2007 INVESTMENT CLIMATE STATEMENT – THE PHILLIPINES
OPENNESS TO FOREIGN INVESTMENT
The Government of the Philippines (GRP) generally maintains a positive attitude towards foreign investment and its role in economic development. The GRP established the Board of Investment (BOI) to assist foreign and domestic investors with regulatory requirements, incentives, and market guidance. 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 and complex judicial system. In addition, the GRP has not adequately addressed other key issues like inadequate public infrastructure and potential electric power shortfalls. Despite these problems, many foreign investors in the Philippines maintain long-term commitments to the market and have prospered.
The GRP is often receptive to suggestions and criticisms from the private sector. Many foreign and domestic businesses continue to work through industry associations to support reforms in the economic system. The American Chamber of Commerce of the Philippines continued to promote its socio-economic and philanthropic agenda spelled out in its 2004 "Roadmap II More Foreign Investment," which identified the opportunities for, as well as the barriers to, investment, as perceived by the foreign business community, and offered workable solutions to lingering problems. In addition, the American Chamber sponsored a day-long workshop on foreign direct investment in October 2006 to explore investment opportunities and challenges in the Philippines, and has continued to contribute many ad hoc advocacy papers both independently and with the joint Foreign Chambers, urging GRP attention to critical economic and political issues.
-- GENERAL PROVISIONS FOR FOREIGN INVESTMENT:
-- RESTRICTIONS ON FOREIGN INVESTMENT:
List A enumerates investment sectors and activities for which foreign equity participation is restricted by constitutional or other 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. Non-Philippine nationals are also restricted from the manufacture, repair, stockpiling and/or distribution of nuclear, biological, chemical, and radiological weapons and anti-personnel mines.
Foreign equity participation in private radio communications networks is limited to 20 percent. 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--BOT--and foreign aid-funded projects, where there is no upper limit). Foreign ownership of 30 percent is allowed for advertising agencies, while 40 percent foreign participation is allowed in natural resource exploration, development, and utilization. The President may also authorize 100 percent foreign ownership for large scale mining operation and natural resource exploration.
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 BOT 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.
Retail trade enterprises with paid-up capital of $2.5 million but less than $7.5 million were limited to 60 percent foreign ownership until March 2002; 100 percent foreign ownership is now allowed, provided that the initial investment to establish a store is more than $830,000. Enterprises engaged in financing and investment activities that are regulated by the Securities and Exchange Commission, including securities underwriting, are also limited to 60 percent foreign ownership.
List B enumerates areas where foreign ownership is restricted or limited (generally to 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, the Philippines generally imposes a foreign ownership ceiling of 40 percent on firms seeking incentives with the BOI under the investment priorities plan. While there are exceptions to the ceiling, divestment of foreign capital participation to reach the 40 percent foreign equity level is required within 30 years from date of registration with BOI. As a general policy, the Department of Labor and Employment (DOLE) allows the employment of foreigners provided there are no qualified Philippine citizens. Top managers (i.e., president, general manager, and treasurer) are exempt from this labor market test.
-- FINANCIAL SERVICES:
The General Banking Law (R.A. 8791, signed in May 2000 to succeed the 1948 General Banking Act) provided a seven-year window during which foreign banks may own up to 100 percent of one locally incorporated commercial or thrift bank (with no obligation to divest later). This represents a temporary relaxation from the 60 percent foreign ownership cap that would otherwise apply. R.A. 8791 imposed a three-year freeze on new bank licenses (i.e., investments must be made in existing banking institutions), reflecting an emphasis on consolidation. Before the law's passage, the Bangko Sentral ng Pilipinas (BSP, the central bank) had imposed a "moratorium" on new bank licenses, with the exception of micro-finance institutions. A "macro" limitation on foreign ownership requires that majority Filipino-owned banks should, at all times, control at least 70 percent of total banking system resources. Rural 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. 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:
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, and to engage in business.
Foreign investors appear to be taking advantage of a December 2004 Supreme Court ruling that allows 100 percent foreign ownership of companies involved in large-scale exploration, development, and utilization of mineral resources. Prominent mining companies especially from China, Australia, and countries in Southeast Asia have registered. The Mines and Geosciences Bureau expects a potential total investment of $6.6 billion for 24 priority copper, gold, and nickel mining projects by 2010. Investors remain wary, however, of unresolved issues regarding regulatory reform and the authority of the national government versus the local government units to regulate, restrict, and tax mining activities.
-- TRENDS AND PROBLEM AREAS:
GRP fiscal conditions, helped recently by new revenue legislation, seem nonetheless to be improving and the general economic outlook is cautiously optimistic for 2007. According to GRP figures, the Philippines' GDP growth accelerated from 5% in 2005 to 5.4 % as of September 2006, spurred by a recovery in post-drought agricultural harvests, more robust export growth, the continued strength of remittances from Filipinos overseas, and a vibrant business process outsourcing sector. A number of foreign donor agencies forecast 2007 GDP growth of between 5.6% and 5.8%. From 7.6% during 2005, average inflation slowed to 6.3% during 2006. The average peso-dollar exchange rate strengthened by 6.8% year-on-year and the local currency hit five-year highs in December 2006 due in part to record remittance inflows. The Philippine balance of payments surplus had widened from $2.4 billion in 2005 to more than $3 billion as of November 2006, and the GRP reduced the budget deficit to below 2% of GDP.
According to balance of payments data, net foreign direct investments (FDI) peaked in 2000 at $2.2 billion, floundered to less than $200 million in 2001, and then increased to $1.5 billion in 2002. Net FDI flows did not break the $1 billion mark again until 2005 ($1.4 billion). As of October 2006, net FDI flows had risen by 73% year-on-year to nearly $2 billion.
Philippine observers will watch closely the Government’s ability to sustain revenue expansion and boost capital expenditures after years of extremely tight budgets. Due to persistent fiscal constraints stemming from the country's high level of debt and persistent tax leakages, the GRP has consistently under-invested in the infrastructure most important to both domestic and foreign investors, such as roads and railroads, utilities, health care, and education. Transportation of goods overland is arduous and time-consuming. Trade infrastructure urgently needs attention, including Bureau of Customs operations and the nation's maritime highway system, including inter-island shipping and port facilities outside of Manila. 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 remain weak. Congestion and pollution in the country's major cities persist, most notably in Manila.
Foreign investors cite relatively high energy costs in the Philippines compared to neighboring countries, and the potential for power shortages in the mid-term, as areas of concern. The GRP is taking these challenges seriously, and is moving forward on its agenda to liberalize the power sector through the sale of national assets and through support for alternative energy sources to reduce dependence on imported fuels. The Energy Development Corporation, the geothermal producer subsidiary of the Philippine National Oil Company, had a successful debut at the stock market. It posted a P4.55 sale price per share, a surge from the initial public offering of P3.20, at close of trading December 18, 2006. Some 5.2 billion primary and secondary shares were sold to generate P16.7 billion in proceeds. However, despite a legal requirement that the GRP divest itself of 70% of electrical generation capacity by the end of 2005, only 11% had been sold by end-2006.
