incentives to PEZA. Enterprises already receiving incentives under the BCDA law are disqualified to receive incentives and benefits offered by other laws.

The Phividec Industrial Estate (Misamis Oriental Province, Mindanao) is governed by Phividec Industrial Authority (PIA) (http://www.piamo.gov.ph/), a government-owned and controlled corporation. Other ecozones are Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) (http://www.zfa.gov.ph/ ) and Cagayan Special Economic Zone (CEZA) and Freeport (Santa Ana, Cagayan Province) (http://ceza.gov.ph/ ). CEZA grants gaming licenses in addition to offering export incentives. The Regional Economic Zone Authority (Cotabato City, Mindanao) (https://reza.bangsamoro.gov.ph/) has been operated by the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). The incentives available to investors in these zones are similar to PEZA but administered independently.

Performance and Data Localization Requirements

The BOI imposes a higher export performance requirement on foreign-owned enterprises (70 percent of production) than on Philippine-owned companies (50 percent of production) when providing incentives under IPP.

Companies registered with BOI and PEZA may employ foreign nationals in supervisory, technical, or advisory positions for five years from date of registration (possibly extendable upon request). Top positions and elective officers of majority foreign-owned BOI-registered enterprises (such as president, general manager, and treasurer, or their equivalents) are exempt from employment term limitation. Foreigners intending to work locally must secure an Alien Employment Permit from the Department of Labor and Employment (DOLE ), renewable every year with the duration of employment (which in no case shall exceed five years). The BOI and PEZA facilitate special investor’s resident visas with multiple entry privileges and extend visa facilitation assistance to foreign nationals, their spouses, and dependents.

The 2006 Biofuels Act establishes local content requirements for diesel and gasoline. Regarding diesel, only locally produced biodiesel is permitted. For gasoline, all local ethanol must be bought off the market before imports are allowed to meet the blend requirement, and the local ethanol production may only be sourced from locally-produced sugar/molasses feedstock.

The Philippines does not impose restrictions on cross-border data transfers. Sensitive personal information is protected under the 2012 Data Privacy Act, which provides penalties for unauthorized processing and improper disposal of data even if processed outside the Philippines.

Real Property

The Philippines recognizes and protects property rights, but the enforcement of laws is weak and fragmented. The Land Registration Authority and the Register of Deeds (http://www.lra.gov.ph/), which facilitate the registration and transfer of property titles, are responsible for land administration, with more information available on their website s. Property registration processes are tedious and costly. Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes. Record management is weak due to a lack of funds and trained personnel. Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes. The Philippines ranked 120th out of 190 economies in terms of ease of property registration in the World Bank’s 2020 Ease of Doing Business report.

Intellectual Property Rights

The Philippines is not listed on the United States Trade Representative’s (USTR) 2020 Special 301 Report. . The country has a robust intellectual property rights (IPR) regime in place, although enforcement is irregular and inconsistent. The total estimated value of counterfeit goods reported seized in 2019 was USD 434 million, close to 2018’s record of USD 453 million. The sale of imported counterfeit goods in local markets has visibly decreased, though stakeholders report the amount of counterfeit goods sold online is gradually increasing.

The Intellectual Property (IP) Code provides a legal framework for IPR protection, particularly in key areas of patents, trademarks, and copyrights. The Intellectual Property Office of the Philippines (IPOPHL) is the implementing agency of the IP Code, with more information available on its website  (https://www.ipophil.gov.ph/). The Philippines generally has strong patent and trademark laws. IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and visits establishments reportedly engaged in IPR-related violations. However, weak border protection, corruption, limited enforcement capacity by the government, and lack of clear procedures continue to weaken enforcement. In addition, IP owners still must assume most enforcement and storage costs when counterfeit goods are seized.

Enforcement actions are often not followed by successful prosecutions. The slow and capricious judicial system keeps most IP owners from pursuing cases in court. IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings, especially as the courts become more crowded out with criminal cases deemed more serious, which receive higher priority. Many IP owners opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in the unpredictable Philippine courts.

The IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center.

For additional information about treaty obligations and points of contact at the local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Contacts at Mission:

Douglas Fowler, Economic Officer
Karen Ang, Trade Specialist Economic Section, U.S. Embassy Manila
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

A list of local lawyers can be found on the U.S. Embassy’s website: https://ph.usembassy.gov/u-s-citizen-services/attorneys/.

Capital Markets and Portfolio Investment

The Philippines welcomes the entry of foreign portfolio investments, including local and foreign-issued equities listed on the Philippine Stock Exchange (PSE ). Investments in certain publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws. Non-residents are allowed to issue bonds/notes or similar instruments in the domestic market with prior approval from the Central Bank; in certain cases, they may also obtain financing in Philippine pesos from authorized agent banks without prior Central Bank approval.

Although growing, the PSE (with fewer than 271 listed firms as of the end of 2019) lags behind many of its neighbors in size, product offerings, and trading activity. The securities market is growing but remains dominated by government bills and bonds. Hostile takeovers are uncommon 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 decrease the likelihood of hostile takeovers.

Credit is generally granted on market terms and foreign investors are able to obtain credit from the liquid domestic market. However, some laws require financial institutions to set aside loans for preferred sectors (e.g. agriculture, agrarian reform, and MSMEs). To help promote lending at competitive rates to MSMEs, the government has fully operationalized a centralized credit information system that uses financial statements to predict firms’ credit worthiness. The government has also implemented the 2018 Personal Property Security law, which aims to spur lending to MSMEs by allowing non-traditional collateral (e.g., movable assets like machinery and equipment and inventories).

Money and Banking System

The Bangko Sentral ng Pilipinas (BSP/Central Bank) is a highly respected institution that oversees a stable banking system. The Central Bank has pursued regulatory reforms promoting good governance and aligning risk management regulations with international standards. Capital adequacy ratios are well above the 8 percent international standard and the Central Bank’s 10 percent regulatory requirement. The non-performing loan ratio was at 2.0 percent as of the end of 2019, and there is ample liquidity in the system, with the liquid assets-to-deposits ratio estimated at about 48 percent. Commercial banks constitute more than 90 percent of the total assets of the Philippine banking industry. The five largest commercial banks represented about 60 percent of the total resources of the commercial banking sector as of 2019. Twenty-six of the 46 commercial banks operating in the country are foreign branches and subsidiaries, including three U.S. banks (Citibank, Bank of America, and JP Morgan Chase). Citibank has the largest presence among the foreign bank branches and currently ranks 13th overall in terms of assets.

Foreign residents and non-residents may open foreign and local currency bank accounts. Although non-residents may open local currency deposit accounts, they are limited to the funding sources specified under Central Bank regulations. For non-residents who wish to convert their local deposits to foreign currency, sales of foreign currencies are limited up to the local currency balance. Non-residents’ foreign currency accounts cannot be funded from foreign exchange purchases from banks and banks’ subsidiary/affiliate foreign exchange corporations.

Foreign Exchange and Remittances

Foreign Exchange

The Bangko Sentral ng Pilipinas (Central Bank) has actively pursued reforms since the 1990s to liberalize and simplify foreign exchange regulations. As a general rule, the Central Bank allows residents and non-residents to purchase foreign exchange from banks, banks’ subsidiary/affiliate foreign exchange corporations, and other non-bank entities operating as foreign exchange dealers and/or money changers and remittance agents to fund legitimate foreign exchange obligations, subject to provision of information and/or supporting documents on underlying obligations. No mandatory foreign exchange surrender requirement is imposed on exporters, overseas workers’ incomes, or other foreign currency earners; these foreign exchange receipts may be sold for pesos or retained in foreign exchange in local and/or offshore accounts. The Central Bank follows a market-determined exchange rate policy, with scope for intervention to smooth excessive foreign exchange volatility.

Remittance Policies

The Central Bank does not restrict payments and transfers for current international transactions, in accordance with the country’s acceptance of International Monetary Fund Article VIII obligations of September 1995. Purchase of foreign currencies for trade and non-trade obligations and/or remittances requires submission of a foreign exchange purchase application form if the foreign exchange is sourced from banks and/or their subsidiary/affiliate foreign exchange corporations and falls within specified thresholds (currently USD 500,000 for individuals and USD 1 million for corporates/other entities). Purchases above the thresholds are also subject to the submission of minimum documentary requirements but do not require prior Central Bank approval. A person may freely bring foreign currencies with a value of up to USD 10,000 into or out of the Philippines; more than this threshold requires submission of a foreign currency declaration form.

Foreign exchange policies do not require approval of inward foreign direct and portfolio investments unless the investor will purchase foreign currency from banks to convert its local currency proceeds or earnings for repatriation or remittance. Registration of foreign investments with the Central Bank or custodian banks is generally optional. Duly registered foreign investments are entitled to full and immediate repatriation of capital and remittance of dividends, profits, and earnings.

As a general policy, government-guaranteed private sector foreign loans/borrowings (including those in the form of notes, bonds, and similar instruments) require prior Central Bank approval. Although there are exceptions, private sector loan agreements should also be registered with the Central Bank if serviced through the purchase of foreign exchange from the banking system.

The Philippines is pushing for amendments to the Anti-Money Laundering Act and Human Security Act to meet the Asia Pacific Group 2019 Mutual Evaluation Report recommendations ahead of the 2020 Financial Action Task Force’s (FATF) review. Proposed amendments include the addition of tax evasion, terrorism-related offenses, and corruption to the list of predicate crimes; the inclusion of real estate developers and brokers as covered persons; and the expansion of Anti-Money Laundering Council’s investigative powers and financial sanctions authority. In 2013, the FATF removed the Philippines from its “grey list” of countries with strategic deficiencies in countering money laundering and the financing of terrorism. The Philippines has a restrictive regime for accessing bank accounts to detect or prosecute financial crimes, which is a significant impediment to enforcing laws against corruption, tax evasion, smuggling, laundering, and other economic crimes.

Sovereign Wealth Funds

The Philippines does not presently have sovereign wealth funds.

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominantly in the power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors. There were 105 operational and functioning GOCCs as of April 2020; a list is available on the Governance Commission for GOCC [GCG] website  (https://gcg.gov.ph). GOCCs are required to remit at least 50 percent of their annual net earnings (e.g. cash, stock, or property dividends) to the national government.

Private and state-owned enterprises generally compete equally. The Government Service Insurance System (GSIS ) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in build-operate-transfer (BOT) projects and privatized government corporations. Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in obtaining financing from government financial institutions and private banks. Most GOCCs are not statutorily independent, but attached to cabinet departments, and, therefore, subject to political interference.

The Philippines is not an OECD member country. The 2011 GOCC Governance Act addresses problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances. The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances. The GCG  formulates and implements GOCC policies. GOCC board members are limited to one-year term and subject to reappointment based on a performance rating set by GCG, with final approval by the Philippine President.

Privatization Program

The Philippine Government’s privatization program is managed by the Privatization Management Office (PMO) under the Department of Finance (DOF). The privatization of government assets undergoes a public bidding process. Apart from restrictions stipulated in FINL, no regulations discriminate against foreign buyers and the bidding process appears to be transparent. Additional information is available on the PMO website (http://www.pmo.gov.ph/index.htm).

Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it. The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions. Various non-government organizations and business associations also promote RBC. The Philippine Business for Social Progress (PBSP ) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines. U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.

The Philippines is not an OECD member country. The Philippine government strongly supports RBC practices among the business community but has not yet endorsed the OECD Guidelines for Multinational Enterprises to stakeholders.

Corruption is a pervasive and long-standing problem in both the public and private sectors. The country’s ranking in Transparency International’s Corruption Perceptions Index declined to the 113th spot (out of 180), its worst score in over seven years. The Philippines was 99th in 2018, and the lack of progress in tackling public corruption resulted in a lower score for 2019. Various organizations, including the World Economic Forum, have cited corruption among the top problematic factors for doing business in the Philippines. The Bureau of Customs is still considered to be one of the most corrupt agencies in the country, having fired and replaced five customs commissioners over the past six years.

The Philippine Development Plan 2017-2022 outlines strategies to reduce corruption by streamlining government transactions, modernizing regulatory processes, and establishing mechanisms for citizens to report complaints. A front line desk in the Office of the President, the Presidential Complaint Center, or PCC (https://op-proper.gov.ph/contact-us/), receives and acts on corruption complaints from the general public. The PCC can be reached through its complaint hotline, text services (SMS), and social media sites.

The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials all 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 more information available on its website . Cases against high-ranking officials are brought before a special anti-corruption court, the Sandiganbayan, while cases against low-ranking officials are filed before regional trial courts.

The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting, accepting, and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government. Government anti-corruption agencies routinely investigate public officials, but convictions by courts are limited, often appealed, and can be overturned. Recent positive steps include the creation of an investors’ desk at the Ombudsman’s Office, and corporate governance reforms of the Securities and Exchange Commission.

The Philippines ratified the United Nations Convention against Corruption in 2003. It is not a signatory to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Office of the Ombudsman
Ombudsman Building, Agham Road, North Triangle
Diliman, Quezon City
Hotline:  (+632) 8926.2662
Telephone:  (+632) 8479.7300
Email/Website: pab@ombudsman.gov.ph / http://www.ombudsman.gov.ph /

Presidential Complaint Center
Gama Bldg., Minerva St. corner Jose Laurel St.
San Miguel, Manila
Telephone: (+632) 8736.8645, 8736.8603, 8736.8606
Email: pcc@malacanang.gov.ph / https://op-proper.gov.ph/presidential-action-center/

Contact Center ng Bayan
Text:  (+63) 908 881.6565
Call:  1-6565
Email/Website: email@contactcenterngbayan.gov.ph / contactcenterngbayan.gov.ph 

Terrorist groups and criminal gangs operate in some regions. The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review the information periodically. A travel advisory is in place for those U.S. citizens contemplating travel to the Philippines.

Terrorist groups, including the ISIS-Philippines affiliated Abu Sayyaf Group (ASG), the Maute Group, Ansar al-Khalifa Philippines (AKP) and elements of the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces. These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea. They are also capable of operating in some areas outside Sulu, as evidenced by the 2015 kidnapping of four hostages from Samal Island, just outside Davao City. Groups affiliated with ISIS-Philippines continued efforts to recover from battlefield losses, recruiting and training new members, and staging suicide bombings and attacks with improvised explosive devices (IEDs) and small arms that targeted security forces and civilians.

In 2017, ISIS-affiliated groups in Mindanao occupied and held siege to Marawi City for five months, prompting President Duterte to declare martial law over the entire Mindanao region – approximately one-third of the country’s territory. After granting multiple extensions of over two and a half years, Congress, with support from the government, allowed martial law to lapse on December 31, 2019. In expressing its support for the decision, the military cited improvement in the security climate in Mindanao, but also noted that Proclamation 55, a national state of emergency declaration, remained in effect and would be used as necessary.

The New People’s Army (NPA), the armed wing of the Communist Party of the Philippines (CPP), is responsible in some parts of the country, mostly Mindanao, for civil disturbances through assassinations of public officials, sporadic attacks on military and police forces, bombings, and attacks on infrastructure, such as power generators and telecommunications towers. The NPA relies on extortionist revolutionary taxes from local and some foreign businesses to fund its operations. The Philippine government ended a unilateral ceasefire with the CPP/NPA in 2017 and announced that it had designated the group as a terrorist organization under domestic law.

The Philippines’ most significant human rights problems were killings allegedly undertaken by vigilantes, security forces, and insurgents; cases of apparent governmental disregard for human rights and due process; official corruption; and a weak and overburdened criminal justice system notable for slow court procedures, weak prosecutions, and poor cooperation between police and investigators.

President Duterte’s administration continued a nationwide campaign, led primarily by the Philippine National Police (PNP), to eliminate illegal narcotics. The ongoing operation continues to receive worldwide attention for its harsh tactics.

Managers of U.S. companies in the Philippines report that local labor costs are relatively low and workers are highly motivated, with generally strong English language skills. As of January 2020, the Philippine labor force reached 43 million workers, with an employment rate of 94.7 percent and an unemployment rate of 5.3 percent. These figures include employment in the informal sector and do not capture the substantial rates of underemployment in the country. Youths between the ages of 15 and 24 made up over 40 percent of the unemployed. More than half of all employment was in the services sector, with 22.7 percent and 18.8 percent in agriculture and industry sectors, respectively.

Compensation packages in the Philippines tend to be comparable with those in neighboring countries. Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages. The non-agricultural daily minimum wage in Metro Manila is approximately USD 10, although some private sector workers receive less. Most regions set their minimum wage significantly lower than Metro Manila. Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine law also provides for a comprehensive set of occupational safety and health standards. The Department of Labor and Employment (DOLE) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.

The Philippines Constitution enshrines the right of workers to form and join trade unions. The trend among firms using temporary contract labor to lower employment costs continues despite government efforts to regulate the practice. The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest. DOLE amended its rules concerning disputes in 2013, specifying industries vital to national interest: hospitals, the electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC). Economic zones often offer on-site labor centers to assist investors with recruitment. Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.

The Philippines is signatory to all International Labor Organization (ILO) core conventions but has faced challenges with enforcement. Unions allege that companies or local officials use illegal tactics to prevent workers from organizing. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities. Meanwhile, the NTIPC monitors the application of international labor standards.

Reports of forced labor in the Philippines continue, particularly in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries.

The U.S. International Development Finance Corp. (DFC, formerly Overseas Private Investment Corporation or OPIC) provides debt financing, partial credit guarantees, political risk insurance, grants, equity investment, and private equity capital to support U.S. investors and their investments. It does so under a bilateral agreement with the Philippines. DFC can provide debt financing, in the form of direct loans and loan guarantees, of up to USD 1 billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others. DFC political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment is also available for business investments in the Philippines. Grants are available for projects that are already reasonably developed but need additional, limited funding and specific work – for example technical, environment and social, or legal – in order to be bankable and eligible for DFC financing or insurance. In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions. Past OPIC activities in the Philippines include projects with the National Power Corporation (NAPOCOR), The Asia Foundation, and a cloud-based technology company for the local cargo and courier industry. In addition, DFC supports twelve private equity funds that are eligible to invest in projects within the Philippines.

The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country. Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB). As of the third quarter of 2019, inward direct investment (i.e. liabilities) is USD 90 billion, while outward direct investment (i.e. assets) is USD 56.1 billion.

The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country. Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that Central Bank publishes and submits to the International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB). As of third quarter 2019, outward portfolio investment (i.e. assets) was USD 25.2 billion, of which USD 2.2 billion was in equity investments and USD 23 billion was in debt securities.

