Philippines: 2009 Investment Climate Statement, Part One

UNCLAS MANILA 000085

SIPDIS

STATE FOR EB/IFD/OIA AND EAP/MTS
STATE PASS USTR
STATE PASS EXIM
USDOC FOR 4430/ITA/MAC/MHOGUE
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EINV EFIN ELAB ETRD KTDB PGOV OPIC USTR RP
SUBJECT: Philippines: 2009 Investment Climate Statement, Part One

REF: 08 STATE 123907


1. Part One of PostQs 2009 Investment Climate Statement is
transmitted in paragraph 2, in accordance with reftel instructions.



2. Begin text:

2009 Investment Climate Statement -- The Philippines

Openness to Foreign Investment

The Government of the Philippines (GRP) generally acknowledges the
importance of foreign investment to economic development. The GRP
established the Board of Investments (BOI) to assist foreign and
domestic investors with regulatory requirements, incentives, and
market guidance. Legal restrictions, regulatory inconsistency and
lack of transparency, however, persist in many sectors. GRP
regulatory authority remains weak or ambiguous. Foreign business
representatives often cite corruption as a serious impediment to
investment. Commercial disputes are often difficult to resolve
quickly or satisfactorily in the understaffed, complex, and
delay-prone judicial system. In addition, the GRP has not adequately
addressed other key issues like inadequate public infrastructure and
electric power rates. Despite these problems, many foreign investors
in the Philippines maintain long-term commitments to the market and
have prospered.

The GRP is receptive to suggestions and criticisms from the private
sector. Many foreign and domestic businesses work through industry
associations to support economic reform. The American Chamber of
Commerce of the Philippines promotes a socio-economic and
philanthropic agenda, identifying investment opportunities and
barriers, and offering possible solutions to problems. Through its
Investment Climate Improvement Project, The Chamber pinpoints
problems in the Philippine investment environment, assesses their
relative importance to the investment climate and works toward
finding and implementing practical and effective solutions. The
Chamber has continued to produce advocacy papers, sometime jointly
with other foreign chambers, on economic and political issues.

-- GENERAL PROVISIONS FOR FOREIGN INVESTMENT:

The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179,
1996) liberalized the entry of foreign investment into the
Philippines. Under the Act, foreign investors are generally treated
like their domestic counterparts and must register with the
Securities and Exchange Commission (SEC) (in the case of a
corporation or partnership) or with the Department of Trade and
Industry's Bureau of Trade Regulation and Consumer Protection (in
the case of a sole proprietorship). Investors generally find this
process to be slow, but nondiscriminatory. The GRP has some foreign
investment incentive programs, which are described below in the
section "Performance Requirements and Incentives." The Philippines
does screen potential foreign investments.

-- RESTRICTIONS ON FOREIGN INVESTMENT:

The 1991 Foreign Investment Act provides for two "negative lists"
(List A and list B),collectively called the "Foreign Investment
Negative List," enumerating areas where foreign investment is
restricted or limited. The restrictions stem from a constitutional
provision, Section 10 of Article XII, which permits Congress to
reserve to Philippine citizens certain areas of investment and
Section 11 of the same article which limits foreign participation in
public utilities or their operation. The Foreign Investment Act
requires the Philippine government to update and publish the
negative list every two years. The Philippine government is
scheduled to release a new list (the eighth Negative List) in
January 2009. These restrictions are viewed as a significant factor
in the Philippines' poor record of attracting foreign investment
relative to neighboring economies. Waivers are not available under
the Negative List.

List A enumerates investment sectors and activities for which
foreign equity participation is restricted by mandate of the
Constitution and specific laws. For example, the practice of
licensed professions such as engineering, medicine, accountancy,
environmental planning, and law are fully reserved for Philippine
citizens. Other investment areas reserved for Filipinos include
retail trade enterprises (with paid-up capital of less than $2.5
million, or less than $250,000 for retailers of luxury goods); mass
media (except recording); small-scale mining; private security;
utilization of marine resources, including small-scale utilization
of natural resources in rivers/lakes/bays & lagoons; and,
manufacture of firecrackers and pyrotechnic devices.

The Philippine government allows up to 20 percent foreign equity
participation in private radio communications networks. Up to 25
percent foreign ownership is allowed for enterprises engaged in
employee recruitment and for public works construction and repair,
with the exception of build-operate-transfer and foreign -funded or
foreign-assisted projects (that is, projects that benefit from
foreign aid, for which there is no upper limit on foreign
ownership). Foreign ownership of 30 percent is allowed for
advertising agencies, while 40 percent foreign participation is
allowed in natural resource exploration, development, and
utilization (although the President may authorize 100 percent
foreign ownership for large scale projects).
Foreign investors are limited to 40 percent equity in educational
institutions, public utilities operation and management, commercial
deep-sea fishing, GRP procurement contracts, adjustment companies,
operations of build-operate-transfer projects in public utilities,
and ownership of private lands. For rice and corn processing,
foreign equity is limited to 40 percent, with the exception that 100
percent foreign participation is allowed with the proviso that the
foreign investor shall divest a minimum of 60 percent of their
equity to Philippine nationals within a 30 year period from start of
operation.
Foreign ownership of retail trade enterprises with paid-up capital
of $2.5 million but less than $7.5 million is now allowed, provided
that the initial investment to establish a store is more than
$830,000, or specializing in high end or luxury products, provided
that the paid up capital per store is not less than $250,000.
Enterprises engaged in financing and investment activities that are
regulated by the Securities and Exchange Commission, including
securities underwriting, are limited to 60 percent foreign
ownership.