In December 2006, Congress passed the Biofuels Act. The President is expected to sign the bill into law early in 2007. The Biofuels Act mandates a 5% blend of bioethanol (alcohol from fermented starches/carbohydrates) in motor fuel within two years and a 10% blend by the fourth year. The bill also mandates a 1% biodiesel blend within three months of the bill becoming law, increasing to 2% in two years. The law also calls for phasing out the use of harmful gasoline additives and oxygenates within six months.
The incentives offered to investors in biofuel ventures include exemptions from the value added tax and other specific taxes, exemptions from wastewater charges, and financial assistance.
-- SANCTITY OF CONTRACTS:
-- STOCK EXCHANGE:
The GRP began its bid to privatize the power sector by selling its assets in June 2001 under the Electric Power Industry Reform Act (EPIRA), which directed the Power Sector Assets and Liabilities Management Corporation (PSALM) to sell 70% of the government-owned National Power Corporation’s (NPC) generating assets within three years. Through August 2006, the NPC had only managed to sell six small hydroelectric power units. Although the government accepted a $560 million bid by a joint venture firm to purchase the 600-megawatt coal-fired power plant at Masinloc, the sale fell through when the company did not make a promised 40% down payment. Several recent sales of assets, however, show increased investor interest. In October 2006, the NPC completed the sale of its 117-megawatt hydropower plants at Pantabangan and Masiway to FirstGen Corporation for $240 million. In December 2006, the NPC held a successful auction for the 300-megawatt coal-fired power plant at Magat in northern Luzon for $530 million. The successful sale by Mirant Corporation Philippines of its power generating assets in December 2006 to a Japanese consortium for $3.42 billion may have further increased investor attention to the country’s power sector.
The agreement between NPC and the Manila Electric Company (MERALCO), the largest power distributor in the Philippines, to a five-year transitional supply contract in July 2006 will further improve the prospects for selling government-owned power assets and improve the reliability of electricity supply in metropolitan Manila and nearby provinces.
-- PUBLIC INFRASTRUCTURE:
CONVERSION AND TRANSFER POLICIES
There are generally no restrictions on the full and immediate transfer of funds associated with foreign investments (i.e., repatriation and remittances), 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, foreign loans and foreign investment must be registered with the BSP. There is no difficulty in obtaining foreign exchange, and foreign exchange can be bought and sold outside the banking system. There are no mandatory foreign exchange surrender requirements imposed on export earners. The exchange rate is not fixed and varies daily in response to market forces. In a move to help curb foreign exchange speculation and volatility, the BSP has required a 90-day minimum holding period for registered foreign investments in peso time deposits since January 2000, during which an investor is not 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, registered anew, and remitted freely using foreign exchange purchased from the banking system.
EXPROPRIATION AND COMPENSATION
Philippine law guarantees investors freedom from expropriation, except 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 right-of-way and acquisition for the implementation of 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 with payments subjected to bureaucratic delays and/or budgetary constraints. One recent expropriation case involving a foreign investor occurred when the GRP took possession of the new terminal (NAIA-3) at Manila's Ninoy Aquino International Airport in 2004. Since then, the case has been embroiled in a legal battle involving a determination of just compensation, which has not yet been resolved, though in September 2006 the GRP made an initial payment of 3 billion pesos against an eventual settlement.
There are laws that mandate divestment (to 40 percent foreign equity) by foreign investors. The Omnibus Investment Code (1987) specifies a 30-year divestment period for non-pioneer foreign-owned companies that qualify for investment incentives. (Note: 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 this 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 settlement. Several disputes have concerned water rights, both for use in manufacturing and in power generation. Under Article XII, Section 2 of the 1987 Constitution, foreign ownership of water rights is restricted to companies that are at least 60 percent Filipino-owned. Another investment dispute involved a tariff reclassification that resulted in a 45 percent tariff increase. While the case is also being addressed in the courts, the American firm is fairly confident a satisfactory administrative solution can be found.
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 challenging the extent of foreign participation in large-scale natural resource exploration activities (such as mining).
-- LEGAL SYSTEM:
Another claim made by some observers is that judges rarely have any background in or thorough understanding of market economics or business, and that decisions stray from the interpretation of law into policymaking. Also troubling are charges that judges are bribed to issue decisions favorable to a particular interest.
The GRP is pursuing judicial reform with support from foreign donors, including the USG, the Asian Development Bank, and the World Bank. To reduce the backlog of civil cases, President Gloria Macapagal Arroyo signed the Alternative Dispute Resolution (ADR) Act into law in April 2004, which institutionalizes the use of ADR and creates a Philippine Center for Alternative Dispute Resolution. The ADR Act was based on the successful reduction of court backlogs in the Court of Appeals through a USAID-supported pilot project. To attract better candidates for judicial appointments and help address delays in the judicial system caused by judicial vacancies, new legislation in October 2003 raised the compensation structure for the judiciary, with 75% of the promised pay raise already in effect. The Supreme Court hired 161 judges during 2006, expanding the number of sitting judges by more than 10%. As deaths and retirements offset some of the increase, the vacancy rate stood at 29%, down from 33% over the past four years.
The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and of the Convention on the Recognition and Enforcement of Foreign Arbitrage Awards. The ICSID is now involved in the NAIA-3 arbitration. 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:
While a significant step forward, reforms have focused mainly on the procedural aspects of adjudicating debt relief and corporate rehabilitation cases. These efforts are embodied in the courts' Rules on Corporate Rehabilitation. To expedite resolution, the rules provide 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."
Although a number of debtor corporations have been successfully rehabilitated under the current rules, investors strongly believe that reforms should go beyond procedural improvements to rationalizing and updating the Philippine bankruptcy/insolvency system. The current legal framework is a mixture of outdated and sometimes inconsistent laws and judicial pronouncements. These include: the Insolvency Law (Act 1956, 1909) for insolvency and debt payment suspension cases; P.D. 902-A (1976, as amended) for corporate rehabilitation; provisions of the Civil Code and Corporation Code; and, various Supreme Court rulings. During a multisectoral Socio-Economic Summit held in Manila in December 2001, the GRP cited passage of a comprehensive and updated law on bankruptcy and corporate recovery as among the administration's legislative priorities. Proposed bills for a "Corporate Recovery Act" have since been introduced in Congress, but progress has been slow.
