2010 INVESTMENT CLIMATE STATEMENT - PHILIPPINES

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SUBJECT: 2010 Investment Climate Statement - Philippines



REFTEL: 09 STATE 124006



1. (U) In response to reftel instructions, this message is Post's

submission of the 2010 Investment Climate Statement for the

Philippines. As requested, we have also provided via email a

Microsoft Word version of the document to EB/IFD/OIA.



2. (U) Begin text of Statement:



Philippines: 2010 Investment Climate Statement

Introduction

--------------



The Government of the Republic of the Philippines (GRP) actively

seeks foreign investment to promote economic development. The

Philippine Board of Investments (BOI) assists investors with

regulatory requirements, incentives, and market guidance to

supported increased foreign investment. The Philippine investment

landscape has some noteworthy strengths, such as its free trade

zones, including the Philippine Economic Zone Authority (PEZA).

Certain industries have experienced impressive growth in recent

years, especially those that are able to leverage the Philippines'

well-educated and English-speaking labor pool.



However, legal restrictions, regulatory inconsistency, and a lack of

transparency hinder foreign investment. In many sectors of the

economy, GRP regulatory authority remains ambiguous and corruption

is a significant factor. In addition, a complex and slow judicial

system inhibits the timely and fair resolution of commercial

disputes.



Openness to Foreign Investment

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The GRP is receptive to suggestions and criticisms from the private

sector, and many foreign and domestic businesses make their views

known through industry associations that support economic reform.

The American Chamber of Commerce of the Philippines, along with

other chambers of commerce based in the Philippines, identify

investment opportunities and barriers, and offer possible solutions

to problems. The Chamber produces publicly-available advocacy

papers on economic and political issues, sometimes jointly with

other chambers. (See http://amchamphilippines.com.)



Philippine gross capital formation ranks among the lowest in

Southeast Asia, averaging at only 15 percent of gross domestic

product. Overall, net foreign direct investment (FDI) flows have

averaged less than $1.6 billion annually over the past ten years.

Net FDI flows 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 to $1.4 billion. As of September 2009,

year-to-date net inflows were estimated at $1.3 billion, up 6.8

percent from 2008's comparable nine-month period. In 2009, the

Philippines scored lower on global competitiveness and

anti-corruption rankings. The American and other foreign chambers

in the country continue to urge the Philippine government to remove

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 projects often suffer from corrupt

practices. Investors cite high electricity costs and power

shortages as areas of concern. The GRP follows a policy of

liberalizing the power sector through the sale of government

generation and transmission assets and through support for

alternative energy sources to reduce dependence on imported fuels.



Third party assessments of the Phiippine investment climate

statement are includedbelow:



World Bank's Doing Business 2010 144 ou of 183

World Bank's Doing Business 2009 141 ou of 183

TI Corruption Index 2009 139 out of 180

Heritage Economic Freedom 2009 104 out of 122



The Philippines ranked 144 out of 183 economies urveyed in the

World Bank's Doing Business 2010 eport, an annual survey of

different economies o the ease of doing business. Of the 10

factors measured in the survey, the Philippines scored 162 i

starting a business, 132 in protecting investor, 118 in enforcing

contracts, 115 in employing wrkers, and 68 in trading across

borders (the onl factor that the Philippines scored below 100).

According to the Heritage Foundation's economic freeom index, the



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Philippines was the 104th freest economy in 2009, scoring a 56.8 in

economic freedom. It scored above the world average in four of the

ten "economic freedoms," namely, trade freedom (76.8),fiscal

freedom (75.4),financial freedom, (50.0),and government size

(90.8). In Transparency International's corruption perception

index, the Philippines scored 2.4, ranking 139 out of 180 countries

ranked. A country scoring 10 in the index is perceived to have low

levels of corruption.



General Provisions



Under the law, foreign investors are generally treated like their

domestic counterparts with important exceptions, as outlined below

and in the Foreign Investment Act (R.A. 7042, 1991, amended by R.A.

8179, 1996). Corporations or partnerships must register with the

Securities and Exchange Commission (SEC) and sole proprietorships

must be registered with the Bureau of Trade Regulation and Consumer

Protection in the Department of Trade and Industry (DTI). Investors

generally say the Philippine bureaucracy is slow to process these

requirements, but nondiscriminatory. Foreign investment incentive

programs are described in the section on "Performance Requirements

and Incentives."



Restrictions on Foreign Investment



The Foreign Investment Negative List is actually two lists that

outline sectors that are restricted or limited in terms of foreign

investment (1991 Foreign Investment Act). These limits are

routinely cited as contributing to the poor Philippine record in

attracting foreign investment, especially compared to its neighbors.

List A enumerates investment sectors and activities for which

foreign equity participation is restricted by mandate of the

Constitution and specific laws. List B enumerates areas where

foreign ownership is restricted or limited (generally at 40 percent)

for reasons of national security, defense, public health, safety,

and morals. The restrictions stem from a constitutional provision

permitting Congress to reserve to Philippine citizens certain areas

of investment (Section 10 of Article XII) and limit foreign

participation in public utilities or their operation (Section 11,

Article XII) . No mechanism exists for a waiver under the negative

lists. The Foreign Investment Act requires the Philippine

government to publish an updated negative list every two years to

reflect changes in law. The 2007 negative list is in force, pending

release of the eighth negative list.



Only Philippine citizens can practice licensed professions such as

engineering, medicine and allied professions, accountancy,

architecture, interior design, chemistry, environmental planning,

social work, teaching, and law. As a general policy, the Department

of Labor and Employment (DOLE) allows the employment of foreigners

provided there are no qualified Philippine citizens who can fill the

position. BOI-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 BOI. 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.



Other investment areas reserved for Filipinos include: mass media

(except recording); small-scale mining; private security;

utilization of marine resources, including small-scale utilization

of natural resources in rivers, lakes, and lagoons; and the

manufacture of firecrackers and pyrotechnic devices.



The retail trade industry is highly restricted to foreign

investment. Retail trade enterprises with paid-up capital of less

than $2.5 million are reserved for Filipinos, or less than $250,000

for retailers of luxury goods. Foreign ownership of retail trade

enterprises with paid-up capital between $2.5 to 7 million is now

allowed, with initial capitalization requirements. Enterprises

engaged in financing and investment activities that are regulated by

the Securities and Exchange Commission (SEC),including securities

underwriting, are limited to 60 percent foreign ownership.



Other specific limits on foreign investment include:



--Private radio communications networks (20 percent)



--Employee recruitment and locally-funded public works construction

and repair (25 percent)



--Advertising agencies (30 percent)



--Natural resource exploration, development, and utilization (40



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percent, with exceptions)



--Education institutions (40 percent)



--Public utilities' operation and management (40 percent)



--Operation of commercial deep-sea fishing vessels (40 percent)



--Philippine government procurement contracts (40 percent)



--Adjustment companies (insurance sector) (40 percent)



--Operations of build-operate-transfer projects in public utilities

(40 percent)



--Ownership of private lands (40 percent)



--Rice and corn processing (40 percent, with exceptions)



In 2004, the Philippine Supreme Court upheld the constitutionality

of the Philippine Mining Act of 1995 allowing a foreign entity full

ownership of a company involved in large-scale exploration,

development, and utilization of mineral resources, as arranged

through Financial and Technical Assistance Agreements with the

Philippine government.



Negative Investment List B enumerates areas where foreign ownership

is restricted or limited for reasons of national security, defense,

public health, safety, and morals. Sectors covered include

explosives, firearms, military hardware, massage clinics, and

gambling, and are generally limited to 40 percent foreign equity.

This list also restricts foreign ownership in small- and

medium-sized enterprises to no more than 40 percent in non-export

firms.



In addition to the restrictions noted in the "A" and "B" lists,

firms with more than 40 percent foreign equity that qualify for BOI

incentives must divest to the 40 percent level within 30 years from

registration date or within a longer period determined by the BOI.

