VZCZCXYZ0000
OO RUEHWEB

DE RUEHML #0085/01 0140854
ZNR UUUUU ZZH
O 140854Z JAN 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2857
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPCIM/CIMS NTDB WASHINGTON DC

UNCLAS MANILA 000085 
 
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 One 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 
 
Openness to Foreign Investment 
 
The Government of the Philippines (GRP) generally acknowledges the 
importance of foreign investment to economic development. The GRP 
established the Board of Investments (BOI) to assist foreign and 
domestic investors with regulatory requirements, incentives, and 
market guidance. Legal restrictions, regulatory inconsistency and 
lack of transparency, however, persist in many sectors. GRP 
regulatory authority remains weak or ambiguous. Foreign business 
representatives often cite corruption as a serious impediment to 
investment. Commercial disputes are often difficult to resolve 
quickly or satisfactorily in the understaffed, complex, and 
delay-prone judicial system. In addition, the GRP has not adequately 
addressed other key issues like inadequate public infrastructure and 
electric power rates. Despite these problems, many foreign investors 
in the Philippines maintain long-term commitments to the market and 
have prospered. 
 
The GRP is receptive to suggestions and criticisms from the private 
sector. Many foreign and domestic businesses work through industry 
associations to support economic reform. The American Chamber of 
Commerce of the Philippines promotes a socio-economic and 
philanthropic agenda, identifying investment opportunities and 
barriers, and offering possible solutions to problems. Through its 
Investment Climate Improvement Project, The Chamber pinpoints 
problems in the Philippine investment environment, assesses their 
relative importance to the investment climate and works toward 
finding and implementing practical and effective solutions. The 
Chamber has continued to produce advocacy papers, sometime jointly 
with other foreign chambers, on economic and political issues. 
 
-- GENERAL PROVISIONS FOR FOREIGN INVESTMENT: 
 
The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 
1996) liberalized the entry of foreign investment into the 
Philippines. Under the Act, foreign investors are generally treated 
like their domestic counterparts and must register with the 
Securities and Exchange Commission (SEC) (in the case of a 
corporation or partnership) or with the Department of Trade and 
Industry's Bureau of Trade Regulation and Consumer Protection (in 
the case of a sole proprietorship). Investors generally find this 
process to be slow, but nondiscriminatory. The GRP has some foreign 
investment incentive programs, which are described below in the 
section "Performance Requirements and Incentives." The Philippines 
does screen potential foreign investments. 
 
-- RESTRICTIONS ON FOREIGN INVESTMENT: 
 
The 1991 Foreign Investment Act provides for two "negative lists" 
(List A and list B), collectively called the "Foreign Investment 
Negative List," enumerating areas where foreign investment is 
restricted or limited. The restrictions stem from a constitutional 
provision, Section 10 of Article XII, which permits Congress to 
reserve to Philippine citizens certain areas of investment and 
Section 11 of the same article which limits foreign participation in 
public utilities or their operation. The Foreign Investment Act 
requires the Philippine government to update and publish the 
negative list every two years. The Philippine government is 
scheduled to release a new list (the eighth Negative List) in 
January 2009. These restrictions are viewed as a significant factor 
in the Philippines' poor record of attracting foreign investment 
relative to neighboring economies. Waivers are not available under 
the Negative List. 
 
List A enumerates investment sectors and activities for which 
foreign equity participation is restricted by mandate of the 
Constitution and specific laws. For example, the practice of 
licensed professions such as engineering, medicine, accountancy, 
environmental planning, and law are fully reserved for Philippine 
citizens. Other investment areas reserved for Filipinos include 
retail trade enterprises (with paid-up capital of less than $2.5 
million, or less than $250,000 for retailers of luxury goods); mass 
media (except recording); small-scale mining; private security; 
utilization of marine resources, including small-scale utilization 
of natural resources in rivers/lakes/bays & lagoons; and, 
manufacture of firecrackers and pyrotechnic devices. 
 
The Philippine government allows up to 20 percent foreign equity 
participation in private radio communications networks. Up to 25 
percent foreign ownership is allowed for enterprises engaged in 
employee recruitment and for public works construction and repair, 
with the exception of build-operate-transfer and foreign -funded or 
foreign-assisted projects (that is, projects that benefit from 
foreign aid, for which there is no upper limit on foreign 
ownership). Foreign ownership of 30 percent is allowed for 
advertising agencies, while 40 percent foreign participation is 
allowed in natural resource exploration, development, and 
utilization (although the President may authorize 100 percent 
foreign ownership for large scale projects). 
Foreign investors are limited to 40 percent equity in educational 
institutions, public utilities operation and management, commercial 
deep-sea fishing, GRP procurement contracts, adjustment companies, 
operations of build-operate-transfer projects in public utilities, 
and ownership of private lands. For rice and corn processing, 
foreign equity is limited to 40 percent, with the exception that 100 
percent foreign participation is allowed with the proviso that the 
foreign investor shall divest a minimum of 60 percent of their 
equity to Philippine nationals within a 30 year period from start of 
operation. 
Foreign ownership of retail trade enterprises with paid-up capital 
of $2.5 million but less than $7.5 million is now allowed, provided 
that the initial investment to establish a store is more than 
$830,000, or specializing in high end or luxury products, provided 
that the paid up capital per store is not less than $250,000. 
Enterprises engaged in financing and investment activities that are 
regulated by the Securities and Exchange Commission, including 
securities underwriting, are limited to 60 percent foreign 
ownership. 
 