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 (IPP), administered by the BOI. Unlike previous IPPs, which classified investment areas into a national list and regional list, the 2006 IPP presents the list of priority investment areas entitled to incentives into the following classes: preferred activities; mandatory inclusions; export activities; projects under the Retention, Expansion, and Diversification Program; relocation activities; and the Autonomous Region in Muslim Mindanao (ARMM) List. Consistent with the 2004-2010 Medium Term Philippine Development Plan, business activities that fall under the listed preferred activities are agribusiness, healthcare and wellness products and services, information and communications technology, electronics, motor vehicle products, energy, infrastructure, tourism, shipbuilding/shipping, jewelry, fashion garments, and machinery and equipment, raw materials and intermediate inputs in support of the activities listed in the IPP. Covered by mandatory inclusion were: industrial tree plantations; iron and steel projects; exploration, mining, quarrying and processing of minerals; publication or printing of books or textbooks; and refining, storage, marketing, and distribution of petroleum products; ecological solid waste management; provision of clean water; projects involving the rehabilitation, self-development and self-reliance of disabled persons; projects covered by the build, operate, and transfer law, and activities covered by bilateral agreements. Covered under export activities were the production and manufacture of non-traditional export products and services in support of exporters as identified in the 2004-2010 Medium-Term Philippine Development Plan or the Philippine Export Development Plan 2005-2007. Projects under the retention, expansion and diversification (RED) program cover the following: activities that are to be encouraged to continue; existing activities that are encouraged to increase capacity within the country; and diversification projects that are new activities of existing investors that are distinct from existing operations. Relocation activities cover projects from other countries that relocate to the Philippines.
Screening mechanisms for companies seeking investment incentives appear to be routine and nondiscriminatory, but the application process can be complicated. Incentives granted by the BOI often depend on actions by other agencies, such as the Department of Finance.
The basic incentives offered to all BOI-registered companies include:
-- INCENTIVES FOR EXPORTERS:
In addition to the general incentives available to BOI- registered companies, a number of incentives provided under Book I of the Omnibus Investment Code apply specifically to registered export-oriented firms. These include:
The BOI 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 BOI incentives. 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.
-- PERFORMANCE AND LOCAL SOURCING REQUIREMENTS:
The BOI generally sets a 20 percent local value-added benchmark when screening applications. The BOI 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.
Local content requirements for cars, commercial vehicles, and motorcycles were eliminated on June 30, 2003. Assembled commercial vehicle models are no longer restricted by local content schemes. However, 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:
-- 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 (RHQs) and regional operating headquarters (ROHQs) in the Philippines. RHQs 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. On the other hand, ROHQs are branches established in the Philippines by multinational companies that are allowed to derive income from their affiliates in the region by providing services such as: general administration and planning; business planning and coordination; sourcing/procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistics services; research and development services, and product development; technical support and maintenance; data processing and communication; and business development.
Incentives to the RHQs include: exemption from income tax; exemption from branch profits remittance tax; exemption from value-added tax; sale or lease of goods and property and services to the RHQ subject to zero percent value-added tax; exemption from all kinds of local taxes, fees, or charges imposed by a local government unit (except real property taxes on land improvement and equipment); and value-added tax and duty-free importation of training and conference materials and equipment solely used for the RHQ/ROHQ functions. ROHQs enjoy many of the same incentives as RHQs but, being income generating, are subject to 12 percent value-added tax, applicable branch profits remittance tax, and a preferential 10 percent corporate income tax. In addition, eligible multinationals establishing ROHQs must spend at least $200,000 yearly to cover operations. Privileges extended to foreign executives working at RHQs and ROHQs include 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.
Multinationals establishing regional warehouses for the supply of spare parts, manufactured components, or raw materials for their foreign markets also enjoy fiscal 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 GRP has yet to issue implementing rules and regulations covering procurement for projects/contracts involving foreign financing and/or assistance, reportedly because foreign donors expressed concern over proposed provisions favoring local suppliers (which would contradict foreign donor procurement policies). The Official Development Assistance (ODA) Act (R.A. 8182, as amended in February 1998 by R.A. 8555) remains in force and authorizes the President to waive the preference for local suppliers. Foreign donors have usually been able to implement their own procurement regulations under the provisions of the ODA Act. The Build-Operate-Transfer Law (R.A. 6957 of July 1990, as amended in May 1994 by R.A. 7718) allows investors in BOT projects and similar arrangements to engage the services of Philippine and/or foreign firms for the construction of BOT infrastructure projects.
In February 2004, President Arroyo issued Executive Order 278 as a response to reported difficulties by local consultants and contractors in bidding/participating in GRP infrastructure projects. The Executive Order provides preferential treatment for Filipino consultants, stipulating that, as much as possible, the GRP should fund consultancy services for its infrastructure projects with local resources and using 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. Although concerned, multilateral donor agencies report that their implementing
-- PROPOSED CHANGES TO INVESTMENT INCENTIVES
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
The GRP respects the private sector's right to acquire and dispose freely 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 for reasons of security, health, or "public morals." The GRP controls and operates the country's casinos through the Philippine Amusement and Gaming Corporation (PAGCOR) and runs lotto/sweepstake operations through the Philippine Charity Sweepstakes Office (PCSO). Private and government-owned firms generally compete equally, although there are exceptions. For example, government-owned banks corner the bulk of public sector deposits. The National Food Authority, a GRP agency, is the sole importer of rice. In some cases, GRP procurement guidelines favor Philippine over foreign-controlled firms. As a general rule, only the state-owned Government Service Insurance System (GSIS) may provide coverage for government-funded projects. Administrative Order 141 of August 1994 also requires proponents and implementers of BOT projects, as well as partially privatized government corporations, to meet insurance and bonding requirements from the GSIS, at least to the extent of the GRP's interests.
The 1987 Constitution provides the GRP with 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. Instead, there are a number of laws dealing with competition, including the Revised Penal Code (R.A. 3815, 1930), the Act to Prohibit Monopolies and Combinations in Restraint of Trade (R.A. 3247, 1961), Civil Code (R.A. 386, 1949), Corporation Code (1980) Price Act (R.A. 7581, 1991) and Consumer Act (R.A. 7394, 1932). These laws are not effectively enforced, due to a lack of interest and/or competence on the part of enforcement agencies in challenging well-entrenched economic and political interests.
PROTECTION OF 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 Intellectual Property Office (IPO)
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 (firstname.lastname@example.org). In addition to its commitments under the WTO TRIPS Agreement, the Philippines is a party to the Paris Convention for the Protection of Industrial Property, Berne Convention for the Protection of Literary and Artistic Works, Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purpose of Patent Procedure, Patent Cooperation Treaty, and Rome Convention. Although the Philippines is a member of the World Intellectual Property Organization, it has not yet fully ratified the WIPO Performances and Phonograms Treaty or the Copyright Treaty. These two treaties are not self-implementing and required legislation has not been passed by Congress.
The Intellectual Property Code (R.A. 8293, 1997) provides the legal framework for IPR 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 shall be 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 (COR) shall remain in force for ten years. A COR 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 WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement);
--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 IP Code to the Internet. Other important laws defining IPR 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 TRIPS-consistent IPR protection for the layout-designs of integrated circuits.