Foreign-controlled companies that export 100 percent of production

are exempt from this requirement.



Financial Services



Although a relaxation of previous policy, the number of new foreign

banks that could open full-service branches in the Philippines was

capped at a total of ten in 1994 (Act Liberalizing the Entry and

Scope of Operations of Foreign Banks in the Philippines, R.A. 7721).

All ten licenses were issued within the five-year window provided

for this mode of entry, which closed in 1999. These foreign banks

are limited to six branch offices each. This is in addition to the

four foreign banks operating in the Philippines prior to 1948, which

were also allowed to open up to six branches each. Foreign banks

that qualify under the law -- publicly-listed and with national or

global rankings -- may own up to 60 percent in a locally

incorporated subsidiary. Foreign investors that do not meet these

requirements are limited to a 40 percent stake.



Since 1999, a Central Bank-imposed moratorium on the issuance of new

bank licenses has limited investments to existing banks, although

micro-finance institutions are exempt. Philippine law also requires

that majority Filipino-owned banks must, at all times, control at

least 70 percent of total banking system resources in the country.



The insurance industry was opened to 100 percent foreign ownership

in 1994, with a sliding scale of minimum capital requirements

depending on the degree of foreign ownership. As a general rule,

only the state-owned Government Service Insurance System may provide

coverage for government-funded projects. Build-operate-transfer

projects and privatized government corporations must secure

insurance and bonding from the Government Service Insurance System,

at least proportional to GRP interests (Administrative Order 141).



The Philippines is generally open to foreign portfolio capital

investment. A more detailed discussion is provided in the section

"Efficient Capital Markets and Portfolio Investment." Membership in

the Philippine Stock Exchange is open to foreign-controlled stock

brokerages incorporated under Philippine law. Offshore companies

not incorporated in the Philippines may underwrite Philippine issues

for foreign markets, but not for the domestic market. The Lending

Company Regulation Act requires majority Philippine ownership for

such enterprises, and was 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. Current law also restricts



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membership on boards of directors for mutual fund companies to

Philippine citizens (Investment Company Act, R.A. 2629).



Land Ownership



The 1987 Constitution prohibits foreign nationals from owning land

in the Philippines. The Investors' Lease Act (R.A. 7652, 1994)

allows foreign investors to lease a contiguous land parcel of up to

1000 hectares for 50 years, renewable once for 25 years.



In mid-2003, the Dual-Citizenship Act (Republic Act 9225) allowed

natural-born Filipinos who became naturalized citizens of a foreign

country to re-acquire Philippine citizenship. Philippine dual

citizens now have full rights of possession of land and property.

Ownership deeds continue to be difficult to establish, are poorly

reported and regulated, and the court system is slow to resolve

cases.



Public Infrastructure



The Build-Operate-Transfer (BOT) Law provides the legal framework

for large infrastructure projects and other types of government

contracts (R.A. 6957 of July 1990, as amended in May 1994 by R.A.

7718). Franchises in railways/urban rail mass transit systems,

electricity distribution, water distribution, and telephone systems

may only be awarded to enterprises with at least 60 percent

Philippine ownership. American firms have won contracts under the

law and similar arrangements, mostly in the power generation sector.

However, more active foreign participation under BOT and similar

arrangements is discouraged by legal administration problems,

including weaknesses in planning, preparing, tendering, and

executing private sector infrastructure projects and lingering

ambiguities about the level of guarantees and other support provided

by the government.



Conversion and Transfer Policies

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There are no restrictions on the full and immediate transfer of

funds associated with foreign investments, foreign debt servicing,

the payment of royalties, lease payments, and similar fees. Foreign

exchange purchased from the banking system, from foreign exchange

corporations that are subsidiaries/affiliates of banks, and from

foreign exchange dealers, money changers and remittance agents

requires specific documentation spelled out in Central Bank

regulations. To obtain foreign exchange for debt servicing,

repatriation of capital, or remittance of profits, the foreign loans

and foreign investment must be registered with the Central Bank. To

be registered with the Central Bank, foreign investments should be

funded by inward remittances of foreign exchange.



There is no mandatory foreign exchange surrender requirement imposed

on export earners and other foreign exchange earners such as

overseas workers. The Central Bank follows a market-determined

exchange rate policy, with scope for occasional intervention

targeted mainly at smoothing excessive foreign exchange volatility.



Expropriation and Compensation

-------------- --- --------------



Philippine law allows for expropriation of private property for

public use or in the interest of national welfare or defense. In

such cases, the 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 no recent cases of expropriation of U.S.

companies in the Philippines.



Philippine law mandates divestment to 40 percent foreign equity in

some sectors. The Omnibus Investment Code specifies a 30-year

divestment period for non-pioneer foreign-owned companies that

accept investment incentives. Exempt from divestment requirements

are pioneer enterprises and companies that export 100 percent of

production. Certain non-luxury retail establishments must offer at

least 30 percent of their equity to the public within eight years

from the start of operations.



Dispute Settlement

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Investment disputes 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 BOT agreements, and challenges to the

extent of foreign participation in large-scale natural resource

exploration activities, such as mining.



Legal System



Many foreign investors describe the inefficiency and uncertainty of

the judicial system as a significant disincentive for investment.

The judiciary is constitutionally independent of the executive and

legislative branches and faces many problems, including

understaffing and corruption. 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



Regional trial courts that are specifically designated by the

Supreme Court as commercial courts have jurisdiction (Securities

Regulation Code of 2000). Bankruptcy cases are governed procedural

rules in effect since January 2009. The new rules allow courts to

approve rehabilitation plans endorsed by creditors holding at least

two-thirds of the total liabilities of the debtor. They also

recognize foreign proceedings, as well as specific deadlines for

compliance with procedural requirements, including court

approval/disapproval of a rehabilitation plan. Some judges

reportedly have not enforced the deadlines in a number of cases,

resulting in protracted proceedings that can take several years to

resolve. Investors have also expressed concern over a provision

that allows the courts to approve a rehabilitation plan despite

opposition from majority creditors.



The legal framework is ambiguous in the area of bankruptcy,

especially regarding secured creditors' rights if a debtor is

liquidated. While the Civil Code stipulates that a secured creditor

has the right to full payment up to the value of the collateral

securing the loan, several subsequent judicial rulings and statutory

provisions have allowed other parties (including employees and tax

authorities) access to the liquidated assets when funds are

insufficient to pay the claimants.



Performance Requirements and Incentives

-------------- -------------- --- --------------



Every year, the Investment Priorities Plan presents a list of

investment areas entitled to incentives. The 2009 Plan was

formulated to mitigate the effects of the global economic slowdown,

the following priority investment areas: agriculture/agribusiness

and fisheries (including biotechnological products and services);

infrastructure; engineered products; tourism; business process

outsourcing; research and development; and, creative industries.

Also covered are "strategic activities," projects with a minimum

investment of US $300 million that create at least 1,000 jobs or use

advanced technology.



Screening for the legitimacy and regulatory compliance of companies

seeking investment incentives appears to be nondiscriminatory, but

the application process can be complicated since incentives granted

by the BOI often depend on action by other agencies, such as the

Department of Finance and the Bureau of Customs. The basic

incentives offered to BOI-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



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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 BOI prescribes a higher percentage;



--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, provided the enterprise meets a

prescribed capital equipment-to-labor ratio set by the BOI. 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, for

purchases made within ten years from a company's registration with

the BOI 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 BOI;



--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 BOI, subject to posting a re-export bond;



--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 BOI) 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;



--Simplification of customs procedures for the importation of

equipment, spare parts, raw materials and supplies and exports of

processed products;



--Access to a bonded manufacturing / trading warehouse subject to

customs regulations.