List B enumerates areas where foreign ownership is restricted or
limited (generally at 40 percent) for reasons of national security,
defense, public health, safety, and morals. Sectors covered include
explosives, firearms, military hardware, massage clinics, and
gambling. This list also seeks to protect local small- and
medium-sized firms by restricting foreign ownership to no more than
40 percent in non-export firms capitalized at less than $200,000 and
for domestic market enterprises that involve advanced technology or
employ at least 50 direct employees with paid-in equity capital of
less than $100,000.

In addition to the restrictions noted in the "A" and "B" lists,
firms with more than 40 percent foreign equity that qualify for
Board of Investment incentives must divest to the 40 percent level
within 30 years from registration date or within a longer period
determined by the Board of Investments. Foreign-controlled
companies that export 100 percent of production are exempt from this
requirement. As a general policy, the Department of Labor and
Employment allows the employment of foreigners provided there are no
qualified Philippine citizens who can fill the position. Board of
Investment-registered companies may employ foreign nationals in
supervisory, technical, or advisory positions for five years from
registration, extendable for limited periods at the discretion of
the Board of Investments. Top positions and elective officers of
majority foreign-owned enterprises (i.e., president, general
manager, and treasurer or their equivalents) are exempt from these
restrictions.

-- FINANCIAL SERVICES:

The Act Liberalizing the Entry and Scope of Operations of Foreign
Banks in the Philippines (R.A. 7721, 1994) limited to ten the number
of new foreign banks that could open full-service branches in the
Philippines. All ten licenses have been issued. These foreign banks
are limited to six branch offices each. The four foreign banks
operating in the Philippines prior to 1948 were also allowed to open
up to six branches. Subject to certain criteria, R.A. 7721 allows a
foreign banking institution up to 60 percent ownership in a locally
incorporated subsidiary. As a general rule, a non-bank foreign
investor or foreign bank that does not meet the criteria stipulated
in R.A. 7721 and its implementing regulations, is limited to 40
percent ownership. For rural banks, only foreign banks that meet
the criteria stipulated in R.A. 7721 may invest; otherwise, foreign
ownership is prohibited.

A seven-year window under the General Banking Act (R..A. 8791,
signed in May 2000) allowing foreign banks to acquire up to 100
percent of one locally incorporated commercial or thrift bank (with
no obligation to divest later) closed in June 2007. The Bangko
Sentral ng Pilipinas (the central bank) imposed a moratorium on new
bank licenses in September 1999 which remains in effect.
Micro-finance institutions are exempted. Another limitation on
foreign ownership is a requirement that majority Filipino-owned
banks should, at all times, control at least 70 percent of total
banking system resources. Cooperative banking remains completely
closed to foreigners.

The insurance industry was opened up to 100 percent foreign
ownership in 1994. However, minimum capital requirements increase
with the degree of foreign ownership. As a general rule, only the
state-owned Government Service Insurance System may provide coverage
for government-funded projects. Administrative Order 141, issued in
August 1994, also required proponents and implementers of
build-operate-transfer projects and privatized government
corporations to secure their insurance and bonding requirements from
the Government Service Insurance System, at least to the extent of
the government's interests.
Membership in the Philippine Stock Exchange is open to
foreign-controlled stock brokerages incorporated under Philippine
law. Securities underwriting companies not established under
Philippine law may underwrite Philippine issues for foreign markets,
but not for the domestic market. The Lending Company Regulation Act
-- signed into law in May 2007 to establish a regulatory framework
for credit enterprises that do not clearly fall under the scope of
existing laws -- requires majority Philippine ownership for such
enterprises.

Although there are no foreign ownership restrictions regarding the
acquisition of shares of mutual funds, current law restricts
membership on boards of directors to Philippine citizens.

-- LAND OWNERSHIP:

The 1987 Constitution bans foreigners from owning land in the
Philippines. The Investors' Lease Act (R.A. 7652, 1994) allows
foreign companies investing in the Philippines to lease a contiguous
land parcel of up to 1000 hectares for 50 years, renewable once for
another 25 years, for a maximum 75 years.
In mid-2003, Republic Act 9225 (Citizenship Retention and
Re-Acquisition Act of 2003 or the Dual-Citizenship Act) allowed
natural-born Filipinos who had undergone naturalization as citizens
of a foreign country to re-acquire Philippine citizenship. The
dual-citizenship holder is entitled to full rights of possession of
land and property as a Philippine citizen.

Deeds of ownership are difficult to establish, poorly reported, and
poorly regulated. The court system is not able to settle cases in a
timely manner.

Foreigners are allowed 100 percent ownership of companies involved
in large-scale exploration, development, and utilization of mineral
resources. Total mineral production up to the third quarter of 2008,
was valued at $1.1 billion, fell by about 27% from the same period
in 2007 due mainly to flagging nickel prices. Some $500 million in
investments were registered in 2007, which is about 60% of the
capital invested in new mining projects since 2004.