List B enumerates areas where foreign ownership is restricted or 
limited (generally at 40 percent) for reasons of national security, 
defense, public health, safety, and morals. Sectors covered include 
explosives, firearms, military hardware, massage clinics, and 
gambling. This list also seeks to protect local small- and 
medium-sized firms by restricting foreign ownership to no more than 
40 percent in non-export firms capitalized at less than $200,000 and 
for domestic market enterprises that involve advanced technology or 
employ at least 50 direct employees with paid-in equity capital of 
less than $100,000. 
 
In addition to the restrictions noted in the "A" and "B" lists, 
firms with more than 40 percent foreign equity that qualify for 
Board of Investment incentives must divest to the 40 percent level 
within 30 years from registration date or within a longer period 
determined by the Board of Investments.  Foreign-controlled 
companies that export 100 percent of production are exempt from this 
requirement. As a general policy, the Department of Labor and 
Employment allows the employment of foreigners provided there are no 
qualified Philippine citizens who can fill the position. Board of 
Investment-registered companies may employ foreign nationals in 
supervisory, technical, or advisory positions for five years from 
registration, extendable for limited periods at the discretion of 
the Board of Investments. Top positions and elective officers of 
majority foreign-owned enterprises (i.e., president, general 
manager, and treasurer or their equivalents) are exempt from these 
restrictions. 
 
-- FINANCIAL SERVICES: 
 
The Act Liberalizing the Entry and Scope of Operations of Foreign 
Banks in the Philippines (R.A. 7721, 1994) limited to ten the number 
of new foreign banks that could open full-service branches in the 
Philippines. All ten licenses have been issued. These foreign banks 
are limited to six branch offices each. The four foreign banks 
operating in the Philippines prior to 1948 were also allowed to open 
up to six branches. Subject to certain criteria, R.A. 7721 allows a 
foreign banking institution up to 60 percent ownership in a locally 
incorporated subsidiary. As a general rule, a non-bank foreign 
investor or foreign bank that does not meet the criteria stipulated 
in R.A. 7721 and its implementing regulations, is limited to 40 
percent ownership.  For rural banks, only  foreign banks that meet 
the criteria stipulated in R.A. 7721 may invest; otherwise, foreign 
ownership is prohibited. 
 
A seven-year window under the General Banking Act (R..A. 8791, 
signed in May 2000) allowing foreign banks to acquire up to 100 
percent of one locally incorporated commercial or thrift bank (with 
no obligation to divest later) closed in June 2007. The Bangko 
Sentral ng Pilipinas (the central bank) imposed a moratorium on new 
bank licenses in September 1999 which remains in effect. 
Micro-finance institutions are exempted. Another limitation on 
foreign ownership is a requirement that majority Filipino-owned 
banks should, at all times, control at least 70 percent of total 
banking system resources. Cooperative banking remains completely 
closed to foreigners. 
 
The insurance industry was opened up to 100 percent foreign 
ownership in 1994. However, minimum capital requirements increase 
with the degree of foreign ownership. As a general rule, only the 
state-owned Government Service Insurance System may provide coverage 
for government-funded projects. Administrative Order 141, issued in 
August 1994, also required proponents and implementers of 
build-operate-transfer projects and privatized government 
corporations to secure their insurance and bonding requirements from 
the Government Service Insurance System, at least to the extent of 
the government's interests. 
Membership in the Philippine Stock Exchange is open to 
foreign-controlled stock brokerages incorporated under Philippine 
law. Securities underwriting companies not established under 
Philippine law may underwrite Philippine issues for foreign markets, 
but not for the domestic market. The Lending Company Regulation Act 
-- signed into law in May 2007 to establish a regulatory framework 
for credit enterprises that do not clearly fall under the scope of 
existing laws -- requires majority Philippine ownership for such 
enterprises. 
 
Although there are no foreign ownership restrictions regarding the 
acquisition of shares of mutual funds, current law restricts 
membership on boards of directors to Philippine citizens. 
 
-- LAND OWNERSHIP: 
 
The 1987 Constitution bans foreigners from owning land in the 
Philippines. The Investors' Lease Act (R.A. 7652, 1994) allows 
foreign companies investing in the Philippines to lease a contiguous 
land parcel of up to 1000 hectares for 50 years, renewable once for 
another 25 years, for a maximum 75 years. 
In mid-2003, Republic Act 9225 (Citizenship Retention and 
Re-Acquisition Act of 2003 or the Dual-Citizenship Act) allowed 
natural-born Filipinos who had undergone naturalization as citizens 
of a foreign country to re-acquire Philippine citizenship. The 
dual-citizenship holder is entitled to full rights of possession of 
land and property as a Philippine citizen. 
 
Deeds of ownership are difficult to establish, poorly reported, and 
poorly regulated. The court system is not able to settle cases in a 
timely manner. 
 
Foreigners are allowed 100 percent ownership of companies involved 
in large-scale exploration, development, and utilization of mineral 
resources. Total mineral production up to the third quarter of 2008, 
was valued at $1.1 billion, fell by about 27% from the same period 
in 2007 due mainly to flagging nickel prices. Some $500 million in 
investments were registered in 2007, which is about 60% of the 
capital invested in new mining projects since 2004. 
 
-- TRENDS AND PROBLEM AREAS: 
 
Philippine gross capital formation, estimated at between 15 and 16 
percent of Gross Domestic Product, ranks among the lowest in Asia. 
Net foreign direct investment improved yearly from less than $500 
million in 2003 to $2.9 billion in 2007, but contracted by more than 
50 percent year-on-year in 2008.  Overall, net FDI flows have 
averaged less than $1.6 billion annually since 2000, trailing many 
of the Philippines' neighbors.  The country captured less than 5 
percent of total net investment flows to Southeast Asia over the 
past eight years and accounts for less than 3.5 percent of the 
foreign investment stock in the region.  The Philippines will need 
to compete more aggressively for risk-averse capital and investments 
during a period of global economic uncertainty, but has recorded 
sliding global competitiveness and anti-corruption rankings. The 
American and other foreign chambers in the country also continue to 
urge the Philippine government to review legal barriers to trade and 
investment and further open up the Philippine economy. 
 