To encourage the regional dispersal of industries, BOI-registered

enterprises that locate in less- developed areas, and the thirty

poorest provinces determined under the Investment Priorities Plan,

are automatically entitled to pioneer incentives. Such enterprises

can deduct from taxable income an amount equivalent to 100 percent

of infrastructure outlays. They may also deduct 100 percent of

incremental labor expenses for the first five years from

registration, which is double the rate allowed for BOI-registered

projects not located in less-developed areas.

Proposed Changes to Investment Incentives



There are currently more than 140 laws that address general and

sector-targeting incentives. The scope and detail of reform remains

contentious, although past and present administrations have

acknowledged the need to rationalize the incentives regime and a

number of bills have been filed in the Philippine Congress.

Proposals to phase out income tax holidays have been especially

controversial and are opposed by business.



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

BOI-registered companies, a number of incentives apply specifically

to registered export-oriented firms. These include:





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--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.



The BOI is flexible with the enforcement of individual export

targets, provided that exports as a percentage of total production

do not fall below the minimum requirement (50 percent for local

firms and 70 percent for foreign firms). BOI-registered foreign

controlled firms that qualify for export incentives are subject to a

30-year divestment period, at the end of which at least 60 percent

of equity must be Filipino-controlled. Foreign firms that export

100 percent of production are exempt from this divestment

requirement.



Firms that earn at least 50 percent of their revenues from exports

may register for additional incentives under the Export Development

Act (R.A. 7844, 1994). Registered exporters may also be eligible

for BOI incentives, provided the exporters are registered according

to BOI rules and regulations and the exporter does not take

advantage of the same or similar incentives twice. Export

incentives include a tax credit ranging from 2.5 percent to 10

percent of annual incremental export revenue.



Performance and Local Sourcing Requirements

-------------- --- -------------- -------------- --------------



Performance requirements are usually based on an approved project

proposal, established by the BOI for investors who are granted

incentives. In general, the BOI and the investor agree on yearly

production schedules and export performance targets.



The BOI requires registered projects to maintain at least 25 percent

of total project cost in the form of equity. The BOI generally sets

a 20 percent local value-added requirement when screening

applications, and is flexible in enforcing this requirement as long

as actual performance does not deviate significantly from the

industry standard.



Specifically in the automotive sector, there are no local content

requirements for cars, commercial vehicles, and motorcycles.

However, to apply for registration with the BOI and to qualify for

incentives, new domestic and foreign assemblers must have a

technical licensing agreement with the overseas

completely-knocked-down supplier to provide technical assistance.

Assemblers must also invest at least $10 million in assembly

operations and associated parts manufacture within one year for

automotive production, $8 million for commercial vehicles, and $2

million for motorcycles.



Certain industries are subject to specific local sourcing

requirements. Foreign retailers must source locally for the first

ten years after the law's effective date. During that period, a

portion of inventory should consist of products assembled or

manufactured in the Philippines, specifically, 30 percent of

inventory in firms dealing primary in non-luxury items, and 10

percent of inventory in primarily luxury-item firms.



Incentives for Regional Headquarters, Regional Operating

Headquarters, and Warehouses



Philippine law provides incentives for multinational enterprises to

establish regional or area headquarters and regional operating

headquarters in the Philippines (Book III of the Omnibus Investment

Code of 1987, amended by R.A. 8756, 1999). Regional headquarters

are branches of multinational companies headquartered outside the

Philippines that do not earn or derive income in the Philippines,

but that act as supervisory, communications, or coordinating

centers. The capital requirement for a regional headquarters is

$50,000 annually to cover operating expenses. Incentives for

regional headquarters include:



--exemption from income tax;



--exemption from branch profits remittance tax;



--exemption from value-added tax;



--sale or lease of goods and property and rendition of services to

the regional headquarters subject to zero percent value-added tax;





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--exemption from all taxes, fees, or charges imposed by a local

government unit (except real property taxes on land improvement and

equipment);



--value-added tax and duty-free importation of training and

conference materials and equipment solely used for the headquarters

functions.



Regional operating headquarters derive income from their affiliates

in the region and in the Philippines by providing services such as

general administration and planning, sourcing of raw materials and

components, marketing, sales, research and development, and business

development. Regional operating headquarters enjoy many of the same

incentives as regional headquarters but, being income generating,

are subject to the standard 12 percent value-added tax, applicable

branch profits remittance tax, and a preferential 10 percent

corporate income tax. Privileges extended to foreign executives

working at these operations include tax and duty-free importation of

personal and household effects, and immigration benefits for

executives. Eligible multinationals establishing regional operating

headquarters must spend at least $200,000 yearly to cover

operations.



Multinationals establishing regional warehouses for the supply of

spare parts, manufactured components, or raw materials for their

foreign markets also enjoy incentives on imports that are

re-exported. Re-exported imports are exempt from customs duties,

internal revenue taxes, and local taxes. Imported merchandise

intended for the Philippine market is subject to applicable duties

and taxes.



Government Procurement



The Philippines is not a signatory to the WTO Agreement on

Government Procurement. Implementing regulations for government

procurement 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, in line with the 2003

Government Procurement Reform Act (GPRA). The GPRA consolidated

procurement laws to simplify and standardize guidelines, procedures

and forms across Philippine government entities. More specifically,

GPRA outlines prequalification procedures, objective criteria in the

selection process, and, guidelines for a single portal electronic

procurement system. U.S. and other foreign companies continue to

raise concerns about irregularities in government procurement and

uneven, inconsistent implementation.



In the bid evaluation process for public sector purchases of goods

and supplies, GPRA regulations give preference to local products

and/or Filipino-controlled enterprises. When the lowest bid is from

a supplier of imported goods and/or from a foreign-owned enterprise,

the lowest domestic bidder or domestic entity can claim preference

and match the offer, provided his bid was no more than 15 percent

higher than that of the foreign bidder or foreign entity.



Filipino consultants enjoy preferential treatment, as the law

requires the GRP to employ local expertise and consultancy services

for its infrastructure projects, as much as possible (Executive

Order 278). When Filipino capability is 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.

Multilateral donor agencies report that their implementing partners

have thus far been able to comply with both donors' internal

procurement guidelines and Executive Order 278.



An exception to this general rule of government procurement is

foreign-funded aid projects. Foreign bidders may participate,

provided the foreign assistance agreement expressly provides use of

the foreign government or international financing institution's

procurement procedures and guidelines. An earlier law, the Official

Development Assistance Act, also authorizes the President to waive

statutory preferences for local suppliers for foreign-funded

projects/programs.



The Government Procurement Reform Act does not cover projects under

the BOT Law, which allows investors in BOT projects and similar

private-public sector arrangements to engage the services of

Philippine and/or foreign firms for the construction of

infrastructure projects.



Procurement by government agencies and government-owned or

controlled corporations is subject to a countertrade requirement



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entailing the payment of at least $1 million in foreign currency

(Executive Order 120). 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.



Right to Private Ownership and Establishment

-------------- -- -------------- -------------- --- --------------



Philippine law recognizes the private right to acquire and dispose

of property 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. The 1987 Constitution gives the GRP

the authority to regulate or prohibit monopolies, and it also bans

unfair competition, although there is no implementing law.



A few sectors are closed to private enterprise, generally on grounds

of security, health, or "public morals." For example, the GRP

controls and operates the country's casinos through the Philippine

Amusement and Gaming Corporation and runs lottery operations through

the Philippine Charity Sweepstakes Office.



Only the state-owned Government Service Insurance System may insure

government-funded projects. BOT projects, as well as partially

privatized government corporations, must meet insurance and bonding

requirements from the government insurance system, in proportion to

GRP interests. In addition, government funds are kept in

government-owned banks.



Protection of Property Rights

-------------- -- -------------- --------------



Although the Philippines has 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. Questions

regarding the general sanctity of contracts, and the property rights

they support, have also clouded the investment climate. Of

particular concern in the Philippines in the challenge of

intellectual property rights protection, for which the Philippines

is listed on United States Trade Representative (USTR) Special 301

Watch List.