Douglas Fowler, Economic Officer
Karen Ang, Trade Specialist
U.S. Embassy Manila
1201 Roxas Boulevard, Manila, Philippines
Telephone: (+632) 5301.2000
Email: ManilaEcon@state.gov

Policies Toward Foreign Direct Investment

The ROK government’s approach toward FDI is positive, and senior policymakers recognize the value of foreign investment.  In a March 2019 meeting, President Moon Jae-in equated the foreign business community’s success “with the Korean economy’s progress.”  The current administration has offered incentives to attract foreign companies bringing needed technology and investment in its ongoing efforts to improve the ROK domestic manufacturing supply base.  Foreign investors in the ROK still face numerous hurdles, however, including insufficient regulatory transparency, inconsistent interpretation of regulations, unanticipated regulatory revisions, underdeveloped corporate governance structures, an inflexible labor framework, burdensome Korea-unique consumer protection measures, and market domination by large conglomerates, known as chaebol.

The 1998 Foreign Investment Promotion Act (FIPA) is the basic law pertaining to foreign investment in the ROK.  FIPA and related regulations categorize business activities as open, conditionally or partly restricted, or closed to foreign investment.  FIPA features include:

• Simplified procedures, including those for FDI notification and registration;
• Expanded tax incentives for high-technology investments;
• Reduced rental fees and lengthened lease durations for government land (including local government land);
• Increased central government support for local FDI incentives;
• Establishment of “Invest KOREA,” a one-stop investment promotion center within the Korea Trade-Investment Promotion Agency (KOTRA) to assist foreign investors; and
• Establishment of a Foreign Investment Ombudsman to assist foreign investors.

The ROK National Assembly website provides a list of laws pertaining to foreigners, including FIPA, in English (http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037 ).

The Korea Trade Investment Promotion Agency (KOTRA) actively facilitates foreign investment through its Invest Korea office (on the web at http://m.investkorea.org/m/index.do).  For investments exceeding 100 million won (about USD 88,000), KOTRA assists in establishing a domestically-incorporated foreign-invested company.  KOTRA and the Ministry of Trade, Industry and Energy (MOTIE) organize a yearly Foreign Investment Week to attract investment to South Korea.  In March 2019, ROK President Moon Jae-in hosted AMCHAM Korea and more than 60 foreign businesses and associations at the Blue House and pledged that Korea would continue to welcome and incentivize foreign investment.  During 2019, ROKG leaders like Trade Minister Yoo Myung Hee, Seoul Mayor Park Won-soon, and former Financial Services Commission Chairman Choi Jong-ku  also met with AMCHAM Korea to promote FDI.  KOTRA also recruits FDI by participating in overseas events such as the March 2019 “South by Southwest Festival” in Austin, Texas, to attract U.S. startups and investors.  The ROK’s key official responsible for FDI promotion and retention is the Foreign Investment Ombudsman.  The position is commissioned by the President and heads a grievance resolution body that: collects and analyzes information concerning problems foreign firms experience; requests cooperation from and recommends implementation of reforms to relevant administrative agencies; proposes new policies to improve the foreign investment promotion system; and carries out other necessary tasks to assist investor companies.  More information on the Ombudsman can be found at http://ombudsman.kotra.or.kr/eng/index.do .

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in almost all forms of remunerative activity.  The number of industrial sectors open to foreign investors is well above the Organization for Economic Cooperation and Development (OECD) average, according to MOTIE.  However, restrictions on foreign ownership remain for 30 industrial sectors, including three that are closed to foreign investment (see below).  Under the KORUS FTA, South Korea treats U.S. companies like domestic entities in select sectors, including broadcasting and telecommunications.  Relevant ministries must approve investments in conditionally or partially restricted sectors.  Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer.  The ROK’s procurement processes comply with the World Trade Organization (WTO) Government Procurement Agreement, but some implementation problems remain.

The following is a list of restricted sectors for foreign investment.  Figures in parentheses generally denote the Korean Industrial Classification Code, while those for the air transport industries are based on the Civil Aeronautics Laws:

Completely Closed

•  Nuclear power generation (35111)
•  Radio broadcasting (60100)
•  Television broadcasting (60210)

Restricted Sectors (no more than 25 percent foreign equity)

•  News agency activities (63910)

Restricted Sectors (less than 30 percent foreign equity)

• Newspaper publication, daily (58121)  (Note: Other newspapers with the same industry code 58121 are restricted to less than 50 percent foreign equity)

Restricted Sectors (no more than 30 percent foreign equity)

• Hydroelectric power generation (35112)
• Thermal power generation (35113)
• Solar power generation (35114)
• Other power generation (35119)

Restricted Sectors (no more than 49 percent foreign equity)

• Newspaper publication, non-daily (58121)  (Note: Daily newspapers with the same industry code 58121 are restricted to less than 30 percent foreign equity)
• Program distribution (60221)
• Cable networks (60222)
• Satellite and other broadcasting (60229)
• Wired telephone and other telecommunications (61210)
• Mobile telephone and other telecommunications (61220)
• Other telecommunications (61299)

Restricted Sectors (no more than 50 percent foreign equity)

• Farming of beef cattle (01212)
• Transmission/distribution of electricity (35120)
• Wholesale of meat (46313)
• Coastal water passenger transport (50121)
• Coastal water freight transport (50122)
• International air transport (51)
• Domestic air transport (51)
• Small air transport (51)
• Publishing of magazines and periodicals (58122)

Open but Regulated under Relevant Laws

• Growing of cereal crops and other food crops, except rice and barley (01110)
• Other inorganic chemistry production, except fuel for nuclear power generation (20129)
• Other nonferrous metals refining, smelting, and alloying (24219)
• Domestic commercial banking, except special banking area (64121)
• Radioactive waste collection, transportation, and disposal, except radioactive waste management (38240)

Other Investment Policy Reviews

The WTO conducted its seventh Trade Policy Review of the ROK in October 2016.  The Review does not contain any explicit policy recommendations.  It can be found at https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=233680,233681,230967,230984,94925,104614,89233,66927,82162,84639&CurrentCatalogueIdIndex=1&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True .  The ROK has not undergone investment policy reviews or received policy recommendations from the OECD or United Nations Conference on Trade and Development (UNCTAD) within the past three years.

Business Facilitation

Registering a business remains a complex process that varies according to the type of business being established and requires interaction with KOTRA, court registries, and tax offices.  Foreign corporations can enter the market by establishing a local corporation, local branch, or liaison office.  The establishment of local corporations by a foreign individual or corporation is regulated by FIPA and the Commercial Act; the latter recognizes five types of companies, of which stock companies with multiple shareholders are the most common.  Although registration can be filed online, there is no centralized online location to complete the process.  For small- and medium-sized enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites.  Registrations can be completed via the Smart Biz website, https://www.startbiz.go.kr/.  The UN’s Global Enterprise Registration (GER), which evaluates whether a country’s online registration process is clear and complete, awarded Smart Biz 2.5 of 10 possible points and suggested improvements in registering limited liability companies.  The Invest Korea information portal received 2 of 10 points.  The mandate of the Korea Commission for Corporate Partnership (http://www.winwingrowth.or.kr/ ) and the Ministry of Gender Equality and Family (http://www.mogef.go.kr/ ) includes creating a better business environment for minorities and women, but the agencies do not offer any direct support program for those groups.  Some local governments provide guaranteed bank loans for women or the disabled, but a lack of data on those programs makes the impact difficult to measure.

Outward Investment

The ROK does not have any restrictions on outward investment.  While Korea’s globally competitive firms complete their investment procedures in-house, the ROK has several offices to assist small business and middle-market firms.

• KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms and holds regular investment information sessions.
• The ASEAN-Korea Centre, which is primarily ROKG-funded, provides counseling and matchmaking support to Korean SMEs interested in investing in the Association of Southeast Asian Nations (ASEAN) region.
• The Defense Acquisition Program Administration in 2019 opened an office to advise Korean SME defense firms on exporting unrestricted defense articles.

The ROK has 16 FTAs encompassing trade with 58 countries, including the United States, and 91 bilateral investment treaties as of February 2020.  The ROK signed additional FTAs in 2019 with the U.K., Israel, and Indonesia, although the FTAs are not yet ratified.  The ROK neared agreement with 14 other Asian countries on the Regional Comprehensive Economic Partnership (RCEP), with a goal to signing RCEP in 2020.  Ongoing FTA negotiations include a ROK-China-Japan trilateral FTA, and bilateral FTAs with Ecuador, Mercado Común del Sur (Mercosur), Philippines, Russia, and Malaysia.  Negotiations are also in progress to expand the ROK-China FTA services and investment chapter and to enhance existing FTAs with ASEAN, India, and Chile.  The ROK also agreed to begin FTA negotiations with the Pacific Alliance (Mexico, Peru, Columbia and Chile) and the Eurasian Economic Union (Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan).

As of April 2020, the ROK had signed bilateral tax agreements with 93 countries.  The ROK National Tax Service has a special unit dedicated to processing Advance Pricing Agreement and Mutual Agreement Procedure requests from North America, Europe, and Australia, as timely processing of these requests has historically been a frequent subject of disputes.  The U.S.-ROK bilateral income tax treaty entered into force in 1979.  A complete list of countries and economies with which South Korea has concluded bilateral investment protection agreements, such as BITs and FTAs with investment chapters, is available at http://www.mofa.go.kr/www/wpge/m_3834/contents.do  and http://investmentpolicyhub.unctad.org/IIA .

notice for an additional USD 17.6 million from regional tax authorities in Seoul.  The assessments were mainly fines and penalties for allegedly failing to issue value-added tax (VAT) invoices and report certain transactions from 2011-2014.  WFS disputes that any VAT was due on the transactions at issue, or that its subsidiary should be required to be a local VAT-registered entity.  WFS’s appeal through the ROK tax administrative appeal process is ongoing.

Transparency of the Regulatory System

ROK regulatory transparency has improved in recent years, due in part to Korea’s membership in the WTO and negotiated FTAs.  However, the foreign business community continues to face numerous Korea-unique rules and regulations.  Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs.  While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers that disadvantage foreign companies.  Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently.  Written guidelines are often issued by ministries to advise implementation of regulations, yet these non-legally binding guidelines provide a strong basis for legal interpretation in ROK courts.  Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that prove burdensome and difficult to follow for foreign firms.  Intermittent ROKG deregulation plans intended to eliminate the use of oral guidelines or subject them to the same level of regulatory review as written regulations have not led to concrete changes.  Despite KORUS FTA provisions designed to address these issues, they remain persistent and prominent.

The ROK constitution allows both the legislative and executive branches to introduce bills.  The legal norm is for regulations to be introduced in the form of an act.  Subordinate statutes (presidential decree, ministerial decree, and administrative rules) largely govern matters promulgated by acts and are drafted by ministries.  Acts and their subordinate regulations can all be relevant for foreign businesses.  Administrative agencies shape policies and draft bills on matters under their respective jurisdictions.  Drafting ministries are required to clearly set policy goals and complete RIAs.  When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment.  The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules within the scope of federal acts and subordinate statutes.  The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Legislation.  Since 2011, all publicly listed companies have been required to follow International Financial Reporting Standards (IFRS, or K-IFRS in South Korea).  The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS.  According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation.  Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry.

Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods.  As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments.  The Korean language text of draft acts and regulations accompanied by executive summaries are published online in the Official Gazette and simultaneously posted on the websites of relevant ministries and the National Assembly.  This is required under the ROK’s public notification process that includes a 40-day comment period.  Foreign firms’ analyses and responses are often delayed because of the need to translate complex documentation.  The Ministry of Government Legislation reviews whether laws and regulations conform to the constitution and monitors government adherence to the Regulation on Legislative Process.  All laws and regulations also undergo review by the Regulatory Reform Committee to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.

In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services.  The program is managed by either MOTIE, the Ministry of Science and ICT, or the Financial Services Commission, depending on the business sector in which a particular proposal falls.  The program is open to Korean companies and to any foreign company with a Korean branch office.  Websites and applications are only offered in Korean.  Despite its limited nature, the initiative is a welcome effort by regulators to spur innovation.

The ROKG enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law.  The government’s enforcement actions can be challenged through an appeal process or administrative litigation.  The CEOs of local branches can be held legally responsible for all actions of their company and at times have been arrested and charged for their companies’ infractions.  Foreign CEOs have cited this as a significant burden to their business operations in Korea.

Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment.  When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties.  These RIAs are usually not publicly available for comment, and comments received by regulators are not made public.  The ROK’s public finances and debt obligations are generally transparent, with some lingering concerns related to state-owned enterprise debt.

International Regulatory Considerations

Though not part of any regional economic bloc (pending finalization of and accession to RCEP), the ROK has revised various local regulations to implement commitments under international treaties and agreements including FTAs.  Treaties duly concluded and promulgated in accordance with the Constitution and the generally recognized rules of international law are accorded the same standing as domestic laws.  ROK officials consistently express a desire to harmonize standards with global norms by benchmarking the United States and the EU.  The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROKG to encourage ROK regulators to incorporate more regulatory analytics, increase transparency, and improve compliance with international standards; however, Korea-unique rules and regulations continue to pose difficulties for foreign companies operating in the ROK.  The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations.  The ROK is also a signatory to the Trade Facilitation Agreement (TFA).  The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementation of the TFA.  The ROK is a global leader in terms of modernized and streamlined procedures for the transportation and customs clearance of goods.  Industry sources report the Korea Customs Service enforces rules of origin issues largely in compliance with free trade agreements.

Legal System and Judicial Independence

The ROK legal system is based on civil law.  Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency.  The ROK has a written commercial law, while matters regarding contracts are covered by the Civil Act.  There are only three specialized courts in the ROK: the patent, family, and administrative courts.  In civil cases, courts deal with disputes surrounding the rights of property or legal relations.  The ROK court system is independent and not subject to government interference in cases that may affect foreign investors.  Foreign court judgments are not enforceable in the ROK.  Rulings by district courts can be appealed to higher courts and the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Laws and regulations enacted within the past year include:

• In January 2019, the government amended the premium pricing policy for global innovative drugs following discussions that took place as part of the negotiations that led to revisions in the KORUS FTA. However, the policy’s criteria are extremely narrow, and industry expressed concern the new policy will have little impact on improving the reimbursement value of global innovative drugs.
• In March 2019, the National Assembly enacted a Low Emission Vehicle (LEV)/Zero-Emission Vehicle (ZEV) mandate, which would require a certain percentage of a manufacturer’s Korean fleet to be composed of low- and zero-emission vehicles. In April 2020, Korea issued a draft implementing regulation that removed concerns by U.S. automobile manufacturers that the parameters of the LEZ/ZEV mandate may constitute a non-tariff barrier to trade.
• In July 2019, a ban on workplace harassment took effect following an amendment of the Labor Standards Act. Under the law, if retaliatory or discriminatory measures are taken against victims or those who report abusive conduct, CEOs could face a maximum three-year jail term and a fine of up to USD 25,000.  The law does not stipulate the punishment for the perpetrator of the bullying, however, and is ambiguous about what constitutes workplace bullying.
• In December 2019, the Ministry of Education (MOE) announced a ministerial decree on Facility Standards for Distance Learning. Although the Ministry of Interior and Safety (MOIS) had amended its guidelines to allow educational institutions to use global public cloud services, the MOE decree requires global providers to obtain a Korea-unique Cloud Security Certificate.  This undermines competition between global and domestic companies.
• In January 2020, the National Assembly passed the “Data 3 Act” (consisting of amendments to the Personal Information Protection Act of 2011, the Act on Promotion of Information and Communications Network Utilization and Information Protection of 2001, and the Credit Information Use and Protection Act of 2008). Industry welcomed the updates, which alleviate regulatory hurdles and allow for new uses of data in the healthcare, financial services, and ICT industries.  The amendments clarified the criteria for assessing anonymous information, develop the concept of pseudonymization, and strengthen personal information processor responsibilities.

Key pending/proposed laws and regulations as of April 2020 include:

• On August 30, 2019, the Ministry of Science and ICT announced plans to increase the value limitation on the sale of insurance products by the state-run Korea Post, which could disadvantage global insurance companies.
• There is no single website for investment-relevant laws and regulations. However, more information is available at the following websites: https://www.better.go.kr/ , https://www.fsc.go.kr/ , and http://motie.go.kr/ .

Competition and Antitrust Laws

The Monopoly Regulation and Fair Trade Act (KFTC Act) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters.

KFTC has a broad mandate that includes promoting competition, strengthening consumers’ rights, creating a competitive environment for SMEs, and restraining the concentration of economic power.  In addition to its authority to conduct investigations, including authority to review corporate and financial restructuring, KFTC can levy sizeable administrative fines for violations of the laws it enforces as well as for failure to cooperate with investigators.  Decisions by KFTC are appealable to the Korean court system.  As part of KORUS implementation, KFTC instituted a consent decree process in 2014, which it continues to refine.

A number of U.S. firms have raised concerns that KFTC has targeted foreign companies with aggressive enforcement efforts. U.S. firms also expressed concerns that KFTC’s procedures and practices do not comply with Korea’s obligations under KORUS because they interfere with the ability of companies to adequately defend themselves during investigatory proceedings and hearings. The United States has continued to have extensive discussions with Korea regarding the right of companies to reasonably access and rebut evidence upon which the KFTC determination may be made.  This matter was the subject of the first ever formal consultations under the KORUS Competition chapter in July 2019.

In December 2018, Korea’s government proposed a significant amendment to the Monopoly Regulation and Fair Trade; revisions passed the National Assembly on April 29, 2020.

Expropriation and Compensation

The ROK follows generally accepted principles of international law with respect to expropriation.  ROK law protects foreign-invested enterprise property from expropriation or requisition.  Private property can be expropriated for a public purpose – like developing new cities, building new industrial complexes, or constructing roads – and claimants are afforded due process.  Property owners are entitled to prompt compensation at fair market value.  There have been many cases of private property expropriation in the ROK for public reasons and these were conducted in a non-discriminatory manner and claimants were compensated at or above fair market value; Embassy Seoul is not aware of any cases alleging a lack of due process.  The ROKG allotted USD 20 billion in its 2019 budget for land expropriation, a 38 percent increase from the previous year.

Dispute Settlement

ICSID Convention and New York Convention

The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967, and the New York Arbitration Convention in 1973.  There are no specific domestic laws providing for enforcement; however, South Korean courts have made rulings based on the ROK’s membership in the conventions.

Investor-State Dispute Settlement

The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency.  ROK courts may ultimately be called upon to enforce an arbitrated settlement.  When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association.  U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity.  The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment.  The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012.  There have been several prominent investment disputes involving foreign investors in Korea in recent years.  In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute lawsuit against the South Korean government with the ICSID in Washington under the investment chapter of the KORUS FTA, and this case is still pending.  The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of the Korea Exchange Bank without cause.  The ICSID was expected to make a ruling in 2017, but the ruling has been repeatedly postponed.  Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK.  There is no history of extrajudicial action against foreign investors.  An arbitration panel under the United Nations Commission on International Trade Law (UNCITRAL) made a USD 68 million ruling against the ROKG in June 2018 in an investor-state dispute settlement filed by Entekhab, owned by Iranian investor Mohammad Reza Dayyani.  In July 2018, an American individual investor filed an investor-state dispute (ISD) lawsuit against the ROKG, claiming that the government had violated the KORUS FTA in expropriating her land.  The case was dismissed on jurisdictional grounds in September 2019.  Also in July 2018, U.S. activist fund Elliott Associates submitted a notice of arbitration over an ISD pertaining to the KORUS FTA.  Elliott Associates claimed they had suffered at least USD 770 million in financial losses due to the merger between Samsung C&T and Cheil Industries, stating the ROKG illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger in 2015.  In September 2018, Mason Capital Management, another American investor, filed for arbitration seeking USD 200 million in compensation for losses incurred from the same controversial merger.  Both cases are pending before an UNCITRAL tribunal.