Deficiencies in the IP Code and other IPR laws remain a source of concern. Weaknesses include: ambiguous provisions on 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:
President Arroyo signed the Optical Media Act into law on February 10, 2004. The Act (Republic Act No. 9239) 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 (OMB) (formerly the Videogram Regulatory Board). OMB 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 and creating the Optical Media Board, for stepping up raids, and for securing several convictions, the GRP continues to lack aggressive prosecution of intellectual property rights (IPR) violators, owing largely to problems that affect the judicial system as a whole. With a strong legislative framework already in place, the GRP now needs firm executive and judicial branch leadership to ensure more vigorous enforcement of IPR laws that results in prosecutions and convictions.
Serious problems continue to hamper the effective operation of agencies tasked with IPR enforcement. Resource constraints, already a problem, have been exacerbated by GRP budgetary shortfalls. In general, GRP 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 (NBI) and the OMB have resulted in some successful enforcement actions. The GRP has tried several different judicial approaches to handling IPR cases, but none have worked well due to lack of resources and heavy non-IPR workloads. In December 2005, the Supreme Court designated a team of judges and prosecutors to handle IPR cases exclusively, but in practice IPR cases represent only about 10% of the workload of taskforce members. The issuance of warrants is often delayed and in a number of instances warrants have been subsequently quashed. Arrests are infrequent. In addition, IPR 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 five convictions in 2006, four in 2005, and one in 2004. Convicted IPR 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 IPO has jurisdiction to resolve certain disputes concerning alleged infringement and licensing. The IPO began to accept complaints in April 2001. However, the IPO's administrative complaint mechanisms appear to be no faster at resolving cases than the judicial system.
Other agencies with IPR enforcement responsibilities include: the Department of Justice; NBI; OMB (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 May 2006, the U.S. lowered the Philippines to the U.S. Trade Representative's (USTR) Watch List from the Priority Watch List under Section 301 of U.S. trade law. Noting the successful implementation of the OMB and efforts to coordinate enforcement through the IPO, USTR nonetheless continued to identify lax copyright enforcement, especially with regard to optical disk piracy, as a particular area of concern. Counterfeit products produced, marketed in, or exported from the Philippines include clothing, medicines, consumer electronics, automotive products, cosmetics, and toys. Piracy of books, cable television, and software remains 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 are supposed to be published in national newspapers of general circulation, often before taking effect. Enforcement of regulations, once issued, is often weak and sometimes 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 SEC, BOI, and the Department of Foreign Affairs) have established express lanes or "one-stop shops" to reduce bureaucratic delays, with varying degrees of success.
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
The Philippines is open to foreign portfolio capital investment. Foreigners may purchase publicly or privately issued domestic securities, invest in money market instruments, and open peso-denominated savings and time deposits. Like direct equity investments, however, portfolio investments in publicly listed firms may be constrained by applicable foreign ownership ceilings stipulated under the Foreign Investment Act (FIA) and other laws. While the securities market is growing, it remains small and relatively underdeveloped, not yet able to offer investors a wide range of choices. Except for a number of major firms/conglomerates, long-term bonds and commercial paper are not yet major sources of long-term capital. In 2004, President Arroyo signed two bills into law to help spur the development of the Philippine capital market. R.A. 9243 of February 2004 rationalized the Philippines' convoluted documentary stamp tax system and exempted secondary-market financial transactions to encourage the development of a secondary trading market and make long-term securities and bonds more attractive. This measure helped pave the way for the March 2005 launching of the country's first fixed-income exchange. The Securitization Act (April 2004) established a framework for the issuance of a wide range of asset-backed securities.
Some firms classify their publicly listed shares as "A" (exclusively for Filipinos) and/or "B" (for foreigners and Filipinos). Foreigners may invest in "A" shares, but only through Filipino-controlled trusts. While the practice of classifying shares was common until the early 1990s, most newly-listed companies no longer classify shares into "A" and/or "B," because the Foreign Investment Act has since lifted the 40 percent general ceiling previously imposed on foreign investments. However, listed firms engaged in activities where foreign investment caps still apply (i.e., banking, utilities, real estate, exploration of natural resources, etc.) find the classification convenient for compliance purposes.
The equities market is thin (less than 240 listed firms), concentrated, and, therefore, prone to volatility. During 2006, the ten most actively traded companies accounted for nearly 60% of trading value and about half of domestic market capitalization. To encourage publicly listed companies to widen their investor base, the Philippine Stock Exchange (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.
Prospects for a more transparent equities and securities market improved with the July 2000 passage of the Securities Regulation Code (SRC, which rewrote the 1982 Revised Securities Act). The Philippine Stock Exchange (PSE) took the first step towards the bourse's demutualization (a major reform stipulated in the SRC) by converting to a stock corporation on August 8, 2001. PSE shares were listed on the exchange in December 2003. In the first quarter of 2004, the PSE sold more than six million shares to five strategic investors. However, brokers still control close to 50 percent of the stock exchange, and the PSE has yet to comply with a SRC provision prohibiting any one industry or business group (including brokers) from controlling more than 20 percent of an exchange's voting rights. The SEC has given the PSE until July 2007 fully to comply with the industry ownership limit. Other SRC provisions strengthened investor protection by: codifying the full disclosure approach to the regulation of public offerings; tightening rules on insider trading; 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. However, prosecution of stock market irregularities is subject to the usual delays and uncertainties of the Philippine legal system.
-- CREDIT POLICIES:
In August 2006, President Arroyo signed EO 558, which allows all government agencies to provide credit services regardless of their mandated functions. EO 558 repealed EO 138, signed by then-President Estrada, which placed strict rules on pricing, subsidies and credit programs. EO 558 also mandated the Department of Social Welfare and Development (DSWD) to implement a micro-finance lending program for the 10 identified poorest provinces in the Philippines. Though the order is intended to increase the availability of micro-finance services, the Asian Development Bank and the World Bank have expressed concern that direct lending by non-financial agencies could lead to government losses caused by corruption and unsound lending decisions.
-- BANKING SYSTEM:
There has been progress in the disposition of non-performing assets (NPAs) since President Arroyo signed the Special Purpose Vehicle (SPV) law in January 2003. The SPV law provided time-bound fiscal and regulatory incentives to encourage the resolution of NPAs outstanding as of June 2002 through private asset management companies. Banks originally had until April 2005 to conclude notarized agreements to sell their non-performing loans (NPLs) and foreclosed assets to qualify for incentives under the law. Legislation signed in April 2006 extended the deadline to May 2008. Total banking sector non-performing assets (NPAs) sold under the initial phase of the SPV law amounted to PHP 96.7 billion ($1.8 billion), equivalent to almost one-fifth of estimated NPAs as of mid-2002. NPLs accounted for over 90 percent of total assets disposed. NPL and NPA ratios - both of which peaked in October 2001 at 18.3 percent and 14.6 percent respectively - have reverted to single-digit levels since June 2005, with commercial banks' NPL ratio estimated at 7.2 percent and NPA ratio at 7.5 percent, as of the end of October 2006. The BSP hopes the extended SPV incentives will help trim NPL and NPA ratios closer to their pre-Asian financial crisis levels of 3 to 4 percent.