Intellectual Property Rights



In 2006, the United States moved the Philippines from the Priority

Watch List on intellectual property protection to the Watch List,

under Section 301 of U.S. trade law. This improvement in its rating

recognized steps the GRP has taken to strengthen its intellectual

property regime. The Philippine government pledged continued focus

on intellectual property rights initiatives following the

announcement.



The Intellectual Property Code provides the legal framework for

intellectual property rights protection in the Philippines,

especially in the key areas of patents, trademarks, and copyright

(R.A. 8293, 1997). The Electronic Commerce Act extends the legal

framework established by the Intellectual Property Code to the

internet (R.A. 8792, 2000). Investor concerns include deficiencies

in the Intellectual Property Code and other IP laws remain investor,

with unclear provisions relating to the rights of copyright owners

over broadcast, rebroadcast, cable retransmission, or satellite

retransmission of their works, and burdensome restrictions affecting

contracts to license software and other technology.



The Philippines has a first-to-file patent system, with a term of 20

years from the date of filing. It also recognizes 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. In 2008, the Philippine Congress passed the Cheaper

Medicines Act, which places limitations on patent protection for

pharmaceuticals, and significantly liberalizes the grounds for the

compulsory licensing of pharmaceuticals (Republic Act 9502).



Prior use of a trademark in the Philippines is not required to file

a trademark application. Well-known marks need not be in actual use

in Philippine commerce or registered with the Bureau of Patents,

Trademarks. A Certificate of Registration remains in force for ten

years and may be renewed for ten-year periods. Notwithstanding



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these legal provisions, counterfeit trademarked goods such as brand

name and designer clothing, handbags, cigarettes, and other consumer

goods remain widely available through mainstream outlets and street

markets.



In the area of 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 (TRIPS). 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, the Philippine government has not enacted

necessary amendments to its Intellectual Property Code that would

fully implement these treaties. Optical media piracy, including

piracy of digital video discs and compact discs, also continues to

be a problem. There are widespread unauthorized transmissions of

motion pictures and other programming on cable television systems

and the clandestine recording of movies in cinemas, piracy of books,

cable television, and computer software also remain significant.



In addition to these provisions, the IP Code recognizes industrial

designs, performers' rights, and trade secrets. The registration of

a qualifying industrial design is for a period of five years and may

be renewed for two consecutive five-year periods. While Philippine

law recognizes performers' rights for 50 years after death, the

exercise of exclusive rights for copyright owners over broadcast and

retransmission is ambiguous. While there are no codified rules on

the protection of trade secrets, GRP officials assert that existing

civil and criminal statutes protect trade secrets and confidential

information.



Other important laws defining intellectual property rights are the

Plant Variety Protection Act (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 addition to its commitments under TRIPS, 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.



Enforcement Challenges for Intellectual Property Rights



Significant concerns remain regarding the consistency and

effectiveness of intellectual property rights protection. U.S.

distributors continue to report high levels of pirated optical discs

of cinematographic, musical works, computer games, and business

software, as well as widespread unauthorized transmissions of motion

pictures and other programming on cable television systems.

Trademark infringement in a variety of product lines is also

widespread, with counterfeit merchandise openly available.



The Intellectual Property Office (IPO) has jurisdiction to resolve

certain disputes concerning alleged infringement and licensing.

Intellectual property owners have used the IPO's administrative

complaint system as an alternative to the judicial court system.

However, it can be slow-moving due to limited resources. Other

agencies with IP enforcement responsibilities include: the

Department of Justice; National Bureau of Investigation (NBI);

Philippine National Police (PNP); Optical Media Board (OMB); the

Bureau of Customs; and the National Telecommunications Commission

(NTC).



The OMB spearheads enforcement of the Optical Media Act since its

establishment in 2005, with jurisdiction over the manufacture,

mastering, replication, importation, and exportation of optical

media, regardless of content (Republic Act No. 9239 of 2004).

Generally, the Philippine government enforcement agencies are most

responsive to those copyright owners who actively work with them to

target infringement. Agencies will not proactively target

infringement unless the copyright owner brings it to their attention

and works with them on surveillance and enforcement actions. Joint

efforts between the private sector and the NBI, the PNP and the OMB

have resulted in some successful enforcement actions.



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Enforcement actions are not often followed by successful

prosecutions. Intellectual property infringement is not considered

a major crime within the Philippine judicial system and takes a

lower precedence in court proceedings. 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. Because of the prospect of

lengthy court action, many cases are settled out of court. Since

2001, there have been sixty-four convictions for IP violations, with

no convictions in 2009. Convicted intellectual property violators

rarely spend time in jail, since the six year penalty enables them

to apply for probation immediately under Philippine law.



Registering Intellectual Property



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.



Transparency of the Regulatory System

-------------- -- --- -------------- --------------



Philippine national agencies are required by law to develop

regulations via a public consultation process, often involving

public hearings. In most cases, this ensures some minimal level of

transparency in the rulemaking process. New regulations must be

published in national newspapers of general circulation or in the

GRP's official gazette before taking effect.



On the enforcement side, however, regulatory action is often weak,

inconsistent, and unpredictable. Regulatory agencies in the

Philippines are generally not statutorily independent, but are

attached to cabinet departments or the Office of the President and

therefore subject to political pressure. Many U.S. investors

describe business registration, customs, immigration, and visa

procedures burdensome and a source of frustration. To counter this,

some agencies, such as the SEC, BOI, and the Department of Foreign

Affairs (DFA),have established express lanes or "one-stop shops" to

reduce bureaucratic delays, with varying degrees of success. More

discussion about express lanes as related to investment zones is in

the section, "Foreign Trade Zones/Free Trade Zones."



Efficient Capital Markets and Portfolio Investment

-------------- -------------- -------------- --- -------------- --------------



The Philippine government welcomes foreign portfolio capital

investment. Non-residents may purchase domestically-issued

securities and invest in money market instruments, as well as in

peso-denominated time deposits with a minimum maturity of 90 days.

Although growing, the securities market remains small and

underdeveloped, with a limited range of choices. Except for a few

large firms, long-term bonds and commercial paper are not yet major

sources of capital.



Investments in publicly listed firms are governed by foreign

ownership ceilings stipulated in the Constitution and other laws.

Fewer than 250 firms are listed in the Philippine Stock Exchange

(PSE). In 2009, the ten most actively-traded companies accounted

for more than 60 percent of trading value and about 40 percent of

domestic market capitalization. To encourage publicly listed

companies to widen their investor base, the PSE introduced reforms

in April 2006 to include trading activity and free float criteria in

the selection of companies comprising the stock exchange index. The

30 companies included in the benchmark index are subject to review

every six months. Hostile takeovers are not common, because most

company shares are not publicly listed and controlling interest

tends to remain with a small group of parties. Cross-ownership and

interlocking directorates among listed companies also lessen the

likelihood of hostile takeovers.



The July 2000 passage of the Securities Regulation Code strengthened

investor protection by requiring full disclosure in the regulation

of public offerings, tightening rules on insider trading,



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segregating broker-dealer functions, outlining rules on mandatory

tender offer requirements, significantly increasing sanctions for

violations of securities laws and regulations, and mandating steps

to improve the internal management of the stock exchange and future

securities exchanges. To improve transparency and minimize

conflict of interest, the Code also prohibits any one industry group

(including brokers) from controlling more than 20 percent of the

stock exchange's voting rights.



The enforcement of these strengthened laws is mixed. While there

has been some progress from the creation of special commercial

courts, the prosecution of stock market irregularities can be

subject to delays and uncertainties of the Philippine legal system.

Compliance with the law is fraught with problems as well. For

example, within the ten years the Code has been in effect, the PSE

has yet to fully comply with the 20 percent industry limit, although

it has taken steps to reduce brokers' ownership from 100 percent to

40 percent of the stock exchange.



