VZCZCXYZ0000
OO RUEHWEB

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

UNCLAS MANILA 000086 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND EAP/MTS 
STATE PASS USTR 
STATE PASS EXIM 
USDOC FOR 4430/ITA/MAC/MHOGUE 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ELAB ETRD KTDB PGOV OPIC USTR RP
SUBJECT: Philippines: 2009 Investment Climate Statement, Part One 
 
REF: 08 STATE 123907 
 
¶1.  Part Two of PostQs 2009 Investment Climate Statement is 
transmitted in paragraph 2, in accordance with reftel instructions. 
 
 
¶2.  Begin text: 
 
2009 Investment Climate Statement -- The Philippines 
 
Efficient Capital Markets And Portfolio Investment 
 
The Philippines is open to foreign portfolio capital investment. 
Foreigners may purchase publicly or privately issued domestic 
securities, invest in money market instruments, and open 
peso-denominated savings and time deposits. Portfolio investments in 
publicly listed firms are, like direct equity investments, 
constrained by foreign ownership ceilings stipulated under the 
Constitution and other laws. Although growing, the securities market 
remains small and underdeveloped, and is not able to offer investors 
a wide range of choices. Except for a few large firms, long-term 
bonds and commercial paper are not yet major sources of capital. 
Secondary trading of publicly-listed stocks is exempt from 
documentary stamp tax through March 2009. 
 
Some firms classify their publicly listed shares as "A" (exclusively 
for Filipinos) and/or "B" (for foreigners and Filipinos). While the 
practice of classifying shares was common until the early 1990s, 
most newly-listed companies no longer classify shares into "A" 
and/or "B," because the Foreign Investment Act has since lifted the 
40 percent general ceiling previously imposed on foreign 
investments. However, listed firms engaged in activities where 
foreign investment caps still apply (i.e., banking, utilities, real 
estate, exploration of natural resources, etc.) find the 
classification convenient for compliance purposes. 
 
The equities market is thin (less than 250 listed firms), 
concentrated, and prone to volatility. During 2008, the ten most 
actively traded companies accounted for more than 50 percent of 
trading value and about 40 percent of domestic market 
capitalization. To encourage publicly listed companies to widen 
their investor base, the Philippine Stock Exchange (PSE) introduced 
reforms in April 2006 to include trading activity and free float 
criteria in the selection of companies comprising the stock exchange 
index. The 30 companies included in the benchmark index are subject 
to review every six months. Hostile takeovers are not common, 
because most company shares are not publicly listed and controlling 
interest tends to remain with a small group of parties. 
Cross-ownership and interlocking directorates among listed companies 
also lessen the likelihood of hostile takeovers. 
 
The July 2000 passage of the Securities Regulation Code strengthened 
investor protection by codifying the full disclosure approach to the 
regulation of public offerings, tightening rules on insider trading, 
segregating broker-dealer functions, outlining rules on mandatory 
tender offer requirements, significantly increasing sanctions for 
violations of securities laws and regulations, and mandating steps 
to improve the internal management of the stock exchange and future 
securities exchanges. However, prosecution of stock market 
irregularities is subject to the usual delays and uncertainties of 
the Philippine legal system.  To improve transparency and minimize 
conflict of interest, the Code also prohibits any one industry group 
(including brokers) from controlling more than 20 percent of the 
stock exchange's voting rights.  The Philippine Stock Exchange has 
yet to fully comply with the 20 percent industry limit, although it 
has taken steps to reduce brokers' ownership from 100 percent to 41% 
of the stock exchange. 
 
-- CREDIT POLICIES: 
 
Credit is generally granted on market terms and foreign firms are 
able to obtain credit from the domestic market. However, some laws 
require financial institutions to set aside loans for certain 
preferred sectors, which may translate into increased costs and/or 
credit risks. The Agri-Agra Law (P.D. 717, as amended) requires 
banks to set aside 25 percent of loanable funds for agricultural 
credit in general, with at least 10 percent earmarked for programs 
such as improving the productivity of farmers to whom land has been 
distributed under agrarian reform programs. To facilitate 
compliance, alternative modes of meeting the agri-agra lending 
requirement include low-cost housing, educational and medical 
developmental loans, and investments in eligible government 
securities. R.A. 9501, the Magna Carta for Micro, Small and Medium 
Enterprises requires banks to set aside ten percent of their loans 
for small-business borrowers. While most domestic banks are able to 
comply with these targeted-lending requirements, foreign banks find 
mandatory policies more burdensome for a number of reasons, 
including their lack of knowledge and experience with these sectors, 
their constrained branch networks, and constitutional restrictions 
on ownership of land by foreigners which impede their ability to 
enforce security rights over land accepted as collateral. 
In August 2006, President Arroyo signed Executive Order 558 (further 
expounded by E.O. 558-A), which allows all government agencies to 
provide credit services regardless of their mandated functions. E.O. 
558 repealed E.O. 138 (issued in August 1999), which rationalized 
and limited the government's role in credit extension activities to 
make way for a more market-driven, private sector role in 
micro-finance.  The Asian Development Bank, the World Bank, and 
Philippine micro-finance industry players have expressed serious 
concern that direct lending by non-financial agencies could lead to 
government losses caused by corruption and unsound lending 
decisions.  Although E.O. 558 has not been repealed, implementation 
appears to have been limited thus far to micro-finance lending 
programs of the Department of Social Welfare and Development 
targeted to the country's ten poorest provinces. 
 
