Investment Climate Statements for 2016 - Philippines

Executive Summary

The Philippines is becoming a more attractive destination for foreign direct investment (FDI). The country’s growing middle class quickly spends its disposable income in a stable political environment, helping gross domestic product soar to an average growth of 6.2 percent over the last six years. FDI reached USD 5.72 billion in 2015. The United States contributed more than any other country, at USD 731 million. The majority of investment inflows are in manufacturing, finance and insurance, real estate, wholesale and retail trade, and construction.

Thanks in part to a large, educated, English-speaking workforce, the Business Process Outsourcing (BPO) and tourism industries have experienced tremendous growth in recent years, with no signs of a slowdown. The Philippines has improved its investment climate under the Aquino Administration, making strides in good governance, transparency, and accountability. Major international credit ratings agencies have upgraded the Philippines’ sovereign credit ratings to investment grade, citing robust economic performance, continued fiscal and debt consolidation, and improved governance.

Still, improvement is needed. The Philippines lags behind most ASEAN nations in attracting FDI because of limits on foreign ownership in many sectors of the economy (the Philippines was ranked number 8 of 10 ASEAN countries as a percentage of GDP in 2014). Poor infrastructure, including high power costs and slow broadband connections, regulatory inconsistency, and corruption are major constraints to investment. The Philippines’ complex, slow, and sometimes corrupt judicial system inhibits the timely and fair resolution of commercial disputes. In addition, traffic and port congestion are a regular cost of business. Investors report the Philippine bureaucracy can be difficult and opaque, and business registration and procedures are slow and burdensome. Many report a more predictable business environment within the special economic zones, particularly those available for export businesses which are operated by the Philippine Economic Zone Authority (PEZA), which is known for its regulatory transparency, no red-tape policy, and “one-stop shop” services for investors.

Overall, the investment climate of the Philippines has improved in recent years. If the country can maintain its reform momentum, particularly after a new president takes office in June 2016, continue to improve its infrastructure and relax foreign ownership limitations, the prospects for investment into the Philippines will continue to brighten.

Table 1

Measure	Year	Index or Rank	Website Address
TI Corruption Perceptions index	2015	95 of 168	http://www.transparency.org/country/#PHL_DataResearch_SurveysIndices
World Bank’s Doing Business Report “Ease of Doing Business”	2016	103 of 189	doingbusiness.org/rankings
Global Innovation Index	2015	83 of 141	https://www.globalinnovationindex.org/content/page/GII-Home
U.S. FDI in partner country ($M USD, stock positions)	2014	USD 5.1 billion	http://bea.gov/international/factsheet/factsheet.cfm?Area=623
World Bank GNI per capita	2014	USD 3,500	data.worldbank.org/indicator/NY.GNP.PCAP.CD

Millennium Challenge Corporation Country Scorecard

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a per capita gross national income (GNI) of $4,125 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/pages/docs/doc/report-guide-to-the-indicators-and-the-selection-process-fy-2015.

1. Openness To, and Restrictions Upon, Foreign Investment

Attitude toward Foreign Direct Investment

The Philippines actively seeks foreign investment to promote economic development, and has conducted road shows in the United States encouraging U.S. firms to invest. The Philippine investment landscape has noteworthy advantages, such as its free trade zones, including zones administered by the Philippine Economic Zone Authority (PEZA) (http://www.peza.gov.ph/), and its large, educated, English-speaking, relatively low-cost Filipino workforce. Philippine law treats foreign investors the same as their domestic counterparts, except in sectors reserved for Filipinos by the Philippine Constitution and Foreign Investment Act (detailed below). However, inadequate public investment in infrastructure and lack of transparency hinder foreign investment. Philippine regulatory regimes remain ambiguous in many sectors of the economy, and corruption is a significant problem. A complex, sometimes corrupt, and slow judicial system is also a major disincentive to investment.

Other Investment Policy Reviews

The World Trade Organization conducted a Trade Policy Review of the Philippines in March 2012. It is available at: https://www.wto.org/english/tratop_e/tpr_e/tpr_e.htm.

Laws/Regulations on Foreign Direct Investment

The Board of Investments (BOI) (http://www.boi.gov.ph/) regulates and promotes investment into the Philippines. The Investment Priorities Plan (IPP), administered by the BOI, identifies preferred economic activities, which are approved every three years by the President. Government agencies are encouraged to adopt policies and implement programs consistent with the IPP.

The 1991 Philippine Foreign Investment Act (FIA) requires the publishing of the Foreign Investment Negative List (FINL), which outlines sectors in which foreign investment is restricted. The FINL consists of two parts. Part A details sectors in which foreign equity participation is restricted by the Philippine Constitution or laws. Part B lists areas in which foreign ownership is limited for reasons of national security, defense, public health, morals, and/or the protection of small and medium enterprises (SMEs). The current FINL was published in May 2015.

The 1995 Special Economic Zone Act allows PEZA to regulate and promote investments in export-oriented manufacturing and service facilities inside special economic zones, including grants of fiscal and non-fiscal incentives.

Further information about investing in the Philippines is available at http://investphilippines.gov.ph/.

Business Registration

Numerous agencies regulate business registration in the Philippines. Sole proprietorships must register with the Bureau of Trade Regulation and Consumer Protection (BTRCP) in the Department of Trade and Industry (DTI) (http://www.dti.gov.ph/), while corporations or partnerships must register with the Securities and Exchange Commission (SEC) (http://www.sec.gov.ph/). Other permits and licenses are issued by different agencies, making business registration cumbersome. It takes an average of 29 days to start a business in Quezon City in Metro Manila, according to 2016 World Bank’s Ease of Doing Business.