International Commercial Arbitration and Foreign Courts

Although commercial disputes can be adjudicated in a civil court, foreign businesses find this method impractical.  Proceedings are conducted in Korean, often without adequate interpretation.  ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts.  Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK.  During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached.  Legal proceedings are expensive and time-consuming, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship.  ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency.  The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues.  Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB).  The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, an arbitration panel consisting of one to three arbitrators would be assigned to decide the case.  If one party is not resident in the ROK, either may request an arbitrator from a neutral country.  If foreign arbitral awards or foreign court rulings meet the requirements of the Civil Procedure Act’s Article 217, then those are enforceable by local courts.  Embassy Seoul is not aware of statistics involving state-owned enterprise investment dispute court rulings.  Gale International (GI), a U.S. real estate development company, has had an ongoing investment dispute with Korean conglomerate POSCO since 2015.  GI claims it is owed USD 350 million and has filed criminal complaints in a Seoul court against POSCO alleging misappropriation of funds and approving documents with the GI seal without authorization.  The case is still pending, and GI has closed its office in the ROK.

Bankruptcy Regulations

The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment.  The procedure commences after a filing by a debtor, creditor, or a group of creditors and determination by the court that a company is bankrupt.  The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts.  Creditors may be granted voting rights in the creditors’ group, as identified by the Custodial Committee.  Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms.  The World Bank ranked ROK policies and mechanisms to address insolvency 11^th among 187 economies in its 2020 Doing Business report.  Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt.  Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties.  Under the revised DRBA enacted in March 2017, Korea established the Seoul Bankruptcy Court (SBC) with nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide more effective, specialized, and consistent guidance in bankruptcy proceedings.  Any Korean company with debt equal to or above KRW 50 billion KRW (about USD 41 million) and 300 or more creditors may file for bankruptcy rehabilitation with the SBC.  Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.

Investment Incentives

The ROK government provides the following general incentives for foreign investors:

• Cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, and similar facilities;
• Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development centers;
• Reduced rent for land and site preparation for foreign investors;
• Grants for establishment of convenience facilities for foreigners;
• Reduced rent for state or public property;
• Preferential financial support for investing in major infrastructure projects;
• Incentives for investments that would increase ROK-based production of materials, parts, and equipment in six critical industrial sectors: semiconductors, displays, automobiles, electronics, machinery, and chemicals; and
• Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-technology businesses, and the biomedical industry.

The ROKG does not issue guarantees or jointly finance foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Ministry of Economy and Finance (MOEF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services.  There are three types of special areas for foreign investment (i.e., Free Economic Zones, Free Investment Zones, and Tariff Free Zones), where favorable tax incentives and other support for investors are available.  The ROK aims to attract more foreign investment by promoting its seven Free Economic Zones: Incheon (near Incheon airport); Busan/Jinhae (in South Gyeongsang Province); Gwangyang Bay (in South Gyeongsang Province); Yellow Sea (in South Chungcheong Province); Daegu/Gyeongbuk (in North Gyeongsang Province); East Sea (in Donghae and Gangneung); and Chungbuk (in North Chungcheong Province).  Additional information is available at http://www.fez.go.kr/global/en/index.do .  There are also 26 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors.  Special considerations for foreign investors vary among these options.  In addition, there are four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensive land, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates.

Performance and Data Localization Requirements

There are no local employment requirements in the ROK.  Anyone who is planning to work during his or her stay in the ROK is required by law to apply for a visa.  Sponsoring employers often file the work permit and visa applications, and companies are required to confirm that a candidate of foreign nationality has a valid work permit prior to making a job offer.  Once an expat’s work permit has been approved, the Ministry of Justice will issue a Certificate of Confirmation of Visa Issuance (CCVI).  This certificate must then be submitted with the relevant visa application forms to the South Korean embassy or consulate in the applicant’s country of residence.  Work visas are usually valid for one year, and work visa issuance generally takes two to four weeks.  Changing a tourist visa to a work visa is not possible within the ROK; a work visa must be applied for at a ROK embassy or consulate.  Sectors such as public administration, national defense, and diplomacy are subject to certain restrictions imposed by the ROK government, but there are no government-imposed conditions or restrictions on investing in the ROK in most sectors.  The conditions to invest in the ROK are elaborated in the FIPA.  Foreign companies are not required to use domestic content or technology, nor are they required to turn over source code or provide access for surveillance to ROK authorities.  The ROK government, however, is implementing policies to foster the domestic software industry, which sometimes creates obstacles for foreign companies pursuing public procurement projects.  The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992.  There are no performance requirements regarding local content, local jobs, R&D activity, or domestic shares in the company’s capital.  There are no legal requirements for foreign information technology (IT) providers to turn over source code and/or provide access to encryption.  However, source code could potentially be required as part of common criteria certification administered by the IT Security Certification Center.  In January 2016, the ROK government announced guidelines stating that common criteria certification is a requirement for cloud computing services to be provided to ROK government agencies or public institutions.  ROK data privacy law has various requirements for companies that collect, use, transfer, outsource, or process personal information.  This law applies uniformly to both domestic and foreign companies that process personal information in the ROK.  The law imposes strict restrictions on transferring personal information outside of the country.  If a data controller intends to transfer the personal information of end-users outside of the ROK, it is required to obtain each end-user’s consent.  In the case of overseas transfer of personal information for the purpose of IT outsourcing, the data controller may forgo obtaining each individual’s consent if the data controller discloses in its privacy policy: (i) the purpose of overseas transfer; (ii) the transferees of personal information; and (iii) other certain items about overseas transfer.  There are similar requirements for a data controller to transfer the personal information of end-users to a third party within the ROK.  To transfer the personal information of end-users to a third party, a data controller must obtain each end-user’s consent.  In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas.  As such, this financial transaction data cannot be outsourced to overseas IT vendors, and financial companies in the ROK must store customers’ financial transaction data in the ROK.  The Financial Services Commission sets Korea’s financial policies, and directs the Financial Supervisory Service in the enforcement of those policies.

Real Property

Property rights and interests are enforced under the Civil Act.  Mortgages and liens exist, and the ROK’s recording system is reliable. The Alien Land Acquisition Act (amended in 1998) extends to non-resident foreigners and foreign corporations the same rights as Koreans in land purchase and use.  The Real Estate Investment Trust (REIT) Act supports indirect investments in real estate and restructuring of corporations.  The REIT Act allows investors to invest funds through an asset management company and in real property such as office buildings, business parks, shopping malls, hotels, and serviced apartments.  Property interests are enforced, and there is a reliable system for registering mortgages and liens, managed by the courts.  Legally-purchased property cannot revert to other owners, but squatters may have very limited rights in special situations, such as a right to cultivation of unoccupied land.

Intellectual Property Rights

Four ROK ministries share primary responsibility for protection and enforcement of intellectual property rights (IPR): the Ministry of Culture, Sports and Tourism (MCST); the Korea Copyright Protection Agency (KCOPA); the Korean Intellectual Property Office (KIPO); and the Korea Customs Service (KCS).  Since being removed from USTR’sSpecial 301 Watch List in 2009, the ROK has become a regional leader in terms of legal framework and enforcement for IPR.  Some industry sources have reported a loss of momentum in preventing the sale of physical counterfeit goods, but online markets are the subject of robust enforcement efforts.

Industry sources have expressed overall satisfaction with the ROK legal framework, calling Korea a “model Asian nation” for IPR protection.  In July 2019, an amendment to the Unfair Competition Prevention and Trade Secret Protection Act entered into force with the following broad effects: reduced requirements for secrecy on the part of information owners; broadened scope of what constitutes “theft;” and increased statutory punishments for trade secret theft.  KIPO suspended 7,662 online transactions on the year, up from 6,181 cases in 2018; and closed 340 illegal online shopping malls in 2019, up from 225 in 2018.  KIPO also introduced a new system in April 2019 that rewards private citizens for reporting counterfeit goods for sale online.  KCS handled 273 border enforcement cases for goods worth an estimated USD 600 million in 2019, annual increases of 56 percent and 26 percent, respectively.  Trademark enforcement accounted for 89 percent of these cases, which were mostly for counterfeit watches, apparel and other consumer goods.  KCS focused its enforcement efforts on online overseas direct purchases.  KCS also promoted IPR protection by posting public service announcements on public transportation and via social media.

Some industry sources have expressed concern that the ROK’s low prosecution-to-indictment ratio in IPR violation cases, light sentencing standards, and low punitive damage assessments are insufficient to deter lucrative infringement activity.  Although MCST Judicial Police recommended 762 IPR cases for legal action to the Supreme Prosecutor’s Office (SPO) in 2019, a 13 percent increase on the previous year, the total number of people indicted by the SPO for Copyright Act violations dropped from 18,392 in 2018 to 15,831 in 2019.  ROKG officials ascribed these divergent trends to the high threshold for prosecutors to take on an IPR case.

Stakeholders continue to express concern about Korea’s pharmaceutical reimbursement policy, specifically that it is not conducted in a fair, transparent, and nondiscriminatory manner that fully recognizes the value of innovation.

The ROK was not listed in the 2020 Special 301 Report, nor were any ROK-based phsyical or online markets included in the 2019 Notorious Markets List.  For additional information about national laws and points of contact at local intellectual property offices, please see World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following a 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock market.  It is tracked by the Korea Composite Stock Price Index (KOSPI) and has an effective regulatory system that encourages portfolio investment.  There is sufficient liquidity in the market to enter and exit sizeable positions.  In 2019, over 2,000 companies were listed with a combined market capitalization of USD 1.4 trillion.  The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets.  The ROK does not restrict payments and transfers for current international transactions, in accordance with the general obligations of member states under International Monetary Fund (IMF) Article VIII.  Credit is allocated on market terms.  The private sector has access to a variety of credit instruments, but non-resident foreigners are unable to borrow money in South Korean won, although they can issue bonds in local currency.  Foreign portfolio investors enjoy open access to the ROK stock market.  Aggregate foreign investment ceilings were abolished in 1998, and foreign investors owned 37.6 percent of benchmark KOSPI stocks and 10.1 percent of the KOSDAQ at the end of 2019.  Foreign portfolio investment decreased slightly over the past year, reflecting slowing global growth.

Money and Banking System

Financial sector reforms enacted to increase transparency and promote investor confidence are often cited as one reason for the ROK’s rapid rebound from the 2008 global financial crisis.  These reforms aimed to increase transparency and investor confidence and generally purge the sector of moral hazard.  Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past.  These reforms addressed the weak supervision and poor lending practices in the South Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis.  The ROK banking sector is healthy overall, with a low non-performing loan ratio of 0.77 percent at the end of 2019, dropping 0.2 percent from the prior year.  Korean commercial banks held more than USD 3.3 trillion in total assets at the end of 2019.  Foreign commercial banks or branches can establish local operations, which would be subject to oversight by ROK financial regulators.  The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy.  There are no restrictions on a foreigner’s ability to establish a bank account in Korea.  The Bank of Korea (BOK) is the central bank.

Foreign Exchange and Remittances

Foreign Exchange

In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment.  All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange.  In effect, these notifications are pro forma, and approval can be processed within three hours.  Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns.  Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector.  According to the Foreign Exchange Transaction Act (FETA), transactions that could harm international peace or public order, such as money laundering and gambling, require additional monitoring or screening.  Three specific types of transactions are restricted:

• Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
• The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
• The ROK government will monitor and ensure that South Korean firms that have extended credit to foreign borrowers collect their debts. The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.

Funds associated with any form of investment can be freely converted into any world currency.  However, there might be some cost or technical problems in case of conversion into lesser used currencies, due to the relatively small foreign exchange market in the country.  In 2019, 69.4 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot and future) was equal to USD 55.8 billion, up 0.5 percent from the previous year.  Exchange rates are generally determined by the market.  The U.S. Department of the Treasury assessed that ROK authorities historically had intervened on both sides of the currency market, with a net impact that resisted won appreciation as demonstrated by a sustained rise in reserves and net forward position.  In its January 2020 semiannual report to Congress, Treasury assessed that in 2018 and the first half of 2019, ROKG authorities on balance intervened to support the won through small net sales of foreign exchange.  Treasury welcomed the ROK’s commitment to increased transparency, while recommending that Korean authorities limit currency intervention to exceptional circumstances.  The BOK’s most recent intervention report, released in March 2020 and covering 4Q 2019, showed zero net intervention.

Remittance Policies

The right to remit profits is granted at the time of original investment approval.  Banks control the now pro forma approval process for FETA-defined open sectors.  For conditionally or partially restricted investments (as defined by the FETA), the relevant ministry must provide approval for both investment and remittance.  When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved by either a bank or MOEF.  Approval is virtually automatic.  An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment.  The ROK routinely permits the repatriation of funds but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets.  To withdraw capital, a stock valuation report issued by a recognized securities company or the ROK appraisal board also must be presented.  Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid.  There are no time limitations on remittances.

Sovereign Wealth Funds

The Korea Investment Corporation (KIC) is a wholly government-owned sovereign wealth fund established in July 2005 under the KIC Act.  KIC’s steering committee is comprised of KIC’s Chief Executive Officer, the Minister of Economy and Finance, the Bank of Korea (BOK) Governor, and six private sector members appointed by the ROK President.  KIC is on the Public Institutions Management Act (PIMA) list.  It is mandated to manage assets entrusted by the ROK government and central bank and generally adopts a passive role as a portfolio investor.  Its assets under management stood at USD 131.6 billion at the end of 2018.  KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules.  It follows the Santiago Principles and participates in the IMF-hosted International Working Group on Sovereign Wealth Funds.  The KIC does not invest in domestic assets, aside from a one-time USD 23 million investment into a domestic real estate fund in January 2015.

Many ROK state-owned enterprises (SOEs) continue to exert significant control over segments of the economy.  There are 36 SOEs active in the energy, real estate, and infrastructure (railroad, highway construction) sectors.  The legal system has traditionally ensured a role for SOEs as sectoral leaders, but in recent years, the ROK has sought to attract more private participation in the real estate and construction sectors.  SOEs are generally subject to the same regulations and tax policies as private sector competitors and do not have preferential access to government contracts, resources, or financing.  The ROK is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in annex three of the ROK’s agreement.  The state-owned Korea Land and Housing Corporation is given preference in developing state-owned real estate projects, notably housing.  The court system functions independently from the government and gives equal treatment to SOEs and private enterprises.  The ROK government does not provide official market share data for SOEs.  It requires each entity to disclose financial statements, the number of employees, and average compensation figures.  The PIMA gives authority to MOEF to administer control of many SOEs, mainly focusing on administrative and human resource management.  However, there is no singular government entity that exercises ownership rights over SOEs.  SOEs subject to PIMA are required to report to a line minister; the President or line ministers appoint CEOs or directors, often from among senior government officials.  SOEs are explicitly obligated to consult with government officials on their budget, compensation, and key management decisions (e.g., pricing policy for energy and public utilities).  For other issues, the government officials informally require the SOEs to either consult with them before making decisions or report ex post facto.  Market analysts generally regard SOEs as a part of the government or entities fully guaranteed by the government, with some exceptions: SOEs listed on local security markets, such as the Industrial Bank of Korea and Korea Electric Power Corporation, are regarded as semi-private firms.  The ROK adheres to the OECD Guidelines for Multinational Enterprises and reports significant changes in the regulatory framework for SOEs to the OECD.  A list of South Korean SOEs is available on this Korean-language website: http://www.alio.go.kr/home.html .  The ROK government officially does not give any non-market based advantage to SOEs competing in the domestic market.  Although the state-owned Korea Development Bank does appear to enjoy lower financing costs because of the government’s guarantee, it does not  have a major effect on U.S. retail banks operating in Korea.

Privatization Program

Privatization of government-owned assets historically faced protests by labor unions and professional associations and a lack of interested buyers in some sectors.  No state-owned enterprises were privatized between 2002 and November 2016.  In December 2016, the ROK sold part of its stake in Woori Bank, recouping USD 2.07 billion, and plans to sell its remaining 21.4 percent stake at an undetermined future date.  Given the current administration’s pro-labor stance, most analysts do not expect significant movement with regard to privatization in the near future.  Foreign investors may participate in privatization programs if they comply with ownership restrictions stipulated for the 30 industrial sectors indicated in this report, Section 1: Openness To, and Restrictions Upon, Foreign Investment.  These programs have a public bidding process that is clear, non-discriminatory, and transparent.  The authority in charge or a delegated private lead manager provides the relevant information.

Awareness of the economic and social value of responsible business conduct and corporate social responsibility (CSR) continues to grow in the ROK.  The Korea Corporate Governance Service, founded in 2002 by entities including the Korea Exchange and the Korea Listed Companies Association, encourages companies to voluntarily improve their corporate governance practices.  Since 2011, its annual assessments have included guidelines and CSR reviews including of corporate environmental responsibility.  The United Nations Global Compact (UNGC) Network Korea, established in 2007, actively promotes corporate involvement in the UN Public Private Partnership for Sustainable Development Goals 2016-2030.  UNGC is focused on human rights, anti-corruption, labor standards, and the environment, with 231 ROK companies listed as UNGC members as of April 2020.  Government-supported subsidies and tax reductions for social enterprises have contributed to an increase in the number of organizations tackling social issues related to unemployment, the environment, and low-income populations.  The ROKG promotes the OECD Guidelines for Multinational Enterprises online, via seminars, and by publishing and distributing promotional materials.  To enhance implementation, the ROKG established a National Action Plan overseen by the Ministry of Justice’s International Human Rights Division, established a National Contact Point (NCP), and designated the Korea Commercial Arbitration Board (KCAB) as the NCP Secretariat.  The KCAB handled 393 cases in 2018 with a total claim amount over USD 670 million.

The National Human Rights Commission, the Ministry of Employment and Labor (MOEL), the Korea Consumer Agency, and the Ministry of Environment impartially enforce ROK laws in the fields of human rights, labor, consumer protection, and the environment.  Shareholders are protected by laws such as the Act on an External Audit of Corporations under the jurisdiction of the Financial Services Commission, the Act on Monopoly Regulation and Fair Trade under the jurisdiction of the KFTC, and the Commercial Act under the jurisdiction of the Ministry of Justice.  The Commercial Act is currently under revision to better represent minority shareholders and enhance the value of shareholders.  Other organizations involved in responsible business conduct include the ROK office of the Trade Union Advisory Committee to the OECD, the Korea Human Rights Foundation, and the Korean House for International Society.  The Korea Sustainability Investing Forum (KOSIF) was established in 2007 and is dedicated to promoting and expanding socially responsible investment and CSR.  Through regular fora, seminars, and publications, KOSIF provides educational opportunities, conducts research to establish a culture of socially responsible investment in the ROK, and supports relevant legislative processes.  It actively engages with National Assembly members and stakeholders to influence decision-making processes.