Credit Policies



Credit is generally granted on market terms and foreign firms are

able to obtain credit from the domestic market. However, some laws

require financial institutions to set aside loans for certain

preferred sectors, which may translate into increased costs and/or

credit risks.



Banks must set aside 25 percent of loanable funds for agricultural

credit, with at least 10 percent earmarked for programs such as

improving the productivity of farmers to whom land has been

distributed under agrarian reform programs (Agri-Agra Law P.D. 717,

as amended). To facilitate compliance, alternative modes of meeting

the Agri-Agra lending requirement include low-cost housing,

educational and medical developmental loans, and investments in

eligible government securities. Recent investor experience in these

alternatives raise questions about implied guarantee by the

Philippine government and investors are cautioned to be wary.



Banks are required to set aside ten percent of their loans for

small-business borrowers (R.A. 9501). While most domestic banks are

able to comply with these requirements, foreign banks find mandatory

policies more burdensome for a number of reasons, including their

lack of knowledge and experience with these sectors, their

constrained branch networks, and constitutional restrictions on

ownership of land by foreigners which impede their ability to

enforce security rights over land accepted as collateral.



Direct lending by non-financial government agencies is limited per

Executive Order 558 to the Department of Social Welfare and

Development, focusing on the poorest areas not being served by

micro-finance institutions.



Banking System



As of the end of September 2009, the five largest commercial banks

in the Philippines represented nearly 53 percent of total commercial

banking system resources, with an estimated total assets of PhP

2,741 billion (equivalent to about US$57 billion). The Bangko

Sentral ng Pilipinas (Central Bank) has worked to strengthen banks'

capital base, reporting requirements, corporate governance, and risk

management systems. Central Bank-mandated phased increases in

minimum capitalization requirements and regulatory incentives for

mergers have prompted several banks to seek partners. All Central

Bank-supervised entities are required to adopt Philippine Financial

Reporting Standards and Philippine Accounting Standards, patterned

after International Financial Reporting and Accounting Standards

issued by the International Accounting Standards Board.



Commercial banks' published average capital adequacy ratio was 15.9

percent on a consolidated basis as of end-June 2009, computed

according to the Basel 2 risk-based capital adequacy framework.

This ratio remains above the Central Bank's 10 percent statutory

limit and the eight percent internationally accepted benchmark.

Philippine banks have limited direct exposure to investment products

issued by troubled financial institutions overseas, estimated at

less than two percent of total banking system resources. Fiscal and

regulatory incentives to encourage the sale of non-performing assets

to private asset management companies have promoted a healthy

banking sector in the Philippines. By the end of September 2009,

non-performing loans and non-performing asset ratios of commercial

banks were estimated at 3.2 percent and 4.1 percent. These ratios

had previously peaked in October 2001 at 18.3 percent and 14.6

percent, respectively.





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The General Banking Law of 2000 paved the way for the Philippine

banking system to phase in these internationally accepted,

risk-based capital adequacy standards. In 2007 a revised capital

adequacy framework (Basel 2) was adopted, expanding coverage from

credit and market risks to include operational risks and enhanced

the risk-weighting framework. Other important provisions of the

General Banking Law strengthened transparency, bank supervision, and

bank management. Some impediments remain to more effective bank

supervision, including stringent bank deposit secrecy laws,

obstacles preventing regulators from examining banks at will, and

inadequate liability protection for Central Bank officials and bank

examiners.



The Paris-based Financial Action Task Force continues to monitor

implementation of the Philippine Anti-Money Laundering Act through

the Anti-Money Laundering Council. Foreign exchange dealers and

remittance agents are required to register with the Central Bank and

must comply with various Central Bank regulations and requirements

related to the implementation of the Philippines' anti-money

laundering law. The Philippines is a member of the Egmont Group,

the international network of financial intelligence units, and the

Financial Action Task Force.



Asia Pacific Group conducted a comprehensive peer review of the

Philippines in September 2008. Some of the more important Asia

Pacific Group concerns cited include the exclusion of casinos from

the scope of current anti-money laundering legislation and court

rulings that inhibit and complicate investigations of fraud and

corruption. Legislation to address these deficiencies is pending,

but unlikely to pass before the May 2010 national election.



In a report released on April 2, 2009, the Organization for Economic

Cooperation and Development (OECD) included the Philippines on a

four-country blacklist that had not committed to Internationally

Agreed Tax Standards (IATS). The IATS promotes international

cooperation in tax matters by requiring the exchange of information,

on request, for the administration and enforcement of a requesting

country's domestic tax laws and to avoid harmful tax practices.

Following subsequent representations by the Philippine government,

the Philippines moved to a gray list of jurisdictions that have

committed to the IATS but have not yet substantially implemented.

Legislatio that would allow and provide the framework for th

exchange of tax-related information was ratifie by both houses of

the Philippine Congress and is being prepared for presidential

signature as of his writing.



Accounting Standards



The Philipines has employed the accounting standards of the

International Accounting Standards Board since 205. The Philippine

SEC and the Central Bank agreed to the full adoption of these

standards, which re now embodied in the Philippine Financial

Repoting Standards and Philippine Accounting Standards However,

some companies/industries have been ganted temporary exceptions.

For example, a Central Bank circular to implement the Special

Purpose ehicle Act deviates from generally accepted accouning

principles by allowing banks to book losses rising from the sale of

non-performing assets ona staggered basis. To encourage

consolidation, the Central Bank has also allowed merging

institutions to stagger provisions for bad debts.



To stem the effects of the worldwide financial crisis, the

Philippines adopted amendments issued by the International

Accounting Standards Board in October 2008 covering the accounting

treatment and disclosure of financial assets. These amendments

provide guidelines for the reclassification of certain

non-derivative financial assets from categories recorded at fair

market value to categories recorded at amortized cost. This move

was intended to promote confidence in financial markets by tempering

the potentially sharp deterioration in balance sheets and incomes

caused by the current global financial turbulence.



The SEC requires a firm's Chairman of the Board, Chief Executive

Officer, and Chief Financial Officer to assume management

responsibility and accountability for financial statements. Current

rules also require the rotation and accreditation of external

auditors of companies imbued with public interest (i.e., publicly

listed firms, investment houses, stock brokerages, and other

secondary licensees of the SEC).



The SEC instituted a system of guidelines for external auditors that

require listed companies to disclose to the SEC any material

findings within five days of receipt of the external audit findings.

Material findings include fraud or error, losses or potential



MANILA 00000149 014 OF 021





losses aggregating 10 percent or more of company assets, and

indications of company insolvency. The external auditor is required

to make the disclosure to the SEC within 30 business days of

submitting its audit report to the client-company, should the latter

fail to comply with this reporting requirement. The regulations

require client-auditor contracts to contain a specific provision

protecting the external auditor from civil, criminal, or

disciplinary proceedings for disclosing material findings to the

SEC.



The SEC guidelines on audits provide for credentialing of auditors.

The SEC requires accredited external auditors to accumulate

professional education credits and to maintain quality assurance

procedures. In 2007, the Auditing and Assurance Standards Council

issued new standards on quality control, auditing, review, assurance

and related services that outline additional measures and policies

for compliance by external auditors to improve the independence,

objectivity, and thoroughness of audit work.



A number of local accountancy firms are affiliated with

international accounting firms, including KPMG,

PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, BDO

Seidman, and Grant Thornton.



Competition from State Owned Enterprises

-------------- -------------- -------------- -------------- --------------



Private and government-owned firms generally compete equally, with

some clear exceptions. The governmental National Food Authority

has, at times, been the sole legal importer of rice, though in 2008

the GRP ceded about half of all rice importation to the private

sector.



In the insurance sector, only the state-owned Government Service

Insurance System (GSIS) may provide coverage for government-funded

projects, although the industry was opened up to 100 percent foreign

ownership in 1994. All build-operate-transfer projects and

privatized government corporations must fulfill all insurance and

bonding requirements from the GSIS, at least proportional to the

government's interests.