Various Philippine laws promote development and assistance to micro-, small- and medium-sized enterprises (MSMEs). Republic Act No. 9501 defines MSMEs according to total asset value: micro – 3 million pesos or less (USD 67,000); small – above 3 million to 15 million pesos USD 335,000); medium – above 15 million. MSMEs whose capital is at least 60 percent Filipino-owned are entitled to special services such as a streamlined business registration process, credit financing, shared service facilities (i.e. machineries/equipment), and capacity building programs.

Industrial Promotion

The Philippines’ Investment Priorities Plan (IPP) enumerates investment sectors entitled to incentives. The 2014-2016 IPP seeks to increase investments in infrastructure, agriculture, education, and health. The IPP list includes: manufacturing (e.g. motor vehicles, shipbuilding, aerospace, etc.), agribusiness and fisheries; services (e.g. creative industries, integrated circuit design, charging stations for e-vehicles, etc.); public infrastructure and logistics (airports, seaports, transport, etc.); Public-Private Partnership (PPP) projects; energy (development of energy sources, power generation plants, and ancillary services); low-cost housing; and hospitals. The BOI reviews projects and then determines incentives.

The PPP program aims to spur private-sector participation in government development projects, specifically in infrastructure. The Build-Operate-Transfer (BOT) law provides the legal framework for the program, and a Public Private Partnership (PPP) Center (http://ppp.gov.ph/) works to promote transparency and oversee project development and approval. The PPP Center has been slow to award contracts. As of April 2016, only 12 out of 51 proposed PPP projects have been awarded, with 16 contracts out for bid. In 2015, the U.S. Department of Commerce and the Philippine National Economic Development Authority (NEDA) (http://www.neda.gov.ph) signed a Memorandum of Cooperation on infrastructure collaboration in which potential U.S. investors will receive notification and information about forthcoming PPP infrastructure projects. For more information, see http://www.ita.doc.gov/infrastructure/.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners are prohibited from fully owning land under the 1987 Constitution, although the 1993 Investors’ Lease Act allows foreign investors to lease a contiguous parcel of up to 1,000 hectares for 50 years, renewable one time for 25 additional years. The 2003 Dual-Citizenship Act allows dual citizens full rights to possess land. Still, ownership deeds continue to be difficult to establish, and the court system is slow to resolve land disputes.

The FINL bans foreign ownership in the following areas: mass media (except recording); small-scale mining; private security; marine resources, including the small-scale utilization of natural resources in rivers, lakes, and lagoons; and the manufacture of firecrackers and pyrotechnic devices. Only Philippine citizens can practice the following professions: law, pharmacy, radiologic and x-ray technology, criminology and forestry. In theory, foreigners may practice professions not prohibited under FINL provided their country allows the same reciprocal rights to Philippine citizens. In practice, however, language exams, onerous registration processes, and other barriers prevent this from taking place.

Other areas that carry varying foreign ownership ceilings include: private radio communications networks (20%); private employee recruitment (25 percent); contracts for the construction and repair of locally funded public works (25 percent); advertising agencies (30 percent); natural resource exploration, development, and utilization (40 percent, with exceptions); educational institutions (40 percent); operation and management of public utilities (40 percent); operation of commercial deep sea fishing vessels (40 percent); Philippine government procurement contracts (40 percent for supply of goods and commodities); construction of locally funded public works (25 percent with some exceptions); adjustment companies (40 percent); operations of Build-Operate-Transfer (BOT) projects in public utilities (40 percent); ownership of private lands (40 percent); rice and corn processing (40 percent, with some exceptions); and financing companies and investment houses (60 percent).

For reasons of national security, defense and public health, the Philippines limits foreign ownership to 40 percent in the following industries: manufacturing of explosives, firearms, military hardware, and massage clinics.

Retail trade enterprises with capital of less than USD2.5 million, or less than USD250,000 for retailers of luxury goods, are reserved for Filipinos. Foreign investors are prohibited from owning stock in lending, financing, or investment companies unless the investor’s home country affords the same reciprocal rights to Filipino investors. Foreign ownership is capped at 60 percent for enterprises engaged in financing and securities underwriting, which are regulated by the SEC.

A law signed on July 2014 liberalized the entry of foreign banks into the Philippine market. If they can meet certain requirements, foreign banks are allowed to establish branches or own up to 100 percent of the voting stock of locally incorporated subsidiaries. However, a foreign bank that seeks to establish branches in the Philippines cannot open more than six branch offices each. The law also stipulates that a minimum 60 percent of the total assets of the Philippine banking system should, at all times, remain controlled by majority Philippine-owned banks. Ownership caps apply to foreign non-bank investors, whose aggregate share should not exceed 40 percent of the total voting stock in a domestic commercial bank and 60 percent of the voting stock in a thrift/rural bank. The 2007 Lending Company Regulation Act requires majority Philippine ownership for credit enterprises that do not clearly fall under the scope of existing laws.

Privatization Program

The Philippine Government’s privatization program is managed by the Privatization Management Office (http://www.pmo.gov.ph/) under the Department of Finance (http://www.dof.gov.ph/). The privatization of government assets has to undergo a public bidding process. Apart from restrictions in the FINL, there are no regulations that discriminate against foreign buyers and the bidding process appears to be transparent.

Screening of FDI

Corporations or partnerships wishing to invest in the Philippines must register with the SEC, while sole proprietorships must register with DTI. A foreign enterprise seeking incentives under the Omnibus Investments Code must apply for registration with the BOI, while export-oriented manufacturing and service enterprises within economic zones must register with PEZA or another authorized economic zone administrator (see Section 16 – Foreign Trade Zones). In addition, foreign investors must register with the Central Bank (http://www.bsp.gov.ph) if the foreign exchange for repatriation of capital and remittance of earnings will be sourced from authorized agent banks or their affiliate foreign exchange corporations.