The ROK does not maintain regulations to prevent conflict minerals from entering supply chains; however, MOTIE supports companies’ voluntary adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  ROK companies are often obligated to follow the conflict-free regulations of economies to which they export goods.  The Korea International Trade Association and private-sector firms provide consulting services to companies seeking to comply with conflict-free regulations.  The ROK is not a member of the Extractive Industries Transparency Initiative, but has a mining industry and has participated in the Kimberly Process since 2012.  The ROK government is taking measures to guarantee transparency through the Mining Act, Overseas Resources Development Business Act, other relevant laws on taxation, environment, labor, and anti-bribery, and OECD Guidelines for Multinational Enterprises.

In an effort to combat corruption, the ROK has introduced systematic measures to prevent the illegal accumulation of wealth by civil servants.  The 1983 Public Service Ethics Act requires high-ranking officials to disclose personal assets, financial transactions, and gifts received during their term of office.  The Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption and Civil Rights Commission (previously called the Anti-Corruption Act) concerns reporting of corruption allegations, protection of whistleblowers, institutional improvement, and training and public awareness to prevent corruption, as well as establishing national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC).  Implementation is behind schedule, according to Transparency International, which ranked the ROK 37 out of 180 countries and territories in its 2019 Corruption Perception Index with a score of 59 out of 100 (with 100 being the best score).  The Department of State’s 2019 ROK Human Rights Report highlighted allegations of corruption levied against former Minister of Justice Cho Kuk in October 2019.  He resigned 35 days after his appointment amid allegations that he and his family used his previous positions unfairly and, in some cases, fraudulently to gain academic benefits for his daughter and inappropriate returns on financial investments.  Public concern about government corruption reached an apex between 2016 and 2017, when local press began exposing the link between then-President Park Geun-hye and her friend and adviser Choi Soon-sil.  Choi was arrested and sentenced to 20 years in jail on charges of fraud, coercion, and abuse of power and President Park was impeached by a 234-56 vote in the National Assembly in December 2016.  Following her removal from office, a presidential by-election was held on May 9, 2017, bringing President Moon Jae-in into office.  Former President Park was found guilty of multiple counts of abuse of power, bribery, and coercion and sentenced to 24 years in prison on April 6, 2018.  Separately, on October 5, 2018, Park’s predecessor, former President Lee Myung-bak was sentenced to 11 months’ imprisonment for graft, embezzlement, and abuse of power, including accepting bribes from a major consumer electronics conglomerate in return for a presidential pardon for its chairman.  Political corruption at the highest levels of elected office have occurred despite efforts by the ROK legislature to pass and enact anti-corruption laws such as the Act on Prohibition of Illegal Requests and Bribes, also known as the Kim Young-ran Act, in March 2015.  The anti-corruption law came into effect on September 28, 2016, and institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers.  It also extends to the spouses of officials.  The Act on the Protection of Public Interest Whistleblowers is designed to protect whistleblowers in the private sector and equally extends to reports on foreign bribery, with a reporting center operated by the ACRC.

In 2014, the Sewol ferry disaster that resulted in the deaths of 304 passengers, most of them school children on a field trip, brought to public attention collusion between government regulators and regulated industries.  Investigators determined that companies associated with the vessel had used insider knowledge and government contacts to skirt legal requirements by hiring recently retired government officials.  In response, the ROK government tightened regulations around hiring of former government officials.  This reform expanded the sectors restricted from employing former government officials, extended the employment ban from two to three years, and increased scrutiny of retired officials employed in fields associated with their former duties.  The Public Service Ethics Commission, between May 2017 and February 2019, approved approximately 85 percent, or 1,335, of the requests made by former political appointees and former government officials to accept government-affiliated or private sector positions, according to local press.  Most companies maintain an internal audit function to prevent and detect corruption.  Government agencies responsible for combating government corruption include the Board of Audit and Inspection, which monitors government expenditures, and the Public Service Ethics Committee, which monitors civil servants’ financial disclosures and their financial activities.  The ACRC focuses on preventing corruption by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems.  In reporting cases of corruption to government authorities, nongovernment organizations and civil society groups are protected by the Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission, as well as the Protection of Public Interest Reporters Act.  Individuals reporting cases of corruption to the ACRC must provide their full name and other personally identifiable information (PII) to make the submission.  However, in April 2018, the law was updated to allow would-be filers to report cases through one’s attorney without disclosing PII to the courts.  Violations of these legal protections can result in fines or prison sentences.  U.S. firms have not identified corruption as an obstacle to FDI.  The ROK ratified the UN Convention against Corruption in 2008.  It is also a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and a member of the Asia-Pacific Economic Cooperation Anti-Corruption and Transparency Working Group.  The Financial Intelligence Unit has cooperated fully with U.S. and UN efforts to shut down sources of terrorist financing.  Transparency International has maintained a national chapter in the ROK since 1999.

Resources to Report Corruption

Government agency responsible for combating corruption:

Anti-Corruption and Civil Rights Commission
Government Complex-Sejong, 20, Doum 5-ro
Sejong-si, 339-012
Tel: +82-44-200-7151
Fax: +82-44-200-7916
Email: acrc@korea.kr
http://www.acrc.go.kr/en/index.do 

Contact at “watchdog” organization:

Corruption Network in Korea (aka Transparency International Korea)
#1006 Pierson Building, 42, Saemunan-ro, Jongno-gu, Seoul 110-761
Tel: +82-2-717-6211
Fax: +82-2-717-6210
Email: ti@ti.or.kr
http://www.transparency-korea.org/ 

The Democratic People’s Republic of Korea (DPRK) and the ROK continue to have a tense relationship despite rapprochement efforts in 2018, and the two Koreas maintain one of the world’s most heavily-fortified borders.  The United States has had a security alliance with the ROK since 1953, with nearly 28,000 U.S. troops currently stationed in the ROK.  The presence of U.S. forces has allowed the Korean Peninsula to maintain general peace and stability since 1953 and enabled the ROK to grow into a modern, prosperous democracy boasting one of the largest and most dynamic economies in the world.  In addition, both the ROK and U.S. governments are attempting to engage with the DPRK in dialogue in an effort to resolve tensions and to realize the complete denuclearization of North Korea.  The two Koreas committed in the April 27, 2018, inter-Korean summit to reduce military tensions on the border and to work toward a permanent peace regime on the Korean Peninsula.  Likewise, the United States and DPRK agreed in the June 12, 2018, Singapore Summit between President Trump and Chairman Kim to work toward the transformation of U.S.-DPRK relations, joint efforts to build a lasting a stable peace regime on the Korean Peninsula, the complete denuclearization of the Korean Peninsula, and the recovery and repatriation of POW/MIA remains from the Korean War.

The ROK’s relations with Japan deteriorated significantly in 2019 due primarily to the government of Japan’s strong reaction against the ROK Supreme Court’s 2018 decisions directing Japanese companies to compensate South Koreans subjected to forced labor during World War II – including the court-directed seizure of defendant company assets – as well as the ROK’s objection to Japan’s subsequent tightening of exports controls against the ROK in 2019.  This prompted consumer boycotts in the ROK against Japanese goods, causing a significant drop in local sales for certain products, including beer and automobiles, as well as at certain Japan-origin retail chains.

The ROK does not have a history of political violence directed against foreign investors.  There have not been reports of politically-motivated threats of damage to foreign-invested projects or foreign-related installations of any sort, nor of any incidents that might be interpreted as having targeted foreign investments.  Labor violence unrelated to the issue of foreign ownership, however, has occurred in foreign-owned facilities in the past.  There have also been protests in the past directed at U.S. economic, political, and military interests (e.g. beef imports in 2008 or Terminal High Altitude Area Defense deployment in 2017 and 2018).  The ROK is a modern democracy with active public political participation, and well-organized political demonstrations are common.  For example, large-scale rallies were a regular occurrence throughout former President Park Geun-hye’s impeachment in 2016 and 2017.  The protests were largely peaceful and orderly.  The presidential by-election and transition that followed Park’s impeachment also proceeded smoothly and without incident.

Upon taking office in May 2017, President Moon Jae-in declared himself the “Jobs President,” and his administration has introduced a number of employment-related reforms since.  In an attempt to reduce the ROK’s notoriously long working hours, the Moon administration introduced a mandatory 52-hour workweek regulation in July 2018.  Domestic and foreign companies, however, expressed concern that the measure added further rigidity to the ROK’s already inflexible labor market.  According to Statistics Korea (http://kostat.go.kr/portal/eng/index.action ), there were approximately 28 million economically active people in the ROK as of February 2020, with an employment rate (OECD standard) of approximately 60 percent.  The overall unemployment rate of 4.1 percent in February 2020 was less than half the 9 percent unemployment rate of youth aged 15-29. The country has two major national labor federations.  As of March 2020, the Federation of Korean Trade Unions (FKTU) had 933,000 members, and the Korean Confederation of Trade Unions (KCTU) had 968,000 members.  KCTU and FKTU are affiliated with the International Trade Union Confederation.  Most of FKTU’s constituent unions maintain affiliations with international union federations.

The minimum wage is reviewed annually.  Labor and business set the minimum wage for 2019 at KRW 8,350 (approximately USD 7.35 per hour), a 10.9 percent increase from 2018.  The Labor Standards Act was revised in 2018 to reduce maximum working hours to 52 per week.  According to Statistics Korea, non-regular workers received 54.6 percent of the wages of regular workers in 2019.  Non-regular workers received KRW 1.73 million per month (about USD 1,484) while regular workers received KRW 3.17 million (about USD 2,714).

For regular, full-time employees, the law provides employment insurance, national medical insurance, industrial accident compensation insurance, and participation in the national pension system through employers or employer subsidies.  Non-regular workers, such as temporary and contracted employees, are not guaranteed the same collection of benefits.  Regarding severance pay for regular workers, ROK law does not distinguish between the firing of an employee versus the laying off of an employee for economic reasons.  Employers’ reliance on non-regular workers is partially explained by the costs that may be associated with dismissing regular full-time employees and the savings from not offering benefits like insurance to non-regular workers.  There are no government policies requiring the hiring of ROK nationals.  In 2004, the ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect the rights of foreign workers.  The EPS allows employers to legally employ a certain number of foreign workers from 16 countries, including the Philippines, Indonesia, and Vietnam, with which the ROK maintains bilateral labor agreements.  In 2015, the ROK increased its annual quota to 55,000 migrant workers.  At the end of 2019, approximately 213,374 foreigners were working under the EPS in the manufacturing, construction, agriculture, livestock, service, and fishery industries.

Legally, unions operate with autonomy from the government and employers, although national labor federations, comprised of various industry-specific unions, receive annual government subsidies.  The ratio of organized labor to the entire population of wage earners at the end of 2018 was 11.8 percent.  ROK trade union participation is lower than the latest-available OECD average of 16 percent in 2016.  More information is available at http://stats.oecd.org/ .  Labor organizations can organize in export processing zones (EPZs), but foreign companies operating in EPZs are exempt from some labor regulations.  Exemptions include provisions that mandate paid leave, require companies with more than 50 people to recruit persons with disabilities for at least two percent of their workforce, encourage companies to reserve three percent of their workforce for workers over 55 years of age, and restrict large companies from participating in certain business categories.  Foreign companies operating in Free Economic Zones have greater flexibility in employing “non-regular” workers in a wider range of sectors for extended contractual periods.  ROK law provides workers with the right to associate freely and allows public servants and private workers to organize unions.  The Trade Union and Labor Relations Adjustment Act provides for the right to collective bargaining and collective action, and allows workers to exercise these rights in practice.

The National Labor Relations Commission is the primary government body responsible for labor dispute resolution.  It provides arbitration and mediation services in response to dispute resolution requests submitted by employees, employers, or both parties.  Labor inspectors from the Ministry of Employment and Labor also have certain legal authorities to participate in dispute settlement related to violations of labor rights.  The Korea Workers’ Compensation and Welfare Service handles labor disputes resulting from industrial accidents or disasters.  In June 2018, the ROK President established the “Economic, Social, and Labor Council” that serves as an advisory group on economic and labor issues.  The Act on the Protection of Fixed-Term and Part-Time Workers prohibits discrimination against non-regular workers and requires that non-regular workers employed longer than two years be converted to permanent status.  The two-year rule went into effect on July 1, 2009.  Both the labor and business sectors have complained that the two-year conversion law forced many businesses to limit the contract terms of non-regular workers to two years and incur additional costs with the entry of new labor every two years.  More information can be found in the Department of State’s Report on Human Rights Practices for 2019: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/south-korea/

U.S. investments in the ROK are eligible for insurance programs sponsored by the U.S. Development Finance Corporation (formerly the Overseas Private Investment Corporation, or OPIC).  The DFC has not guaranteed any U.S. investments in the ROK since 1998, when OPIC reinstated coverage it had suspended in 1991 due to concerns about worker rights.  Coverage issued prior to 1991 is still in force.  The United States and the ROK signed an investment incentive agreement on July 30, 1998.  The ROK has been a member of the World Bank’s Multilateral Investment Guarantee Agency since 1987.  In the second quarter of 2018, Korean firm ARK Impact Asset Management and OPIC embarked on a joint investment in the Mumbai Slum Redevelopment Project.

*ROK Sources: GDP – http://ecos.bok.or.kr/  (as of March 2019); inbound FDI – http://www.motie.go.kr ; (as of January 2019) outbound FDI – http://www.koreaexim.go.kr  (as of March 2019) portfolio investment – http://www.fss.or.kr  (as of January 2019)

Economic Section, U.S. Embassy Seoul
188 Sejong-daero, Sejongno, Jongno-gu, Seoul, South Korea, 110-710
Tel: +82 2-397-4114 

Transparency of the Regulatory System

Generally, Thai regulations are readily available to the public. Foreign investors have, on occasion, expressed frustration that draft regulations are not made public until they are finalized. Comments stakeholders submit on draft regulations are not always taken into consideration. Non-governmental organizations report, however, the Thai government actively consults them on policy, especially in the health sector and on intellectual property issues. In other areas, such as digital and cybersecurity laws, the Thai government has taken stakeholders’ comments into account and amended draft laws accordingly.

U.S. businesses have repeatedly expressed concerns about Thailand’s customs regime. Complaints center on lack of transparency, the significant discretionary authority exercised by Customs Department officials, and a system of giving rewards to officials and non-officials for seized goods based on a percentage of their sales price. Specifically, the U.S. government and private sector have expressed concern about inconsistent application of Thailand’s transaction valuation methodology and the Customs Department’s repeated use of arbitrary values. Thailand’s latest Customs Act, which entered into force on November 13, 2017, is a moderate step forward. The Act removed the Customs Department Director General’s discretion to increase the Customs value of imports. It also reduced the percentage of remuneration awarded to officials and non-officials from 55 percent to 40 percent of the sale price of seized goods (or of the fine amount). While a welcome development, reduction of this remuneration is insufficient to remove the personal incentives given Customs officials to seize goods nor to address the conflicts of interest the system entails.

Consistent and predictable enforcement of government regulations remains problematic. In 2017, the Thai government launched a “regulatory guillotine” initiative to cut down on red tape, licenses, and permits. The policy focused on reducing and amending outdated regulations in order to improve Thailand’s ranking on the World Bank “Ease of Doing Business” report. The regulatory guillotine project has helped improve Thailand’s ranking and is still underway.

Gratuity payments to civil servants responsible for regulatory oversight and enforcement remain a common practice. Firms that refuse to make such payments can be placed at a competitive disadvantage to other firms that do engage in such practices.

The Royal Thai Government Gazette (www.ratchakitcha.soc.go.th ) is Thailand’s public journal of the country’s centralized online location of laws, as well as regulation notifications.

International Regulatory Considerations

Thailand is a member of the World Trade Organization (WTO) and notifies most draft technical regulations to the Technical Barriers to Trade (TBT) Committee and the Sanitary and Phytosanitary Measures Committee. However, Thailand does not always follow WTO and other international standard-setting norms or guidance, butprefers to set its own standards in many cases. In October 2015, the country ratified the WTO Trade Facilitation Agreement, which came into effect in February 2017.

Legal System and Judicial Independence

Thailand has a civil code, commercial code, and a bankruptcy law. Thailand has an independent judiciary that is generally effective in enforcing property and contractual rights. The legal process is slow in practice, and litigants or third parties sometimes influence judgments through extra-legal means. Monetary judgments are calculated at the market exchange rate. Decisions of foreign courts are not accepted or enforceable in Thai courts. Disputes such as the enforcement of property or contract rights have generally been resolved in Thai courts.

There are three levels to the judicial system in Thailand: The Court of First Instance, which handles most matters at inception; the Court of Appeals; and the Supreme Court. There are also specialized courts, such as the Labor Court, Family Court, Tax Court, the Central Intellectual Property and International Trade Court, and the Bankruptcy Court.

The Specialized Appeal Court handles appeals from specialized courts. The Supreme Court has discretion whether to take a case that has been decided by the Specialized Appeal Court. If the Supreme Court decides not to take up a case, the Specialized Appeal Court decision stands.

Laws and Regulations on Foreign Direct Investment

The Foreign Business Act (described in detail above) governs most investment activity by non-Thai nationals. Other key laws governing foreign investment are the Alien Employment Act (1978) and the Investment Promotion Act (1977). However, as explained above, many U.S. businesses enjoy investment benefits through the U.S.-Thailand Treaty of Amity and Economic Relations (often referred to as the ‘Treaty of Amity’), which was established to promote friendly relations between the two nations. Pursuant to the Treaty, American nationals are entitled to certain exceptions to the FBA restrictions.

Pertaining to the services sector, the 2007 Financial Institutions Business Act unified the legal framework and strengthened the Bank of Thailand’s (the country’s central bank) supervisory and enforcement powers. The Act allows the Bank of Thailand to raise foreign ownership limits for existing local banks from 25 percent to 49 percent on a case-by-case basis. The Minister of Finance can authorize foreign ownership exceeding 49 percent if recommended by the central bank. Details are available at https://www.bot.or.th/English/AboutBOT/LawsAndRegulations/SiteAssets/Law_E24_Institution_Sep2011.pdf .

Apart from acquiring shares of existing (traditional) local banks, foreign banks can enter the Thai banking system by obtaining new licenses. The Ministry of Finance issues such licenses, following a consultation process with the Bank of Thailand. The Thai central bank is currently studying new licenses for digital-only banks, a tool meant to enhance financial inclusion and keep pace with consumer needs in the digital age. Digital-only banks can operate at a lower cost and offer different services than traditional banks.