Commercial banks' published average capital adequacy ratio (19.5 percent on consolidated basis as of end-March 2006, computed according to the Basel Capital Accord framework) remains above the BSP's 10 percent statutory limit and the 8 percent internationally accepted benchmark. While the Philippines has thus far avoided systemic problems, a number of commercial banks pose potential risks pending their recapitalization and/or rehabilitation. Significant troubles at any major bank could lead to a swift reversal in investor sentiment, potentially straining the system's ability to service withdrawals. More than 200 banking institutions (including 7 commercial banks) remain short of BSP-prescribed minimum capitalization levels, and more than 140 banking institutions (including 4 commercial banks) have yet to comply with the BSP's minimum capital adequacy ratio.
The General Banking Law of 2000 (R.A. 8791, signed in May 2000) paved the way for the Philippine banking system to adopt internationally accepted, risk-based capital adequacy standards. The BSP required banks to comply by July 1, 2001 with new capital-adequacy guidelines patterned after the Basel Capital Accord -- an important step towards aligning Philippine prudential requirements with international best practices. Other important provisions of the banking law are geared towards strengthening transparency, bank supervision, and bank management. The BSP has announced and taken steps to phase in the adoption of Basel 2 standards by July 2007 that would, among other changes, expand coverage from credit and market risks to operational risks, as well as enhance the risk-weighting framework. Nevertheless, the circumstances surrounding bank closures highlight remaining impediments to more effective bank supervision and timely intervention, including stringent bank secrecy laws, obstacles preventing regulators from examining banks at will, and inadequate legal protection for BSP officials and bank examiners.
On the anti-money laundering front, the Paris-based Financial Action Task Force (FATF) removed the Philippines from its list of Non-Cooperating Countries and Territories (NCCTs) in February 2005, noting progress made to remedy concerns and deficiencies identified by FATF and to improve anti-money laundering efforts. FATF continues to monitor implementation of the Philippines' Anti-Money Laundering Act (AMLA) through the Anti-Money Laundering Council (AMLC) to ensure that NCCT-delisted countries sustain progress. The BSP issued a circular during 2005 to bring loosely regulated foreign exchange dealers and remittance agents under BSP supervision/monitoring. These enterprises are now required to register with the BSP in order to operate and must comply with various BSP regulations and requirements related to the implementation of the Philippines' anti-money laundering law. Non-government organizations, casinos, and car dealerships are, however, now emerging as creative mechanisms through which to launder money, which the AMLC is working to address.
The Egmont Group, the international network of financial intelligence units (FIUs), admitted the Philippines to its membership in June 2005. As of December 2006, anti-terrorism/terrorist financing legislation had been passed in the House of Representatives and was pending on second reading in the Philippine Senate.
-- ACCOUNTING STANDARDS:
The SEC requires that management certify a company's 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, pre-need companies, stock brokerages, and other secondary licensees of the SEC). In June 2002, the SEC issued a memorandum circular (amended by subsequent circulars in 2003 and 2004) outlining "Accreditation and Reportorial Requirements of External Auditors of Public Companies." The regulations instituted a system of accreditation for external auditors of firms that issue securities to the investing public. They also required client-companies to disclose to the SEC any material findings (i.e., fraud or error, losses or potential losses aggregating 10 percent or more of company assets, and indications of company insolvency) within five days from receipt of the external-audit findings. The external auditor would, furthermore, be required to make the disclosure to the SEC within 30 business days from submitting its audit report to the client-company should the latter fail to comply with this reportorial requirement. The regulations required 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. They also required accredited external auditors to accumulate continuing education credits and to comply with certain operational requirements such as quality assurance procedures and the communication of critical and alternative accounting policies and practices.
The SEC also issued circulars on new and/or revised Philippine standards on auditing, review engagements, assurance engagements, quality control, and auditing practice statements. These circulars outlined additional measures and policies for compliance by external auditors to improve independence, objectivity, and completeness of audit work.
A number of the larger local accountancy firms are affiliated with international accounting firms, including PricewaterhouseCoopers, Ernst & Young, Klynveld Peat Marwick Goerdeler, and Deloitte & Touche, BDO Seidman, and Grant Thornton.
Terrorist groups, criminal gangs, communist insurgents, and Islamic separatists operate in many regions of the country. The Department of State publishes a consular information sheet on the internet at htttp://travel.state.gov and advises all Americans to review this information periodically. The Department of State urges American citizens to consider carefully the risks of travel to the Philippines and continues to warn against all but essential travel throughout the country in light of heightened threats to Westerners. The Department also continues to urge Americans who choose to travel to the Philippines to observe vigilant personal security precautions, and to remain aware of the continued potential for terrorist attacks, including those against U.S. citizens. The Department strongly encourages 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, https://travelregistration.state.gov.
During the year there was an apparent increase in the number of arbitrary, unlawful, and extrajudicial killings by a variety of culprits. Many of these killings went unsolved and unpunished, despite intensified efforts in 2006 by the government to investigate and prosecute such cases.
The Abu Sayyaf Group (ASG), a US Government-listed terrorist organization, continues to operate despite sustained vigorous military operations against it by the Armed Forces of the Philippines (AFP). The ASG and Rajah Solaiman Movement (RSM) have bombed multiple targets, killing and wounding civilians. On October 10, two bombs exploded separately in Makilala, North Cotabato, and in Tacurong, Sultan Kudarat, killing eight people and wounding at least 30 others. The next day, another bomb went off in Cotabato City. No one was killed or injured in this incident. Another bomb exploded near a police camp in Jolo, Sulu on October 18, and at least three people were killed. The authorities tagged the ASG as responsible for this series of attacks. Throughout the year, clashes between the AFP, Jemaah Islamiyah (JI), and ASG, mostly in the Zamboanga peninsula and Sulu archipelago, contributed to the displacement of civilians.
JI, a regional terrorist group with ties to al-Qaida, has been linked to deadly bombings in the Philippines since December 2000. JI has demonstrated transnational capabilities to carry out attacks against locations where Westerners congregate. Past violent incidents against Americans include the January 2002 shooting death of an American tourist who was hiking on the slopes of Mount Pinatubo and a similar incident in June 2001 in which five on-leave US Navy personnel and their guides were fired upon. In October 2002, at least 20 people were killed, including one American soldier, and more than 100 people were injured, including another American soldier, in various bombing attacks in Zamboanga City and the surrounding area, and in Kidapawan, Cotabato Province. Authorities have discovered and defused other explosive devices prior to detonation in these and other areas of Mindanao. On March 4, 2003, a bomb exploded at the airport in Davao, Mindanao, killing at least 20 people, including one American, and injuring over 140 others.