Trade infrastructure urgently needs attention, including Bureau of 
Customs operations, the nation's inter-island shipping, and port 
facilities.  Infrastructure spending remains subject to corrupt 
practices in allocation, procurement, contracting, and 
implementation, with a significant portion of the budget wasted. 
Anti-corruption vigilance and enforcement has been weak. Congestion 
and pollution in the country's major cities persist, most notably in 
Manila. 
Investors cite high electricity costs in the Philippines and power 
shortages as areas of concern. The GRP follows a policy of 
 
liberalizing the power sector through the sale of government 
generation and distribution assets and through support for 
alternative energy sources to reduce dependence on imported fuels. 
 
-- SANCTITY OF CONTRACTS: 
 
Questions over the general sanctity of contracts in the Philippines 
have clouded the investment climate. The judicial system has a weak 
track record in this area. A more detailed discussion of this issue 
is found in the section entitled "Dispute Settlement." 
 
-- STOCK EXCHANGE: 
 
The Philippines is generally open to foreign portfolio capital 
investment. A more detailed discussion is provided in the section 
entitled "Efficient Capital Markets and Portfolio Investment." 
 
-- PRIVATIZATION: 
 
The Privatization Management Office, under the Department of 
Finance, is the technical and implementing agency tasked to carry 
out the day-to-day government responsibilities of the privatization 
program. The Office serves as the marketing arm of the GRP for 
privatized assets, as well as government-owned and controlled 
corporations assigned for disposition, and is responsible for 
implementing the actual marketing/disposition program for government 
corporations, assets and idle properties. Apart from restrictions 
under the Foreign Investment Negative List (detailed above), there 
are no separate regulations that discriminate against foreign 
buyers. The bidding process appears to be transparent, though the 
Supreme Court has twice overturned high profile privatization 
transactions to foreign buyers. 
The Power Sector Assets and Liabilities Management Corporation is 
mandated to sell 70% of the government-owned National Power 
Corporation's generating assets.  Eight years after the signing of 
the Electric Power Industry Reform Act, the Philippine government 
will close the year 2008 having privatized more than 70% of the 
generation assets, one of the three necessary conditions needed to 
trigger the implementation of the open access and retail competition 
provisions of the electricity reform law. 
-- PUBLIC INFRASTRUCTURE: 
 
The Build-Operate-Transfer Law provides the legal framework for 
large infrastructure projects and other types of government 
contracts. Consistent with constitutional limitations on foreign 
investment in public utilities, franchises in railways/urban rail 
mass transit systems, electricity distribution, water distribution, 
and telephone systems must be awarded to enterprises that are at 
least 60 percent Philippine-owned. American firms have won contracts 
under the law and similar arrangements, mostly in the power 
generation sector. However, because of weaknesses in planning, 
preparing, tendering, and executing private sector infrastructure 
projects, lingering ambiguities about the level of guarantees and 
other support provided by the government, and other uncertainties 
pertaining to the general enabling framework for private sector 
participation in infrastructure, there is relatively low interest by 
foreign firms in pursuing projects in the Philippines at present. 
 
Conversion And Transfer Policies 
 
There are generally no restrictions on the full and immediate 
transfer of funds associated with foreign investments, foreign debt 
servicing, and the payment of royalties, lease payments, and similar 
fees. To obtain foreign exchange from the banking system for debt 
servicing, repatriation of capital, or remittance of profits, the 
foreign loans and foreign investment must be registered with the 
central bank. There are no restrictions on obtaining foreign 
exchange, and foreign exchange can be bought and sold outside the 
banking system. There is no mandatory foreign exchange surrender 
requirement imposed on export earners and other foreign exchange 
earners such as overseas workers. The exchange rate is not fixed and 
varies daily in response to market forces. Central bank intervention 
is targeted mainly at smoothing volatility. 
To curb foreign exchange speculation and volatility, the central 
bank requires a 90-day minimum holding period for foreign 
investments in peso time deposits to be eligible for registration. 
Pre-termination before the prescribed period would result in the 
cancellation of the registration and the investor will not be 
allowed to purchase foreign exchange from banks for repatriation and 
remittance purposes. However, the peso proceeds from the 
pre-terminated time deposits may be invested in other instruments 
and registered anew. 
 
Expropriation And Compensation 
Philippine law allows expropriation for public use or in the 
interest of national welfare or defense. In such cases, the GRP 
offers compensation for the affected property. Most expropriation 
cases involve acquisition for major public sector infrastructure 
projects. In the event of expropriation, foreign investors have the 
right under Philippine law to remit sums received as compensation in 
the currency in which the investment was originally made and at the 
exchange rate at the time of remittance. However, agreeing on a 
mutually acceptable price can be a protracted process. 
 
There are laws that mandate divestment (to 40 percent foreign 
equity) by foreign investors. The Omnibus Investment Code specifies 
a 30-year divestment period for non-pioneer foreign-owned companies 
that accept investment incentives. Pioneer enterprises are 
registered enterprises engaged in the manufacture and processing of 
products or raw materials that are not yet produced in the 
Philippines in large volume. Non-pioneer enterprises refer to all 
registered producer enterprises not included in the pioneer 
enterprise list. Companies that export 100 percent of production are 
exempt from the divestiture requirement. The Retail Trade 
Liberalization Act (R.A. 8762, 2000) requires retail establishments 
that are capitalized at $2.5 million or more and/or that do not 
specialize in luxury products to offer at least 30 percent of their 
equity to the public within eight years from the start of 
operations. 
 