Besides confronting direct competition from state owned enterprises

in some limited areas, some sectors experience government

intervention to directly cap or control pricing in private markets.

Most notably in 2009, the Philippine government imposed temporary

price controls on gasoline (Executive Order 939) and a basket of

basic goods and services (Price Act 1991, R.A. 7581) in the wake of

typhoons. Under Philippine law, the President may freeze prices on

basic goods and services for a period of 90 days under a state of

emergency. President Macapagal-Arroyo has also exercised her

discretionary authority (Executive Order 821, July 2009) to force

price reductions for specific name-brand pharmaceutical medicines.



Privatization



The Privatization Management Office, under the Department of

Finance, is the agency tasked to manage the privatization program.

Apart from restrictions under the Foreign Investment Negative List,

there are no regulations that discriminate against foreign buyers.

The bidding process appears to be transparent, though the Supreme

Court has twice overturned high profile privatization transactions

to foreign buyers.



The Power Sector Assets and Liabilities Management Corporation is

mandated to sell 70 percent of the government-owned National Power

Corporation's (NPC) generating assets and transfer 70 percent of

NPC-Independent Power Producer contracts to private companies. Nine

years after the signing of the Electric Power Industry Reform Act,

the Philippine government has opened access and retail competition:

unbundled rates; removed cross-subsidies; established the Wholesale

Electricity Spot Market and privatized 70 percent of NPC's

generation assets. The remaining fifth requirement, the transfer of

the NPC-IPP contracts of IPP administrators, is slated for

completion in 2010.



Corporate Social Responsibility

-------------- -------------- --------------



Although no law requires foreign or domestic private companies to

institute corporate social responsibility (CSR) programs, they

constitute a basic and fundamental feature of most significant

business operations in the Philippines. U.S. companies report

strong and favorable response to CSR programs among employees and

within local communities. Many CSR programs focus on poverty



MANILA 00000149 015 OF 021





alleviation efforts, promotion of the environment, health

initiatives, and education.

In some cases, the GRP has compelled its own entities to engage in

CSR. For example, the Philippine Bases Conversion and Development

Authority is mandated to declare portions of its property in Fort

Bonifacio and surrounding areas as low-cost housing sites (Executive

Order 70).

Political Violence

-------------- --------------



Terrorist groups and criminal gangs operate in some regions of the

country. The Department of State publishes a consular information

sheet at (http://travel.state.gov) and advises all Americans living

in or visiting the Philippines to review this information

periodically. The Department of State has issued a travel warning

to U.S. citizens contemplating travel to the Philippines at

(travel.state.gov). The Department strongly encourages visiting and

resident Americans in the Philippines to register with the Consular

Section of the U.S. Embassy in Manila through the State Department's

travel registration website, (travelregistration.state.gov).



Arbitrary, unlawful, and extrajudicial killings by various actors

continue to be a problem in the Philippines. Following increased

domestic and international scrutiny, the number of killings and

disappearances had dropped significantly in 2008 from a peak in

2006, but recent incidents have again garnered significant

international attention. The Philippines will hold national and

local elections -- including a presidential election -- in May 2010.

Violence has marred the campaign season, with the high-profile

killings of a group of 57 civilians, including journalists, in an

election-related incident in central Mindanao in November 2009.



In December 2009, the government and the Mindanao-based insurgent

group Moro Islamic Liberation Front (MILF) formally resumed peace

talks. The peace process had stalled in August 2008 after the

Supreme Court placed a temporary restraining order on the signing of

a preliminary peace accord and, some MILF members in response

attacked villages in central Mindanao and killed dozens of

civilians. The ensuing fighting between government and insurgent

forces caused both combat and civilian deaths and the displacement

of hundreds of thousands of people. In July 2009, both sides

instituted ceasefires, ending nearly one year of intense fighting

and enabling the parties to discuss a return to the negotiating

table.



The New People's Army (NPA),the military arm of the Communist Party

of the Philippines, is responsible for general civil disturbance

through assassinations of public officials, bombings, and other

tactics. It frequently demands "revolutionary taxes" from local

and, at times, foreign businesses and business people. To enforce

its demands, the NPA sometimes attacks infrastructure such as power

facilities, telecommunications towers, and bridges. The National

Democratic Front, an umbrella organization which includes the

Communist Party and its allies, has engaged in intermittent but

generally non-productive peace talks with the Philippine government.

It has not targeted foreigners in recent years, but could threaten

U.S. citizens engaged in business or property management activities.





Terrorist groups, including the Rajah Sulaiman Movement, Abu Sayaaf

Group and Jema'ah Islamiyah, periodically attack civilian targets in

Mindanao, kidnap civilians for ransom, and engage in armed

skirmishes with the security forces.



The Philippines faces no major external threat and enjoys strong

relations with the United States. The United States and the

Philippines are allies under the 1951 Mutual Defense Treaty, and the

U.S. designated the Philippines as a major non-North Atlantic Treaty

Organization ally in 2003. The Visiting Forces Agreement, ratified

in 1999, provides a framework for U.S.-Philippine military

cooperation, including exercises, ship visits, and counter-terrorism

cooperation.



Corruption

--------------



Corruption is a pervasive and longstanding problem in the

Philippines. The Philippines is not a signatory of the Organization

for Economic Cooperation and Development Convention on Combating

Bribery. The Philippines signed the UN Convention against

Corruption in 2003, which the Senate ratified in November 2006.



There are a number of laws and mechanisms directed at combating

corruption and related anti-competitive business practices, although



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the enforcement of anti-corruption law has been weak and

inconsistent. These new laws and mechanisms include the Philippine

Revised Penal Code, Anti-Graft and Corrupt Practices Act, and Code

of Ethical Conduct for Public Officials. The Office of the

Ombudsman investigates and prosecutes cases of alleged graft and

corruption involving public officials, with the Sandiganbayan

(anti-graft court) prosecuting and adjudicating cases filed by the

Ombudsman.



A Presidential Anti-Graft Commission assists the President in

coordinating, monitoring, and enhancing the government's

anti-corruption efforts. The Commission also investigates and hears

administrative cases involving presidential appointees in the

executive branch and government-owned and controlled corporations.

Soliciting/accepting and offering/giving a bribe are criminal

offenses, punishable with imprisonment (6-15 years),a fine, and/or

disqualification from public office or business dealings with the

government.



The Philippine government has worked in recent years to reinvigorate

its anti-corruption drive. However, corruption indicators developed

by non-governmental organizations suggest that these efforts have

been inconsistent. Reforms have not improved public perception and

are overshadowed by high-profile cases frequently reported in the

Philippine media.



Bilateral Investment Agreements

-------------- -------------- --------------



As of December 2009, the Philippines had signed bilateral investment

agreements with Argentina, Australia, Austria, Bahrain, Bangladesh,

Belgium and Luxembourg, Canada, Cambodia, Chile, China, the Czech

Republic, Denmark, Equatorial Guinea, Finland, France, Germany,

India, Indonesia, Iran, Italy, Japan, Republic of Korea, Kuwait,

Laos, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Romania,

Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria,

Taiwan, Thailand, Turkey, United Kingdom, Venezuela, and Vietnam.

The general provisions of the bilateral investment agreements

include: the promotion and reciprocal protection of investments;

nondiscrimination; the free transfer of capital, payments and

earnings; freedom from expropriation and nationalization; and,

recognition of the principle of subrogation.



Taxation



The Philippines has a tax treaty with the United States for the

purpose of avoiding double taxation, providing procedures for

resolving interpretative disputes, and enforcing taxes of both

countries. The treaty also encourages bilateral trade and

investments by allowing the exchange of capital, goods and services

under clearly defined tax rules and, in some cases, preferential tax

rates or tax exemptions.