The GRP has made some progress in talks with Muslim separatists. Its 1996 accord with the Moro National Liberation Front (MNLF) strengthened the Autonomous Region in Muslim Mindanao (ARMM), and peace with the MNLF continues to hold. The GRP and the Moro Islamic Liberation Front (MILF) have engaged in several rounds of intermittent fighting and agreed to a cease-fire in July 2003, which has continued to hold. As of 2006, there are still significant disagreements about the issue of ancestral domain, which is the most contentious issue in the peace negotiations. Both sides have nonetheless expressed cautious optimism for a final peace agreement in 2007.
The New People's Army (NPA), the military arm of the Communist Party of the Philippines (CPP), remains a threat to the long-term stability of the country and is also on the U.S. Foreign Terrorist Organization list. The NPA often clashes with AFP units and has been known to stage kidnappings and to take political prisoners. It has not attacked Americans in over a decade, although it has issued warnings it might do so. It is also responsible for general civil disturbance through insurgency operations, assassinations of public officials, bombings, and other tactics. It frequently demands "revolutionary taxes" from local and, at times, foreign businesses and business people, and sometimes attacks infrastructure installations such as power grids, telecommunications towers, and bridges to enforce its demands. The National Democratic Front, the CPP's political arm, has engaged in intermittent, but generally non-productive peace talks with the GRP, currently on an indefinite hold.
The Philippines faces no major external threat apart from the JI, and continues to strengthen military relations with the United States and with member states of the Association of Southeast Asian Nations (ASEAN). The dispute over ownership of the Spratly Islands continues as a point of potential friction among countries of the region, but China, Vietnam and the Philippines are cooperating on a trilateral survey of resources in this contested area. 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-NATO ally in 2003. The Visiting Forces Agreement, ratified in 1999, provides a framework for US-Philippine military cooperation, including several large-scale exercises, ship visits, and most recently AFP training in counter-terrorism practices.
Corruption is a pervasive and long-standing problem in the Philippines. Under the Trade and Investment Framework Agreement (TIFA), the United States continues to work with the Philippines to tackle the problem of corruption as a means of improving the investment climate. The Philippines' score in Transparency International's annual Corruption Perceptions Index survey has averaged 2.5 to 2.6 (out of a best score of 10) since 2002, a deterioration from 3.6 in 1999. The Philippines is not a signatory of the OECD 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. These 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 cases of alleged graft and corruption involving public officials. The Sandiganbayan (anti-graft court) prosecutes and adjudicates cases filed by the Ombudsman. There is also a Presidential Anti-Graft Commission to assist the President coordinate, monitor, and enhance the GRP's anti-corruption efforts and to investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations.
Soliciting/accepting and offering/giving a bribe are criminal offenses, punishable with imprisonment (6-15 years), a fine and/or disqualification from public office or business dealings with the GRP. As with many other pieces of legislation, however, enforcement of anti-corruption laws has been inconsistent. The GRP launched an initiative to strengthen public and private governance with bilateral and multilateral aid donors in May 2000. Results of this initiative have been mixed and have not reached a critical mass to improve public perception appreciably.
The GRP has worked in recent years to reinvigorate its anti-corruption campaign and the U.S. Government has assisted it through training programs for high-level officials. In December 2003, President Arroyo signed an executive order creating an anti-corruption watchdog, the Revenue Integrity Protection Service (RIPS), in the Department of Finance to work closely with the Ombudsman to help curb corruption in revenue collection agencies. President Arroyo has articulated her desire to strengthen the Office of the Ombudsman to become as efficient as Hong Kong’s Independent Commission against Corruption and has made significantly higher budget requests for this office since 2005. In June 2006, the Millennium Challenge Corporation approved a two-year $21 million grant to implement a Threshold Country Plan (TCP), which focuses on strengthening the anti-corruption capabilities of the Ombudsman and tax collection agencies, including RIPS.
BILATERAL INVESTMENT AGREEMENTS
As of November 2006, 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, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Romania, Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Taiwan Province of China, 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 seeks to encourage 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. The more common treaty disputes between U.S.-owned companies and the Bureau of Internal Revenue (BIR) involve the interpretation of permanent establishments, business profits, and the final withholding tax on dividends and royalties paid to U.S. residents.
Most Favored Nation Clause (royalties): Pursuant to the most favored nation (MFN) clause of the Philippine-U.S. tax treaty, U.S. recipients of royalty income may avail of the preferential rate under the Philippine-China tax treaty, which went into effect in January 2002. That treaty allows a lower rate of 10 percent 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. In September 2002, the BIR issued a circular confirming that the 10 percent referential tax rate under the Philippine-China tax treaty could be applied to U.S. residents under the Philippine-U.S. tax treaty's MFN provision. Entitlement to the lower rate requires the prior clearance from the BIR's International Tax Affairs Division. The BIR has issued a number of rulings approving the application of U.S. companies for the preferential tax treatment. The Court of Tax Appeals (CTA) recently confirmed the application of the preferential 10% rate under the Philippine-China Tax Treaty with respect to royalty payments to a U.S. corporation.
Permanent establishments: A foreign company that renders services to Philippine clients without setting-up a branch office is considered a "permanent establishment" liable to pay Philippine taxes if the services rendered to a Philippine client requires its personnel stay in the country for more than 183 days in a twelve-month period. BIR rulings on the taxation of permanent establishments have been inconsistent. In some rulings, the BIR applied the corporate income tax rate on net taxable income, a treatment that applies to resident foreign corporations. In others, it applied the corporate income tax rate on gross income, a treatment that applies to non-resident foreign firms. Some tax lawyers believe that the provisions of the Philippine-U.S. tax treaty support the treatment of permanent establishments as resident foreign companies subject to income tax based on net income. In a 2005 decision involving a U.S. company, the Court of Tax Appeals ruled that the creation of a permanent establishment did not automatically convert the status of a non-resident corporation into a resident corporation for income tax purposes. The U.S. company appealed the decision which, as of December 2006, was pending with the Supreme Court. Tax experts hope that a final Supreme Court ruling will clarify whether foreign companies deemed to have created a permanent establishment by rendering services without setting up a local office should be taxed on gross income or on net income.
Tax Treaty Relief Rulings: In order to avail of preferential tax treaty rates and treatment, a tax treaty relief ruling must be secured from the BIR’s International Trade Affairs Department (ITAD), pursuant to Revenue Memorandum Order 1-2000. The Court of Tax Appeals has held that claiming benefits under a tax treaty must be preceded by an application for tax treaty relief to prevent any erroneous interpretation of a treaty’s provisions and to ensure that the benefits are enjoyed only by duly entitled persons or corporations. According to tax lawyers, it normally takes from six to eight weeks from the filing of the tax relief application and the accompanying supporting documents to obtain a ruling from the ITAD.