Competition Law

The Philippine competition law was enacted in July 2015, but the implementing rules and regulations were still being drafted as of April 2016. The law establishes a Philippine Competition Commission (PCC), an independent body mandated to resolve complaints on issues such as price fixing and bid rigging, and to stop mergers that would restrict competition. The Department of Justice (http://www.doj.gov.ph/) is responsible for the prosecution of criminal offenses involving violations of competition laws. Former National Economic and Development Authority Chairman Arsenio Balisacan will head the PCC.

2. Conversion and Transfer Policies

Foreign Exchange

The Central Bank has accelerated efforts to relax and streamline the Philippine foreign exchange regulatory framework. There are no restrictions on the full and immediate transfer of funds associated with foreign investments, foreign debt servicing, or payment of royalties, lease payments, and similar fees. The Central Bank follows a market-determined exchange rate policy, with scope for intervention to smooth excess foreign exchange volatility.

Remittance Policies

Central Bank regulations provide specific requirements for foreign exchange purchases from banks and from foreign exchange dealers, money changers, and remittance agents. No mandatory foreign exchange surrender requirement is imposed on export earners or other foreign currency earners, such as overseas workers.

The Financial Action Task Force (FATF) removed the Philippines from its “watch list” of countries with strategic deficiencies in countering money laundering and the financing of terrorism but continues to urge regulation of the country’s growing casino industry for anti-money laundering/terrorism financing purposes. FATF is monitoring progress of pending legislation seeking to include casinos as covered institutions; however, the bill is unlikely to be enacted into law before President Aquino’s term ends on June 30, 2016. A high profile international money laundering case in February, 2016 heightened interest in amending the laws.

3. Expropriation and Compensation

Philippine law allows expropriation of private property for public use or in the interest of national welfare or defense, and offers fair market value compensation. In the event of expropriation, foreign investors have the right to receive compensation in the currency in which the investment was originally made and to remit it at the equivalent exchange rate. However, the process of agreeing on a mutually acceptable price can be protracted in Philippine courts. There are no recent cases of actual expropriation involving U.S. companies in the Philippines.

On March 7, 2016, the Philippines passed a law that facilitates the acquisition of right-of-way sites for national government infrastructure projects. The law outlines procedures on providing “just compensation” to owners of expropriated real properties to expedite implementation of government infrastructure programs.

4. Dispute Settlement

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

The Philippines has a mixed legal system of civil, common, Islamic, and customary laws. It also has commercial and contractual laws.

The Philippine judicial system is a separate and independent branch of the government, made up of the Supreme Court (http://sc.judiciary.gov.ph/) and lower courts. The Supreme Court is the highest court and the sole constitutional body. The lower courts consist of (a) trial courts with limited jurisdictions (i.e. Municipal Trial Courts, Metropolitan Trial Courts, etc.); (b) Regional Trial Courts (RTCs); (c) Shari’ah District Courts (Muslim courts); and (d) Court of Appeals (appellate courts). Special courts include the “Sandiganbayan” (anti-graft court for public officials) and the Court of Tax Appeals. Several RTCs have been designated as Special Commercial Courts (SCC) to hear intellectual property (IP) cases, with four SCCs authorized to issue writs of search and seizure on IP violations, enforceable nationwide.

Under Philippine law, a separate action must be filed for foreign judgments to be recognized or enforced. Philippine law does not recognize or enforce foreign judgments that run counter to existing laws, particularly those relating to public order, public policy, and good customs.

Bankruptcy

The 2010 Philippine bankruptcy and insolvency law provides a predictable framework for the rehabilitation and liquidation of distressed companies. Rehabilitation may be initiated by debtors or creditors under court-supervised, pre-negotiated, or out-of-court proceedings. The law sets the conditions for voluntary (debtor-initiated) and involuntary (creditor-initiated) liquidation. It also recognizes cross-border insolvency proceedings in accordance with the UNCTAD Model Law on Cross-Border Insolvency, allowing courts to recognize proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines. Regional trial courts designated by the Supreme Court have jurisdiction over insolvency and bankruptcy cases. The Philippines ranked 103 out of 189 economies in World Bank’s 2016 Ease of Doing Business report in terms of resolving insolvency and bankruptcy cases.

Investment Disputes

Foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive to investment. Many investors decline to file dispute cases in court because of slow and complex litigation processes and corruption among some personnel. Stakeholders also report an inexperienced judiciary when confronted with complex issues such as technology, science, trade, and intellectual property cases.

Several laws on alternative dispute resolution (ADR) mechanisms (i.e., arbitration, mediation, negotiation, and conciliation) have been approved to decongest the court’s clogged dockets. PPP contracts are required to include ADR provisions to make resolving disputes less expensive and time-consuming, particularly for large-scale capital-intensive infrastructure and development contracts.

International Arbitration

ICSID Convention and New York Convention

The Philippines is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the “New York Convention.” Foreign arbitral awards are enforceable upon application in writing to the regional trial court with jurisdiction. The petition may be filed any time after receipt of the award.

Duration of Dispute Resolution – Local Courts

Investment disputes can take years to resolve due to systemic problems in the Philippine judicial system. A lack of resources, understaffing, and corruption make the already complex court processes protracted and expensive.

5. Performance Requirements and Investment Incentives

WTO/TRIMS

The Philippines does not have any measures that are inconsistent with Trade Related Investment Measures (TRIMS) commitments.

