Sep 202014
 

http://wikileaks.org/cable/2009/01/09MANILA86.html#
Reference ID Created Released Classification Origin
09MANILA86
2009-01-14 08:54
2011-08-30 01:44
UNCLASSIFIED
Embassy Manila

VZCZCXYZ0000
OO RUEHWEB

DE RUEHML #0086/01 0140854
ZNR UUUUU ZZH
O 140854Z JAN 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2869
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPCIM/CIMS NTDB WASHINGTON DC
UNCLAS MANILA 000086

SIPDIS

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

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

REF: 08 STATE 123907

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

¶2. Begin text:

2009 Investment Climate Statement — The Philippines

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. Portfolio investments in
publicly listed firms are, like direct equity investments,
constrained by foreign ownership ceilings stipulated under the
Constitution and other laws. Although growing, the securities market
remains small and underdeveloped, and is not able to offer investors
a wide range of choices. Except for a few large firms, long-term
bonds and commercial paper are not yet major sources of capital.
Secondary trading of publicly-listed stocks is exempt from
documentary stamp tax through March 2009.

Some firms classify their publicly listed shares as “A” (exclusively
for Filipinos) and/or “B” (for foreigners and Filipinos). 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 250 listed firms),
concentrated, and prone to volatility. During 2008, the ten most
actively traded companies accounted for more than 50 percent of
trading value and about 40 percent 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.

The July 2000 passage of the Securities Regulation Code 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. 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 Philippine Stock Exchange has
yet to fully comply with the 20 percent industry limit, although it
has taken steps to reduce brokers’ ownership from 100 percent to 41%
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. The Agri-Agra Law (P.D. 717, as amended) requires
banks to set aside 25 percent of loanable funds for agricultural
credit in general, 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. 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. R.A. 9501, the Magna Carta for Micro, Small and Medium
Enterprises requires banks to set aside ten percent of their loans
for small-business borrowers. While most domestic banks are able to
comply with these targeted-lending 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.
In August 2006, President Arroyo signed Executive Order 558 (further
expounded by E.O. 558-A), which allows all government agencies to
provide credit services regardless of their mandated functions. E.O.
558 repealed E.O. 138 (issued in August 1999), which rationalized
and limited the government’s role in credit extension activities to
make way for a more market-driven, private sector role in
micro-finance. The Asian Development Bank, the World Bank, and
Philippine micro-finance industry players have expressed serious
concern that direct lending by non-financial agencies could lead to
government losses caused by corruption and unsound lending
decisions. Although E.O. 558 has not been repealed, implementation
appears to have been limited thus far to micro-finance lending
programs of the Department of Social Welfare and Development
targeted to the country’s ten poorest provinces.

— BANKING SYSTEM:

The Philippine banking system is dominated by 38 commercial banks
that account for nearly 90 percent of total banking system
resources. As of the end of September 2008, the five largest
commercial banks had estimated total assets of PHP 2,442 billion
(equivalent to about $52 billion), representing 52 percent of total
commercial banking system resources. The 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 entities under Central bank supervision are
required to adopt Philippine Financial Reporting and Accounting
Standards — patterned after International Financial Reporting and
Accounting Standards.
There has been progress in disposing of non-performing assets since
President Arroyo signed the Special Purpose Vehicle law in January
2003, which provided fiscal and regulatory incentives to encourage
the resolution of non-performing assets through their sale to
private asset management companies. Banks were given until May 2008
to conclude notarized agreements to sell their non-performing loans
and foreclosed assets to qualify for incentives under the second
phase of the law. Total banking sector non-performing assets sold
under the Special Purpose Vehicle law amounted to PHP 152.9 billion
($3.1 billion),, equivalent to almost 30 percent of eligible
mid-2002 non-performing assets. Non-performing loans accounted for
almost 70 percent of total assets sold. Non-performing loan and
non-performing asset ratios of commercial banks – which peaked in
October 2001 at 18.3 percent and 14.6 percent respectively – were
estimated at 4.0 percent and 4.9 percent, as of the end of September
2008, back to their pre-Asian crisis levels.