Inter-Company Transfer Pricing: Transfer pricing remains one of the contentious issues between multinational companies and the BIR. The Tax Code authorizes the BIR Commissioner 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. In 1998 and 1999, the BIR issued audit guidelines for the determination of an arm's length price for related-party transactions, including arm's length interest rates on inter-company loans and advances. However, tax practitioners have noted that the BIR guidelines are limited in scope and lack clarity and detail, making them subject to issues of interpretation and application. The BIR has reiterated its intention to issue more comprehensive and detailed transfer-pricing regulations (possibly with provisions for unilateral and/or bilateral advance pricing arrangements) and has been gathering materials and resources towards this objective. In November 2005, the BIR conducted the first public hearing on the proposed regulations on transfer pricing and hopes to issue the new regulations in 2006. However, the BIR had not yet finalized nor issued the regulations as of December 2006.
Improperly accumulated earnings: Early in 2001, the BIR issued regulations imposing a 10 percent improperly accumulated earnings tax (IAET) on taxable income earned starting January 1, 1998 by closely-held domestic corporations. The tax is directed at preventing individual taxpayers from avoiding progressive income tax rates by using corporations to accumulate taxable income. Accumulation of earnings for the reasonable needs of a business is exempted from the 10 percent tax. In a number of rulings issued by the BIR since 2002, the BIR held that the ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company. In a case involving a wholly-owned subsidiary of a U.S. corporation, the BIR ruled that the Philippine company was exempt from the IAET because it was considered a publicly held corporation after the BIR traced ownership of the Philippine subsidiary to the individual shareholders of the U.S. parent company.
Value Added Tax (VAT): The GRP began implementing an expanded value added tax (VAT) law in November 2005 to increase revenues. The new law reduced the list of VAT-exempt goods and services, including exemptions previously enjoyed by the fuel and electricity sectors, and increased the VAT rate from 10 percent to 12 percent in February 2006. The amended VAT law also temporarily raised the corporate income tax rate from 32 percent to 35 percent until the end of 2008, after which the rate is to decline to 30 percent. It also staggered credits on input VAT paid on capital equipment over a five-year period, a provision that had been opposed by capital-intensive sectors as an additional burden on business finances. Another provision strongly opposed by the business sector capped input VAT claims at 70 percent of output VAT in any one quarter, requiring that any excess input VAT credits be carried over to succeeding quarters. In November 2006, President Arroyo signed into law amendatory legislation passed by the Philippine Congress scrapping the 70 percent cap on input VAT utilization.
Taxes on OBUs and FCDUs: Prior to 1997, tax laws exempted foreign currency deposit units (FCDUs) and offshore banking units (OBUs) from the gross receipts tax (GRT), documentary stamp tax (DST), and branch profit remittance tax. In 1997, a Comprehensive Tax Reform Program (CTRP) widened the tax base but left out the phrase granting OBUs and FCDUs, both Philippine and foreign, these tax exemptions. May 2004 legislation restored the tax exemptions for OBUs and FCDUs, but resulted in BIR demands for payment of alleged back taxes for the period when the exemptions were not in place (1998-2004). Although some banks had reached agreement with BIR on partial payments too resolve this issue at end-2006, others were still in negotiation.
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
The Philippines currently does not provide guarantees against losses due to inconvertibility of currency or damage caused by war. An updated agreement between the Overseas Private Investment Corporation (OPIC) and the BOI entered into force on February 15, 2000. The Philippines is a member of the Multilateral Investment Guaranty Agency (MIGA).
The estimated annual dollar equivalent of expenditures in Philippine pesos by U.S. Government agencies is about $65 million. Local currency purchases are made as needed by soliciting competing quotes from commercial banks. Local currency is purchased at the prevailing market rate. The peso strengthened against the dollar during 2006 by an average rate of 6.8 percent.
Labor Force: American managers operating in the Philippines will find a large, highly motivated work force that is easy to recruit and train. The labor force in 2006 was estimated at 36.2 million, a 0.7 million increase from 2005. In 2006, the official unemployment rate slightly increased to 8 percent from 7.7 percent the year before, although this figure does not capture the full extent of underemployment.
Plant managers are generally pleased with Filipino workers and often cite productivity and receptivity to training as a positive factor. Special zones and low wages are other positive factors for investors.
High Trainability: Literacy in both English and Filipino is relatively high. However, English proficiency appears to be declining. President Arroyo has publicly supported English language capability as a priority and in 2003, signed E.O. 210, which directed the Department of Education to use English as the primary language of instruction for science and math. Legislation is pending before Congress that would mandate English as the language of instruction for all subjects.
High productivity: Employers find that Filipino workers respond well to productivity goals and wage incentives for increasing their output. Exceptions can often be attributed to lack of modernized equipment, poor training, and high levels of job insecurity and temporary contract labor.
Special Economic Zones: Special Economic Zones (SEZs) continue to play a significant role in attracting new investors to the country. SEZs normally include their own labor centers for assisting investors with recruitment, coordinating with the Department of Labor and Employment and Social Security Agency, and mediating labor disputes. The SEZs 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 2005, an estimated 1,121,660 employees were working in SEZs under the Philippine Economic Zone Authority (www.peza.gov.ph), of which 448,664 were directly employed, and about 672,996 were indirectly employed as seasonal and contractual workers.
Low Wages: Multinational managers report that their total compensation packages tend to be lower than other neighboring countries, a good value for their mid-level management and skilled staff in the Philippines. In the call center industry, 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. In recent years, the regional boards have adjusted the minimum wage rate about once annually. The National Capital Regional board sets the national trend. As of July 2006, the daily minimum wage in Metro Manila was pegged at PHP 300 plus a PHP 50 cost-of-living allowance (totaling about $7 at current exchange rates). Minimum wage for non-agricultural workers is PHP 300 daily, while workers in agriculture, private hospitals, retail service, and manufacturing receive PHP 263. Cost of living allowances are given across the board. Other regions set their minimum wage at about PHP 60 to PHP 150 less than Manila's. Some provinces in the ARMM have daily minimum wages as low as PHP 200. The regional boards grant various exceptions, depending on the type of industry and number of employees at a given firm.
Labor-Management Relations: The Constitution enshrines the right of workers to form and join trade unions. Many employers indicate a productive working relationship with local trade union leaders, with the exception of radical unions engaged in political activism. The mainstream trade union movement recognizes that its members' welfare is tied to the productivity of the economy and competitiveness of firms. The impact of globalization and freer trade continue to force unions to modify their bargaining and organizing approach. Frequent plant closures in industries adversely affected by lower trade barriers have made many unions more willing to accept productivity-based employment packages.
The number of strikes has shown a steady decline from 60 in 2000 to 12 strikes in 2006, as of November. The trade union movement is divided and rarely speaks with a single voice. There are 28,496 recognized unions, with a membership of 2,279,932 workers. 1,674 unions had existing collective bargaining agreements that covered 241,668 workers. Mainstream union federations typically enjoy a good working relationship with employers, including those in SEZs.