-- TRENDS AND PROBLEM AREAS:

Philippine gross capital formation, estimated at between 15 and 16
percent of Gross Domestic Product, ranks among the lowest in Asia.
Net foreign direct investment improved yearly from less than $500
million in 2003 to $2.9 billion in 2007, but contracted by more than
50 percent year-on-year in 2008. Overall, net FDI flows have
averaged less than $1.6 billion annually since 2000, trailing many
of the Philippines' neighbors. The country captured less than 5
percent of total net investment flows to Southeast Asia over the
past eight years and accounts for less than 3.5 percent of the
foreign investment stock in the region. The Philippines will need
to compete more aggressively for risk-averse capital and investments
during a period of global economic uncertainty, but has recorded
sliding global competitiveness and anti-corruption rankings. The
American and other foreign chambers in the country also continue to
urge the Philippine government to review legal barriers to trade and
investment and further open up the Philippine economy.

Trade infrastructure urgently needs attention, including Bureau of
Customs operations, the nation's inter-island shipping, and port
facilities. Infrastructure spending remains subject to corrupt
practices in allocation, procurement, contracting, and
implementation, with a significant portion of the budget wasted.
Anti-corruption vigilance and enforcement has been weak. Congestion
and pollution in the country's major cities persist, most notably in
Manila.
Investors cite high electricity costs in the Philippines and power
shortages as areas of concern. The GRP follows a policy of

liberalizing the power sector through the sale of government
generation and distribution assets and through support for
alternative energy sources to reduce dependence on imported fuels.

-- SANCTITY OF CONTRACTS:

Questions over the general sanctity of contracts in the Philippines
have clouded the investment climate. The judicial system has a weak
track record in this area. A more detailed discussion of this issue
is found in the section entitled "Dispute Settlement."

-- STOCK EXCHANGE:

The Philippines is generally open to foreign portfolio capital
investment. A more detailed discussion is provided in the section
entitled "Efficient Capital Markets and Portfolio Investment."

-- PRIVATIZATION:

The Privatization Management Office, under the Department of
Finance, is the technical and implementing agency tasked to carry
out the day-to-day government responsibilities of the privatization
program. The Office serves as the marketing arm of the GRP for
privatized assets, as well as government-owned and controlled
corporations assigned for disposition, and is responsible for
implementing the actual marketing/disposition program for government
corporations, assets and idle properties. Apart from restrictions
under the Foreign Investment Negative List (detailed above),there
are no separate regulations that discriminate against foreign
buyers. The bidding process appears to be transparent, though the
Supreme Court has twice overturned high profile privatization
transactions to foreign buyers.
The Power Sector Assets and Liabilities Management Corporation is
mandated to sell 70% of the government-owned National Power
Corporation's generating assets. Eight years after the signing of
the Electric Power Industry Reform Act, the Philippine government
will close the year 2008 having privatized more than 70% of the
generation assets, one of the three necessary conditions needed to
trigger the implementation of the open access and retail competition
provisions of the electricity reform law.
-- PUBLIC INFRASTRUCTURE:

The Build-Operate-Transfer Law provides the legal framework for
large infrastructure projects and other types of government
contracts. Consistent with constitutional limitations on foreign
investment in public utilities, franchises in railways/urban rail
mass transit systems, electricity distribution, water distribution,
and telephone systems must be awarded to enterprises that are at
least 60 percent Philippine-owned. American firms have won contracts
under the law and similar arrangements, mostly in the power
generation sector. However, because of weaknesses in planning,
preparing, tendering, and executing private sector infrastructure
projects, lingering ambiguities about the level of guarantees and
other support provided by the government, and other uncertainties
pertaining to the general enabling framework for private sector
participation in infrastructure, there is relatively low interest by
foreign firms in pursuing projects in the Philippines at present.

Conversion And Transfer Policies

There are generally no restrictions on the full and immediate
transfer of funds associated with foreign investments, foreign debt
servicing, and the payment of royalties, lease payments, and similar
fees. To obtain foreign exchange from the banking system for debt
servicing, repatriation of capital, or remittance of profits, the
foreign loans and foreign investment must be registered with the
central bank. There are no restrictions on obtaining foreign
exchange, and foreign exchange can be bought and sold outside the
banking system. There is no mandatory foreign exchange surrender
requirement imposed on export earners and other foreign exchange
earners such as overseas workers. The exchange rate is not fixed and
varies daily in response to market forces. Central bank intervention
is targeted mainly at smoothing volatility.
To curb foreign exchange speculation and volatility, the central
bank requires a 90-day minimum holding period for foreign
investments in peso time deposits to be eligible for registration.
Pre-termination before the prescribed period would result in the
cancellation of the registration and the investor will not be
allowed to purchase foreign exchange from banks for repatriation and
remittance purposes. However, the peso proceeds from the
pre-terminated time deposits may be invested in other instruments
and registered anew.

Expropriation And Compensation
Philippine law allows expropriation for public use or in the
interest of national welfare or defense. In such cases, the GRP
offers compensation for the affected property. Most expropriation
cases involve acquisition for major public sector infrastructure
projects. In the event of expropriation, foreign investors have the
right under Philippine law to remit sums received as compensation in
the currency in which the investment was originally made and at the
exchange rate at the time of remittance. However, agreeing on a
mutually acceptable price can be a protracted process.