-- BANKING SYSTEM: 
 
The Philippine banking system is dominated by 38 commercial banks 
that account for nearly 90 percent of total banking system 
resources. As of the end of September 2008, the five largest 
commercial banks had estimated total assets of PHP 2,442 billion 
(equivalent to about $52 billion), representing 52 percent of total 
commercial banking system resources. The central bank has worked to 
strengthen banks' capital base, reporting requirements, corporate 
governance, and risk management systems. Central bank-mandated 
phased increases in minimum capitalization requirements and 
regulatory incentives for mergers have prompted several banks to 
seek partners. All entities under Central bank supervision are 
required to adopt Philippine Financial Reporting and Accounting 
Standards -- patterned after International Financial Reporting and 
Accounting Standards. 
There has been progress in disposing of non-performing assets since 
President Arroyo signed the Special Purpose Vehicle law in January 
2003, which provided fiscal and regulatory incentives to encourage 
the resolution of non-performing assets through their sale to 
private asset management companies. Banks were given until May 2008 
to conclude notarized agreements to sell their non-performing loans 
and foreclosed assets to qualify for incentives under the second 
phase of the law.  Total banking sector non-performing assets sold 
under the Special Purpose Vehicle law amounted to PHP 152.9 billion 
($3.1 billion),, equivalent to almost 30 percent of eligible 
mid-2002 non-performing assets. Non-performing loans accounted for 
almost 70 percent of total assets sold. Non-performing loan and 
non-performing asset ratios of commercial banks - which peaked in 
October 2001 at 18.3 percent and 14.6 percent respectively - were 
estimated at 4.0 percent and 4.9 percent, as of the end of September 
2008, back to their pre-Asian crisis levels. 
 
Commercial banks' published average capital adequacy ratio (15.5 
percent on consolidated basis as of end-June 2008, computed 
according to the Basel 2 Risk-based Capital Adequacy framework) 
remains above the central bank's 10 percent statutory limit and the 
8 percent internationally accepted benchmark. Philippine banks have 
limited direct exposure to investment products issued by troubled 
financial institutions overseas (estimated at less than 2 percent of 
total banking system resources).. 
The General Banking Law of 2000 paved the way for the Philippine 
banking system to phase in internationally accepted, risk-based 
capital adequacy standards. In 2007 a revised capital adequacy 
framework (Basel 2) was adopted. It expands coverage from credit and 
market risks to operational risks and enhances the risk-weighting 
framework. Other important provisions of the General Banking Law are 
geared towards strengthening transparency, bank supervision, and 
bank management. Remaining impediments to more effective bank 
supervision and timely intervention include stringent bank secrecy 
laws, obstacles preventing regulators from examining banks at will, 
and inadequate liability protection for central bank officials and 
bank examiners. 
 
The Paris-based Financial Action Task Force continues to monitor 
implementation of the Philippines' Anti-Money Laundering Act through 
the Anti-Money Laundering Council to ensure that the Philippines 
sustains progress. Foreign exchange dealers and remittance agents 
are required to register with the central bank in order to operate 
and must comply with various central bank regulations and 
requirements related to the implementation of the Philippines' 
anti-money laundering law. The Egmont Group, the international 
network of financial intelligence units, admitted the Philippines to 
its membership in June 2005.  The Financial Action Task Force Asia 
Pacific Group conducted a comprehensive peer review of the 
Philippines in September 2008.  Some of the more important Asia 
Pacific Group concerns include the exclusion of casinos from the 
scope of current anti-money laundering legislation and 2008 court 
rulings that inhibit and complicate investigations of fraud and 
corruption by prohibiting ex-parte inquiries regarding suspicious 
accounts due to bank privacy laws.  The Philippine legislature is 
considering amendments to the Anti-Money Laundering Act of 2001 to 
address these issues. 
 