The 2008 Life Insurance Act and the 2008 Non-Life Insurance Act apply a 25 percent cap on foreign ownership of insurance companies. Foreign boards of directors’ membership is also limited to 25 percent. However, in January 2016 the Office of the Insurance Commission (OIC), the primary insurance industry regulator, notified that Thai life or non-life insurance companies wishing to exceed these limits may apply to the OIC for approval. Any foreign national wishing to hold more than 10 percent of the voting shares in an insurance company must seek OIC approval. With approval, a foreign national can acquire up to 49 percent of the voting shares. Finally, the Finance Minister, with OIC’s positive recommendation, has discretion to permit greater than 49 percent foreign ownership and/or a majority of foreign directors, when the operation of the insurance company may cause loss to insured parties or to the public.

The Board of Investment offers qualified investors several benefits and provides information to facilitate a smoother investment process in Thailand. Information on the BOI’s “One Start One Stop” investment center can be found at http://osos.boi.go.th . A physical office is located on the 18th floor of Chamchuri Square on Rama 4/Phayathai Road in Bangkok.

Competition and Anti-Trust Laws

Thailand updated the Trade Competition Act on October 5, 2017. The updated Act covers all business activities, except: state-owned enterprises exempted by law or cabinet resolution; specific activities related to national security, public benefit, common interest and public utility; cooperatives, agricultural and cooperative groups; government agencies; and other enterprises exempted by the law. The Act broadens the definition of a business operator to include affiliates and group companies, and broadens the liability of directors and management, subjecting them to criminal and administrative sanctions if their actions (or omissions) resulted in violations. The Act also provides details about penalties in cases involving administrative court or criminal court actions. The amended Act has been noted as an improvement over the prior legislation and a step towards Thailand’s adoption of international standards in this area.

The Office of Trade Competition Commission (OTCC) is an independent agency and the main enforcer of the Trade Competition Act B.E. 2560 (2018). The OTCC is comprised of seven members nominated by a selection committee and endorsed by the Cabinet. The Commission has the following responsibilities: advises the government on issuance of relevant regulations; ensures fair and free trade practices; investigates cases and complaints of unfair trade; and pursues criminal and disciplinary actions against those found guilty of unfair trade practices stipulated in the law. The law focuses on the following areas: unlawful exercise of market dominance; mergers or collusion that could lead to monopoly; unfair competition and restricting competition; and unfair trade practices.

The government has authority to control the price of specific products and services under the Price of Goods and Services Act. The MOC’s Department of Internal Trade administers the law and interacts with affected companies. The Committee on Prices of Goods and Services makes final decisions on products to add or remove from price controls. As of October 2019, the MOC decreased the number of controlled commodities and services to 52 from 54 the previous year. Examples of controlled products include automotive tires, agricultural fertilizer, and sugar. Raising prices of controlled products and services is prohibited without obtaining the Committee’s approval. The government uses its controlling stakes in major suppliers of products and services, such as Thai Airways and PTT Public Company Limited (the national petroleum company), to influence prices in the market.

Expropriation and Compensation

Thai laws provide guarantees regarding protection from expropriation without compensation and non-discrimination for some, but not all, investors. Thailand’s Constitution provides protection from expropriation without fair compensation and requires the government to pass a specific, tailored expropriation law if the expropriation is required for the purpose of public utilities, national defense, acquisition of national resources, or for other public interests. The Investment Promotion Act also guarantees the government shall not nationalize the operations and assets of BOI-promoted investors.

The Expropriation of Immovable Property Act (EIP), most recently amended in 2019, applies to all property owners, whether foreign or domestic nationals. The Act provides a framework and clear procedures for expropriation; sets forth detailed provision and measures for compensation of land owners, lessees and other persons that may be affected by an expropriation; and recognizes the right to appeal decisions to Thai courts. The 2019 EIP requires the government to return land that was expropriated but has not been used back to the original property owners. However, the EIP and Investment Promotion Act do not protect against indirect expropriation and do not distinguish between compensable and non-compensable forms of indirect expropriation.

Thailand has a well-established system for land rights that is generally upheld in practice, but the legislation governing land tenure still significantly restricts foreigners’ rights to acquire land.

Dispute Settlement

ICSID Convention and New York Convention

Thailand is a signatory to the New York Convention, which means that investors can enforce arbitral awards in any other signatory country. Thailand signed the Convention on the Settlement of Investment Disputes in 1985 but has not ratified it. Therefore, most foreign investors covered under Thailand’s treaties with investor-state dispute settlement (ISDS) provisions that are limited to ICSID arbitration have not been able to bring ISDS claims against Thailand under these treaties.

Investor-State Dispute Settlement

Thailand is party to bilateral investment treaties with 46 nations. Two treaties — with the Netherlands and United States (Treaty of Amity) — do not include binding dispute resolution provisions. This means that investors covered under these treaties are unable to pursue international arbitration proceedings against the Thai government without first obtaining the government’s consent. There have been two notable cases of investor-state disputes in the last fifteen years, neither of which involved U.S. companies. The first case involved a concession agreement for a construction project filed under the Germany-Thailand bilateral investment treaty. In the second case, Thailand is engaged in a dispute over the government’s invocation of special powers to shut down a gold mine in early 2017.

International Commercial Arbitration and Foreign Courts

Thailand’s Arbitration Act of 2002, modeled in part after the UNCITRAL Model Law, governs domestic and international arbitration proceedings. The Act states that “in cases where an arbitral award was made in a foreign country, the award shall be enforced by the competent court only if it is subject to an international convention, treaty, or agreement to which Thailand is a party.” Any arbitral award between parties subject to the New York Convention should thus be enforced. The following organizations provide arbitration services in Thailand: the Thai Arbitration Institute of the Alternative Dispute Resolution Office; Office of the Judiciary; and the Office of the Arbitration Tribunal of the Board of Trade of Thailand. In addition, the semi-public Thai Arbitration Center offers mediation and arbitration for civil and commercial disputes. An amendment to the Arbitration Act that allows foreign arbitrators to take part in cases involving foreign parties came into force on April 15, 2019. Under very limited circumstances, a court can set aside an arbitration award.

Bankruptcy Regulations

Thailand’s bankruptcy law is modeled after that of the United States. The law authorizes restructuring proceedings that require trained judges who specialize in bankruptcy matters to preside. According to the law, bankruptcy is defined as a state in which courts permit the distribution of assets belonging to a debtor among the creditors within the parameters of the law. Thailand’s bankruptcy law allows for corporate restructuring similar to U.S. Chapter 11 and does not criminalize bankruptcy. The law also distinguishes between secured and unsecured claims, with the former prioritized. While bankruptcy is under consideration, creditors can request the following ex parte applications from the Bankruptcy Court: an examination by the receiver of all the debtor’s assets and/or that the debtor attend questioning on the existence of assets; a requirement that the debtor provide satisfactory security to the court; and immediate seizure of the debtor’s assets and/or evidence in order to prevent the loss or destruction of such items.

The law stipulates that all applications for repayment must be made within one month after the Bankruptcy Court publishes the appointment of an official receiver. If a creditor eligible for repayment does not apply within this period, the creditor forfeits his/her right to receive payment or the court may cancel the order to reorganize the business. If any person opposes a filing, the receiver shall investigate the matter and approve, partially approve, or dismiss the application. Any objections to the orders issued by the receiver may be filed with the court within 14 days after learning of the issued order.

Within bankruptcy proceedings, it is also possible to undertake a “composition” in order to avoid a long and protracted process. A composition takes place when a debtor expresses in writing a desire to settle his/her debts, either partially or in any other manner, within seven days of submitting an explanation of matters related to the bankruptcy or during a time period prescribed by the receiver. After the proposal for a composition has been submitted, the receiver calls for a meeting among creditors to consider whether or not to accept the proposal. If the proposal is accepted, the court will approve the composition in order to legally execute the proposal; however, it will only do so if the proposal includes clear provisions for the repayment of debts.

The National Credit Bureau of Thailand (NCB) provides the financial services industry with information on consumers and businesses. The NCB is required to provide the financial services sector with payment history information from utility companies, retailers and merchants, and trade creditors.

Investment Incentives

The Board of Investment:

The Board of Investment offers investment incentives to qualified domestic and foreign investors. To upgrade the country’s technological capacity, the BOI presently gives more weight to applications in high-tech, innovative, and sustainable industries. These include digital technology, “smart agriculture” and biotechnology, aviation and logistics, automation and robotics, medical and wellness tourism, and other high-value services.

The most significant privileges offered by the BOI for promoted projects include: corporate income tax exemptions; tariff reductions or exemptions on imports of machinery used in the investment; tariff-free treatment on imported raw materials used in production for export.

• corporate income tax exemptions; tariff reductions or exemptions on imports of machinery used in the investment; tariff-free treatment on imported raw materials used in production for export.
• permission to own land; permission to bring foreign experts; and visa and work permit facilitation.

Investment projects with a significant R&D, innovation, or human resource development component may be eligible for additional grants and incentives. Moreover, grants are provided to support targeted technology development under the Competitive Enhancement Act. BOI offers a one-stop service to expedite multiple business processes for investors.

For additional information, contact the Office of Board of Investment on 555 Vibhavadi-Rangsit Road, Chatuchak, Bangkok 10900 and telephone at +662-553-8111 or website at www.boi.go.th.

Office of the Eastern Economic Corridor:

Thailand’s flagship investment zone, the “Eastern Economic Corridor (EEC),” spans the provinces of Chachoengsao, Chonburi, and Rayong (5,129 square miles). The EEC leverages the developed infrastructure networks of the adjacent Eastern Seaboard industrial area, Thailand’s primary investment destination for more than 30 years. The Thai government foresees the EEC as a primary investment and infrastructure hub in ASEAN and a gateway to east and south Asia. Among the EEC development projects are: smart cities; an innovation district (EECi); a digital park (EECd); an aerotropolis (EEC-A); a medical hub (EECmd); and other state-of-the-art facilities. The EEC is targeting twelve key industries:

• Next-generation automotive
• Intelligent electronics
• Advanced agriculture and biotechnology
• Food processing
• Tourism
• Advance robotics and automation
• Integrated aviation industry
• Medical hub and total healthcare services
• Biofuels and biochemicals
• Digital technology
• Defense industry
• Human resource development

The EEC Act authorized investment incentives and privileges. Investors can obtain long-term land leases of 99 years (with an initial lease of up to 50 years and a renewal of up to 49 years). The EEC Act shortens the public-private partnership approval process to approximately nine months.

The BOI works in cooperation with the EEC Office. BOI offers corporate income tax exemptions of up to 13 years for strategic projects in the EEC area. Foreign executives and experts who work in targeted industries in the EEC are subject to a maximum personal income tax rate of 17 percent.

For additional information, contact the Eastern Economic Corridor Office at 25th floor, CAT Tower, 72 Soi Wat Maungkhae, Charoenkrung Road, Bangrak, Bangkok 10500, telephone at +662-033-8000 and website at https://eng.eeco.or.th/en.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Industrial Estate Authority of Thailand (IEAT), a state-enterprise under the Ministry of Industry, develops suitable locations to accommodate industrial properties. IEAT has an established network of industrial estates in Thailand, including Laem Chabang Industrial Estate in Chonburi Province and Map Ta Phut Industrial Estate in Rayong Province in Thailand’s eastern seaboard region, a common location for foreign-owned factories due to its proximity to seaport facilities and Bangkok. Foreign-owned firms generally have the same investment opportunities in the industrial zones as Thai entities. While the IEAT Act requires that in the case of foreign-owned firms, the IEAT Committee must consider and approve the amount of space/land bought or leased in industrial estates, in practice, there is no record of disapproval for requested land. Private developers are heavily involved in the development of these estates.

The IEAT currently operates 14 estates, plus 45 more in conjunction with the private sector, in 16 provinces nationwide. Private-sector developers independently operate over 50 industrial estates, most of which have received promotion privileges from the Board of Investment. Amata Industrial Estate and WHA Industrial Development are Thailand’s leading private industrial estate developers. Most major foreign manufacturing investors, including U.S. manufacturers, are located in these two companies’ industrial estates and in the eastern seaboard region.

The IEAT has established 12 special IEAT “free trade zones” reserved for industries manufacturing exclusively for export. Businesses may import raw materials into, and export finished products from, these zones free of duty (including value added tax). These zones are located within industrial estates and many have customs facilities to speed processing. The free trade zones are located in Chonburi, Lampun, Pichit, Songkhla, Samut Prakarn, Bangkok (at Lad Krabang), Ayuddhya, and Chachoengsao. In addition to these zones, factory owners may apply for permission to establish a bonded warehouse within their premises to which raw materials, used exclusively in the production of products for export, may be imported duty-free.

The Thai government also established Special Economic Zones (SEZs) in ten provinces bordering neighboring countries: Tak, Nong Khai, Mukdahan, Sa Kaeo, Trad, Narathiwat, Chiang Rai, Nakhon Phanom, Songkhla, and Kanchanaburi. Business sectors and industries that can benefit from tax and non-tax incentives offered in the SEZs include logistics; warehouses near border areas; distribution; services; labor-intensive factories; and manufacturers using raw materials from neighboring countries. These SEZs support Thai government goals for closer economic ties with neighboring countries and allow investors to tap into abundant migrant labor; however, these SEZs have proven less attractive to overseas investors due to their remote locations far from Bangkok and other major cities.

In 2019, Thai Customs implemented three measures to improve trade and customs processing efficiency: Pre-Arrival Processing (PAP); an “e-Bill Payment” electronic payment system; and an e-Customs system that waives the use of paper customs declaration copies. The measures comply with the World Trade Organizations (WTO) Trade Facilitation Agreement (TFA), adopted in February 2016, which requires WTO members to adopt procedures for pre-arrival processing for imports and to authorize electronic submission of customs documents, where appropriate. The measures have also improved Thailand’s ranking in the World Bank’s “Doing Business: Trading Across Borders 2020” index.

Performance and Data Localization Requirements

The Thai government does not have specific laws or policies regarding performance or data localization requirements. Foreign investors are not required to use domestic content in goods or technology, but the Thai government has encouraged such an approach through domestic preferences in government procurement proceedings.

There are currently no requirements for foreign IT providers to localize their data, turn over source code, or provide access to surveillance. However, the Thai government in 2019 passed new laws and regulations on cybersecurity and personal data protection that have raised concerns about Thai authorities’ broad power to potentially demand confidential and sensitive information. IT operators and analysts have expressed concern with private companies’ legal protections, ability to appeal, or ability to limit such access. IT providers have expressed concern that the new laws might place unreasonable burdens on them and have introduced new uncertainties in the technology sector. As of March 2020, the government is still in the process of considering and implementing regulations to enforce laws on Cyber Security and Personal Data Protection.

Thailand has implemented a requirement that all debit transactions processed by a domestic debit card network must use a proprietary chip.

Real Property

Property rights are guaranteed by the Constitution. While the government provides fair compensation in instances of expropriation, Thai policy generally does not permit foreigners to own land. There have been instances, however, of granting such permission to foreigners under certain laws or ministerial regulations for residential, business, or religious purposes. Foreign ownership of condominiums and buildings is permitted under certain laws. Foreigners can freely lease land. Relevant articles of the Civil and Commercial Codes do not distinguish between foreign and Thai nationals in the exercise of lease rights. Secured interests in property, such as mortgage and pledge, are recognized and enforced. Unoccupied property legally owned by foreigners or Thais may be subject to adverse possession by squatters who stay on that property for at least 10 years.

IP Enforcement

The National Committee on Intellectual Property Policy sets Thailand’s overall Intellectual Property (IP) policy. The National Committee is chaired by the Prime Minister with two Deputy Prime Ministers as vice chairs. Eighteen heads of government agencies serve as Committee members. In 2017, this Committee approved a 20-year IP Roadmap to reform the country’s IP system.

The Department of Intellectual Property (DIP) is responsible for IP-related administration, including registration and recording of IP rights and coordination of IP enforcement activities. DIP also acts as the secretary of the National Committee on Intellectual Property Policy.

Patents and Trademarks

Thailand is a member of the Patent Cooperation Treaty (PCT). Thailand’s patent regime generally provides protection for most new inventions. The process of patent examination through issuance of patents takes on average six to eight years. The patenting process may take longer for certain technology sectors such as pharmaceuticals and biotechnology. In order to address the long patent pendency and backlogs, DIP hired 91 patent and trademark examiners in recent years. While the patent backlogs decreased from prior years in 2018, volumes increased again in 2019. As of September 2019, approximately 19,000 patent applications were pending examination, according to DIP.

The Thai government is in the process of preparing two amendments to the Patent Act. The first amendment, which concerns streamlining of the patent examination process, is pending review by the Council of the State as of April 2020. This amendment is expected to be adopted by the Parliament by the end of 2020. A second amendment to the Patent Act will authorize Thailand’s accession to the “Hague Agreement Concerning the International Registration of Industrial Designs.” The draft of this second amendment is expected to be submitted to the Council of State after the Council completes its review of the first amendment.

Thailand protects trademarks, traditional marks, and sound marks. As a member of the “Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks” (Madrid Protocol). Thailand allows trademark owners to apply for trademark registrations in Thailand directly at DIP or through international applications under the Madrid Protocol. DIP historically takes 10 to 14 months to register a trademark. More than 46,000 trademark applications were pending examination at the end of 2019.

Copyrights

As Thailand is a member of the “Bern Convention,” copyright works are protected automatically. However, copyright owners may record their works with DIP to establish proof of ownership. Thailand joined the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired or Otherwise Print Disabled in January 2019. The Guidelines on Use of Copyright Works for the Benefits of Disabled Persons is available on the DIP website, Thai language only (http://www.ipthailand.go.th/th/dip-law-2/item/notificatioofmoc_disableperson2019.html).

In addition, Thailand is in the process of a two-phase amendment of the Copyright Act. The first phase will enhance protections of copyrights in the digital environment and prepare Thailand for accession to the WIPO Copyright Treaty. The second phase will prepare Thailand for accession to the WIPO Performances and Phonograms Treaty. The first-phase draft is undergoing a legal review by the Council of State, after which it will be submitted to the Parliament. The second amendment remains in the drafting process.

DIP recently adopted a new system of voluntary registration of copyright (collective management) agents to curb illegal activities of rogue agents. To register, an agent must meet certain qualifications and undergo prescribed training. The roster of registered agents along with associated licensed copyrights is available on the DIP website. The Thai government amended the Computer Crime Act in 2017 to add IPR infringement as a predicate offense under the Act’s Section 20. This enables IP rights-holders to file requests to either DIP or the Ministry of Digital Economy and Society for removal of online IPR-infringing content from computer systems or for disabling access.

Geographical Indications

Thailand’s Geographical Indications (GI) Act has been in force since April 2004. Thailand protects GIs, which identify goods by their specific geographical origins. The geographical origins identified by a GI must be directly attributable to the reputation, qualities, or characteristics of the good. In Thailand, a registered trademark does not prevent a similar geographical name to be registered as a GI.