There are laws that mandate divestment (to 40 percent foreign
equity) by foreign investors. The Omnibus Investment Code specifies
a 30-year divestment period for non-pioneer foreign-owned companies
that accept investment incentives. Pioneer enterprises are
registered enterprises engaged in the manufacture and processing of
products or raw materials that are not yet produced in the
Philippines in large volume. Non-pioneer enterprises refer to all
registered producer enterprises not included in the pioneer
enterprise list. Companies that export 100 percent of production are
exempt from the divestiture requirement. The Retail Trade
Liberalization Act (R.A. 8762, 2000) requires retail establishments
that are capitalized at $2.5 million or more and/or that do not
specialize in luxury products to offer at least 30 percent of their
equity to the public within eight years from the start of
operations.

Dispute Settlement - Investment Disputes

Investment disputes are infrequent, but when they occur it can take
years for parties to reach final settlement. A number of GRP actions
in recent years have raised questions over the sanctity of contracts
in the Philippines and have clouded the investment climate. Recent
high-profile cases include the GRP-initiated review and
renegotiation of contracts with independent power producers, court
decisions voiding allegedly tainted and disadvantageous
build-operate-transfer agreements and challenging the extent of
foreign participation in large-scale natural resource exploration
activities (such as mining).

-- LEGAL SYSTEM:

Many, perhaps most, foreign investors view the inefficiency and
uncertainty of the judicial system as a significant disincentive for
investment. Although the judiciary is constitutionally independent
of the executive and legislative branches, it faces many problems,
including understaffing and corruption. Critics also charge that
judges rarely have a background in or thorough understanding of
market economics or business, and that their decisions stray from
the interpretation of law into policymaking. The GRP is pursuing
judicial reform with support from foreign donors, including the U.S.
Government, the Asian Development Bank, and the World Bank.
The Philippines is a member of the International Center for the
Settlement of Investment Disputes and of the Convention on the
Recognition and Enforcement of Foreign Arbitrage Awards. However,
Philippine courts have, in several cases involving U.S. and other
foreign firms, shown a reluctance to abide by the arbitral process
or its resulting decisions. Enforcing an arbitral award in the
Philippines can take years.

-- BANKRUPTCY LAW:

The Securities Regulation Code of 2000 assigned jurisdiction over
debt payment suspension and corporate rehabilitation cases to
regional trial courts designated by the Supreme Court as commercial
courts. The Supreme Court's "Interim Rules of Procedure on Corporate
Rehabilitation," which took effect in December 2000, provided for
specific periods and deadlines for compliance with procedural
requirements (including court approval/disapproval of a
rehabilitation plan). However, in some cases judges reportedly have
not enforced the deadlines stipulated in the rules. Investors have
also expressed concern over a "cram down" provision that allows the
courts to approve a rehabilitation plan despite opposition from
majority creditors "if, in [the court's] judgment, the
rehabilitation of the debtor is feasible and the opposition of the
creditors manifestly unreasonable." In December 2008, the Supreme
Court approved revised "Rules of Procedure on Corporate
Rehabilitation," which succeeded the 2000 "interim" rules effective
January 16, 2009 (http://sc.judiciary.gov.ph/rulesofcourt/2008 /
dec/A.M.NO.00-8-10-SC.pdf). The more significant improvements
include new provisions covering petitions for the approval of
pre-negotiated rehabilitation plans carrying the endorsement of
creditors holding at least two-thirds of the total liabilities of
the debtor (including secured creditors holding more than 50 percent
of the total secured claims and unsecured creditors holding more
than 50 percent of unsecured claims); as well as the inclusion of
provisions on the recognition of foreign proceedings.
Investors nevertheless strongly believe that reforms should go
beyond procedural improvements and continue to push for
comprehensive legislation to rationalize and update the Philippine
bankruptcy/insolvency system. The current legal framework is a
mixture of outdated and sometimes inconsistent laws and judicial
pronouncements.

Performance Requirements And Incentives

Book I, Investment with Incentives, of the Omnibus Investment Code
(1987) prescribes incentives available to qualified firms engaged in
preferred sectors and geographic areas included in the annual
Investment Priorities Plan, administered by the Board of
Investments. The 2008 Investment Priorities Plan presents a list of
priority investment areas entitled to incentives into the following
classes: preferred activities; mandatory inclusions; export
activities; and the Autonomous Region in Muslim Mindanao List.

Preferred activities include projects in agriculture/agribusiness
and fishery, infrastructure, tourism, research and development,
engineered products, and strategic activities. Export activities
cover the production and manufacture of non-traditional export
products and services as identified under the Medium Term Philippine
Development Plan. Mandatory inclusions are activities that require
inclusion in the Investment Priorities Plan as provided for under
existing laws. The Autonomous Region in Muslim Mindanao List covers
priority activities independently identified by the Autonomous
Region of Muslim Mindanao.

Screening mechanisms for companies seeking investment incentives
appear to be routine and nondiscriminatory, but the application
process can be complicated. Incentives granted by the Board often
depend on actions by other agencies, such as the Department of
Finance.