Dispute Settlement - Investment Disputes 
 
Investment disputes are infrequent, but when they occur it can take 
years for parties to reach final settlement. A number of GRP actions 
in recent years have raised questions over the sanctity of contracts 
in the Philippines and have clouded the investment climate. Recent 
high-profile cases include the GRP-initiated review and 
renegotiation of contracts with independent power producers, court 
decisions voiding allegedly tainted and disadvantageous 
build-operate-transfer agreements and challenging the extent of 
foreign participation in large-scale natural resource exploration 
activities (such as mining). 
 
-- LEGAL SYSTEM: 
 
Many, perhaps most, foreign investors view the inefficiency and 
uncertainty of the judicial system as a significant disincentive for 
investment. Although the judiciary is constitutionally independent 
of the executive and legislative branches, it faces many problems, 
including understaffing and corruption. Critics also charge that 
judges rarely have a background in or thorough understanding of 
market economics or business, and that their decisions stray from 
the interpretation of law into policymaking. The GRP is pursuing 
judicial reform with support from foreign donors, including the U.S. 
Government, the Asian Development Bank, and the World Bank. 
The Philippines is a member of the International Center for the 
Settlement of Investment Disputes and of the Convention on the 
Recognition and Enforcement of Foreign Arbitrage Awards. However, 
Philippine courts have, in several cases involving U.S. and other 
foreign firms, shown a reluctance to abide by the arbitral process 
or its resulting decisions. Enforcing an arbitral award in the 
Philippines can take years. 
 
-- BANKRUPTCY LAW: 
 
The Securities Regulation Code of 2000 assigned jurisdiction over 
debt payment suspension and corporate rehabilitation cases to 
regional trial courts designated by the Supreme Court as commercial 
courts. The Supreme Court's "Interim Rules of Procedure on Corporate 
Rehabilitation," which took effect in December 2000,  provided for 
specific periods and deadlines for compliance with procedural 
requirements (including court approval/disapproval of a 
rehabilitation plan). However, in some cases judges reportedly have 
not enforced the deadlines stipulated in the rules. Investors have 
also expressed concern over a "cram down" provision that allows the 
courts to approve a rehabilitation plan despite opposition from 
majority creditors "if, in [the court's] judgment, the 
rehabilitation of the debtor is feasible and the opposition of the 
creditors manifestly unreasonable."  In December 2008, the Supreme 
Court approved revised "Rules of Procedure on Corporate 
Rehabilitation," which succeeded the 2000 "interim" rules effective 
January 16, 2009 (http://sc.judiciary.gov.ph/rulesofcourt/2008 / 
dec/A.M.NO.00-8-10-SC.pdf).  The more significant improvements 
include new provisions covering petitions for the approval of 
pre-negotiated rehabilitation plans carrying the endorsement of 
creditors holding at least two-thirds of the total liabilities of 
the debtor (including secured creditors holding more than 50 percent 
of the total secured claims and unsecured creditors holding more 
than 50 percent of unsecured claims); as well as  the inclusion of 
provisions on the recognition of foreign proceedings. 
Investors nevertheless strongly believe that reforms should go 
beyond procedural improvements and continue to push for 
comprehensive legislation to rationalize and update the Philippine 
bankruptcy/insolvency system. The current legal framework is a 
mixture of outdated and sometimes inconsistent laws and judicial 
pronouncements. 
 
Performance Requirements And Incentives 
 
Book I, Investment with Incentives, of the Omnibus Investment Code 
(1987) prescribes incentives available to qualified firms engaged in 
preferred sectors and geographic areas included in the annual 
Investment Priorities Plan, administered by the Board of 
Investments.  The 2008 Investment Priorities Plan presents a list of 
priority investment areas entitled to incentives into the following 
classes: preferred activities; mandatory inclusions; export 
activities; and the Autonomous Region in Muslim Mindanao List. 
 
Preferred activities include projects in agriculture/agribusiness 
and fishery, infrastructure, tourism, research and development, 
engineered products, and strategic activities.  Export activities 
cover the production and manufacture of non-traditional export 
products and services as identified under the Medium Term Philippine 
Development Plan.  Mandatory inclusions are activities that require 
inclusion in the Investment Priorities Plan as provided for under 
existing laws.  The Autonomous Region in Muslim Mindanao List covers 
priority activities independently identified by the Autonomous 
Region of Muslim Mindanao. 
 
Screening mechanisms for companies seeking investment incentives 
appear to be routine and nondiscriminatory, but the application 
process can be complicated. Incentives granted by the Board often 
depend on actions by other agencies, such as the Department of 
Finance. 
 
The basic incentives offered to all Board of Investment-registered 
companies include: 
 
* Income tax holiday: new projects with "pioneer" status receive a 
six-year income tax holiday, with the possibility of an extension to 
eight years. New projects with non-pioneer status receive a 
four-year holiday with a possible extension to six years. New or 
expansion projects in less developed areas, regardless of status, 
receive a six-year income tax holiday. Expansion and modernization 
projects receive three years (limited to incremental sales 
revenue/volume). Enterprises located in less developed areas may 
secure a bonus year if: the ratio of total imported and domestic 
capital equipment to number of workers for the project does not 
exceed $10,000 per worker; the net foreign exchange savings or 
earnings amount to at least $500,000 annually for the first three 
years of operation; or indigenous raw materials used are at least 50 
percent of the total cost of raw materials for the years prior to 
the extension unless the Board prescribes a higher percentage; 
 