Investment Incentives

There are about 180 fiscal incentive laws in the Philippines. The Investment Priorities Plan lists investment areas entitled to incentives facilitated by BOI. Available fiscal incentives include an income tax holiday, tax credits, and deductions from taxable income. Non-fiscal incentives include: employment of foreign nationals; simplified customs procedures; importation of consigned equipment; and operation of a bonded manufacturing warehouse.

BOI-registered enterprises which locate in less-developed areas are entitled to “pioneer” incentives and can deduct 100 percent of the cost of necessary infrastructure work and labor expenses from its taxable income. Pioneer status can be granted to enterprises producing new products or using new methods, goods deemed highly essential to the country’s agricultural self-sufficiency program, or goods utilizing non-conventional fuel sources. Furthermore, an enterprise with more than 40 percent foreign equity that exports at least 70 percent of its production may be entitled to incentives even if the activity is not listed in the Investment Priorities Plan. Export-oriented firms with at least 50 percent of their revenues derived from exports may register for additional incentives under the 1994 Export Development Act.

Philippine law also provides incentives for multinational enterprises to establish regional or area headquarters in the Philippines. Multinational entities that establish regional warehouses for the supply of spare parts, manufactured components, or raw materials for foreign markets also enjoy incentives on imports that are re-exported, including exemption from customs duties, internal revenue taxes, and local taxes.

Research and Development

Foreign entities’ participation in research and development is limited by several laws and regulations that stem from “essentially” limiting the practice of professions, including engineering and teaching, to Filipino citizens. The “Balik Scientist” Program of the Department of Science and Technology (DOST) (http://bsp.dost.gov.ph/) allows natural Filipino-born scientists who have acquired foreign citizenship to return to the Philippines to help accelerate scientific, agro-industrial and economic development in the country. The DOST secures a special/temporary permit from the Professional Regulatory Commission (http://www.prc.gov.ph/) to allow these “foreign” scientists to practice their profession in the Philippines.

Performance Requirements

In general, only Filipino citizens are allowed to practice licensed professions but companies registered with the BOI and PEZA may employ foreign nationals in supervisory, technical, or advisory positions for five years from the date of registration (possibly extendable upon request). Top positions and elective officers of majority foreign-owned BOI-registered enterprises (i.e., president, general manager, and treasurer, or their equivalents) are exempt from the five-year limitation. Foreigners intending to work locally must secure an Alien Employment Permit from the Department of Labor and Employment (DOLE) (http://www.dole.gov.ph), renewable every year or co-terminus with the duration of employment (which in no case shall exceed five years). The BOI and PEZA can help facilitate a special non-immigrant visa with multiple entry privileges and extend visa facilitation assistance to foreign nationals, their spouses and dependents.

The 2003 Government Procurement Reform Act (GPRA) requires the public sector to procure goods, supplies, and consulting services from enterprises at least 60 percent Filipino-owned and infrastructure services from enterprises with at least a 75 percent Filipino interest. More recently, government agencies have required U.S. companies to submit Certificates of Reciprocity with their bid documents to certify that Philippine companies have equivalent rights in bidding on similar procurements with the U.S. Government. (Please contact businessphilippines@trade.gov for more information or assistance.) A single portal electronic procurement system, called the Philippine Government Electronic Procurement System (http://philgeps.gov.ph/), exists to provide transparency and efficiency in procurement procedures, but the U.S. and other countries continue to raise concerns about irregularities and inconsistent implementation of government procurement. The Philippines is not a signatory to the WTO Agreement on Government Procurement.

Data Storage

The Philippines has no data localization law and does not impose restrictions on cross-border data transfers. Sensitive personal information is protected under the 2012 Data Privacy Act, which provides penalties for unauthorized processing and improper disposal of data even if processed outside the Philippines.

6. Protection of Property Rights

Real Property

The Land Registration Authority (http://www.lra.gov.ph/) and the Register of Deeds, which facilitates the registration and transfer of property titles, are responsible for land administration. The Philippines recognizes and protects property rights, but the laws are weakly implemented. Multiple agencies are involved in property administration, which results in overlapping procedures for land valuation and titling processes. Property registration is tedious and costly. Record management is weak due to a lack of funds and trained personnel. Corruption is also prevalent among land administration personnel and the court system is slow to resolve land disputes. The Philippines ranked 112 out of 189 economies in terms of ease of property registration in the World Bank’s 2016 Ease of Doing Business report.

Intellectual Property Rights

The Philippines remains off the United States Trade Representative’s (USTR) Special 301 Watch List and has no physical markets listed in the 2015 Notorious Markets Report. However, intellectual property rights enforcement declined significantly in 2015. The total estimated value of seized counterfeit goods fell from USD302 million in 2014 to USD45 million in 2015. U.S. rights holders continue to report concerns about the availability of counterfeit items such as software, medicines, and clothing, as well as judicial inexperience in IPR enforcement.

The Intellectual Property (IP) Code provides the legal framework for IPR protection, particularly in the key areas of patents, trademarks, and copyright. The Intellectual Property Office (IPOPHL) (http://www.ipophil.gov.ph/) is the implementing agency of the IP Code. The Philippines generally has strong patent and trademark laws.

IPOPHL seeks to expand cooperation between the government and rights-holders to strengthen enforcement. IPOPHL’s IP Enforcement Office (IEO) reviews IPR-related complaints and conducts visits to establishments reportedly engaged in IPR-related violations. Stakeholders report the IEO has been effective in streamlining the process of filing complaints, coordinating among enforcement agencies, and reducing possibilities for corrupt officers to request bribes.