The basic incentives offered to all Board of Investment-registered
companies include:

* Income tax holiday: new projects with "pioneer" status receive a
six-year income tax holiday, with the possibility of an extension to
eight years. New projects with non-pioneer status receive a
four-year holiday with a possible extension to six years. New or
expansion projects in less developed areas, regardless of status,
receive a six-year income tax holiday. Expansion and modernization
projects receive three years (limited to incremental sales
revenue/volume). Enterprises located in less developed areas may
secure a bonus year if: the ratio of total imported and domestic
capital equipment to number of workers for the project does not
exceed $10,000 per worker; the net foreign exchange savings or
earnings amount to at least $500,000 annually for the first three
years of operation; or indigenous raw materials used are at least 50
percent of the total cost of raw materials for the years prior to
the extension unless the Board prescribes a higher percentage;

* Additional deduction for wages: for the first five years after
registration, an additional deduction from taxable income equivalent
to 50 percent of the wages of additional direct- hire workers is
allowed, provided the enterprise meets a prescribed capital
equipment-to-labor ratio set by the Board. Firms that benefit from
this incentive cannot simultaneously claim an income tax holiday;

* Additional deduction from taxable income for necessary and major
infrastructure works for companies located in areas with deficient
infrastructure, public utilities, and other facilities: a company
may deduct from its taxable income an amount equivalent to expenses
incurred in the development of necessary and major infrastructure
works. This deduction is not applicable for mining and
forestry-related projects;

* Tax and duty exemption on imported breeding stocks and genetic
materials and/or tax credits on local purchases thereof (equivalent
to the taxes and duties that would have been waived if imported),
for purchases made within ten years from a company's registration
with the Board or from the start of its commercial operation;

* Exemption from wharf dues and any export tax, duty, impost, or
fees on non-traditional export products made within ten years of a
company's registration with the Board;

* Tax and duty exemption on importation of required supplies/spare
parts for consigned equipment by a registered enterprise with a
bonded manufacturing warehouse;

* Importation of consigned equipment for ten years from date of
registration with the Board, subject to posting a re-export bond;

* Employment of foreign nationals: enterprises may employ foreign
nationals in supervisory, technical, or advisory positions for a
period not exceeding five years from registration (extendible for
limited periods at the discretion of the Board of Investment) under
simplified visa requirements. The positions of president, general
manager, and treasurer of foreign-owned registered enterprises are
not subject to this limitation. GRP regulations require the training
of Filipino understudies for the positions held by foreigners. If
foreign controlled, registered firms may indefinitely retain
foreigners in the positions of president, treasurer, general
manager, or their equivalents;

* Simplification of customs procedures for the importation of
equipment, spare parts, raw materials and supplies and exports of
processed products;

* Operation of a bonded manufacturing / trading warehouse subject to
customs regulations.

* To encourage the regional dispersal of industries, Board of
Investment-registered enterprises that locate in less developed
areas, regardless of whether the companies are classified as
"pioneer" or "non-pioneer," are automatically entitled to "pioneer"
incentives. In addition, such enterprises can deduct from taxable
income an amount equivalent to 100 percent of outlays for
infrastructure works. They may also deduct 100 percent of
incremental labor expenses from taxable income for the first five
years from registration (double the rate allowed for
Board-registered projects not located in less developed areas).

Detailed information and guidelines on the Philippines' 2008
Investment Priorities Plan can be obtained from the Board of
Investments website, www.boi.gov.ph.

-- INCENTIVES FOR EXPORTERS:

An enterprise with more than 40 percent foreign equity that exports
at least 70 percent of its production may still be entitled to
incentives even if the activity is not listed in the Investment
Priorities Plan.

In addition to the general incentives available to Board of
Investment- registered companies, a number of incentives provided
under Book I of the Omnibus Investment Code apply specifically to
registered export-oriented firms. These include:

* Tax credit for taxes and duties paid on imported raw materials
used in the processing of export products;

* Exemption from taxes and duties on imported spare parts (applies
to firms exporting at least 70 percent); and,

* Access to customs bonded manufacturing warehouses. Firms that earn
at least 50 percent of their revenues from exports may register for
incentives under the Export Development Act (R.A. 7844, 1994).
Exporters registered under the Act may also be eligible for Board of
Investment incentives, provided the exporters are registered
according to Board of Investment rules and regulations, and the
exporter does not take advantage of the same or similar incentives
twice. Incentives under the Act include a tax credit that ranges
from 2.5 percent to 10 percent of annual incremental export revenue.


The Board of Investments has been flexible in enforcing individual
export targets, provided that exports as a percentage of total
production do not fall below the minimum requirement (50 percent for
local firms and 70 percent for foreign firms) needed to qualify for
incentives. Board of Investment-registered foreign controlled firms
that qualify for export incentives are subject to a 30 year
divestment period, at the end of which at least 60 percent of equity
must be Filipino-controlled. Foreign firms that export 100 percent
of production are exempt from this divestment requirement.

-- PERFORMANCE AND LOCAL SOURCING REQUIREMENTS:

Performance requirements, usually based on an applicant's approved
project proposal, are established for investors who are granted
incentives, and vary from project to project. In general, the Board
of Investments and the investor agree on yearly production schedules
and, for export-oriented firms, export performance targets. The
Board requires registered projects to maintain at least 25 percent
of total project cost in the form of equity.
The Board generally sets a 20 percent local value-added benchmark
when screening applications. The Board is flexible in enforcing
local value-added ratios to which registrants commit in their
approved project proposal, as long as actual performance does not
deviate significantly from other participants in the same activity.

There are no local content requirements for cars, commercial
vehicles, and motorcycles. However, to apply for registration with
the Board of Investments and to qualify for incentives, new domestic
and foreign assemblers must have a technical licensing agreement
with the overseas completely-knocked-down suppliers to provide
technical assistance and are required to invest at least $10 million
in assembly operations and associated parts manufacture within one
year to produce cars, $8 million for commercial vehicles, and $2
million for motorcycles.