* Additional deduction for wages: for the first five years after 
registration, an additional deduction from taxable income equivalent 
to 50 percent of the wages of additional direct- hire workers is 
allowed, provided the enterprise meets a prescribed capital 
equipment-to-labor ratio set by the Board. Firms that benefit from 
this incentive cannot simultaneously claim an income tax holiday; 
 
* Additional deduction from taxable income for necessary and major 
infrastructure works for companies located in areas with deficient 
infrastructure, public utilities, and other facilities: a company 
may deduct from its taxable income an amount equivalent to expenses 
incurred in the development of necessary and major infrastructure 
works. This deduction is not applicable for mining and 
forestry-related projects; 
 
* Tax and duty exemption on imported breeding stocks and genetic 
materials and/or tax credits on local purchases thereof (equivalent 
to the taxes and duties that would have been waived if imported), 
for purchases made within ten years from a company's registration 
with the Board or from the start of its commercial operation; 
 
* Exemption from wharf dues and any export tax, duty, impost, or 
fees on non-traditional export products made within ten years of a 
company's registration with the Board; 
 
* Tax and duty exemption on importation of required supplies/spare 
parts for consigned equipment by a registered enterprise with a 
bonded manufacturing warehouse; 
 
* Importation of consigned equipment for ten years from date of 
registration with the Board, subject to posting a re-export bond; 
 
* Employment of foreign nationals: enterprises may employ foreign 
nationals in supervisory, technical, or advisory positions for a 
period not exceeding five years from registration (extendible for 
limited periods at the discretion of the Board of Investment) under 
simplified visa requirements. The positions of president, general 
manager, and treasurer of foreign-owned registered enterprises are 
not subject to this limitation. GRP regulations require the training 
of Filipino understudies for the positions held by foreigners. If 
foreign controlled, registered firms may indefinitely retain 
foreigners in the positions of president, treasurer, general 
manager, or their equivalents; 
 
* Simplification of customs procedures for the importation of 
equipment, spare parts, raw materials and supplies and exports of 
processed products; 
 
* Operation of a bonded manufacturing / trading warehouse subject to 
customs regulations. 
 
* To encourage the regional dispersal of industries, Board of 
Investment-registered enterprises that locate in less developed 
areas, regardless of whether the companies are classified as 
"pioneer" or "non-pioneer," are automatically entitled to "pioneer" 
incentives. In addition, such enterprises can deduct from taxable 
income an amount equivalent to 100 percent of outlays for 
infrastructure works. They may also deduct 100 percent of 
incremental labor expenses from taxable income for the first five 
years from registration (double the rate allowed for 
Board-registered projects not located in less developed areas). 
 
Detailed information and guidelines on the Philippines' 2008 
Investment Priorities Plan can be obtained from the Board of 
Investments website, www.boi.gov.ph. 
 
-- INCENTIVES FOR EXPORTERS: 
 
An enterprise with more than 40 percent foreign equity that exports 
at least 70 percent of its production may still be entitled to 
incentives even if the activity is not listed in the Investment 
Priorities Plan. 
 
In addition to the general incentives available to Board of 
Investment- registered companies, a number of incentives provided 
under Book I of the Omnibus Investment Code apply specifically to 
registered export-oriented firms. These include: 
 
* Tax credit for taxes and duties paid on imported raw materials 
used in the processing of export products; 
 
* Exemption from taxes and duties on imported spare parts (applies 
to firms exporting at least 70 percent); and, 
 
* Access to customs bonded manufacturing warehouses. Firms that earn 
at least 50 percent of their revenues from exports may register for 
incentives under the Export Development Act (R.A. 7844, 1994). 
Exporters registered under the Act may also be eligible for Board of 
Investment incentives, provided the exporters are registered 
according to Board of Investment rules and regulations, and the 
exporter does not take advantage of the same or similar incentives 
twice. Incentives under the Act include a tax credit that ranges 
from 2.5 percent to 10 percent of annual incremental export revenue. 
 
 
The Board of Investments has been flexible in enforcing individual 
export targets, provided that exports as a percentage of total 
production do not fall below the minimum requirement (50 percent for 
local firms and 70 percent for foreign firms) needed to qualify for 
incentives. Board of Investment-registered foreign controlled firms 
that qualify for export incentives are subject to a 30 year 
divestment period, at the end of which at least 60 percent of equity 
must be Filipino-controlled. Foreign firms that export 100 percent 
of production are exempt from this divestment requirement. 
 
-- PERFORMANCE AND LOCAL SOURCING REQUIREMENTS: 
 
Performance requirements, usually based on an applicant's approved 
project proposal, are established for investors who are granted 
incentives, and vary from project to project. In general, the Board 
of Investments and the investor agree on yearly production schedules 
and, for export-oriented firms, export performance targets. The 
Board requires registered projects to maintain at least 25 percent 
of total project cost in the form of equity. 
The Board generally sets a 20 percent local value-added benchmark 
when screening applications. The Board is flexible in enforcing 
local value-added ratios to which registrants commit in their 
approved project proposal, as long as actual performance does not 
deviate significantly from other participants in the same activity. 
 
There are no local content requirements for cars, commercial 
vehicles, and motorcycles. However, to apply for registration with 
the Board of Investments and to qualify for incentives, new domestic 
and foreign assemblers must have a technical licensing agreement 
with the overseas completely-knocked-down suppliers to provide 
technical assistance and are required to invest at least $10 million 
in assembly operations and associated parts manufacture within one 
year to produce cars, $8 million for commercial vehicles, and $2 
million for motorcycles. 
 