Commercial banks’ published average capital adequacy ratio (15.5
percent on consolidated basis as of end-June 2008, computed
according to the Basel 2 Risk-based Capital Adequacy framework)
remains above the central bank’s 10 percent statutory limit and the
8 percent internationally accepted benchmark. Philippine banks have
limited direct exposure to investment products issued by troubled
financial institutions overseas (estimated at less than 2 percent of
total banking system resources)..
The General Banking Law of 2000 paved the way for the Philippine
banking system to phase in internationally accepted, risk-based
capital adequacy standards. In 2007 a revised capital adequacy
framework (Basel 2) was adopted. It expands coverage from credit and
market risks to operational risks and enhances the risk-weighting
framework. Other important provisions of the General Banking Law are
geared towards strengthening transparency, bank supervision, and
bank management. Remaining impediments to more effective bank
supervision and timely intervention include stringent bank 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 Philippines’ Anti-Money Laundering Act through
the Anti-Money Laundering Council to ensure that the Philippines
sustains progress. Foreign exchange dealers and remittance agents
are required to register with the central bank in order to operate
and must comply with various central bank regulations and
requirements related to the implementation of the Philippines’
anti-money laundering law. The Egmont Group, the international
network of financial intelligence units, admitted the Philippines to
its membership in June 2005. 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 include the exclusion of casinos from the
scope of current anti-money laundering legislation and 2008 court
rulings that inhibit and complicate investigations of fraud and
corruption by prohibiting ex-parte inquiries regarding suspicious
accounts due to bank privacy laws. The Philippine legislature is
considering amendments to the Anti-Money Laundering Act of 2001 to
address these issues.

— ACCOUNTING STANDARDS:

The Philippine Securities and Exchange Commission and the Bangko
Sentral ng Pilipinas agreed to the full adoption of International
Accounting Standards Board-prescribed standards starting in 2005.
These standards are now embodied in the Philippine Financial
Reporting Standards and Philippine Accounting Standards. However,
some companies/industries have been granted temporary exceptions.
For example, a central bank circular to implement the Special
Purpose Vehicle Act deviates from generally accepted accounting
principles by allowing banks to book losses arising from the sale of
non-performing assets on a staggered basis. To encourage
consolidation, the central bank has also allowed merging
institutions to stagger provisions for bad debts. “Non-publicly
accountable entities” (i.e., small and medium enterprises and firms
that are not publicly listed, that are not debt/securities issuers,
that are not engaged in fiduciary activities, or that are not public
utilities or essential public service providers) are exempt from the
new accounting and financial reporting standards, pending issuance
by the International Accounting Standards Board of a separate
accounting standard for small and medium enterprises.
The Philippine Financial Reporting Standards Council approved the
immediate adoption of amendments issued by the International
Accounting Standards Board in October 2008 covering the accounting
treatment and disclosure of financial assets. The Board amendments
provided guidelines for the reclassification of certain
non-derivative financial assets from categories recorded at fair
market value to categories recorded at amortized cost, purposely to
help promote confidence in financial markets by tempering the
potentially sharp deterioration in balance sheets and incomes from
the current global financial turbulence. The Philippine Securities
and Exchange Commission and the central bank have issued circulars
to implement the amendments. As additional regulatory relief, the
central bank also allowed the reclassification, until mid-November
2008, of credit link notes and similar products backed by Republic
of the Philippines bonds.

The Philippine Securities and Exchange Commission 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 Securities and
Exchange Commission). The Securities and Exchange Commission’s
“Guidelines on Accreditation and Reportorial Requirements of
External Auditors of Public Companies” instituted a system of
accreditation for external auditors of firms that issue securities
to the investing public. It also requires client-companies to
disclose to the Securities and Exchange Commission 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 of receipt of the
external-audit findings. The external auditor is required to make
the disclosure to the Securities and Exchange Commission within 30
business days from 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 Securities and Exchange Commission. They also
require 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. In 2007, the Auditing and Assurance Standards Council
issued new standards on quality control, auditing, review, assurance
and related services which outline 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 KPMG,
PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, BDO
Seidman, and Grant Thornton.

Political Violence

Terrorist groups and criminal gangs operate in some 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 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. The full current text of the warning is available at
http://travel.state.gov/ travel/cis_pa_tw/ tw/tw_2190.html. 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/.