-- ACCOUNTING STANDARDS: 
 
The Philippine Securities and Exchange Commission and the Bangko 
Sentral ng Pilipinas  agreed to the full adoption of International 
Accounting Standards Board-prescribed standards starting in 2005. 
These standards are now embodied in the Philippine Financial 
Reporting Standards and Philippine Accounting Standards. However, 
some companies/industries have been granted temporary exceptions. 
For example, a central bank circular to implement the Special 
Purpose Vehicle Act deviates from generally accepted accounting 
principles by allowing banks to book losses arising from the sale of 
non-performing assets on a staggered basis. To encourage 
consolidation, the central bank has also allowed merging 
institutions to stagger provisions for bad debts. "Non-publicly 
accountable entities" (i.e., small and medium enterprises and firms 
that are not publicly listed, that are not debt/securities issuers, 
that are not engaged in fiduciary activities, or that are not public 
utilities or essential public service providers) are exempt from the 
new accounting and financial reporting standards, pending issuance 
by the International Accounting Standards Board of a separate 
accounting standard for small and medium enterprises. 
The Philippine Financial Reporting Standards Council approved the 
immediate adoption of amendments issued by the International 
Accounting Standards Board in October 2008 covering the accounting 
treatment and disclosure of financial assets.  The Board amendments 
provided guidelines for the reclassification of certain 
non-derivative financial assets from categories recorded at fair 
market value to categories recorded at amortized cost, purposely to 
help promote confidence in financial markets by tempering the 
potentially sharp deterioration in balance sheets and incomes from 
the current global financial turbulence.  The Philippine Securities 
and Exchange Commission and the central bank have issued circulars 
to implement the amendments.  As additional regulatory relief, the 
central bank also allowed the reclassification, until mid-November 
2008, of credit link notes and similar products backed by Republic 
of the Philippines bonds. 
 
The Philippine Securities and Exchange Commission requires a firm's 
Chairman of the Board, Chief Executive Officer, and Chief Financial 
Officer to assume management responsibility and accountability for 
financial statements. Current rules also require the rotation and 
accreditation of external auditors of companies imbued with public 
interest (i.e., publicly listed firms, investment houses, stock 
brokerages, and other secondary licensees of the Securities and 
Exchange Commission). The Securities and Exchange Commission's 
"Guidelines on Accreditation and Reportorial Requirements of 
External Auditors of Public Companies" instituted a system of 
accreditation for external auditors of firms that issue securities 
to the investing public. It also requires client-companies to 
disclose to the Securities and Exchange Commission any material 
findings (i.e., fraud or error, losses or potential losses 
aggregating 10 percent or more of company assets, and indications of 
company insolvency) within five days of receipt of the 
external-audit findings. The external auditor is required to make 
the disclosure to the  Securities and Exchange Commission within 30 
business days from submitting its audit report to the client-company 
should the latter fail to comply with this reporting requirement. 
The regulations require client-auditor contracts to contain a 
specific provision protecting the external auditor from civil, 
criminal, or disciplinary proceedings for disclosing material 
findings to the  Securities and Exchange Commission. They also 
require accredited external auditors to accumulate continuing 
education credits and to comply with certain operational 
requirements such as quality assurance procedures and the 
communication of critical and alternative accounting policies and 
practices. In 2007, the Auditing and Assurance Standards Council 
issued new standards on quality control, auditing, review, assurance 
and related services which outline additional measures and policies 
for compliance by external auditors to improve independence, 
objectivity, and completeness of audit work. 
 
A number of the larger local accountancy firms are affiliated with 
international accounting firms, including KPMG, 
PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, BDO 
Seidman, and Grant Thornton. 
 
Political Violence 
 
Terrorist groups and criminal gangs operate in some regions of the 
country. The Department of State publishes a consular information 
sheet on the internet at htttp://travel.state.gov and advises all 
Americans living in or visiting the Philippines to review this 
information periodically. The Department of State has issued a 
travel warning to U.S. citizens contemplating travel to the 
Philippines. The full current text of the warning is available at 
http://travel.state.gov/ travel/cis_pa_tw/ tw/tw_2190.html. The 
Department strongly encourages Americans in the Philippines to 
register with the Consular Section of the U.S. Embassy in Manila 
through the State Department's travel registration website, 
https://travelregistration.state.gov/. 
 