Certain industries are subject to specific laws that require local 
sourcing: 
 
* The Retail Trade Act of 2000 requires local sourcing for the first 
ten years after the law's effective date. During that period, at 
least 30 percent of the cost of inventory of foreign retail firms 
not dealing exclusively in luxury goods, and 10 percent of the 
inventory of firms selling luxury products, should consist of 
products assembled or manufactured in the Philippines. 
 
-- INCENTIVES FOR REGIONAL HEADQUARTERS, REGIONAL OPERATING 
HEADQUARTERS, AND REGIONAL WAREHOUSES: 
 
Book III of the Omnibus Investment Code (1987, amended by R.A. 8756, 
1999) provides incentives for multinational enterprises to establish 
regional or area headquarters and regional operating headquarters in 
the Philippines. Regional headquarters are branches of multinational 
companies headquartered outside the Philippines that do not earn or 
derive income in the Philippines that act as supervisory, 
communications, or coordinating centers for their subsidiaries, 
affiliates, and branches in the region. The capital requirement for 
a regional headquarters is $50,000 annually to cover operatng 
expenses.  Regional operating headquarters are branches established 
in the Philippines by multiational companies that may derive income 
from thir affiliates in the region and in the Philippinesby 
providing services such as general administraion and planning; 
business planning and coordination; sourcing/procurement of raw 
materials and coponents; corporate finance advisory services; 
maketing control and sales promotion; training and prsonnel 
management; logistics services; researchand development services, 
and product development; technical support and maintenance; data 
processng and communication; and business development. 
Incentives to regional headquarters include exempton from income 
tax; exemption from branch profit remittance tax; exemption from 
value-added tax; sale or lease of goods and property and renditionof services to the regional headquarters subject t zero percent 
value-added tax; exemption from al kinds of local taxes, fees, or 
charges imposed y a localgovernment unit (except real property 
txes on land improvement and equipment); and value-dded tax and 
duty-free importation of training ad conference materials and 
equipment solely usedfor the headquarters functions. Regional 
operatig headquarters enjoy many of the same incentives asregional 
headquarters but, being income generating, are subject to the 
standard 12 percent value-added tax, applicable branch profits 
remittance tax, and a preferential 10 percent corporate income tax. 
Privileges extended to foreign executives working at these 
operationsinclude tax and duty-free importation of personal and 
household effects, multiple entry visas for the executive and 
his/her family, travel tax exemption, as well as exemption from 
various types of government-required clearances and from fees under 
immigration and alien registration laws. Eligible multinationals 
establishing regional operating headquarters must spend at least 
$200,000 yearly to cover operations. 
Multinationals establishing regional warehouses for the supply of 
spare parts, manufactured components, or raw materials for their 
foreign markets also enjoy incentives on imports that are 
re-exported. Re-exported imports are exempt from customs duties, 
internal revenue taxes, and local taxes. Imported merchandise 
intended for the Philippine market is subject to applicable duties 
and taxes. 
 
-- GOVERNMENT PROCUREMENT 
 
The 2003 Government Procurement Reform Act consolidated various 
procurement laws and issuances and called for simplified and 
standardized guidelines, procedures and forms across Philippine 
government agencies, government-controlled corporations, and local 
government units.  The Act provided for simpler prequalification 
 
procedures; more objective, nondiscretionary criteria in the 
selection process; the establishment of an electronic procurement 
system to serve as the single portal for government procurement 
activities; and other reforms to improve monitoring and transparency 
in public sector procurement.  However, implementation has been 
uneven and inconsistent and U.S. and other foreign companies 
continue to raise concerns about irregularities in government 
procurement. 
 
Philippine regulations require the public sector to procure goods, 
supplies, and consulting services from enterprises that are at least 
60 percent Filipino-owned and infrastructure services from 
enterprises with at least 75 percent Filipino interest, for 
locally-funded projects.  The Official Development Assistance Act 
authorizes the President to waive statutory preferences for local 
suppliers for foreign-funded projects/programs. Foreign donors have 
usually been able to implement their own procurement regulations 
under the provisions of the Act. The Build-Operate-Transfer Law 
(R.A. 6957 of July 1990, as amended in May 1994 by R.A. 7718) allows 
investors in projects and similar arrangements to engage the 
services of Philippine and/or foreign firms for the construction of 
infrastructure projects. 
 
Executive Order 278 provides preferential treatment for Filipino 
consultants, stipulating that, as much as possible, the GRP should 
fund consultancy services for its infrastructure projects with its 
own resources and use local expertise. When Filipino capability is 
determined to be insufficient, Filipino consultants may hire or work 
with foreigners but should be the lead consultants. Where foreign 
funding is indispensable, foreign consultants must enter into joint 
ventures with Filipinos. In packaging public sector infrastructure 
projects, Executive Order 278 also provides that financial and 
technical capabilities of Filipino contractors be taken into 
account. Multilateral donor agencies report that their implementing 
partners have thus far been able to comply with donors' internal 
procurement guidelines, despite Executive Order 278. However, 
because an executive order has the force of law, the specter of 
problems arising in the future remains. 
Executive Order 120, issued in August 1993, mandates a countertrade 
requirement for procurement by government agencies and 
government-owned or controlled corporations that entails the payment 
of at least $1 million in foreign currency. Implementing regulations 
set the level of countertrade obligations at a minimum of 50 percent 
of the import price and set penalties for nonperformance of 
countertrade obligations. 
 
The Philippines is not a signatory to the WTO Agreement on 
Government Procurement. 
 