Most Favored Nation Clause for Royalties



Pursuant to the most favored nation clause of the Philippine - U.S.

tax treaty, U.S. recipients of royalty income may avail of the

preferential rate provided in the Philippine-China tax treaty, which

went into effect in January 2002. Accordingly, a lower tax rate of

10 percent applies with respect to royalties arising from: the use

of (or right to use) any patent, trademark, design, model, plan,

secret formula, or process; or, the use (or right to use)

industrial, commercial, and scientific equipment, or information

concerning industrial, commercial, or scientific experience.



Permanent Establishments



A foreign company without a branch office that renders services to

Philippine clients is considered a permanent establishment, and is

liable to pay Philippine taxes if the services rendered to a

Philippine client require its personnel to stay in the country for

more than 183 days for the same or a connected project in a

twelve-month period. However, Bureau of Internal Revenue (BIR)

rulings on the taxation of permanent establishments have been

inconsistent. In some rulings, the Philippine government has

applied the corporate income tax rate on net taxable income, a

treatment that applies to resident foreign corporations. In others,

it has applied the corporate income tax rate on gross income, a

treatment that applies to non-resident foreign corporations.



Tax Treaty Relief Rulings



Philippine courts reportedly have denied a number of claims for

refund of tax payments in excess of rates prescribed under



MANILA 00000149 017 OF 021





applicable tax treaties for failure to secure tax treaty relief

rulings. An entity must obtain a tax treaty relief ruling from the

BIR in order to qualify for preferential tax treaty rates and

treatment, However, according to several tax lawyers, the volume of

tax treaty relief applications has resulted in processing delays,

with most applications reportedly pending for over a year.



Tax on Liquidating Gains



Recently, the Bureau of Internal Revenue appears to be altering its

position on taxing gains through liquidation. Until recently, the

BIR consistently applied Philippine-U.S. Tax Treaty provisions

exempting foreign companies from capital gains and corporate income

tax on profit from the redemption and sale of shares by Philippine

affiliates/subsidiaries being liquidated. However, in 2009, a BIR

ruling involving foreign company held that such gains were subject

to corporate income tax but not to capital gains tax. In another

case, the BIR ruled that the gains were subject to tax on dividends.

The companies and other interested parties have filed position

papers with the Department of Finance to contest these rulings.



Inter-Company Transfer Pricing



Although the BIR has yet to finalize long-pending draft regulations

on transfer pricing, it has declared that, as a matter of policy, it

subscribes to the OECD's transfer pricing guidelines. In

anticipation of the release of the final BIR regulations,

multinational companies are weighing in on this issue with transfer

pricing studies and/or benchmarking for their related-party

transactions. Currently, the Tax Code authorizes the BIR to

allocate income or deductions among related organizations or

businesses, whether or not organized in the Philippines, if such

allocation is necessary to prevent tax evasion.



Optional Standard Deduction



Domestic and foreign resident companies subject to regular income

tax may claim an optional standard deduction of up to 40 percent of

gross income, in lieu of itemized deductions per Republic Act (June

2008). Implementing regulations allow companies to use either the

optional standard deduction or itemized deductions in filing their

quarterly income tax returns. However, in the final consolidated

return for the taxable year, companies must make a final choice

between standard or itemized deductions for the purpose of

determining final taxable income for the year.



Stock Transfer Tax



The stock transfer tax is an ad valorem, transactional tax on the

sale of publicly-listed stock shares. The BIR does not consider the

stock transfer tax as income tax; bilateral treaties that exempt

foreign nationals from income or capital gains taxes therefore do

not exempt them from the stock transfer tax.





International Financial Reporting Standards



BIR rules and regulations for tax accounting have not been fully

harmonized with the Philippine Financial Reporting Standards, which

are patterned after standards issued by the International Accounting

Standards Board. The disparities between reports for financial

accounting and tax accounting purposes can be an irritant between

taxpayers and tax collectors. The BIR requires taxpayers to

maintain records reconciling figures presented in financial

statements and income tax returns.



OPIC and Other Investment Insurance Programs

-------------- --- -------------- -------------- -------------- --------------



The Philippine government currently does not provide guarantees

against losses due to inconvertibility of currency or damage caused

by war. The Overseas Private Investment Corporation can provide

U.S. investors with political risk insurance for expropriation,

inconvertibility and transfer, and political violence, based on its

agreement with the Philippines. The Philippines is a member of the

Multilateral Investment Guaranty Agency.



Labor

--------------



Managers of U.S.-based companies widely report a large, motivated

work force in the Philippines that is easy to recruit and train.

Low wages, as well as tax benefits and investment incentives offered

in Special Economic Zones are other positive factors for investors.



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U.S. employers regularly report that Filipino workers respond well

to productivity goals and wage incentives for increasing their

output.



Literacy in both English and Filipino is relatively high, although

there have been concerns in the business and education communities

that English proficiency was on the decline, as noted in Department

of Education data. The Department of Education, under its National

English Proficiency Program, continues its efforts to strengthen

English language training, including school-based mentoring programs

for public elementary and secondary school teachers aimed at

improving their English language skills.



Philippine labor is plentiful. In mid-2009, the Philippine labor

force was estimated at 38.4 million, with an increase in the

official unemployment rate at 7.6 percent in 2009, up from 7.4 in

2008 and 6.3 in 2007 percent in the previous year. This figure

includes employment in the informal sector and does not capture the

substantial underemployment in the country.

Special Economic Zones (ecozones) continue to play a significant

role in attracting new investors to the country, often with on-site

labor centers to assist investors with recruitment. These centers

coordinate with the Department of Labor and Employment (DOLE) and

Social Security Agency, and can offers services such as mediating

labor disputes. The ecozones have helped produce rapid growth in

new jobs, as both Philippine and foreign firms seek the tax and

other advantages of these areas devoted to fostering export

industries. As of November 2009, over 600,000 Filipinos were

estimated to be directly employed in zones regulated by the

Philippine Economic Zone Authority.



Multinational managers report that total compensation packages tend

to be comparable with those in neighboring countries. In the call

center industry, the average labor cost is between $1.60 and $1.90

per hour. Regional Wage and Productivity Boards meet periodically

in each of the country's 16 administrative regions to determine

minimum wages, with the National Capital Board setting the national

trend. As of January 2010, the non-agricultural daily minimum wage

in the National Capital Region was PhP382 (approximately $8),

although some private sector workers received less. Cost of living

allowances are given across the board. Most other regions set their

minimum wage significantly lower than Manila. The lowest minimum

wage rates were in the Southern Tagalog Region, where daily

agricultural wages were PhP187 ($4.20). Regional Boards may grant

various exceptions to the minimum wage, depending on the type of

industry and number of employees at a given firm.



Violation of minimum wage standards is common, especially

non-payment of social security contributions, bonuses, and overtime.

In 2009, President Arroyo signed a law offering relief for

companies that had not been paying social security taxes for their

employees, as an incentive to resume their social security

remittances (R.A. 9903). Philippine law also provides for a

comprehensive set of occupational safety and health standards,

although workers do not have a legally-protected right to remove

themselves from dangerous work situations without risking loss of

employment. DOLE has responsibility for safety inspection, but a

severe shortage of inspectors makes enforcement extremely

difficult.



There have been some reports of forced labor in connection with

human trafficking for commercial sex activities.



The Constitution enshrines the right of workers to form and join

trade unions. The mainstream trade union movement recognizes that

its members' welfare is tied to the productivity of the economy and

competitiveness of firms; frequent plant closures have made many

unions even more willing to accept productivity-based employment

packages. The trend among firms of using temporary contract labor

continues to grow.



The number of strikes in the Philippines has been on the decline.

The year 2009 saw a record low of four strikes, down from five in

2008 and 25 in 2004. The DOLE Secretary has the authority to end

strikes and mandate a settlement between the parties in cases

involving the national interest, which can include cases where

companies face strong economic or competitive pressures in their

industries. As of July 2009, there were 141 registered labor

federations and 15,712 private sector unions. The 1.96 million

union members represented approximately 5.2 percent of the total

workforce of 37.8 million. Mainstream union federations typically

enjoy a good working relationship with employers. Although labor

laws apply equally to ecozones, unions have noted some difficulty

organizing inside them.



