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http://wikileaks.org/cable/2010/01/10MANILA149.html#
Reference ID Created Released Classification Origin
10MANILA149
2010-01-25 07:59
2011-08-30 01:44
UNCLASSIFIED
Embassy Manila

VZCZCXRO6533
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #0149/01 0250759
ZNR UUUUU ZZH
O 250759Z JAN 10
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6360
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPCIM/CIMS NTDB WASHDC
UNCLAS SECTION 01 OF 21 MANILA 000149

SIPDIS

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

E.O. 12958: N/A
TAGS: ECONEINVETRDEFINELABETRDKTDBPGOVOPIC USTRRP
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
——– — ——- ———-

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
———- —- ——– ——-

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

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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

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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

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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

   

 

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