-- PROPOSED CHANGES TO INVESTMENT INCENTIVES 
 
There are currently more than 140 laws involving incentives offered 
by various investment promotion agencies, special incentive laws 
targeted at specific sectors and industry groups, and those granted 
to government-owned and controlled corporations under their 
charters. The government has supported incentives rationalization 
and a number of bills have been filed in the Philippine Congress 
toward this end. However, the scope and details of reform remain 
contentious. Proposals to phase out income tax holidays have been 
especially controversial and are opposed by business. 
 
Right To Private Ownership And Establishment 
 
The GRP respects the private sector's right to acquire and dispose 
of properties or business interests, although acquisitions, mergers, 
and other combinations of business interests involving foreign 
equity must comply with foreign nationality caps specified in the 
Constitution and other laws. 
 
There are a few sectors closed to private enterprise, generally on 
grounds of security, health, or "public morals." The GRP controls 
and operates the country's casinos through the Philippine Amusement 
and Gaming Corporation and runs lotto/sweepstake operations through 
the Philippine Charity Sweepstakes Office. 
 
Private and government-owned firms generally compete equally, 
although there are exceptions. The National Food Authority, a GRP 
agency, has at times been the sole importer of rice, though in 2008, 
the GRP ceded about half of all rice importation to the private 
sector. In some cases, GRP procurement guidelines favor Philippine 
over foreign-controlled firms. As a general rule, only the 
state-owned Government Service Insurance System may provide 
insurance for government-funded projects and government funds are 
kept in government-owned banks. Administrative Order 141 requires 
proponents and implementers of build-operate-transfer projects, as 
well as partially privatized government corporations, to meet 
insurance and bonding requirements from the government insurance 
system, at least to the extent of the GRP's interests. 
 
The 1987 Constitution gives the GRP the authority to regulate or 
prohibit monopolies, and it also bans combinations in restraint of 
trade and unfair competition. However, there is no comprehensive 
competition law to implement this constitutional provision. 
 
Protection of Intellectual Property Rights 
 
Although the Philippines has established procedures and systems for 
registering claims on property (including intellectual property and 
chattel/mortgages), delays and uncertainty associated with a 
cumbersome court system continue to concern investors. 
 
-- INTELLECTUAL PROPERTY RIGHTS: 
 
The Philippines has made progress in recent years in protecting 
intellectual property rights, but enforcement continues to be 
problematic. U.S. manufacturers and suppliers should register their 
copyrights, trademarks, and patents with: 
 
The Intellectual Property Office (IPO) 
351 Sen. Gil J. Puyat Avenue 
Makati City 
fax: (63-2) 897-1724 / 752.5450 to 65 local 201 / 207 
email: dittb@ipophil.gov.ph; mail@ipophil.gov.ph 
website: http://www.ipophil.gov.ph/ 
 
Manufacturers and importers are also encouraged to register 
copyrights, trademarks, and patents with the Bureau of Customs to 
facilitate enforcement of rights. A list of Philippine lawyers and 
law firms specializing in intellectual property law is available 
from the U.S. Embassy Foreign Commercial Service 
(manila.office.box@mail.doc.gov ). 
 
In addition to its commitments under the World Trade Organization 
agreement on the Trade-Related Aspects of Intellectual Property 
Rights, the Philippines is a party to the following international 
intellectual property agreements:  the Paris Convention for the 
Protection of Industrial Property, the Berne Convention for the 
Protection of Literary and Artistic Works, the Budapest Treaty on 
the International Recognition of the Deposit of Microorganisms for 
the Purposes of Patent Procedure, the Patent Cooperation Treaty; 
and the Rome Convention for the Protection of Performers, Producers 
of Phonograms and Broadcasting Organizations. Although the 
Philippines is a member of the World Intellectual Property 
Organization, and has acceded to the WIPO Copyright Treaty and the 
WIPO Performances and Phonograms Treaty (known collectively as the 
WIPO Internet Treaties), which took effect in October 2002, the 
Philippine government has not yet enacted necessary amendments to 
its Intellectual Property Code that would fully implement the two 
Internet Treaties into domestic law. 
 
The Intellectual Property Code (R.A. 8293, 1997) provides the legal 
framework for intellectual property rights protection in the 
Philippines. Key provisions of the Intellectual Property Code are: 
 
--Patents: the Philippines uses a first-to-file system, with a 
patent term of 20 years from date of filing, and provides for the 
patentability of microorganisms and non-biological and 
microbiological processes. The holder of a patent is guaranteed an 
additional right of exclusive importation of his invention. A 
compulsory license may be granted in some circumstances, including 
if the patented invention is not being used in the Philippines 
without satisfactory reason, although importation of the patented 
article constitutes using the patent; 
 
* Industrial Designs: the registration of a qualifying industrial 
design is for a period of five years from the filing date of the 
application. The registration of an industrial design may be renewed 
for not more than two consecutive periods of five years each; 
 
* Trademarks, service marks, and trade names: prior use of a 
trademark in the Philippines is not a requirement for filing a 
trademark application. Well-known marks need not be in actual use in 
Philippine commerce or registered with the Bureau of Patents, 
Trademarks, and Technology Transfer. A Certificate of Registration 
shall remain in force for ten years. It may be renewed for periods 
of ten years at its expiration upon request and payment of a 
prescribed fee; 
 
* Copyright: computer software is protected as a literary work. 
Exclusive rental rights may be offered in several categories of 
works and sound recordings. Terms of protection for sound 
recordings, audiovisual works, and newspapers and periodicals are 
compatible with the Agreement on the Trade-Related Aspects of 
Intellectual Property Rights; 
 
* Performers Rights: "the qualifying rights of a performer . . . 
shall be maintained and exercised fifty years after his death." 
However, ambiguities exist concerning exclusive rights for copyright 
owners over broadcast and retransmission; 
 
* Trade secrets: while there are no codified rules on the protection 
of trade secrets, GRP officials assert that existing civil and 
criminal statutes protect trade secrets and confidential 
information. 
 