Certain industries are subject to specific laws that require local
sourcing:

* The Retail Trade Act of 2000 requires local sourcing for the first
ten years after the law's effective date. During that period, at
least 30 percent of the cost of inventory of foreign retail firms
not dealing exclusively in luxury goods, and 10 percent of the
inventory of firms selling luxury products, should consist of
products assembled or manufactured in the Philippines.

-- INCENTIVES FOR REGIONAL HEADQUARTERS, REGIONAL OPERATING
HEADQUARTERS, AND REGIONAL WAREHOUSES:

Book III of the Omnibus Investment Code (1987, amended by R.A. 8756,
1999) provides incentives for multinational enterprises to establish
regional or area headquarters and regional operating headquarters in
the Philippines. Regional headquarters are branches of multinational
companies headquartered outside the Philippines that do not earn or
derive income in the Philippines that act as supervisory,
communications, or coordinating centers for their subsidiaries,
affiliates, and branches in the region. The capital requirement for
a regional headquarters is $50,000 annually to cover operatng
expenses. Regional operating headquarters are branches established
in the Philippines by multiational companies that may derive income
from thir affiliates in the region and in the Philippinesby
providing services such as general administraion and planning;
business planning and coordination; sourcing/procurement of raw
materials and coponents; corporate finance advisory services;
maketing control and sales promotion; training and prsonnel
management; logistics services; researchand development services,
and product development; technical support and maintenance; data
processng and communication; and business development.
Incentives to regional headquarters include exempton from income
tax; exemption from branch profit remittance tax; exemption from
value-added tax; sale or lease of goods and property and renditionof services to the regional headquarters subject t zero percent
value-added tax; exemption from al kinds of local taxes, fees, or
charges imposed y a localgovernment unit (except real property
txes on land improvement and equipment); and value-dded tax and
duty-free importation of training ad conference materials and
equipment solely usedfor the headquarters functions. Regional
operatig headquarters enjoy many of the same incentives asregional
headquarters but, being income generating, are subject to the
standard 12 percent value-added tax, applicable branch profits
remittance tax, and a preferential 10 percent corporate income tax.
Privileges extended to foreign executives working at these
operationsinclude tax and duty-free importation of personal and
household effects, multiple entry visas for the executive and
his/her family, travel tax exemption, as well as exemption from
various types of government-required clearances and from fees under
immigration and alien registration laws. Eligible multinationals
establishing regional operating headquarters must spend at least
$200,000 yearly to cover operations.
Multinationals establishing regional warehouses for the supply of
spare parts, manufactured components, or raw materials for their
foreign markets also enjoy incentives on imports that are
re-exported. Re-exported imports are exempt from customs duties,
internal revenue taxes, and local taxes. Imported merchandise
intended for the Philippine market is subject to applicable duties
and taxes.

-- GOVERNMENT PROCUREMENT

The 2003 Government Procurement Reform Act consolidated various
procurement laws and issuances and called for simplified and
standardized guidelines, procedures and forms across Philippine
government agencies, government-controlled corporations, and local
government units. The Act provided for simpler prequalification

procedures; more objective, nondiscretionary criteria in the
selection process; the establishment of an electronic procurement
system to serve as the single portal for government procurement
activities; and other reforms to improve monitoring and transparency
in public sector procurement. However, implementation has been
uneven and inconsistent and U.S. and other foreign companies
continue to raise concerns about irregularities in government
procurement.

Philippine regulations require the public sector to procure goods,
supplies, and consulting services from enterprises that are at least
60 percent Filipino-owned and infrastructure services from
enterprises with at least 75 percent Filipino interest, for
locally-funded projects. The Official Development Assistance Act
authorizes the President to waive statutory preferences for local
suppliers for foreign-funded projects/programs. Foreign donors have
usually been able to implement their own procurement regulations
under the provisions of the Act. The Build-Operate-Transfer Law
(R.A. 6957 of July 1990, as amended in May 1994 by R.A. 7718) allows
investors in projects and similar arrangements to engage the
services of Philippine and/or foreign firms for the construction of
infrastructure projects.

Executive Order 278 provides preferential treatment for Filipino
consultants, stipulating that, as much as possible, the GRP should
fund consultancy services for its infrastructure projects with its
own resources and use local expertise. When Filipino capability is
determined to be insufficient, Filipino consultants may hire or work
with foreigners but should be the lead consultants. Where foreign
funding is indispensable, foreign consultants must enter into joint
ventures with Filipinos. In packaging public sector infrastructure
projects, Executive Order 278 also provides that financial and
technical capabilities of Filipino contractors be taken into
account. Multilateral donor agencies report that their implementing
partners have thus far been able to comply with donors' internal
procurement guidelines, despite Executive Order 278. However,
because an executive order has the force of law, the specter of
problems arising in the future remains.
Executive Order 120, issued in August 1993, mandates a countertrade
requirement for procurement by government agencies and
government-owned or controlled corporations that entails the payment
of at least $1 million in foreign currency. Implementing regulations
set the level of countertrade obligations at a minimum of 50 percent
of the import price and set penalties for nonperformance of
countertrade obligations.

The Philippines is not a signatory to the WTO Agreement on
Government Procurement.