Enforcement actions, however, are often not followed by successful prosecutions. IP infringement is not considered a major crime in the Philippines and takes a lower priority in court proceedings. Many stakeholders opt for out-of-court settlements (such as ADR) rather than filing a lawsuit that may take years to resolve in Philippine courts. IPOPHL has jurisdiction to resolve certain disputes concerning alleged infringement and licensing through its Arbitration and Mediation Center. IPOPHIL reported that 42 percent of cases received in 2015 had successful mediation.

For additional information about treaty obligations and points of contact at local IP offices, see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Contact at Mission:

Brian Breuhaus, Economic Officer
Economic Section, U.S. Embassy Manila
Telephone: (+632) 301.2000
Email: ManilaEcon@state.gov

Local lawyers list:

http://manila.usembassy.gov/wwwha004.html

7. Transparency of the Regulatory System

In general, regulatory enforcement in the Philippines is weak, inconsistent, and unpredictable. Regulatory agencies 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 as burdensome and a source of frustration. To counter this, several government agencies have established express lanes or “one-stop shops” to reduce bureaucratic delays.

All proposed laws must undergo public comment and review. Concerned government agencies are required to craft implementing rules and regulations (IRRs) through public consultation hearings after laws are passed. New regulations must be published in newspapers or in the government’s official gazette before taking effect.

The Philippines follows the Philippine Financial Reporting Standards (PFRS), patterned after the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). The PFRS for SMEs is a reporting framework that applies specifically to small- and medium-sized enterprises.

The Philippine SEC requires an entity’s Chairman of the Board, CEO, and CFO to assume management responsibility and accountability for financial statements. Financial statements are examined by independent auditors in accordance with PFRS. Certain regulatory agencies, such as the Central Bank, SEC, Insurance Commission (http://www.insurance.gov.ph/), and Bureau of Internal Revenue (http://www.bir.gov.ph/) enforce separate accreditation rules.

8. Efficient Capital Markets and Portfolio Investment

The Philippines supports the entry of foreign portfolio investments, including into local and foreign-issued equities listed on the Philippine Stock Exchange (PSE) (http://www.pse.com.ph). There are minimal requirements for the divestment of portfolio investments and the subsequent repatriation of capital. Investments in publicly listed companies are subject to foreign ownership restrictions specified in the Constitution and other laws.

There are generally no restrictions on outward portfolio investments by Philippine residents, defined to include non-Filipino citizens who have been residing in the country for at least one year, foreign-controlled entities organized under Philippine laws, and branches/subsidiaries/affiliates of foreign enterprises organized under foreign laws operating in the country. However, foreign exchange purchases from banks and foreign exchange subsidiaries/affiliates above USD60 million per investor, or per fund per year, require prior Central Bank approval.

Although growing, the Philippine stock market, with 265 listed firms, lags behind many of its neighbors in size, product offerings, and trading activity. The PSE launched a new industry-leading trading system powered by NASDAQ’s X-stream trading technology in June 2015. The securities market is growing but remains dominated by government bills andbonds.

The Central Bank does not restrict payments and transfers for current transactions, subject to the submission of specified documentary requirements.

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 preferred sectors (e.g. agriculture, agrarian reform, and MSMEs). To help promote lending at competitive rates to MSMEs, the Philippines enacted the Credit Information System Act, which established the legal and regulatory framework for a centralized credit information system that collects and disseminates information about the track record of borrowers and the credit activities of entities in the financial system. The system is in place, but not yet operational.

Money and Banking System, Hostile Takeovers

The banking system is stable. The Central Bank has broadly revised its risk-based capital framework in step with adjustments in the Basel Committee on Banking Supervision capital adequacy rules. Capital adequacy ratios are well above the 8 percent international standard and the Central Bank’s 10 percent regulatory requirement. The non-performing loan ratio was at 2.1 percent as of end-2015. There is ample liquidity, with the liquid assets-to-deposits ratio estimated at 54 percent. Commercial banks constitute more than 90 percent of the total assets of the Philippine banking industry. The five largest commercial banks represented about 59 percent of the total resources of the commercial banking sector as of 2015.

Foreign residents and non-residents may open foreign exchange and local currency bank accounts. Although non-residents may open local currency deposit accounts, they are subject to conditions on the funding sources specified under Central Bank regulations.

Hostile takeovers are uncommon because most companies’ 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 decrease the number of hostile takeovers.

9. Competition from State-Owned Enterprises

State-owned enterprises, known in the Philippines as government-owned and controlled corporations (GOCC), are predominant in the power, transport, infrastructure, communications, land and water resources, social services, housing, and support services sectors. There were 147 operational GOCCs as of 2016 (see list at http://gcg.gov.ph/site/goccclassification). The Philippine government derives substantial revenues from GOCCs, which are required to remit at least 50 percent of their annual net earnings (e.g. cash, stock or property dividends) to the national government. In 2014, the total assets of all GOCCs were 6.07 trillion pesos (about USD133 billion) and remitted 24.37 billion pesos (about USD541 million) dividends to the national government.

Private and state-owned enterprises generally compete equally, with some clear exceptions. The National Food Authority (http://www.nfa.gov.ph/) first allowed the private sector to import rice in 2002. The Government Service Insurance System (GSIS) (http://www.gsis.gov.ph) is the only agency, with limited exceptions, allowed to provide coverage for the government’s insurance risks and interests, including those in BOT projects and privatized government corporations. Since the national government acts as the main guarantor of loans, stakeholders report GOCCs often have an advantage in getting financing from government financial institutions and some private banks. Also, most GOCCs are not statutorily independent, but attached to cabinet departments, and, therefore, subject to political interference.