The Electronic Commerce Act (R.A. 8792, 2000) extends the legal 
framework established by the Intellectual Property Code to the 
internet. Other important laws defining intellectual property rights 
in the Philippines are the Plant Variety Protection Act (R.A. 9168, 
2002), which provides plant breeders intellectual property rights 
consistent with the 1991 Union for the Protection of New Varieties 
of Plants Convention, and the Integrated Circuit Act (R.A. 9150, 
2001), which provides WTO-consistent protection for the layout 
designs of integrated circuits. 
 
In 2008, the Philippine Congress passed the Cheaper Medicines Act 
(RA 9502), which includes amendments to the Intellectual Property 
Code with respect to patent registration for pharmaceutical 
products.  The Act places limitations on patent protection for 
pharmaceuticals, and significantly liberalizes the grounds for the 
compulsory licensing of pharmaceuticals. 
Deficiencies in the Intellectual Property Code and other IP laws 
remain a source of concern. Weaknesses include unclear provisions 
relating to the rights of copyright owners over broadcast, 
rebroadcast, cable retransmission, or satellite retransmission of 
their works; and, burdensome restrictions affecting contracts to 
license software and other technology. 
 
-- STATUS OF IPR ENFORCEMENT: 
 
Significant problems remain in ensuring the consistent and effective 
protection of intellectual property rights. There are serious 
concerns regarding lack of consistent, effective and sustained IP 
enforcement in the Philippines.  U.S. distributors continued to 
report high levels of pirated optical discs of cinematographic, 
musical works, computer games, and business software as well as 
widespread unauthorized transmissions of motion pictures and other 
programming on cable television systems. Trademark infringement in a 
variety of product lines is also widespread, with counterfeit 
merchandise openly available. 
 
The Optical Media Act (Republic Act No. 9239 of 2004) regulates the 
manufacture, mastering, replication, importation and exportation of 
optical media. The implementing rules and regulations were signed in 
February 2005, establishing the Optical Media Board (formerly the 
Videogram Regulatory Board). The Board spearheads enforcement of the 
Optical Media Act and has jurisdiction over all optical media, 
regardless of content. 
 
Although the Philippines deserves credit for passing the Optical 
Media Act, creating the Optical Media Board and stepping up raids, 
the Philippine government continues to lack aggressive prosecution 
of intellectual property rights violators, owing largely to problems 
that affect the judicial system as a whole. In general, Philippine 
government enforcement agencies are most responsive to those 
copyright owners who actively work with them to target infringement. 
Enforcement agencies generally will not proactively target 
infringement unless the copyright owner brings it to their attention 
and works with them on surveillance and enforcement actions. Joint 
efforts between the private sector and the National Bureau of 
Investigation and the Optical Media Board have resulted in some 
successful enforcement actions. The Philippine government has tried 
several different judicial approaches to handling intellectual 
property cases, but none have worked well due to lack of resources 
and heavy non-IP workloads. In addition, intellectual property cases 
are not considered major crimes and take a lower precedence in court 
proceedings. Because of the prospect that court action will be 
lengthy, many cases are settled out of court. There were three 
convictions in 2008, only one in 2007, nineteen convictions in 2006, 
and twenty in 2005.  Since 2001, there have been sixty-four 
convictions for IP violations.  Convicted intellectual property 
violators rarely spend time in jail, since the six year penalty 
enables them to apply for probation immediately under Philippine 
law. 
Under the IP Code, the Intellectual Property Office has jurisdiction 
to resolve certain disputes concerning alleged infringement and 
licensing. However, the Intellectual Property Office's 
administrative complaint mechanisms appear to be no faster at 
resolving cases than the judicial system. Other agencies with IP 
enforcement responsibilities include: the Department of Justice; 
National Bureau of Investigation; Optical Media Board (for piracy 
involving any form of media on optical discs); the Bureau of 
Customs; and the National Telecommunications Commission (for piracy 
involving satellite signals and cable programming). 
 
In 2006, the United States moved the Philippines from the Special 
301 Priority Watch List (where it had been listed for 5 consecutive 
years) to the Watch List under Section 301 of U.S. trade law to 
acknowledge steps the Philippines has taken to strengthen its 
intellectual property regime.  Following the announcement, the 
Philippine government pledged continued momentum and increased 
effort on intellectual property rights initiatives.  However, 
counterfeit goods such as brand name and designer clothing, 
handbags, cigarettes, and other consumer goods remain widely 
available.  Optical media piracy, including piracy of digital video 
discs and compact discs, also continues to be a problem.  In 
addition, there are widespread unauthorized transmissions of motion 
pictures and other programming on cable television systems.  The 
clandestine recording of movies in cinemas, piracy of books, cable 
television, and computer software also remain significant. 
 
Transparency Of The Regulatory System 
 
Agencies are required to develop regulations via a public 
consultation process, often involving public hearings. In most 
cases, this ensures some transparency in the process of developing 
regulations. New regulations must be published in national 
newspapers of general circulation or in the GRP's Official Gazette 
before taking effect. Enforcement of regulations is often weak and 
inconsistent. Regulatory agencies in the Philippines are generally 
not statutorily independent, but are attached to cabinet departments 
or the Office of the President. Many U.S. investors find business 
registration, customs, immigration, and visa procedures burdensome 
and a source of frustration. Some agencies (such as the Securities 
and Exchange Commission, Board of Investment, and the Department of 
Foreign Affairs) have established express lanes or "one-stop shops" 
to reduce bureaucratic delays, with varying degrees of success. 
 
Kenney