Arbitrary, unlawful, and extrajudicial killings by a variety of
actors continue to be a problem. Following increased domestic and
international scrutiny, the number of killings and disappearances
continue to drop significantly from a peak in 2006. Despite
government efforts to investigate and prosecute these cases, many
have gone unsolved and unpunished. The 2007 congressional and local
elections were generally free and fair but were marred by violence
and allegations of vote buying and electoral fraud. On August 11,
more than 1.31 million of the 1.52 million registered voters from
the six provinces comprising the Autonomous Region in Muslim
Mindanao elected a Regional Governor, a Regional Vice Governor, and
Regional Legislative District Assemblymen. The Asian Network for
Free Elections Foundation noted the government’s commitment to make
the elections as free and fair as possible. However, election
monitors documented allegations of fraud and irregularities in some
localities.

Members of the insurgent group Moro Islamic Liberation Front
attacked villages in central Mindanao and killed dozens of civilians
in August 2008 after the Supreme Court placed a temporary
restraining order on the signing of a preliminary peace accord. The
ensuing fighting between government and insurgent forces has led to
both combat and civilian deaths and the displacement of thousands of
people. While the parties have not yet agreed on a new roadmap for
future negotiations, the government has announced its commitment to
resume talks.

The New People’s Army, the military arm of the Communist Party of
the Philippines, remains a threat to the long-term stability of the
country. It has not targeted foreigners in recent years, but could
threaten U.S. citizens engaged in business or property management
activities. It is responsible for general civil disturbance through
assassinations of public officials, bombings, and other tactics. IQ
frequently demands “revolutionary taxes” from local and, at times,
foreign businesses and business people, and sometimes attacks
infrastructure such as power facilities, telecommunications towers,
and bridges to enforce its demands. The National Democratic Front,
the Communist Party’s political arm, has engaged in intermittent but
generally non-productive peace talks with the Philippine
government.

Other terrorist groups, including the Abu Sayaaf Group and Jema’ah
Islamiyah, periodically attack civilian targets in Mindanao or
kidnap civilians for ransom.

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 US-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. 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 and prosecutes 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 in coordinating, monitoring, and enhancing the
government’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
government. However, enforcement of anti-corruption laws has been
weak and inconsistent.

The Philippine government has worked in recent years to reinvigorate
its anti-corruption drive. However, worsening corruption rankings
suggest that efforts have been inconsistent; reforms have not
reached a critical mass to improve public perception; are being
overshadowed by high-profile cases intermittently reported in the
Philippine media; and that other countries have pursued
anti-corruption programs more aggressively.

Bilateral Investment Agreements

As of December 2008, 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,
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: tQ 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 or tax exemptions.

Most Favored Nation Clause (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.
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.
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 (for the same or a connected
project) in a twelve-month period. Bureau of Internal Revenue
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: To use preferential tax treaty rates and
treatment, a tax treaty relief ruling must be secured from the
Bureau of Internal Revenue’s International Trade Affairs Department.
According to tax lawyers, the process can be subject to delay, with
some tax treaty relief applications reportedly pending for from
several months to over a year.
Inter-Company Transfer Pricing: The Tax Code authorizes the Bureau
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. The Bureau has yet
to finalize draft regulations on transfer pricing, a contentious
issue between multinational companies and the Bureau, but declared
in early 2008 that, as a matter of policy, it subscribes to the
Organization for Economic Cooperation and Development’s transfer
pricing guidelines. In anticipation of the release of the final
Bureau regulations, multinational companies have undertaken, or are
preparing, transfer pricing studies and/or benchmarking for their
related-party transactions.
Value Added Tax: The GRP implemented an expanded value added tax law
in November 2005 to increase revenues. The amendments to the Tax
Code reduced the list of VAT-exempt goods and services (including
exemptions previously enjoyed by the fuel and electricity sectors).
A 12 percent tax rate applies on domestic sales of goods and
services and on imports. The 2005 amendments to the Tax Code also
temporarily raised the corporate income tax rate from 32 percent to
35 percent until the end of 2008. A lower 30 percent corporate
income tax rate took effect in January 2009.

Optional Standard Deduction: Republic Act 9504 — issued in June
2008 mainly to provide tax relief to minimum wage earners and
individual taxpayers — included a provision allowing domestic and
foreign resident companies subject to the regular corporate income
tax to opt for a 40 percent standard deduction against gross
sales/receipts. Prior to R.A. 9504, the optional standard deduction
(previously set at 10 percent) applied only to the self-employed and
those engaged in the practice of professions.