OECD Guidelines on Corporate Governance of SOEs

The Philippines is not an OECD member country. The 2011 GOCC Governance Act was enacted to address problems experienced by GOCCs, including poor financial performance, weak governance structures, and unauthorized allowances. The law allows unrestricted access to GOCC account books and requires strict compliance with accounting and financial disclosure standards; establishes the power to privatize, abolish, or restructure GOCCs without legislative action; and sets performance standards and limits on compensation and allowances. The law also created the GOCC Commission on Governance (GCG) (http://gcg.gov.ph/) to formulate and implement GOCC policies. GOCC Board Members are limited to one-year terms, subject to reappointment based on a performance rating set by the GCG, with final approval by the President of the Philippines.

Sovereign Wealth Funds

The Philippines does not have sovereign wealth funds.

10. Responsible Business Conduct

Responsible Business Conduct (RBC) is regularly practiced in the Philippines, although no domestic laws require it. The Philippine Tax Code provides RBC-related incentives to corporations, such as tax exemptions and deductions. Various non-government organizations and business associations also promote RBC. The Philippine Business for Social Progress (PBSP) (http://www.pbsp.org.ph/) is the largest corporate-led social development foundation involved in advocating corporate citizenship practice in the Philippines. U.S. companies report strong and favorable responses to RBC programs among employees and within local communities.

OECD Guidelines for Multinational Enterprises

The Philippines is not an OECD member country. While the Philippine government strongly supports RBC practices among the business community, it has not endorsed the OECD Guidelines for Multinational Enterprises to stakeholders.

11. Political Violence

Terrorist groups and criminal gangs operate in some regions of the country. The Department of State publishes a consular information sheet and advises all Americans living in or visiting the Philippines to review this information periodically.

A travel warning is in place for those U.S. citizens contemplating travel to the Philippines:

http://travel.state.gov/content/passports/en/alertswarnings/philippines-travel-warning.html.

The Philippines’ most significant human rights problems continued to be extrajudicial killings and disappearances at the hands of security forces and private armed groups; a dysfunctional criminal justice system with poor cooperation between police and investigators; few prosecutions and lengthy procedural delays; and improving but still widespread official corruption and abuse of power.

The Philippines held a national election May 9, 2016 for president, vice president, half the seats in Senate, House of Representatives, provincial governorships and a range of local offices. The election was largely peaceful. Davao Mayor Rodrigo Duterte was elected president, and he will take office July 1.

The New People’s Army (NPA), the military arm of the Communist Party of the Philippines, is responsible in some parts of the country, mostly in Mindanao, for civil disturbances through assassinations of public officials, sporadic attacks on military and police forces, bombings, and other attacks. It frequently demands “revolutionary taxes” from local and, at times, foreign businesses, and attacks infrastructure such as power facilities and telecommunications towers.

Terrorist groups, including the Abu Sayaaf Group (ASG), Jema’ah Islamiyah (JI), and a Moro Islamic Liberation Front (MILF) splinter group called the Bangsamoro Islamic Freedom Fighters (BIFF), periodically attack civilian targets in Mindanao, kidnap civilians – including foreigners – for ransom, and engage in armed skirmishes with government security forces. These groups have mostly carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago. They are also capable of operating in some areas outside Sulu if they choose to do so.

12. Corruption

Corruption is a pervasive and long-standing problem in the Philippines. The country’s ranking in Transparency International’s Corruption Perceptions Index declined from 85 in 2014 to 95 in 2015. The World Economic Forum’s 2015-2016 Global Competitiveness Report ranked corruption as among the top problematic factors for doing business in the Philippines. Some key officials of the Aquino Administration were embattled with corruption issues despite making anti-corruption efforts a flagship program of the government. The Bureau of Customs, known widely as the most corrupt agency in the Philippines, is also a particular concern.

The Philippines continues to implement anti-corruption reforms outlined in the Philippine Development Plan 2011-2016. Its 2012-2016 Good Governance and Anti-Corruption Cluster Plan further identifies specific measures to curb corruption through greater transparency and accountability in government transactions. Several bills supporting anti-corruption efforts are currently pending in Congress. Government anti-corruption agencies routinely investigate public officials, but convictions by anti-corruption courts are limited, often appealed, and convictions can be overturned. Corruption charges have been filed against several high-profile public officials under the Aquino administration, with no convictions to date.

The Philippine Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and the Code of Ethical Conduct for Public Officials aim to combat corruption and related anti-competitive business practices. The Office of the Ombudsman (http://www.ombudsman.gov.ph/) investigates and prosecutes cases of alleged graft and corruption involving public officials. Cases against high-ranking officials are brought before the special anti-corruption court, the “Sandiganbayan”, while cases against low-ranking officials are filed before regional trial courts. The Office of the President can directly investigate and hear administrative cases involving presidential appointees in the executive branch and government-owned and controlled corporations. Soliciting, accepting and/or offering/giving a bribe are criminal offenses punishable by imprisonment, a fine, and/or disqualification from public office or business dealings with the government.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The Philippines ratified the United Nations Convention against Corruption in 2003. It is not a signatory to the OECD Convention on Combating Bribery.