Intellectual Property Rights

In 2017, Thailand was placed on the USTR Special 301 Watch List. Thailand has one physical market, Patpong Market in Bangkok, listed in the USTR’s 2019Review of Notorious Markets.

Thailand has taken the following steps recently to improve IP enforcement: provided ex-officio authority for border enforcement officials to inspect in-transit goods; set enforcement benchmarks; published monthly enforcement statistics online; and stepped up efforts to investigate IP cases. Thailand’s Central Intellectual Property and International Trade Court (CIPIT) is the first instance of a court having jurisdiction over both civil and criminal intellectual property cases and civil international trade cases for all of Thailand. The Court of Appeal for Specialized Cases hears appeals from the CIPIT, including administrative appeals from DIP that already received a first instance decision from the CIPIT.

For additional information about national laws and points of contact at local IP offices, please see the DIP website at https://www.ipthailand.go.th/en/  and WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

The Thai government maintains a regulatory framework that broadly encourages and facilitates portfolio investment. The Stock Exchange of Thailand, the country’s national stock market, was established under the Securities Exchange of Thailand Act B.E. 2535 in 1992. There is sufficient liquidity in the markets to allow investors to enter and exit sizeable positions. Government policies generally do not restrict the free flow of financial resources to support product and factor markets. The Bank of Thailand, the country’s central bank, has respected IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions.

Credit is generally allocated on market terms rather than by “direct lending.” Foreign investors are not restricted from borrowing on the local market. In theory, the private sector has access to a wide variety of credit instruments, ranging from fixed term lending to overdraft protection to bills of exchange and bonds. However, the private debt market is not well developed. Most corporate financing, whether for short-term working capital needs, trade financing, or project financing, requires borrowing from commercial banks or other financial institutions.

Money and Banking System

Thailand’s banking sector, with 15 domestic commercial banks, is sound and well-capitalized. As of December 2019, the non-performing loan rate was low (around 2.98 percent industry wide). The ratio of capital funds/risk-weighted assets (capital adequacy) was high (19.61 percent). Thailand’s largest commercial bank is Bangkok Bank, with assets totaling USD 100 billion as of December 2019. The combined assets of the five largest commercial banks totaled USD 450 billion, or 69.39 percent of the total assets of the Thai banking system, at the end of 2019.

In general, Thai commercial banks provide the following services: accepting deposits from the public; granting credit; buying and selling foreign currencies; and buying and selling bills of exchange (including discounting or re-discounting, accepting, and guaranteeing bills of exchange). Commercial banks also provide credit guarantees, payment, remittance and financial instruments for risk management. Such instruments include interest-rate derivatives and foreign-exchange derivatives. Additional business to support capital market development, such as debt and equity instruments, is allowed. A commercial bank may also provide other services, such as bank assurance and e-banking.

Thailand’s central bank is the Bank of Thailand (BOT), which is headed by a Governor appointed for a five-year term. The BOT serves the following functions: prints and issues banknotes and other security documents; promotes monetary stability and formulates monetary policies; manages the BOT’s assets; provides banking facilities to the government; acts as the registrar of government bonds; provides banking facilities for financial institutions; establishes or supports the payment system; supervises financial institutions manages the country’s foreign exchange rate under the foreign exchange system; and determines the makeup of assets in the foreign exchange reserve.

Apart from the 15 domestic commercial banks, there are currently 11 registered foreign bank branches, including three American banks (Citibank, Bank of America, and JP Morgan Chase), and four foreign bank subsidiaries operating in Thailand. To set up a bank branch or a subsidiary in Thailand, a foreign commercial bank must obtain approval from the Ministry of Finance and the BOT. Foreign commercial bank branches are limited to three service points (branches/ATMs) and foreign commercial bank subsidiaries are limited to 40 service points (branches and off-premise ATMs) per subsidiary. Newly established foreign bank branches are required to have minimum capital funds of 125 million baht (USD 4.03 million at end of 2019 exchange rates) invested in government or state enterprise securities, or directly deposited with the Bank of Thailand. The number of expatriate management personnel is limited to six people at full branches, although Thai authorities frequently grant exceptions on a case-by-case basis.

Non-residents can open and maintain foreign currency accounts without deposit and withdrawal ceilings. Non-residents can also open and maintain Thai baht accounts; however, in an effort to curb speculation, in July 2019 the Bank of Thailand capped non-resident Thai baht deposits to 200 million baht across all domestic bank accounts. Any deposit in Thai baht must be derived from conversion of foreign currencies, receipt of payment for goods and services, or capital transfers. Withdrawals are freely permitted. Since mid-2017, the BOT has allowed commercial banks and payment service providers to introduce new financial services technologies under its “Regulatory Sandbox” guidelines. Recently introduced technologies under this scheme include standardized QR codes for payments, blockchain funds transfers, electronic letters of guarantee, and biometrics.

Thailand’s alternative financial services include cooperatives, micro-saving groups, the state village funds, and informal money lenders. The latter provide basic but expensive financial services to households, mostly in rural areas. These alternative financial services, with the exception of informal money lenders, are regulated by the government.

Foreign Exchange and Remittances

Foreign Exchange

There are no limitations placed on foreign investors for converting, transferring, or repatriating funds associated with an investment; however, supporting documentation is required. Any person who brings Thai baht currency or foreign currency in or out of Thailand in an aggregate amount exceeding USD 15,000 or the equivalent must declare the currency at a Customs checkpoint. Investment funds are allowed to be freely converted into any currency.

The exchange rate is generally determined by market fundamentals but is carefully scrutinized by the BOT under a managed float system. During periods of excessive capital inflows/outflows (i.e., exchange rate speculation), the central bank has stepped in to prevent extreme movements in the currency and to reduce the duration and extent of the exchange rate’s deviation from a targeted equilibrium.

Remittance Policies

Thailand imposes no limitations on the inflow or outflow of funds for remittances of profits or revenue for direct and portfolio investments. There are no time limitations on remittances.

Sovereign Wealth Funds

Thailand does not have a sovereign wealth fund and the Bank of Thailand is not pursuing the creation of such a fund. However, the International Monetary Fund has urged Thailand to create a sovereign wealth fund due to its large accumulated foreign exchange reserves (USD 224.3 billion as of December 2019).

Thailand’s 56 state-owned enterprises (SOEs) have total assets of USD 422 billion and a combined net income of USD 8.3 billion (end of 2018 figures, latest available). They employ around 270,000 people, or 0.7 percent of the Thai labor force. Thailand’s SOEs operate primarily in-service delivery, in particular in the energy, telecommunications, transportation, and financial sectors. More information about SOEs is available at the website of the State Enterprise Policy Office (SEPO) under the Ministry of Finance at www.sepo.go.th .

A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 56 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions. The Thai government generally defines SOEs as special agencies established by law for a particular purpose that are 100 percent owned by the government (through the Ministry of Finance as a primary shareholder). The government recognizes a second category of “limited liability companies/public companies” in which the government owns 50 percent or more of the shares. Of the 56 total SOEs, 43 are wholly-owned and 13 are majority-owned. Twelve of these companies are classed as limited liability companies. Five are publicly listed on the Stock Exchange of Thailand: Thai Airways International Public Company Limited; Airports of Thailand Public Company Limited; PTT Public Company Limited; MCOT Public Company Limited; and Krung Thai Bank Public Company Limited. By regulation, at least one-third of SOE boards must be comprised of independent directors.

Private enterprises can compete with SOEs under the same terms and conditions with respect to market share, products/services, and incentives in most sectors, but there are some exceptions, such as fixed-line operations in the telecommunications sector.

While SEPO officials aspire to adhere to the OECD Guidelines on Corporate Governance for SOEsno level playing field exists between SOEs and private sector enterprises, which are often disadvantaged in competing with Thai SOEs for contracts.

Generally, SOE senior management reports directly to a line minister and to SEPO. Corporate board seats are typically allocated to senior government officials or politically-affiliated individuals. Privatization Program

The 1999 State Enterprise Corporatization Act provides a framework for conversion of SOEs into stock companies. Corporatization is viewed as an intermediate step toward eventual privatization. (Note: “corporatization” describes the process by which an SOE adjusts its internal structure to resemble a publicly-traded enterprise; “privatization” denotes that a majority of the SOE’s shares is sold to the public; and “partial privatization” refers to a situation in which less than half of a company’s shares are sold to the public.) Foreign investors are allowed to participate in privatizations, but restrictions are applied in certain sectors, as regulated by the FBA and the Act on Standards Qualifications for Directors and Employees of State Enterprises of 1975, as amended. However, privatizations have been on hold since 2006 largely due to strong opposition from labor unions.

A 15-member State Enterprises Policy Commission, or “superboard,” oversees operations of the country’s 56 SOEs. In May 2019, the Development of Supervision and Management of State-Owned Enterprise Act B.E. 2562 (2019) went into effect. The law aims to reform SOEs and ensure transparent management decisions; however, privatization is not part of this process.

The Thai government has committed to implement the UN Guiding Principles on Business and Human Rights (UNGP).

On October 29, 2019, Thailand’s Cabinet adopted the country’s first National Action Plan on Business and Human Rights (NAP on BHR). The NAP aims to prevent adverse effects of business operations on human rights. Regional consultations and discussions with various stakeholders during the drafting process of the NAP (2016-2019) identified four priority areas: 1) labor; 2) community, land, natural resource and environment; 3) human rights defenders; and 4) cross border investment and multinational enterprises.

The Ministry of Industry has joined the National Human Rights Committee, the Ministry of Justice, the Ministry of Foreign Affairs, the Ministry of Commerce, the Federation of Thai Industries, the Thai Bankers Association, the Thai Chamber of Commerce, and the Global Computing Network of Thailand in signing a memorandum of cooperation to advance implementation of the UNGP.

In May 2019, Thailand’s capital market regulator, the Securities and Exchange Commission (SEC), and the National Human Rights Commission of Thailand signed an MO]U to uphold UNGP principles. The Ministry of Industry’s Department of Industrial Works encourages the private sector to implement its Corporate Social Responsibility (CSR-DIW) standards to achieve ISO 26000 standards (an international standard on CSR). I

There are several local NGOs that promote and monitor responsible business conduct. Most such NGOs operate without hindrance, though a few have experienced intimidation as a result of their work. International NGOs continue to call on the Thai government and Thai companies to act more responsibly with respect to human and labor rights.

Transparency International’s Corruption Perceptions Index ranked Thailand 101st out of 180 countries with a score of 36 out of 100 in 2019. According to some studies, a cultural propensity to forgive bribes as a normal part of doing business and to equate cash payments with finders’ fees or consultants’ charges, coupled with the relatively low salaries of civil servants, encourages officials to accept gifts and illegal inducements. U.S. executives with experience in Thailand often advise new-to-market companies that it is far easier to avoid corrupt transactions from the beginning than to stop such practices once a company has been identified as willing to operate in this fashion. American firms that comply with the strict guidelines of the Foreign Corrupt Practices Act (FCPA) are able to compete successfully in Thailand. U.S. businessmen say that publicly affirming the need to comply with the FCPA helps to shield their companies from pressure to pay bribes.

Thailand has a legal framework and a range of institutions to counter corruption. The Organic Law to Counter Corruption criminalizes corrupt practices of public officials and corporations, including active and passive bribery of public officials. The anti-corruption laws extend to family members of officials and to political parties.

Thai procurement regulations prohibit collusion amongst bidders. If an examination confirms allegations or suspicions of collusion among bidders, the names of those applicants must be removed from the list of competitors.

Thailand adopted its first national government procurement law in December 2016. Based on UNCITRAL model laws and the WTO Agreement on Government Procurement, the law applies to all government agencies, local authorities, and state-owned enterprises, and aims to improve transparency. Officials who violate the law are subject to 1-10 years imprisonment and/or a fine from Thai baht 20,000 (approximately USD 615) to Thai baht 200,000 (approximately USD 6,150).

Since 2010, the Thai Institute of Directors has built an anti-corruption coalition of Thailand’s largest businesses. Coalition members sign a Collective Action Against Corruption Declaration and pledge to take tangible, measurable steps to reduce corruption-related risks identified by third party certification. The Center for International Private Enterprise equipped the Thai Institute of Directors and its coalition partners with an array of tools for training and collective action.

Established in 2011, the Anti-Corruption Organization of Thailand (ACT) aims to encourage the government to create laws to combat corruption. ACT has 54 member organizations drawn from the private, public, and academic sectors. Their signature program is the “integrity pact.” Drafted by ACT and the Finance Ministry and based on a tool promoted by Transparency International, the pact forbids bribes from signatory members in bidding for government contacts. Member agencies and companies must adhere to strict transparency rules by disclosing and making easily available to the public all relevant bidding information, such as the terms of reference and the cost of the project.

Thailand is a party to the UN Anti-Corruption Convention, but not the OECD Anti-Bribery Convention.

Thailand’s Witness Protection Act offers protection (to include police protection) to witnesses, including NGO employees, who are eligible for special protection measures in anti-corruption cases.

Resources to Report Corruption

Contact at government agency or agencies responsible for combating corruption:

International Affairs Strategy Specialist
Office of the National Anti-Corruption Commission
361 Nonthaburi Road, Thasaai District, Amphur Muang Nonthaburi 11000, Thailand
Tel: +662-528-4800
Email: TACC@nacc.go.th

Contact at “watchdog” organization:

Dr. Mana Nimitmongkol
Secretary General
Anti-Corruption Organization of Thailand (ACT)
44 Srijulsup Tower, 16th floor, Phatumwan, Bangkok 10330
Tel: +662-613-8863
Email: mana2020@yahoo.com

On March 24, 2019, Thailand held its first national election since the 2014 military coup that ousted democratically elected Prime Minister Yingluck Shinawatra. On June 5, the newly-seated Parliament elected coup leader General Prayut Chan-o-cha to continue in his role as Prime Minister.

Violence related to an ongoing ethno-nationalist insurgency in Thailand’s southernmost provinces has claimed more than 7,000 lives since 2004. Although the number of deaths and violent incidents has decreased year-over-year, efforts to end the insurgency have so far been unsuccessful. The government is currently engaged in confidence-building measures with the leading insurgent group. Almost all attacks have occurred in the three southernmost provinces of the country.

In 2019, 38.18 million people were in Thailand’s formal labor pool, comprising 57 percent of the total population. Thailand’s official unemployment rates stood at 1.0 percent at the end of 2019, slightly less than 1.1 percent the previous year. Unemployment among youth (15-24 years old) is around 5.2 percent, while the rate is only 0.5 percent for adults over 25 years old. Well over half the labor force (54.3 percent) earns income in the informal sector, including through self-employment and family labor, which limits their access to social welfare programs. (Note: These statistics do not take into account the impact of the coronavirus pandemic, the long-term impact of which on the Thai labor force is difficult to ascertain. End note.)

The Thai government is actively seeking to address shortages of both skilled and unskilled workers through education reform and various worker-training incentive programs. Low birth rates, an aging population, and a skills mismatch, are exacerbating labor shortages in many sectors. Despite provision of 15 years of free universal education, Thailand continues to suffer from a skills mismatch that impedes innovation and economic growth. Thailand has a shortage of high-skill workers such as researchers, engineers, and managers, as well as technicians and vocational workers.

Regional income inequality and labor shortages, particularly in labor-intensive manufacturing, construction, hospitality and service sectors, have attracted millions of migrant workers, mostly from neighboring Burma, Cambodia, and Laos. In 2019, the International Organization for Migration estimated Thailand hosted 4.9 million migrant workers, or 13 percent of country’s labor force. Although an increasing number of migrant laborers are documented, many continue to work illegally. As of 2019, approximately 3.8 million formerly undocumented migrant workers had been regularized.

Employers may dismiss workers provided the employer pays severance. Where an employer temporarily suspends business, in part or in whole, the employer must pay the employee at least 75 percent of his or her daily wages throughout the suspension period.

Among wage and salary workers, 3.5 percent are unionized and only 34 out of 77 provinces have labor unions. Thai law allows private-sector workers to form and join trade unions of their choosing without prior authorization, to bargain collectively, and to conduct legal strikes, although these rights come with some restrictions. Noncitizen migrant workers, whether registered or undocumented, do not have the right to form unions or serve as union officials. Migrants can join unions organized and led by Thai citizens.

In 2019 the government issued a new regulation to ensure that seasonal employees in agriculture, fishing, forestry, and husbandry businesses have access to the government’s accident compensation fund. Additional information on migrant workers issues and rights can be found in the U.S. Trafficking in Persons Report, as well as the Labor Rights chapter of the U.S. Human Rights report.

Under an agreement with the Thai government, the U.S. International Development Finance Corporation (DFC, formerly the Overseas Private Investment Corporation) can provide equity investments, debt financing, partial credit guarantees, political risk insurance, grants and private equity capital to support U.S. and other investors and their investments. DFC also can provide debt financing, in the form of direct loans and loan guarantees, of up to USD one billion per project for business investments, preferably with U.S. private sector participation, covering sectors as diverse as tourism, transportation, manufacturing, franchising, power, infrastructure, and others. DFC political risk insurance is also available for currency inconvertibility, expropriation, and political violence for U.S. and other investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment. Grants, a new tool for DFC, are available for projects that are already reasonably developed but need additional, limited funding and specific work — for example technical, environmental and social-risk (E&S) screening, or legal advice — in order to be bankable and eligible for DFC financing or insurance. In addition, DFC supports twelve private equity funds that are eligible to invest in projects in Thailand. In all cases, DFC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions.

http://data.imf.org/regular.aspx?key=60587804 

U.S. Embassy Bangkok
Economic Section
BangkokEconSection@state.gov

Policies Toward Foreign Direct Investment

Since Vietnam embarked on economic reforms in 1986 to transition to a market-based economy, the government has welcomed FDI and recognizes FDI as a key component of Vietnam’s high rate of economic growth over the last two decades. Foreign investments continue to play a crucial role in the economy: according to Vietnam’s General Statistics Office (GSO), Vietnam exported USD 181 billion in goods in 2019, of which 69 percent came from projects utilizing FDI.

In 2019, the Politburo issued Resolution 55 to increase Vietnam’s attractiveness to foreign investment. The Resolution aims to attract USD 50 billion in new foreign investment by 2030 by amending regulations that inhibit foreign investment and by codifying quality, efficiency, advanced technology, and environmental protection as the evaluation criteria. The government has not released further details on this strategy.

While the government does not have laws that specifically discriminate against foreign investment, the government continues to have foreign ownership limits (FOLs) in industries Vietnam considers important to national security. In January 2020, the government removed FOLs on companies in the eWallet sector and made reforms in procedures related to electronic payments made by foreign firms. Some U.S. investors report that these changes have given more regulatory certainty, which has, in turn, instilled greater confidence as they consider long-term investments in Vietnam.

Many U.S. investors cite concerns with confusing tax regulations, retroactive changes of laws – including tax rates, tax policies, and preferential treatment of Vietnamese state-owned enterprises (SOEs). In 2019, members of the American Chamber of Commerce (AmCham) in Hanoi noted that fair, transparent, stable, and effective legal frameworks would help Vietnam better attract U.S. investment. These concerns are echoed by Vietnamese companies.