Stock Transfer Tax: A February 2007 Bureau of Internal Revenue
ruling involving a Singaporean investor contradicted previous
rulings which exempted from stock transaction tax sales of shares in
publicly-listed companies in the stock exchange by virtue of tax
treaty provisions granting exemption from capital gains tax. In
1994, amendments to the Tax Code replaced a capital gains tax
imposed on shares sold through the stock exchange with a stock
transfer tax. The February 2007 ruling concluded that a Singapore
resident does not qualify for tax exemption under the
Singapore-Philippines Tax Treaty for shares sold through the stock
exchange because stock transfer tax, as an ad-valorem transaction
tax and not an income tax, cannot be considered an identical or
substantially similar tax on income in place of the capital gains
tax imposed under the previous law. This recent interpretation could
be used by the Bureau of Internal Revenue as a precedent for
resolving future tax treaty relief applications by U.S. and other
foreign investors.

International Financial Reporting Standards: Bureau of Internal
Revenue rules/regulations for tax accounting purposes have not been
fully harmonized with the recording and recognition of transactions
for financial accounting and reporting purposes prescribed under
Philippine Financial Reporting Standards (patterned after standards
issued by the International Accounting Standards Board). The
disparities between reports for financial accounting versus tax
accounting purposes can be an irritant between taxpayers and tax
collectors. The Bureau of Internal Revenue requires taxpayers to
maintain records reconciling figures presented in financial
statements and income tax returns.

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. 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

Labor Force: American managers operating in the Philippines will
find a large, highly motivated work force that is easy to recruit
and train. The July 2008 labor force survey revealed that the labor
force is estimated at 37.3 million. In 2008, the official
unemployment rate increased to 7.4 percent from 6.3 percent in 2007.
This figure includes employment in the informal sector and does not
capture the substantial underemployment in the country.

Plant managers are generally pleased with Filipino workers and often
cite productivity and receptivity to training as positive factors.
The existence of Special Economic 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. The Department of Education, under its National English
Proficiency Program, continues its effort to strengthen English
language training including through school-based mentoring programs
for public elementary and secondary school teachers, aimed at
improving public school teachers’ English language skills and
competence.

High productivity: Employers find that Filipino workers generally
respond well to productivity goals and wage incentives for
increasing their output. Exceptions can often be attributed to lack
of equipment, poor training, and job insecurity.
Special Economic Zones: Special Economic Zones continue to play a
significant role in attracting new investors to the country. The
zones 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 zones 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 2008, an estimated 1.53 million employees were working in
zones under the Philippine Economic Zone Authority
(www.peza.gov.ph).

Low Wages: Multinational managers report that their total
compensation packages tend to be comparable with those in
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 Region Board sets the
national trend. As of August 2008, the daily minimum wage in Metro
Manila was pegged between PHP345 and PHP382 ($7 to $8). While the
Philippine government maintains a minimum wage of PHP382 per day for
what it calls “non-agricultural workers,” employees in agriculture,
private hospitals, retail service, and manufacturing in fact receive
PHP345. Cost of living allowances are given across the board. Most
other regions set their minimum wage at about PHP62 to PHP149 less
than Manila’s. Some provinces in the Autonomous Region of Muslim
Mindanao and Bicol region have daily minimum wages as low as PHP
¶196. 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. 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 free trade continues to force unions to modify
their bargaining and organizing approach. Frequent plant closures
have made many unions more willing to accept productivity-based
employment packages. The number of firms using temporary contract
labor continues to grow.

The number of strikes has declined from 25 in 2004 to 5 strikes in
2008, through September. There are 17,105 recognized unions, with a
membership of more than 1.9 million workers (about 5 percent of the
workforce). As of June 2008, 1,437 unions have existing collective
bargaining agreements that cover 218,639 workers. Mainstream union
federations typically enjoy a good working relationship with
employers, including those in Special Economic Zones.

In May 2007, a new labor law lowered the requirements for union
registration. Under the new law, unions tied to federations are no
longer required to maintain a minimum membership of 20 percent of
the workers in a bargaining unit. However, independent unions are
required to meet the 20 percent membership requirement. By the end
of December 2008, however, the Department of Labor and Employment
had not yet issued the required implementing rules and regulations
for the new law to take effect.