Worker Rights: Although the Philippines is a signatory to all ILO conventions on worker rights, deviations from adherence exist. Violation of minimum wage standards is common. In 2005, 19 percent of commercial establishments inspected by the Philippine Department of Labor and Employment (DOLE) were not in compliance with the prevailing minimum wage. However, DOLE estimates that the actual percentage of non-compliant businesses may be much higher. Non-payment of social security contributions, bonuses, and overtime are particularly common. The law provides for a comprehensive set of occupational safety and health standards, although workers do not have a legally protected right to remove themselves from dangerous work situations without risking loss of employment. DOLE has responsibility for safety inspection, but a severe shortage of inspectors makes enforcement extremely difficult. Reports have surfaced of forced labor in connection with drugs and prostitution.
Although labor laws apply equally to SEZs, relatively few unions exist in the majority of SEZ areas, to the consternation of many trade union leaders. Unions report facing the same types of barriers to organizing inside the zones as outside, including "company unions" designed to thwart genuine worker representation. Illegal discovery tactics and dismissal of union members are often cited as barriers to organization. The quasi-judicial National Labor Relations Commission reviews allegations of intimidation and discrimination in connection with union activities, although effectiveness of enforcement is reportedly questionable.
The Special Economic Zone Act (R.A. 7916, 1995) grants preferential tax treatment to enterprises located in special economic zones (also referred to as ecozones). Pursuant to R.A. 7916, ecozones include export processing zones, free trade zones, and certain industrial estates. The Philippine Economic Zone Authority (PEZA) manages four government-owned export-processing zones and administers incentives available to firms located in some 130 privately owned and operated zones. Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export processing zone enterprise with PEZA. Enterprises located in ecozones that are designated export processing zones are considered to be outside the customs territory of the Philippines 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.
Incentives for firms in export processing and free trade zones include: exemption from corporate income tax (four years for non-pioneer and six years for pioneer, renewable up to an additional two years); after the expiration of the income tax exemption, a special five percent tax rate in lieu of all national and local income taxes (with the exception of land owned by developers, which are subject to real property tax); tax and duty-free importation of capital equipment, raw materials, spare parts, supplies, breeding stocks, and genetic materials; tax credits for import substitution; exemptions from wharfage dues, export taxes, 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 BSP; domestic sales allowance equivalent to 30 percent of total export sales; permanent resident status for foreign investors and immediate family members; permission to hire foreign nationals; exemption from local business taxes; and simplified import procedures. PEZA Board Resolution No. 99-264 provides for the registration as ecozones of information technology (IT) parks/buildings with a minimum area of five hectares. Upon registration, IT park developers, locators, and utilities enterprises are eligible to receive the same package of investment incentives PEZA extends to registered economic zones. PEZA's Guidelines for the Establishment and Operation of Information Technology (IT) Parks defines IT as a collective term for various technologies involved in processing and transmitting information, which include computing, multimedia, telecommunications, and microelectronics. IT parks located in the National Capital Region (Metropolitan Manila) may serve only as locations for service-type activities, with no manufacturing operations. As of November 2006, there were 170 SEZs operating in the country under PEZA, of which 4 are government-owned ecozones located in Mactan, Bataan, Baguio, and Cavite. Another 59 have been approved by PEZA but are not yet operational. Moreover, there are 5 zones under the Bases Conversion Development Authority (BCDA), namely: Subic Bay Freeport and SEZ; Clark SEZ; John Hay SEZ; Poro Point Special Economic and Freeport Zone; and, the Morog SEZ. 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 provided for by R.A. 7903 and 7922, respectively, and are very similar to those provided by PEZA under R.A. 7916.
The SEZs located inside the two principal former U.S. military bases in the Philippines are independent of PEZA and subject to separate legislation under the Bases Conversion Development Authority (created under R.A. 7227). These are the Subic Bay Freeport Zone (SBFZ) in Subic Bay, Zambales, and the Clark Special Economic Zone (CSEZ) in Angeles City, Pampanga. Firms operating inside the SBFZ and CSEZ are exempt from import duties and national taxes on imports of capital equipment and raw materials needed for their operations within the zone. Both the SBFZ and the CSEZ 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 5 percent tax based on their gross income. Both zones have their own international airports, power plants, telecom networks, housing complexes, and tourist facilities. A 2005 ruling by the Supreme Court nullified the designation of Clark, thereby removing all investor incentives and imposing back taxes on benefiting firms. While Congress considers several bills addressing both the incentive package and amnesty for prior liabilities, Clark was placed under PEZA administration to restore some of the incentives and keep the zone attractive to new investment. Bills seeking to restore incentives have been certified as priority legislation by the Arroyo Administration.
-- CAPITAL OUTFLOW POLICY:
Outward investments exceeding $6 million funded with foreign exchange purchases from the local banking system are subject to BSP approval and subsequent registration. Applications to purchase foreign exchange from the local banking system for overseas investments should be accompanied by a copy of the applicant’s latest income tax return; project feasibility study, investment proposal, and/or other documents showing the nature and place of the investment; and a written undertaking to inwardly remit and sell for pesos to authorized agent banks the dividends, earnings, and divestment proceeds from the outward investments. Current BSP regulations require that the foreign exchange proceeds from profits/dividends and capital divestments from such outward capital investments be remitted within 15 banking days from receipt overseas and sold for pesos to authorized banks within three banking days from receipt in the Philippines.
FOREIGN DIRECT INVESTMENT STATISTICS
The SEC, BOI, National Economic and Development Authority, and the BSP each generate their own respective direct investment statistics. BSP data (which records actual rather than approved investments, and which is readily available in US dollar terms and broken down by investor country and by industry) is widely used as a convenient and reasonably reliable indicator of foreign investment stock and foreign investment flows. The data reflects foreign investment remittances registered with the BSP or a designated custodian bank. Registration is required to enable foreign exchange sourcing from the domestic banking system for profit remittance and/or capital repatriation purposes. BSP does not have readily available data on foreign direct investment withdrawals broken down by economy/country or industry. The figures in Tables 1 and 2 below refer to cumulative foreign direct investment by investor economy/country and by industry registered with the BSP from 1973 to the dates indicated. The BSP-registered foreign direct equity investment data is the only available data that the BSP has on investment stock data. These reflect gross rather than net foreign direct investment levels. Tables 3 and 4, on the other hand, provide annual net foreign direct investments using the balance of payments concept. Table 5 provides a list of major foreign investors in the Philippines as of 2005, using the latest available published information from the SEC.
a/ Annual inflow equivalent to Balance of Payments Net Foreign Direct Investment (FDI) flows which refer
b/ Covers non-residents investments in non-banks sourced from the Cross-Border Transactions survey; industry breakdown statistics are not available.
Source: Bangko Sentral ng Pilipinas