Resources to Report Corruption

Contact at government agency:

Office of the Ombudsman
Ombudsman Building, Agham Road, North Triangle, Diliman
Quezon City, Philippines 1101
Telephone: (+632) 479.7300
Email: pab@ombudsman.gov.ph / http://www.ombudsman.gov.ph/

Contact at Watchdog Organization:

Transparency International Philippines, Inc.
4/F Libran House Building
144 Legazpi St. cor. V.A. Rufino and Bolanos Sts., Legazpi Village
Makati City, Philippines
Telephone: (+632) 869.9702
Email: info@transparency-ph.org / http://www.transparency-ph.org/

13. Bilateral Investment Agreements

Bilateral Taxation Treaties

The Philippines has neither a bilateral investment nor a free trade agreement with the United States. The Philippines has bilateral investment agreements with 38 countries: Argentina, Australia, Austria, Bangladesh, Belgium and Luxembourg, Cambodia, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Iran, Italy, Kuwait, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Republic of Korea, Romania, Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, and Vietnam.

The Philippines is a member of four ASEAN free trade agreements that include an investment chapter with trading partners Australia, New Zealand, Republic of Korea, and China. It also has an investment agreement with Japan under the Japan-Philippines Economic Partnership Agreement. The Philippines in 2016 was negotiating free trade agreements with both the European Free Trade Association (EFTA) and the European Union (EU).

Bilateral Taxation Treaties

U.S.–Philippines Tax Treaty

The Philippines has a tax treaty with the United States to avoid double taxation, provide procedures for resolving interpretative disputes, and enforce taxes in both countries. The treaty encourages bilateral trade and investment by allowing the exchange of capital, goods and services under clearly defined tax rules and, in some cases, preferential tax rates or tax exemptions.

U.S. recipients of royalty income qualify for preferential tax rates (currently 10 percent) under the most favored nation clause of the United States-Philippines tax treaty. A preferential tax treaty rate of 15 percent applies to dividends and interest income. An entity must obtain a tax treaty relief ruling from the Bureau of Internal Revenue (BIR) to qualify for preferential tax treaty rates and treatment; tax practitioners find the requirements burdensome. Although the Supreme Court ruled in October 2013 against stricter regulations issued by the BIR in 2010 disqualifying late filings from preferential tax rate receivers, issues reportedly can arise during tax audits. The volume of tax treaty relief applications also has resulted in processing delays, with most applications reportedly pending for over a year. Concerns also exist about inconsistent taxation rulings.

The BIR rules and regulations for tax accounting have not been fully harmonized with the Philippine Financial Reporting Standards. The disparities between reports for financial accounting and tax accounting purposes are common issues in tax assessments and are an irritant between taxpayers and tax collectors. The BIR requires taxpayers to maintain records reconciling figures presented in financial statements and income tax returns.

14. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) provides political risk insurance, debt financing, and private equity capital to support U.S. investors and their investments. It does so under a bilateral agreement with the Philippines.

OPIC can provide political risk insurance for currency inconvertibility, expropriation, and political violence for U.S. investments including equity, loans and loan guarantees, technical assistance, leases, and consigned inventory or equipment. OPIC debt financing in the form of direct loans and loan guarantees of up to US $250 million per project are also available for business investments in the Philippines. In addition, OPIC supports three private equity funds eligible to invest in projects in the Philippines. In all cases OPIC support is available only where sufficient or appropriate investment support is unavailable from local or other private sector financial institutions.

15. Labor

Managers of U.S.-based companies report that Philippine labor costs are low, and workers are highly motivated, with strong English language skills. In 2015, the Philippine labor force reached 38.8 million, with an employment rate of 94.3 percent and an unemployment rate of 5.7 percent. This figure includes employment in the informal sector and does not capture the substantial rates of underemployment in the country. Youths between the age of 15 and 24 made up nearly 50 percent of the unemployed. More than half of all employed persons worked in services, with 29 percent in agriculture and 16 percent in industry.

Multinational managers report that compensation packages in the Philippines tend to be comparable with neighboring countries. Regional Wage and Productivity Boards meet periodically in each of the country’s 16 administrative regions to determine minimum wages. The non-agricultural daily minimum wage in Metro Manila is approximately USD10.22, although some private sector workers receive less. Most regions set their minimum wage significantly lower than Metro Manila. Violation of minimum wage standards is common, especially non-payment of social security contributions, bonuses, and overtime. Philippine law also provides for a comprehensive set of occupational safety and health standards. The Department of Labor and Employment (DOLE) (http://www.dole.gov.ph/) has responsibility for safety inspection, but a shortage of inspectors has made enforcement difficult.

The Philippine Constitution enshrines the right of workers to form and join trade unions. The trend among firms of using temporary contract labor continues to grow. The DOLE Secretary has the authority to end strikes and mandate a settlement between parties in cases involving national interest. In 2013, the DOLE amended its rules concerning disputes, specifying industries vital to national interest: hospitals, electric power industry, water supply services (excluding small bottle suppliers), air traffic control, and other industries as recommended by the National Tripartite Industrial Peace Council (NTIPC). Economic zones often offer on-site labor centers to assist investors with recruitment. Although labor laws apply equally to economic zones, unions have noted some difficulty organizing inside the zones.

The Philippines is a signatory to all International Labor Organization (ILO) core conventions 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. Meanwhile, NTIPC monitors the application of international labor standards.

There have been some reports of forced labor in the Philippines in connection with human trafficking in the commercial sex, domestic service, agriculture, and fishing industries.

16. Foreign Trade Zones/Free Ports/Trade Facilitation

Businesses enjoy preferential tax treatment when located in export processing zones, free trade zones, and certain industrial estates, collectively known as economic zones, or “ecozones.” Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions. Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Selective Preshipment Advance Classification Scheme. While some ecozones are designated as both export processing zones and free trade zones, individual businesses within them are only permitted to receive incentives under a single category.