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The Philippines is a signatory to all International Labor

Organization (ILO) conventions on worker rights, but has faced

challenges enforcing them. Unions allege that companies or local

officials use illegal tactics to prevent them from organizing

workers. The quasi-judicial National Labor Relations Commission

reviews allegations of intimidation and discrimination in connection

with union activities. In September 2009, the GRP welcomed an ILO

mission to the Philippines to examine labor rights. The ILO will

issue its report and recommendations in March 2010.



Foreign Trade Zones/Free Trade Zones

-------------- -------------- -------------- -------------- -------------- --------------



Enterprises enjoy preferential tax treatment when located in

ecozones. The Special Economic Zone Act (R.A. 7916, 1995) outlines

the categories of such ecozones, including export processing zones,

free trade zones, and certain industrial estates.



Enterprises located in ecozones also designated export processing

zones are considered to be outside the customs territory and are

allowed to import capital equipment and raw material free from

customs duties, taxes, and other import restrictions. Goods

imported into free trade zones may be stored, repacked, mixed, or

otherwise manipulated without being subject to import duties. Goods

imported into both export processing zones and free trade zones are

exempt from the GRP's Selective Preshipment Advance Classification

Scheme. While some ecozones have been designated as both export

processing zones and free trade zones, individual businesses within

them are only permitted to receive incentives under a single

category.



The Philippine Economic Zone Authority (PEZA)



The Philippine Economic Zone Authority (PEZA) manages five

government-owned export-processing zones (in Mactan, Bataan, Baguio,

Cavite, and Pampanga) and administers incentives available to firms

located in about 205 privately-owned and operated zones, technology

parks and buildings. Any person, partnership, corporation, or

business organization, regardless of nationality, control and/or

ownership, may register as an export processing zone enterprise with

PEZA. PEZA administrators have earned a reputation for maintaining

clear and predictable investment environment within the zones of

their authority. PEZA announced in early 2010 an investment goal

target of PhP201.67 billion (over US4.1 billion) for the year.



Incentives for firms in export processing and free trade zones

include:



--income tax holiday or exemption from corporate income tax and all

local government imposts, fees, licenses or taxes, for four years,

extendable to a maximum of eight years (this does not include

exemption from real estate tax);



--machinery installed and operated in the economic zone of

manufacturing, processing, or for industrial purposes shall be

exempt from real estate taxes for the first three years of operation

of such machinery;



--after the expiration of the income tax exemption, a special five

percent tax rate on gross income in lieu of all national and local

income taxes (with the exception of land owned by developers, which

is subject to real property tax);



--tax and duty-free importation of capital equipment, raw materials,

spare parts, supplies, breeding stocks, and genetic materials;

--exemptions from wharfage dues, export taxes, imposts and other

fees; a tax credit on domestic capital equipment;



--tax credits on domestic breeding stocks and genetic materials;



--additional deductions for incremental labor costs and training

expenses;



--unrestricted use of consigned equipment;



--remittance of earnings without prior approval from the Central

Bank;



--domestic sales allowance equivalent to 30 percent of total export

sales;



--permanent resident status for foreign investors and immediate

family members;



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--permission to hire foreign nationals;



--exemption from local business taxes; and,



--simplified import and export procedures.



Information technology parks located in the National Capital Region

may serve only as locations for service-type activities, with no

manufacturing operations. PEZA defines information technology as a

collective term for various technologies involved in processing and

transmitting information, which include computing, multimedia,

telecommunications, and microelectronics.



Bases Conversion Development Authority (BCDA)



The ecozones located inside the two principal former U.S. military

bases and several minor former bases are independent of PEZA and

subject to separate legislation under the Bases Conversion

Development Authority (created under R.A. 7227). The principal

bases are the Subic Bay Freeport Zone in Subic Bay, Zambales, and

the Clark Special Economic Zone in Angeles City, Pampanga.



Five independent operational zones were converted under the Bases

Conversion Development Authority:



--Subic Bay Freeport and Special Economic Zone;

--Clark Special Economic Zone;



--John Hay Special Economic Zone;



--Poro Point Special Economic and Freeport Zone; and,



--Morong Special Economic Zone (Bataan Technology Park)



Firms operating inside the zones are exempt from import duties and

national taxes on imports of capital equipment and raw materials

needed for their operations within the zone. The zones are managed

as separate customs territories. Products imported into the zones

are exempt from the GRP's Selective Preshipment Advance

Classification Scheme, with the exception of products imported for

sale at duty-free retail establishments within the zones. Firms

operating in the zones are required to pay only a five percent tax

based on their gross income. Additionally, both Clark and Subic

have their own international airports, power plants,

telecommunications networks, housing complexes, and tourist

facilities.



Regional Ecozones: Zamboanga and Cagayan



In addition to the PEZA zones and converted bases, two other

privately-owned ecozones are independent of PEZA oversight: the

Zamboanga City Economic Zone and Freeport, located in Zamboanga

City, Mindanao; and the Cagayan Special Economic Zone and Freeport,

covering the city of Santa Ana, Cagayan Province, and adjacent

islands. The incentives available to investors in these zones are

very similar PEZA incentives, and are provided for by the Zamboanga

City Special Economic Zone Act of 1995 (R.A. 7903) and the Cagayan

Special Economic Zone Act of 1995 (R.A. 7922).



Capital Outflow Policy



Outward capital investments from the Philippines do not require

prior approval from the Central Bank when the outward investments

are funded by withdrawals from foreign currency deposit accounts;

the funds to be invested are not purchased from the banking system

or foreign exchange corporations that are subsidiaries/affiliates of

banks; or, if sourced from the banking system or bank-affiliated

foreign exchange corporations, the funds to be invested do not

exceed $30 million per investor or per fund per year.



Outward investments exceeding $30 million funded with foreign

exchange purchases from the banking system or bank-affiliated

foreign exchange corporations are subject to prior Central Bank

approval and registration. Qualified investors, such as mutual

funds, pension or retirement funds, insurance companies, and such

other funds or entities that the Central Bank determines as

qualified investors, may apply for a higher, annual outward

investment limit. All outward investments of banks in subsidiaries

and affiliates abroad require prior Central Bank approval.



Applications to purchase foreign exchange from the banking system

and from bank-affiliated foreign exchange corporations for outward

investments should be accompanied by supporting documents and an



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affidavit of undertaking. Current regulations require that the

foreign exchange proceeds from profits/dividends and capital

divestments from such outward investments be inwardly remitted and

sold for Philippine pesos within seven banking days from receipt of

the funds abroad. Regulations do not require inward remittance of

these proceeds if intended for reinvestment overseas, provided the

funds are reinvested abroad within two banking days from receipt.



Foreign Direct Investment Statistics

-------------- -------------- -------------- --------------



The Philippine Securities & Exchange Commission (SEC),Board of

Investments (BOI),National Economic and Development Authority

(NEDA),and the Central Bank each generate direct investment

statistics. The Central Bank records actual investments based on

balance of payments methodologies, readily available in US dollar

terms. Central Bank data are widely used as a reasonably reliable

indicator of foreign investment stock and foreign investment flows.

They are published annually by country and industry. The Central

Bank is currently working to improve measurement of foreign direct

investment stock.



The figures in Tables 1 refer to foreign direct investment stock

reported by the Central Bank, based on the Philippines'

international investment position using a balance of payments

framework; however, disaggregation by country and by industry is not

available. Tables 2 and 3 provide annual net foreign direct

investment flows. Table 4 provides a list of major foreign

investors in the Philippines, using the latest available published

information from the SEC. The United States is the Philippines'

largest foreign investor, with an estimated 20 percent share of the

Philippines' foreign direct investment stock as of year-end 2008.



The formatted tables have been e-mailed to the Department

separately.



BASSET