The Ministry of Planning and Investment (MPI) is the country’s national agency charged with promoting and facilitating foreign investment; most provinces and cities also have local equivalents. MPI and local investment promotion offices provide information and explain regulations and policies to foreign investors and inform the Prime Minister and National Assembly on trends in foreign investment. However, U.S. investors should still consult lawyers and/or other experts regarding issues on which regulations are unclear.

The Prime Minister, along with other senior leaders, states that Vietnam prioritizes both investment retention and maintaining dialogue with investors. Vietnam’s senior leaders often meet with foreign government and private-sector representatives to emphasize Vietnam’s attractiveness as an FDI destination. The semiannual Vietnam Business Forum includes meetings between foreign investors and Vietnamese government officials; the U.S.-ASEAN Business Council (USABC), AmCham, and other U.S. associations also host multiple yearly missions for their U.S. company members, which allow direct engagement with senior government officials. Foreign investors in Vietnam have reported that these meetings and dialogues have helped address obstacles.

Limits on Foreign Control and Right to Private Ownership and Establishment

Both foreign and domestic private entities have the right to establish and own business enterprises in Vietnam and engage in most forms of legal remunerative activity. Vietnam does have some statutory restrictions on foreign investment, including FOLs or requirements for joint partnerships in selected sectors, including banking, network infrastructure services, non-infrastructure telecommunication services, transportation, energy, and defense. By law, the Prime Minister can waive these FOLs on a case-by-case basis. In practice, however, when the government has removed or eased FOLs, it has done so for the whole industry sector (versus resolution for specific investments).

MPI takes the lead with respect to investment screening. Approval of an FDI project requires signoff by the provincial People’s Committee in which the project would be located. Large-scale FDI projects must obtain the approval of the National Assembly before investment can proceed. MPI’s process includes an assessment of the following criteria: the investor’s legal status and financial strength; the project’s compatibility with the government’s long- and short-term goals for economic development and government revenue; the investor’s technological expertise; environmental protection; and plans for land use and land clearance compensation, if applicable.

The following FDI projects require the Prime Minister’s approval: airports and seaports; casinos; oil and gas exploration, production, and refining; tobacco-related projects; telecommunications/network infrastructure; forestry projects; publishing; and projects with an investment capital greater than USD 217 million.

Other Investment Policy Reviews

The most recent third-party investment policy review related to Vietnam is the OECD’s 2018 Review: https://www.oecd.org/countries/vietnam/oecd-investment-policy-reviews-viet-nam-2017-9789264282957-en.htm 

Business Facilitation

The World Bank’s 2020 Ease of Doing Business Index ranked Vietnam 70 of 190 economies. The World Bank reported that in some factors Vietnam lags behind other Southeast Asian countries. For example, it takes businesses 384 hours to pay taxes in Vietnam compared with 64 in Singapore, 174 in Malaysia, and 191 in Indonesia.

• On February 1, 2019, Vietnam issued a decree that simplifies procedures for FDI related to vocational training;
• On May 13, 2019, the State Bank of Vietnam (SBV) issued a Circular that allows foreign investors to pay for investment collateral in foreign currencies in certain defined circumstances. Previously, foreign investors had to pay collateral in the Vietnamese dong (VND);
• On September 6, 2019, SBV issued a Circular on foreign exchange that simplified certain procedures with respect to foreign investments;
• On November 18, 2019, Vietnam issued a decree that raised the foreign ownership cap on air transportation from 30 to 34 percent;
• Further information can be found at the UNCTAD’s site: .

On May 5, 2020, USAID and the Vietnam Chamber of Commerce and Industry (VCCI) released the Provincial Competitiveness Index (PCI) 2019 Report, showing continued improvement in economic governance: http://eng.pcivietnam.org/ . This annual report provides an independent, unbiased view on the provincial business environment by surveying over 8,500 domestic private firms on a variety of business issues. Overall, Vietnam’s median PCI score improved, reflecting the government’s efforts to improve economic governance, improvements in the quality of infrastructure, and a decline in the prevalence of corruption (bribes).

Outward Investment

The government does not have a clear mechanism to promote or incentivize outward investment, nor does it have regulations restricting domestic investors from investing abroad. Vietnam does not release statistics on outward investment, but local media reported that in 2019 total outward FDI investment from Vietnam was USD 508 billion and went to 32 countries. Australia received the most outward FDI, with USD 154 million in 2019, mostly to the dairy industry. The United States ranked second, with USD 93.4 million in 26 projects.

Transparency of the Regulatory System

U.S. companies continue to report that they face frequent and significant challenges with inconsistent regulatory interpretation, irregular enforcement, and an unclear legal framework. AmCham members have consistently said they perceive that Vietnam lacks a fair legal system for investments, which affects these companies’ ability to do business in Vietnam. The 2019 PCI report documented companies’ difficulties dealing with land, taxes, and social insurance issues, but also found improvements in procedures related to business administration.

Accounting systems are inconsistent with international norms, which increase transaction costs for investors. Vietnam has improved the way it accounts for government revenues, and the government’s long-term goal is to have financial institutions and companies using International Financial Reporting Standards (IFRS) by 2020. Currently, Vietnam has its own accounting standards to which publicly listed Vietnamese companies must adhere. Some companies – particularly those that receive foreign investment – already prepare financial statements in line with IFRS.

In Vietnam, the National Assembly passes laws, which serve as the highest form of legal direction, but often lack specifics. Ministries provide draft laws to the National Assembly. The Prime Minister issues decrees, which provide guidance on how to implement a law. Individual ministries issue circulars, which provide guidance on how a ministry will administer a law or decree.

After line ministries have cleared a particular law in preparation to send the law to the National Assembly, the government posts the law for a 60-day comment period. However, sometimes, in practice, the public comment period is far shorter than 60 days. Foreign governments, NGOs, and private-sector companies can and do comment during this period, following which the ministry may redraft the law after considering the comments. Upon completion of the revisions, the ministry submits the legislation to the Office of the Government (OOG) for approval, including the Prime Minister’s signature, and then the legislation moves to the National Assembly for committee review. During this process, the National Assembly can send the legislation back to the originating ministry for further changes. The Communist Party of Vietnam’s Politburo reserves the right to review special or controversial laws.

In practice, drafting agencies often lack the resources needed to conduct adequate data-driven assessments. Ministries are supposed to conduct policy impact assessments that holistically consider all factors before drafting a law, but the quality of these assessments varies.

The Ministry of Justice (MOJ) is in charge of ensuring that government ministries and agencies follow administrative procedures. The MOJ has a Regulatory Management Department, which oversees and reviews legal documents after they are issued to ensure compliance with the legal system. The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements be published online for comments for 60 days and published in the Official Gazette before implementation.

Business associations and various chambers of commerce regularly comment on draft laws and regulations. However, when issuing more detailed implementing guidelines, government entities sometimes issue circulars with little advance warning and without public notification, resulting in little opportunity for comment by affected parties. In several cases, authorities receive comments for the first draft only and do not provide subsequent draft versions to the public. The centralized location where key regulatory actions are published can be found here: http://vbpl.vn/ .

While general information is publicly available, Vietnam’s public finances and debt obligations (including explicit and contingent liabilities) are not transparent. The National Assembly set a statutory limit for public debt at 65 percent of nominal GDP, and, according to official figures, Vietnam’s public debt to GDP ratio in late 2019 was 56 percent, down 6 percent from 2018. However, the official public-debt figures exclude the debt of certain SOEs. This poses a risk to Vietnam’s public finances, as the government is ultimately liable for the debts of these companies. Vietnam could improve its fiscal transparency by making its executive budget proposal, including budgetary and debt expenses, widely and easily accessible to the general public long before the National Assembly enacts the budget, ensuring greater transparency of off-budget accounts, and by publicizing the criteria by which the government awards contracts and licenses for natural resource extraction.

International Regulatory Considerations

Vietnam is a member of ASEAN, a 10-member regional organization working to advance economic integration through cooperation in economic, social, cultural, technical, scientific and administrative fields. Within ASEAN, the ASEAN Economic Community (AEC) has the goal of establishing a single market across ASEAN nations (similar to the EU’s common market), but member states have not made significant progress. To date, the greatest success of the AEC has been tariff reductions.

Vietnam is also a member of the Asia-Pacific Economic Cooperation (APEC), an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region. APEC aims to facilitate business among member states through trade facilitation programming, senior-level leaders’ meetings, and regular dialogue. However, APEC is a non-binding forum. ASEAN and APEC membership has not resulted in Vietnam incorporating international standards, especially when compared with the EU or North America.

Vietnam is a party to the WTO’s Trade Facilitation Agreement (TFA) and has been implementing the TFA’s Category A provisions. Vietnam submitted its Category B and Category C implementation timelines on August 2, 2018. According to these timelines, Vietnam will fully implement the Category B and C provisions by the end of 2023 and 2024, respectively.

Legal System and Judicial Independence

Vietnam’s legal system mixes indigenous, French, and Soviet-inspired civil legal traditions. Vietnam generally follows an operational understanding of the rule of law that is consistent with its top-down, one-party political structure and traditionally inquisitorial judicial system.

The hierarchy of the country’s courts is: 1) the Supreme People’s Court; 2) the High People’s Court; 3) Provincial People’s Courts; and 4) District People’s Courts. The People’s Courts operate in five divisions: criminal, civil, administrative, economic, and labor. The Supreme People’s Procuracy is responsible for prosecuting criminal activities as well as supervising judicial activities.

Vietnam lacks an independent judiciary and separation of powers among Vietnam’s branches of government. For example, Vietnam’s Chief Justice is also a member of the Communist Party’s Central Committee. According to Transparency International, there is significant risk of corruption in judicial rulings. Low judicial salaries engender corruption; nearly one-fifth of surveyed Vietnamese households that have been to court declared that they had paid bribes at least once. Many businesses therefore avoid Vietnamese courts.

Along with corruption, the judicial system continues to face additional problems. For example, many judges and arbitrators lack adequate legal training and are appointed through personal or political contacts with party leaders or based on their political views. Regulations or enforcement actions are appealable, and appeals are adjudicated in the national court system. Through a separate legal mechanism, individuals and companies can file complaints against enforcement actions under the Law on Complaints.

The 2005 Commercial Law regulates commercial contracts between businesses. Specific regulations prescribe specific forms of contracts, depending on the nature of the deals. If a contract does not contain a dispute-resolution clause, courts will have jurisdiction over a possible dispute. Vietnamese law allows dispute-resolution clauses in commercial contracts explicitly through the Law on Commercial Arbitration. The law follows the United Nations Commission on International Trade Law (UNCITRAL) model law as an international standard for procedural rules.

Vietnamese courts will only consider recognition of civil judgments issued by courts in countries that have entered into agreements on recognition of judgments with Vietnam or on a reciprocal basis. However, with the exception of France, these treaties only cover non-commercial judgments.

Laws and Regulations on Foreign Direct Investment

The legal system includes provisions to promote foreign investment. Vietnam uses a “negative list” approach to approve foreign investment, meaning foreign businesses are allowed to operate in all areas except for six prohibited sectors (illicit drugs, wildlife trade, prostitution, human trafficking, human cloning, and other commerce related to otherwise illegal activities).

The law also requires foreign and domestic investors be treated the same in cases of nationalization and confiscation. However, foreign investors are subject to different business-licensing processes and restrictions, and Vietnamese companies that have a majority foreign investment are subject to foreign-investor business-license procedures.

In 2019, Vietnam passed a new Securities Law, which stated the government’s long-term intention to remove some FOLs (but did not give specifics) and allows for the sale of certain derivatives. Also, in 2019, Vietnam adopted a new Labor Code, which allows greater flexibility in contract termination, allows employees to work more overtime hours, increases the retirement age, and adds more flexibility in terms of labor contracts. There is a “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors: https://vietnam.eregulations.org/ 

Competition and Anti-Trust Laws

In 2018, Vietnam passed a new Law on Competition, which came into effect on July 1, 2019, replacing Vietnam’s Law on Competition of 2004. The Law includes punishments – such as fines – for those who violate the law. The government has not prosecuted any person or entity under this law since it came into effect, though there were prosecutions under the 2004 law. The law does not appear to have affected foreign investment.

Expropriation and Compensation

Under Vietnamese law, the government can only expropriate investors’ property in cases of emergency, disaster, defense, or national interest, and the government is required to compensate investors if it expropriates property. Under the U.S.-Vietnam Bilateral Trade Agreement, Vietnam must apply international standards of treatment in any case of expropriation or nationalization of U.S. investor assets, which includes acting in a non-discriminatory manner with due process of law and with prompt, adequate, and effective compensation. The U.S. Mission in Vietnam is unaware of any expropriation cases involving U.S. firms.

Dispute Settlement

ICSID Convention and New York Convention

Vietnam has not yet acceded to the International Center for Settlement of Investment Disputes (ICSID) Convention. MPI has submitted a proposal to the government to join the ICSID, but the government has not moved forward on this. Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), meaning that foreign arbitral awards rendered by a recognized international arbitration institution should be respected by Vietnamese courts without a review of cases’ merits.

Investor-State Dispute Settlement

Vietnam has signed 66 bilateral investment treaties, is party to 26 treaties with investment provisions, and is a member of 12 free trade agreements in force. Some of these include provisions for Investor-State Dispute Settlement. As a signatory to the New York Convention, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with very few exceptions. Technically, foreign and domestic arbitral awards are legally enforceable in Vietnam; however, foreign investors in Vietnam do not trust the system will work in a fair and impartial manner. Vietnamese courts may reject foreign arbitral awards if the award is contrary to the basic principles of Vietnamese laws.

According to UNCTAD, over the last 10 years there were two dispute cases against the Vietnamese government involving U.S. companies.  The courts decided in favor of the government in one case, and the parties decided to discontinue the other case.  The Vietnamese government is currently in two pending, active disputes (with the UK and South Korea, respectively). More details are available at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/229/viet-nam.

International Commercial Arbitration and Foreign Courts

With an underdeveloped legal system, Vietnam’s courts are often ineffective in settling commercial disputes. Negotiation between concerned parties is the most common means of dispute resolution. Since the Law on Arbitration does not allow a foreign investor to refer an investment dispute to a court in a foreign jurisdiction, Vietnamese judges cannot apply foreign laws to a case before them, and foreign lawyers cannot represent plaintiffs in a court of law. Vietnam does not have a domestic arbitration body, but the Law on Commercial Arbitration of 2011 permits foreign arbitration centers to establish branches or representative offices (although none have done so).

There are no readily available statistics on how often domestic courts rule in favor of SOEs. In general, the court system in Vietnam works slowly. International arbitration awards, when enforced, may take years from original judgment to payment. Many foreign companies, due to concerns related to time, costs, and potential for bribery, have reported that they have turned to arbitration or asking influential individuals to weigh in.

Bankruptcy Regulations

Based on the 2014 Bankruptcy Law, bankruptcy is not criminalized unless it relates to another crime. The law clarified the definition of insolvency as an enterprise that is more than three months overdue in meeting its payment obligations. The law also provided provisions allowing creditors to commence bankruptcy proceedings against an enterprise and created procedures for credit institutions to file for bankruptcy. Despite these changes, according to the World Bank’s 2020 Ease of Doing Business Report, Vietnam ranked 122 out of 190 for resolving insolvency. The report noted that it still takes, on average, five years to conclude a bankruptcy case in Vietnam. The Credit Information Center of the State Bank of Vietnam provides credit information services for foreign investors concerned about the potential for bankruptcy with a Vietnamese partner.

Investment Incentives

Foreign investors are exempt from import duties on goods imported for their own use that cannot be procured locally, including machinery; vehicles; components and spare parts for machinery and equipment; raw materials; inputs for manufacturing; and construction materials. Remote and mountainous provinces are allowed to provide additional tax breaks and other incentives to prospective investors.

Projects in the following sectors are eligible for investment incentives, including lower corporate income tax rates, exemption of some import tariffs, and/or favorable land rental rates: high-tech; research and development; new materials; energy; clean energy; renewable energy; energy saving products; automobiles; software; waste treatment and management; and primary or vocational education.

The government rarely issues guarantees for financing FDI projects; when it does so, it is usually because the project links to a national security priority. Joint financing with the government occurs when a foreign entity partners with an SOE. The government’s reluctance to guarantee projects reflects its desire to stay below a statutory 65 percent public debt-to-GDP ratio cap, and a desire to avoid incurring liabilities from projects that would not be economically viable without the guarantee. This has delayed approval of some large-scale projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Vietnam has prioritized efforts to establish and develop foreign trade zones (FTZs) over the last decade. Vietnam currently has more than 350 industrial zones (IZs) and export processing zones (EPZs). Many foreign investors report that it is easier to implement projects in IZs because they do not have to be involved in site clearance and infrastructure construction. Enterprises pay no duties when importing raw materials if they export the finished products. Customs warehouse companies in FTZs can provide transportation services and act as distributors for the goods deposited.

Additional services relating to customs declaration, appraisal, insurance, reprocessing, or packaging require the approval of the provincial customs office. In practice, the time involved for clearance and delivery of goods by provincial custom officials can be lengthy and unpredictable. Vietnam also has economic zones which can contain IZs and EPZs. Companies operating economic zones are entitled to more tax reductions as measures to incentivize investments.

Performance and Data Localization Requirements

Vietnamese law states that employers can only recruit foreign nationals for high-skilled positions such as manager, managing director, expert, or technical worker. Local companies must also justify that their efforts to hire suitable local employees were unsuccessful before recruiting foreigners, and their justification must be approved in writing by the local authority and/or the national government. This does not apply to board members elected by shareholders or capital contributors.

Over the last four years, the government has issued decrees that have made it easier for foreign investors and workers to obtain visas, work permits, and residence. The government plans to further streamline this process in 2021.

On January 1, 2019, the Law on Cybersecurity (LOCS) came into effect, requiring cross-border services to store data of Vietnamese users in Vietnam, despite sustained international and domestic opposition to the regulation. The latest draft of the LOCS implementing decree, released in July 2019, sparked concerns among foreign digital services firms regarding the draft decree’s provisions on data localization and local presence for a broad range of services in the Internet economy, from cloud computing to email. Provisions of the LOCS require firms to provide unencrypted user information upon request by law enforcement. However, application of this requirement hinges on issuance of the implementing decree, which is still pending as of May 2020. The government committed to consider comments from the U.S. government, companies, and trade associations and promised to consult with the U.S. government before finalization.

On July 1, 2020, the Law on Tax Administration will come into effect and will require foreign entities doing business on digital platforms without permanent presence in Vietnam to register as taxpaying entities in Vietnam. The Ministry of Finance said it would issue guidance on this requirement but had not done so as of May 2020.

There are currently no measures preventing or unduly impeding companies from freely transmitting customer or other business-related data outside of Vietnam.