Philippine Economic Zone Authority (PEZA)

PEZA currently operates 326 ecozones, primarily in the manufacturing, IT, tourism, medical tourism, logistics/warehousing, and agro-industrial sectors. PEZA manages three government-owned export-processing zones (Mactan, Baguio, and Cavite) and administers incentives to enterprises located in other privately owned and operated ecozones. Any person, partnership, corporation, or business organization, regardless of nationality, control and/or ownership, may register as an export, IT, tourism, medical tourism, or agro-industrial enterprise with PEZA, provided that the enterprise physically locates its activity inside any of the proclaimed ecozones. PEZA administrators have earned a reputation for maintaining a clear and predictable investment environment within the zones of their authority.

Bases Conversion Development Authority (BCDA) and Subic Bay Metropolitan Authority (SBMA)

The ecozones located inside former U.S. military bases were established under the 1992 Bases Conversion and Development Act. The BCDA (http://www.bcda.gov.ph/) operates the Clark Freeport Zone (Angeles City, Pampanga), the John Hay Special Economic Zone (Baguio), the Poro Point Freeport Zone (La Union), and the Bataan Technology Park (Morong, Bataan). The SBMA operates the Subic Bay Freeport Zone (Subic Bay, Zambales). Clark and Subic have their own international airports, power plants, telecommunications networks, housing complexes, and tourist facilities. These ecozones are independent of PEZA, though they offer comparable incentives. Enterprises already receiving incentives under the BCDA law are disqualified to receive incentives and benefits offered by other laws.

Other Zones

The Phividec Industrial Estate (Misamis Oriental, Mindanao) is governed by the Phividec Industrial Authority (PIA) (http://www.piamo.gov.ph/pia/), a government-owned and controlled corporation. Two lesser-known ecozones are the Zamboanga City Economic Zone and Freeport (Zamboanga City, Mindanao) (http://www.zfa.gov.ph/) and the Cagayan Special Economic Zone and Freeport (Santa Ana, Cagayan Province) (http://ceza.gov.ph/). The incentives available to investors in these zones are similar to PEZA incentives but administered independently. In addition to offering export incentives, the Cagayan Economic Zone Authority (CEZA) is authorized to grant gaming licenses.

17. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

	Host Country Statistical source*		USG or international statistical source		USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data	Year	Amount	Year	Amount
Host Country Gross Domestic Product (GDP) ($M USD)	2015	$291,983	2014	$284,777	www.worldbank.org/en/country
Foreign Direct Investment	Host Country Statistical source*		USG or international statistical source		USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions)	2014	N/A	2014	$5,071	BEA data available at http://bea.gov/international/direct_investment_ multinational_companies_comprehensive_data.htm
Host country’s FDI in the United States ($M USD, stock positions)	2014	N/A	2014	N/A	BEA data available at http://bea.gov/international/direct_investment_ multinational_companies_comprehensive_data.htm
Total inbound stock of FDI as % host GDP	2014	20%	2014	12.5%	N/A

*Host Country Statistical Sources:

Table 3: Sources and Destination of FDI

The Philippine Central Bank does not publish or post inward and outward FDI stock broken down by country. Total stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund (IMF)’s Dissemination Standards Bulletin Board (DSBB) using BPM6 concept. As of 2014, inward direct investments (i.e. liabilities) are USD57,093 million, while outward direct investments (i.e. assets) are USD36,217 million.

Host Country Statistical Sources:

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment			Outward Direct Investment
Total Inward	35,665	100%	Total Outward	6,864	100%
Singapore	7,258	20%	China,P.R.: Hong Kong	1,330	19%
Japan	6,415	18%	British Virgin Islands	1,193	17%
Netherlands	5,272	15%	China,P.R.: Mainland	1,070	16%
United States	4,204	12%	Cayman Islands	891	13%
China,P.R.: Hong Kong	2,590	7%	United States	815	12%
"0" reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

The Philippine Central Bank disaggregates data into equity and debt securities but does not publish or post the stock of portfolio investments assets broken down by country. Total foreign portfolio investment stock figures are reported under the “International Investment Position” data that the Central Bank publishes and submits to the International Monetary Fund (IMF)’s Dissemination Standards Bulletin Board (DSBB) using BPM6 concept. As of 2014, outward portfolio investments (i.e. assets) are USD $10,553 million, of which USD $388 million is in equity securities and USD $10,165 million is in debt securities.

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total			Equity Securities			Total Debt Securities
All Countries	8,023	100%	All Countries	319	100%	All Countries	7,705	100%
United States	2,932	37%	United States	198	62%	United States	2,734	35%
Indonesia	1,535	19%	Luxembourg	59	19%	Indonesia	1,535	20%
China, P.R.: Mainland	678	8%	Netherlands	9	3%	China, P.R.: Mainland	673	9%
Cayman Islands	370	5%	China, P.R.: Hong Kong	8	2%	Cayman Islands	369	5%
China, P.R.: Hong Kong	234	3%	Australia	7	2%	China, P.R.: Hong Kong	226	3%

18. Contact for More Information

Brian Breuhaus
Economic Officer
U.S. Embassy Manila
1201 Roxas Boulevard, Manila
Telephone: (+632) 301.2000
Email: ManilaEcon@state.gov

ecoi.net description:: Annual report on investment climate, incl. information on legal and regulatory system, political violence, corruption, labour and economic issues, etc. (as of March 2016)

Country:: Philippines
Source:: USDOS – US Department of State (Author)
Published:: 5 July 2016
Original link:: http://www.state.gov/e/eb/rls/othr/ics/2016/eap/254309.htm
Document type:: Periodical Report
Language:: English
Document ID:: 1329578 (former ID 332458)