-- PROPOSED CHANGES TO INVESTMENT INCENTIVES

There are currently more than 140 laws involving incentives offered
by various investment promotion agencies, special incentive laws
targeted at specific sectors and industry groups, and those granted
to government-owned and controlled corporations under their
charters. The government has supported incentives rationalization
and a number of bills have been filed in the Philippine Congress
toward this end. However, the scope and details of reform remain
contentious. Proposals to phase out income tax holidays have been
especially controversial and are opposed by business.

Right To Private Ownership And Establishment

The GRP respects the private sector's right to acquire and dispose
of properties or business interests, although acquisitions, mergers,
and other combinations of business interests involving foreign
equity must comply with foreign nationality caps specified in the
Constitution and other laws.

There are a few sectors closed to private enterprise, generally on
grounds of security, health, or "public morals." The GRP controls
and operates the country's casinos through the Philippine Amusement
and Gaming Corporation and runs lotto/sweepstake operations through
the Philippine Charity Sweepstakes Office.

Private and government-owned firms generally compete equally,
although there are exceptions. The National Food Authority, a GRP
agency, has at times been the sole importer of rice, though in 2008,
the GRP ceded about half of all rice importation to the private
sector. In some cases, GRP procurement guidelines favor Philippine
over foreign-controlled firms. As a general rule, only the
state-owned Government Service Insurance System may provide
insurance for government-funded projects and government funds are
kept in government-owned banks. Administrative Order 141 requires
proponents and implementers of build-operate-transfer projects, as
well as partially privatized government corporations, to meet
insurance and bonding requirements from the government insurance
system, at least to the extent of the GRP's interests.

The 1987 Constitution gives the GRP the authority to regulate or
prohibit monopolies, and it also bans combinations in restraint of
trade and unfair competition. However, there is no comprehensive
competition law to implement this constitutional provision.

Protection of Intellectual Property Rights

Although the Philippines has established procedures and systems for
registering claims on property (including intellectual property and
chattel/mortgages),delays and uncertainty associated with a
cumbersome court system continue to concern investors.

-- INTELLECTUAL PROPERTY RIGHTS:

The Philippines has made progress in recent years in protecting
intellectual property rights, but enforcement continues to be
problematic. U.S. manufacturers and suppliers should register their
copyrights, trademarks, and patents with:

The Intellectual Property Office (IPO)
351 Sen. Gil J. Puyat Avenue
Makati City
fax: (63-2) 897-1724 / 752.5450 to 65 local 201 / 207
email: dittb@ipophil.gov.ph; mail@ipophil.gov.ph
website: http://www.ipophil.gov.ph/

Manufacturers and importers are also encouraged to register
copyrights, trademarks, and patents with the Bureau of Customs to
facilitate enforcement of rights. A list of Philippine lawyers and
law firms specializing in intellectual property law is available
from the U.S. Embassy Foreign Commercial Service
(manila.office.box@mail.doc.gov ).

In addition to its commitments under the World Trade Organization
agreement on the Trade-Related Aspects of Intellectual Property
Rights, the Philippines is a party to the following international
intellectual property agreements: the Paris Convention for the
Protection of Industrial Property, the Berne Convention for the
Protection of Literary and Artistic Works, the Budapest Treaty on
the International Recognition of the Deposit of Microorganisms for
the Purposes of Patent Procedure, the Patent Cooperation Treaty;
and the Rome Convention for the Protection of Performers, Producers
of Phonograms and Broadcasting Organizations. Although the
Philippines is a member of the World Intellectual Property
Organization, and has acceded to the WIPO Copyright Treaty and the
WIPO Performances and Phonograms Treaty (known collectively as the
WIPO Internet Treaties),which took effect in October 2002, the
Philippine government has not yet enacted necessary amendments to
its Intellectual Property Code that would fully implement the two
Internet Treaties into domestic law.

The Intellectual Property Code (R.A. 8293, 1997) provides the legal
framework for intellectual property rights protection in the
Philippines. Key provisions of the Intellectual Property Code are:

--Patents: the Philippines uses a first-to-file system, with a
patent term of 20 years from date of filing, and provides for the
patentability of microorganisms and non-biological and
microbiological processes. The holder of a patent is guaranteed an
additional right of exclusive importation of his invention. A
compulsory license may be granted in some circumstances, including
if the patented invention is not being used in the Philippines
without satisfactory reason, although importation of the patented
article constitutes using the patent;

* Industrial Designs: the registration of a qualifying industrial
design is for a period of five years from the filing date of the
application. The registration of an industrial design may be renewed
for not more than two consecutive periods of five years each;

* Trademarks, service marks, and trade names: prior use of a
trademark in the Philippines is not a requirement for filing a
trademark application. Well-known marks need not be in actual use in
Philippine commerce or registered with the Bureau of Patents,
Trademarks, and Technology Transfer. A Certificate of Registration
shall remain in force for ten years. It may be renewed for periods
of ten years at its expiration upon request and payment of a
prescribed fee;

* Copyright: computer software is protected as a literary work.
Exclusive rental rights may be offered in several categories of
works and sound recordings. Terms of protection for sound
recordings, audiovisual works, and newspapers and periodicals are
compatible with the Agreement on the Trade-Related Aspects of
Intellectual Property Rights;

* Performers Rights: "the qualifying rights of a performer . . .
shall be maintained and exercised fifty years after his death."
However, ambiguities exist concerning exclusive rights for copyright
owners over broadcast and retransmission;

* Trade secrets: while there are no codified rules on the protection
of trade secrets, GRP officials assert that existing civil and
criminal statutes protect trade secrets and confidential
information.