The Ministry of Information and Communications (MIC) issued Circular 38 on Cross Border Provisioning of Public Information in 2016. Circular 38 does not require localization of servers but does require offshore service providers in Vietnam to comply with local-content restrictions. This includes websites, social networks, mobile phone apps, search engines, and other similar services that 1) have more than one million monthly users in Vietnam or 2) lease a data center to store digital information in Vietnam in order to provide services. MIC’s Authority on Broadcasting and Electronic Information is currently reviewing Circular 38 and related legislation with the goal of revision by late 2020.

MIC released a draft of Decree 72 on Internet Services and Information Content Online for public comment on April 19, 2020. Foreign investors reported concerns regarding Decree 72’s provisions on mandatory licensing requirements for large foreign social networks; tightened regulations on social media companies; compulsory content review; and policies requiring responses to government takedown requests within 24 to 48 hours. The draft Decree requires local Internet service providers to terminate services for companies that fail to cooperate with the new regulations. According to the government’s plan for issuing legal documents, the revised decree is scheduled to go into effect in late 2020.

MIC is also revising Decree 06 on Management, Provision and Utilization of Radio and Television Services, which applies specifically to streaming services that provide online content. The first draft, released August 2019, required onerous licensing procedures, local-presence (including joint venture) requirements, local-content quotas, content preapproval, compulsory translation, and local advertising agents. These requirements are inconsistent with Vietnam’s commitments under the World Trade Organization (WTO).

Real Property

The State collectively owns and manages all land in Vietnam, and therefore neither foreigners nor Vietnamese nationals can own land. However, the government grants land-use and building rights, often to individuals. According to the Ministry of National Resources and Environment (MONRE), as of September 2018 – the most recent time period in which the government has made figures available – the government has issued land-use rights certificates for 96.9 percent of land in Vietnam. If land is not used according to the land-use rights certificate or if it is unoccupied, it reverts to the government. Vietnam is building a national land-registration database, and some localities have already digitized their land records.

State protection of property rights are still evolving, and the law does not clearly demarcate circumstances in which the government would use eminent domain. Under the Housing Law and Real Estate Business Law passed by the National Assembly in November 2014, the government can take land if it deems it necessary for socio-economic development in the public or national interest and the Prime Minister, the National Assembly, or the Provincial People’s Council approves such action. However, the law loosely defines “socio-economic” development, and there are many outstanding legal disputes between landowners and local authorities – including some U.S. entities. Disputes over land rights continue to be a significant driver of social protest in Vietnam. Foreign investors also may be exposed to land disputes through merger and acquisition activities when they buy into a local company.

Foreign investors can lease land for renewable periods of 50 years, and up to 70 years in some underdeveloped areas of the country. This allows titleholders to conduct property transactions, including mortgages on property. Some investors have encountered difficulties amending investment licenses to expand operations onto land adjoining existing facilities. Investors also note that local authorities may seek to increase requirements for land-use rights when current rights must be renewed, particularly when the investment in question competes with Vietnamese companies.

The government is working on reforms relating to property rights. MONRE is currently drafting amendments to the 2013 Land Law, which would allow foreigners to own homes in Vietnam. MONRE expects to submit the draft law to the National Assembly for review and approval in late 2020.

Intellectual Property Rights

Vietnam does not have a strong record on protecting and enforcing intellectual property (IP). There were positive developments over the past year, such as the issuance of the national IP strategy, public awareness campaigns and training activities, and reported improvements on border enforcement in some parts of the country. However, IP enforcement continues to be a challenge.

Lack of coordination among ministries and agencies responsible for enforcement is a primary obstacle, and capacity constraints related to enforcement persist, in part, due to a lack of resources and IP expertise. Vietnam continues to rely heavily on administrative enforcement actions, which have consistently failed to deter widespread counterfeiting and piracy.

The United States is closely monitoring and engaging with the Vietnamese government on the ongoing implementation of amendments to the 2015 Penal Code with respect to criminal enforcement of IP violations. Counterfeit goods are widely available online and in physical markets. In addition, online piracy (including the use of piracy devices and applications to access unauthorized audiovisual content); book piracy; lack of effective criminal measures for cable and satellite signal theft; and both private and public-sector software piracy remain problematic.

Vietnam’s system for protecting against the unfair commercial use and unauthorized disclosure of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products needs clarification.  The United States is monitoring the implementation of IP provisions of the CPTPP, which the National Assembly ratified in November 2018, and the EVFTA, which Vietnam’s National Assembly expects to ratify in late 2020.

In its international agreements, Vietnam committed to strengthen its IP regime and is in the process of drafting implementing legislation and other measures in a number of IP-related areas, including in preparation for acceding to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty.  In September 2019, Vietnam acceded to the Hague Agreement Concerning the International Registration of Industrial Designs, and the United States will monitor the implementation of that agreement.

The United States, through the U.S.-Vietnam Trade and Investment Framework Agreement and other bilateral fora, continues to urge Vietnam to address these issues and to provide interested stakeholders with meaningful opportunities for input as it proceeds with these reforms. The United States and Vietnam signed a Customs Mutual Assistance Agreement in December 2019, which will facilitate bilateral cooperation in IP enforcement.

In 2019, the Intellectual Property Office of Vietnam (IP Vietnam) reported receiving 120,793 IP applications of all types (up 10 percent from 2018), of which 75,742 were registered for industrial property rights (up 16 percent from 2018). IP Vietnam reported granting 2,922 patents in 2019 (up 13 percent from 2018). Industrial designs registrations reached 2,172 in 2019 (down 8 percent from 2018). In total, IP Vietnam granted more than 40,715 protection titles for industrial property, out of more than 75,742 applications in 2019 (up 41 percent from 2018). The DMS processed 9,510 counterfeit and IP infringement cases and collected over USD 1.5 million in fines. The most infringed-upon products were clothes, consumer goods, electronics, foodstuffs, fertilizers, pharmaceuticals, cosmetics, construction materials, and bicycle and automobile parts.

The Copyright Office of Vietnam received and settled 15 copyright petitions and five requests for copyright assessment in 2019. In 2019, the Ministry of Culture, Sports, and Tourism’s Inspector General carried out inspections for software licensing compliance and discovered 111 violations, resulting in total fines of USD 150,000 – nearly triple the amount in 2018. For more information, please see the following reports from the U.S. Trade Representative:

• Special 301 Report: https://ustr.gov/sites/default/files/2019_Special_301_Report.pdf 

• Notorious Markets Report: https://ustr.gov/sites/default/files/2019_Special_301_Report.pdf 
• For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

The Vietnamese government generally encourages foreign portfolio investment. The country has two stock markets – the Ho Chi Minh City Stock Exchange, which lists publicly traded companies, and the Hanoi Stock Exchange, which lists bonds and derivatives. Vietnam also has a market for unlisted public companies (UPCOM) at the Hanoi Securities Center.

Although Vietnam welcomes portfolio investment, the country sometimes has difficulty in attracting such investment. Morgan Stanley Capital International (MSCI) classifies Vietnam as a Frontier Market, which precludes some of the world’s biggest asset managers from investing in its stock markets. Vietnam is improving its legal framework to reach its goal of meeting the “emerging market” criteria in 2020 and attracting more foreign capital. However, exogenous events may make this difficult: in the first quarter of 2020, foreign investors withdrew USD 500 million in portfolio assets from Vietnam due to the COVID-19 pandemic.

There is enough liquidity in the markets to enter and maintain sizable positions. Combined market capitalization at the end of 2019 was approximately USD 189 billion, equal to 73 percent of Vietnam’s GDP, with the Ho Chi Minh City Stock Exchange accounting for USD 141 billion, the Hanoi Exchange USD 8 billion, and the UPCOM USD 40 billion. Bond market capitalization reached over USD 50 billion in 2019, the majority of which were government bonds, largely held by domestic commercial banks.

Vietnam complies with International Monetary Fund (IMF) Article VIII. The government notified the IMF that it accepted the obligations of Article VIII, Sections 2, 3, and 4, effective November 8, 2005.

Local banks generally allocate credit on market terms, but the banking sector is not as sophisticated or capitalized as those in advanced economies. Foreign investors can acquire credit in the local market, but both foreign and domestic firms often seek foreign financing since Vietnamese banks do not have sufficient capital at appropriate interest rate levels for a significant number of FDI projects.

Money and Banking System

Vietnam’s banking sector has been stable since recovering from the 2008 global recession. Nevertheless, the SBV estimated in 2018 that half of Vietnam’s population is underbanked or lacks bank accounts due to a preference for cash, distrust in commercial banking, limited geographical distribution of banks, and a lack of financial acumen. The World Bank’s Global Findex Database 2017 (the most recent available) estimated that only 31 percent of Vietnamese over the age of 15 had an account at a financial institution or through a mobile money provider.

Although the banking sector was stable during 2019, COVID-19 may challenge the sector. Ratings agency Moody’s reported, on April 7, 2020, that “the consumer finance industry in Vietnam is vulnerable to disruptions given its risky borrower profile,” and noted that layoffs, underemployment, and business closures resulting from COVID-19 further decrease the creditworthiness of borrowers. At the end of 2019, the SBV reported that the percentage of non-performing loans (NPLs) in the banking sector was 1.9 percent, a significant improvement from the 2.4 percent at the end of 2018.

The banking sector’s estimated total assets stood at USD 519 billion, of which USD 222 billion belonged to seven state-owned and majority state-owned commercial banks – accounting for 42 percent of total assets. Though classified as joint-stock (private) commercial banks, the Bank of Investment and Development Bank (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) all are majority-owned by SBV. In addition, the SBV holds 100 percent of Agribank, Global Petro Commercial Bank (GPBank), Construction Bank (CBBank), and Oceanbank.

The U.S. Mission in Vietnam did not find any evidence that a Vietnamese bank had lost a correspondent banking relationship in the past three years; there is also no evidence that a correspondent banking relationship is currently in jeopardy.

Foreign Exchange and Remittances

Foreign Exchange

There are no legal restrictions on foreign investors converting and repatriating earnings or investment capital from Vietnam. A foreign investor can convert and repatriate earnings provided the investor has the supporting documents required by law and has applied to remit money. The SBV sets the interbank lending rate and announces a daily interbank reference exchange rate. SBV determines the latter based on the previous day’s average interbank exchange rates, while considering movements in the currencies of Vietnam’s major trading and investment partners. The Vietnamese government generally keeps the exchange rate at a stable level compared to major world currencies.

Remittance Policies

Vietnam mandates that in-country transactions must be made in the local currency – Vietnamese dong (VND). The government allows foreign businesses to remit lawful profits, capital contributions, and other legal investment earnings via authorized institutions that handle foreign currency transactions. Although foreign companies can remit profits legally, sometimes these companies find difficulties bureaucratically, as they are required to provide supporting documentation (audited financial statements, import/foreign-service procurement contracts, proof of tax obligation fulfillment, etc.). SBV also requires foreign investors to submit notification of profit remittance abroad to tax authorities at least seven working days prior to the remittance; otherwise there is no waiting period to remit an investment return.

The inflow of foreign currency into Vietnam is less constrained. There are no recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.

Sovereign Wealth Funds

Vietnam does not have a Sovereign Wealth Fund.

In 2018, the government created the Commission for State Capital Management at Enterprises (CMSC) to manage SOEs with increased transparency and accountability. The CMSC’s goals include accelerating privatization in a transparent manner, promoting public listings of SOEs, and transparency in overall financial management of SOEs.

SOEs do not operate on a level playing field with domestic companies and continue to benefit from preferential access to resources such as land, capital, and political largesse. In the 2019 PCI report, however, the percentage of surveyed firms agreeing with the statement “SOEs find it easier to win state contracts” dropped to 21 percent from 27 percent in 2015.

Third-party market analysts note that a significant number of SOEs have extensive liabilities, including pensions owed, real estate holdings in areas not related to the SOE’s ostensible remit, and a lack of transparency with respect to operations and financing.

Privatization Program

Vietnam officially started privatizing SOEs in 1998. The process has been slow because privatization has historically transferred only a small share of an SOE (two to three percent) to the private sector, and investors have had concerns about the financial health of many companies. Additionally, the government has inadequate regulations with respect to privatization procedures.

Companies are required to publish their corporate social responsibility activities, corporate governance work, information of related parties and transactions, and compensation of management. Companies must also announce extraordinary circumstances, such as changes to management, dissolution, or establishment of subsidiaries, within 36 hours of the event.

Most multinational companies implement Corporate Social Responsibility (CSR) programs that contribute to improving the business environment in Vietnam, and awareness of CSR programs is increasing among large domestic companies. The VCCI conducts CSR training and highlights corporate engagement on a dedicated website (http://www.csr-vietnam.eu/ ) in partnership with the UN.

AmCham also has a CSR group that organizes events and activities to raise awareness of social issues. Non-governmental organizations collaborate with government bodies, such as VCCI and the Ministry of Labor, Invalids, and Social Affairs (MOLISA), to promote business practices in Vietnam in line with international norms and standards.

Overall, the government has not defined responsible business conduct (RBC), nor has it established a national plan or agenda for RBC. The government has yet to establish a national point of contact or ombudsman for stakeholders to get information or raise concerns regarding RBC. The new Labor Code passed in December 2019 recognizes the right of employees to establish their own representative organizations. For a detailed description of regulations on worker/labor rights in Vietnam, see the Department of State’s Human Rights Report (https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/vietnam/).

Vietnam has laws to combat corruption by public officials, and they extend to all citizens. Corruption is due, in large part, to low levels of transparency, accountability, and media freedom, as well as poor remuneration for government officials and inadequate systems for holding officials accountable. Competition among agencies for control over businesses and investments has created overlapping jurisdictions and bureaucratic procedures that, in turn, create opportunities for corruption.

The government has tasked various agencies to deal with corruption, including the Central Steering Committee for Anti-Corruption (chaired by the Communist Party of Vietnam General Secretary Nguyen), the Government Inspectorate, and line ministries and agencies. Formed in 2007, the Central Steering Committee for Anti-Corruption has been under the purview of the CPV Central Commission of Internal Affairs since February 2013. The National Assembly provides oversight on the operations of government ministries. Civil society organizations have encouraged the government to establish a single independent agency with oversight and enforcement authority to ensure enforcement of anti-corruption laws.

Resource to Report Corruption

Contact at government agency responsible for combating corruption:

Mr. Phan Dinh Trac
Chairman, Communist Party Central Committee Internal Affairs
4 Nguyen Canh Chan; +84 0804-3557
Contact at NGO:
Ms. Nguyen Thi Kieu Vien
Executive Director, Towards Transparency
Transparency International National Contact in Vietnam
Floor 4, No 37 Lane 35, Cat Linh street, Dong Da, Hanoi, Vietnam; +84-24-37153532
Fax: +84-24-37153443;
kieuvien@towardstransparency.vn

Vietnam is a unitary single-party state, and its political and security environment is largely stable. Protests and civil unrest are rare, though there are occasional demonstrations against perceived or real social, environmental, labor, and political injustices.

In August 2019, online commentators expressed outrage over the slow government response to an industrial fire in Hanoi that released unknown amounts of mercury. Other localized protests in 2019 and early 2020 broke out over alleged illegal dumping in waterways and on public land, and the perceived government attempts to cover up potential risks to local communities.

Citizens sometimes protest actions of the People’s Republic of China (PRC), usually online. For example, they did so in June 2019, when China Coast Guard vessels harassed the operations of Russian oil company Rosneft in Block 06-01, Vietnam’s highest-producing natural gas field.

In April 2016, after the Formosa Steel plant discharged toxic pollutants into the ocean and caused a large number of fish deaths, the affected fishermen and residents in central Vietnam began a series of regular protests against the company and the government’s lack of response to the disaster. Protests continued into 2017 in multiple cities until security forces largely suppressed the unrest. Many activists who helped organize or document these protests were subsequently arrested and imprisoned.

The Labor Code passed in December 2019 will come into effect on January 1, 2021. The CPTPP and the EVFTA helped advance labor reform in Vietnam. In particular, the EVFTA requires Vietnam to publish a timeline for ratifying the two remaining core International Labor Organization (ILO) conventions: Convention 105 (abolition of forced labor) in 2020; and Convention 87 (freedom of association and protection of the right to organize) in 2023. Convention 87, together with Convention 98, would allow trade unions, which are currently dominated by the sole national trade union, the Vietnam General Confederation of Labor, to better represent workers’ interests. Even with new momentum on labor issues, enactment of legal and regulatory changes to improve working conditions in Vietnam will still take years to fully develop and implement.

According to Vietnam’s General Statistics Office (GSO), in the first quarter of 2019 there were 55 million people participating in the formal labor force in Vietnam out of over 72 million people aged 15 and above. The labor force is relatively young, with workers 15-39 years of age accounting for half of the total labor force.

Estimates on the size of the informal economy differ widely. The IMF states 40 percent of Vietnam’s laborers work on the informal economy; the World Bank puts the figure at 55 percent; the ILO puts the figure as high as 79 percent if agricultural households are included.

An employer is permitted to lay off employees due to technological changes, organizational changes (in cases of a merger, consolidation, or cessation of operation of one or more departments), or when the employer faces economic difficulties. There are no waivers on labor requirements to attract foreign investment. COVID-19 has increased the number of layoffs in the Vietnamese economy. In March and April 2020, the Vietnamese government passed measures, including cash payments and supplemental cash for companies, to help pay salaries for workers and offer unemployment insurance.

The constitution affords the right of association and the right to demonstrate. The 2019 Labor Code, that will come into effect on January 1, 2021, allows workers to establish and join independent unions of their choice. However, the relevant governmental agencies are still drafting the implementing decrees on procedures to establish and join independent unions, and to determine the level of autonomy independent unions will have in administering their affairs.

Vietnam has been a member of the ILO since 1992, and has ratified six of the core ILO labor conventions (Conventions 100 and 111 on discrimination, Conventions 138 and 182 on child labor, Convention 29 on forced labor, and Convention 98 on rights to organize and collective bargaining). While the constitution and law prohibit forced or compulsory labor, Vietnam has not ratified Convention 105 on forced labor as a means of political coercion and discrimination and Convention 87 on freedom of association and protection of the rights to organize, although the government states it is currently taking steps toward ratification.

The Overseas Private Investment Corporation (OPIC), the predecessor of the U.S. International Development Finance Corporation (DFC), signed a bilateral agreement with Vietnam in 1998, and Vietnam joined the Multilateral Investment Guarantee Agency (MIGA) in 1995.

On January 8, 2020, DFC CEO Adam Boehler made his first visit to Vietnam and met with the Prime Minister. CEO Boehler noted that the DFC hopes to make a multibillion-dollar commitment to Vietnam in the coming years, with investments in energy, healthcare, education, and small businesses.

* General Statistics Office (GSO)

Table 3: Sources and Destination of FDI
Data not available.

Economic Section
U.S. Embassy
7 Lang Ha, Ba Dinh, Hanoi, Vietnam +84-24-3850-5000
+84-24-3850-5000
InvestmentClimateVN@state.gov