Worker Rights: Although the Philippines is a signatory to all
International Labor Organization conventions on worker rights, it is
not in full compliance with all of their requirements. Illegal
discovery tactics and dismissal of union members are alleged 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. In cases
involving the national interest, which can include cases where
companies face strong economic or competitive pressures, the
Secretary of the Department of Labor and Employment has the
authority to end strikes and mandate a settlement between the
parties. Although labor laws apply equally to special economic
zones, relatively few unions exist in them, to the consternation of
many trade union leaders.

Violation of minimum wage standards is common. As of March 2008, 18
percent of the 13,147 commercial establishments inspected by the
Philippine Department of Labor and Employment were not in compliance
with the prevailing minimum wage. However, the Department estimates
that the actual percentage of non-compliant businesses may be much
higher. Non-payment of social security contributions, bonuses, and
overtime is 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. The Department of Labor and Employment has
responsibility for safety inspection, but a severe shortage of
inspectors makes enforcement extremely difficult. There have been
instances of forced labor in connection with human trafficking.

Foreign Trade Zones/Free Trade Zones

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). Ecozones include export processing zones,
free trade zones, and certain industrial estates. The Philippine
Economic Zone Authority manages five government-owned
export-processing zones and administers incentives available to
firms located in more than 170 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 the Authority. 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: income tax holiday or exemption from corporate income tax
for four years, extendable to a maximum of eight years; 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; permission to hire foreign nationals; exemption from local
business taxes; and simplified import and export procedures.

The Philippine Economic Zone Authority’s Guidelines for the
Establishment and Operation of Information Technology Parks defines
information technology as a collective term for various technologies
involved in processing and transmitting information, which include
computing, multimedia, telecommunications, and microelectronics.
Information technology parks located in the National Capital Region
(Metropolitan Manila) may serve only as locations for service-type
activities, with no manufacturing operations. As of December 2008,
there were more than 170 economic zones operating in the country
under the Authority, of which 5 are government-owned ecozones
located in Mactan, Bataan, Baguio, Cavite, and Pampanga. Another 88
have been approved by the Authoeirt but are not yet operational.
Moreover, there are 5 zones under the Bases Conversion Development
Authority, namely: Subic Bay Freeport and Special Economic Zone;
Clark Special Economic Zone; John Hay Special Economic Zone; Poro
Point Special Economic and Freeport Zone; and, the Morog Special
Economic Zone. Two other privately-owned ecozones are independent of
Authority 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 the
Philippine Economic Zone Authority under R.A. 7916.

The economic zones located inside the two principal former U.S.
military bases in the Philippines are independent of the Philippine
Economic Zone Authority and subject to separate legislation under
the Bases Conversion Development Authority (created under R.A.
7227). These are the Subic Bay Freeport Zone in Subic Bay, Zambales,
and the Clark Special Economic Zone in Angeles City, Pampanga. 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. Both 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. Both zones have their own international
airports, power plants, telecom networks, housing complexes, and
tourist facilities.

— CAPITAL OUTFLOW POLICY:

Outward capital investments from the Philippines do not require
prior central bank approval 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, if
sourced from the banking system, the funds to be invested do not
exceed $30 million per investor per year.
Outward investments exceeding $30 million funded with foreign
exchange purchases from the local banking system are subject to
prior central bank approval and registration. Applications to
purchase foreign exchange from the local banking system for overseas
investments should be accompanied by supporting documents 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 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 Securities & Exchange Commission, Board of Investments, National
Economic and Development Authority, and the Bangko Sentral ng
Pilipinas each generate their own respective direct investment
statistics. Central bank data (which records actual rather than
approved investments based on balance of payments
concepts/methodologies, and which is readily available in US dollar
terms) is widely used as a convenient and reasonably reliable
indicator of foreign investment stock and foreign investment flows.
The Central bank publishes annual data on net foreign direct
investment flows broken down by country and by industry. The
central bank is currently working to improve measurement of foreign
direct investment stock.

The formatted tables have been e-mailed to the Department
separately. Those needing a copy may request one from the Economic
Section at Embassy Manila at RovinskyDJ@state.gov.

Kenney

   

 

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