The Electronic Commerce Act (R.A. 8792, 2000) extends the legal
framework established by the Intellectual Property Code to the
internet. Other important laws defining intellectual property rights
in the Philippines are the Plant Variety Protection Act (R.A. 9168,
2002),which provides plant breeders intellectual property rights
consistent with the 1991 Union for the Protection of New Varieties
of Plants Convention, and the Integrated Circuit Act (R.A. 9150,
2001),which provides WTO-consistent protection for the layout
designs of integrated circuits.

In 2008, the Philippine Congress passed the Cheaper Medicines Act
(RA 9502),which includes amendments to the Intellectual Property
Code with respect to patent registration for pharmaceutical
products. The Act places limitations on patent protection for
pharmaceuticals, and significantly liberalizes the grounds for the
compulsory licensing of pharmaceuticals.
Deficiencies in the Intellectual Property Code and other IP laws
remain a source of concern. Weaknesses include unclear provisions
relating to the rights of copyright owners over broadcast,
rebroadcast, cable retransmission, or satellite retransmission of
their works; and, burdensome restrictions affecting contracts to
license software and other technology.

-- STATUS OF IPR ENFORCEMENT:

Significant problems remain in ensuring the consistent and effective
protection of intellectual property rights. There are serious
concerns regarding lack of consistent, effective and sustained IP
enforcement in the Philippines. U.S. distributors continued to
report high levels of pirated optical discs of cinematographic,
musical works, computer games, and business software as well as
widespread unauthorized transmissions of motion pictures and other
programming on cable television systems. Trademark infringement in a
variety of product lines is also widespread, with counterfeit
merchandise openly available.

The Optical Media Act (Republic Act No. 9239 of 2004) regulates the
manufacture, mastering, replication, importation and exportation of
optical media. The implementing rules and regulations were signed in
February 2005, establishing the Optical Media Board (formerly the
Videogram Regulatory Board). The Board spearheads enforcement of the
Optical Media Act and has jurisdiction over all optical media,
regardless of content.

Although the Philippines deserves credit for passing the Optical
Media Act, creating the Optical Media Board and stepping up raids,
the Philippine government continues to lack aggressive prosecution
of intellectual property rights violators, owing largely to problems
that affect the judicial system as a whole. In general, Philippine
government enforcement agencies are most responsive to those
copyright owners who actively work with them to target infringement.
Enforcement agencies generally will not proactively target
infringement unless the copyright owner brings it to their attention
and works with them on surveillance and enforcement actions. Joint
efforts between the private sector and the National Bureau of
Investigation and the Optical Media Board have resulted in some
successful enforcement actions. The Philippine government has tried
several different judicial approaches to handling intellectual
property cases, but none have worked well due to lack of resources
and heavy non-IP workloads. In addition, intellectual property cases
are not considered major crimes and take a lower precedence in court
proceedings. Because of the prospect that court action will be
lengthy, many cases are settled out of court. There were three
convictions in 2008, only one in 2007, nineteen convictions in 2006,
and twenty in 2005. Since 2001, there have been sixty-four
convictions for IP violations. Convicted intellectual property
violators rarely spend time in jail, since the six year penalty
enables them to apply for probation immediately under Philippine
law.
Under the IP Code, the Intellectual Property Office has jurisdiction
to resolve certain disputes concerning alleged infringement and
licensing. However, the Intellectual Property Office's
administrative complaint mechanisms appear to be no faster at
resolving cases than the judicial system. Other agencies with IP
enforcement responsibilities include: the Department of Justice;
National Bureau of Investigation; Optical Media Board (for piracy
involving any form of media on optical discs); the Bureau of
Customs; and the National Telecommunications Commission (for piracy
involving satellite signals and cable programming).

In 2006, the United States moved the Philippines from the Special
301 Priority Watch List (where it had been listed for 5 consecutive
years) to the Watch List under Section 301 of U.S. trade law to
acknowledge steps the Philippines has taken to strengthen its
intellectual property regime. Following the announcement, the
Philippine government pledged continued momentum and increased
effort on intellectual property rights initiatives. However,
counterfeit goods such as brand name and designer clothing,
handbags, cigarettes, and other consumer goods remain widely
available. Optical media piracy, including piracy of digital video
discs and compact discs, also continues to be a problem. In
addition, there are widespread unauthorized transmissions of motion
pictures and other programming on cable television systems. The
clandestine recording of movies in cinemas, piracy of books, cable
television, and computer software also remain significant.

Transparency Of The Regulatory System

Agencies are required to develop regulations via a public
consultation process, often involving public hearings. In most
cases, this ensures some transparency in the process of developing
regulations. New regulations must be published in national
newspapers of general circulation or in the GRP's Official Gazette
before taking effect. Enforcement of regulations is often weak and
inconsistent. Regulatory agencies in the Philippines are generally
not statutorily independent, but are attached to cabinet departments
or the Office of the President. Many U.S. investors find business
registration, customs, immigration, and visa procedures burdensome
and a source of frustration. Some agencies (such as the Securities
and Exchange Commission, Board of Investment, and the Department of
Foreign Affairs) have established express lanes or "one-stop shops"
to reduce bureaucratic delays, with varying degrees of success.

Kenney