Arbitrary, unlawful, and extrajudicial killings by a variety of 
actors continue to be a problem. Following increased domestic and 
international scrutiny, the number of killings and disappearances 
continue to drop significantly from a peak in 2006. Despite 
government efforts to investigate and prosecute these cases, many 
have gone unsolved and unpunished. The 2007 congressional and local 
elections were generally free and fair but were marred by violence 
and allegations of vote buying and electoral fraud. On August 11, 
more than 1.31 million of the 1.52 million registered voters from 
the six provinces comprising the Autonomous Region in Muslim 
Mindanao elected a Regional Governor, a Regional Vice Governor, and 
Regional Legislative District Assemblymen. The Asian Network for 
Free Elections Foundation noted the government's commitment to make 
the elections as free and fair as possible. However, election 
monitors documented allegations of fraud and irregularities in some 
localities. 
 
Members of the insurgent group Moro Islamic Liberation Front 
attacked villages in central Mindanao and killed dozens of civilians 
in August 2008 after the Supreme Court placed a temporary 
restraining order on the signing of a preliminary peace accord. The 
ensuing fighting between government and insurgent forces has led to 
both combat and civilian deaths and the displacement of thousands of 
people. While the parties have not yet agreed on a new roadmap for 
future negotiations, the government has announced its commitment to 
resume talks. 
 
The New People's Army, the military arm of the Communist Party of 
the Philippines, remains a threat to the long-term stability of the 
country. It has not targeted foreigners in recent years, but could 
threaten U.S. citizens engaged in business or property management 
activities. It is responsible for general civil disturbance through 
assassinations of public officials, bombings, and other tactics. IQ 
frequently demands "revolutionary taxes" from local and, at times, 
foreign businesses and business people, and sometimes attacks 
infrastructure such as power facilities, telecommunications towers, 
and bridges to enforce its demands. The National Democratic Front, 
the Communist Party's political arm, has engaged in intermittent but 
generally non-productive peace talks with the Philippine 
government. 
 
Other terrorist groups, including the Abu Sayaaf Group and Jema'ah 
Islamiyah, periodically attack civilian targets in Mindanao or 
kidnap civilians for ransom. 
 
The Philippines faces no major external threat and enjoys strong 
relations with the United States. The United States and the 
Philippines are allies under the 1951 Mutual Defense Treaty, and the 
U.S. designated the Philippines as a major non-North Atlantic Treaty 
Organization ally in 2003. The Visiting Forces Agreement, ratified 
in 1999, provides a framework for US-Philippine military 
cooperation, including exercises, ship visits, and counter-terrorism 
cooperation. 
 
Corruption 
 
Corruption is a pervasive and longstanding problem in the 
Philippines. The Philippines is not a signatory of the Organization 
for Economic Cooperation and Development Convention on Combating 
Bribery. The Philippines signed the UN Convention against Corruption 
in 2003, which the Senate ratified in November 2006. 
 
There are a number of laws and mechanisms directed at combating 
corruption and related anti-competitive business practices. These 
include the Philippine Revised Penal Code, Anti-Graft and Corrupt 
Practices Act, and Code of Ethical Conduct for Public Officials. The 
Office of the Ombudsman investigates and prosecutes cases of alleged 
graft and corruption involving public officials. The Sandiganbayan 
(anti-graft court) prosecutes and adjudicates cases filed by the 
Ombudsman. There is also a Presidential Anti-Graft Commission to 
assist the President in coordinating, monitoring, and enhancing the 
government's anti-corruption efforts and to investigate and hear 
administrative cases involving presidential appointees in the 
executive branch and government-owned and controlled corporations. 
Soliciting/accepting and offering/giving a bribe are criminal 
offenses, punishable with imprisonment (6-15 years), a fine, and/or 
disqualification from public office or business dealings with the 
government. However, enforcement of anti-corruption laws has been 
weak and inconsistent. 
 
The Philippine government has worked in recent years to reinvigorate 
its anti-corruption drive.  However, worsening corruption rankings 
suggest that efforts have been inconsistent; reforms have not 
reached a critical mass to improve public perception; are being 
overshadowed by high-profile cases intermittently reported in the 
Philippine media; and that other countries have pursued 
anti-corruption programs more aggressively. 
 
Bilateral Investment Agreements 
 
As of December 2008, the Philippines had signed bilateral investment 
agreements with Argentina, Australia, Austria, Bahrain, Bangladesh, 
Belgium and Luxembourg, Canada, Cambodia, Chile, China, the Czech 
Republic, Denmark, Equatorial Guinea, Finland, France, Germany, 
India, Indonesia, Iran, Italy, Japan, Republic of Korea, Kuwait, 
Laos, Mongolia, Myanmar, Netherlands, Pakistan, Portugal, Romania, 
Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, 
Taiwan, Thailand, Turkey, United Kingdom, Venezuela, and Vietnam. 
The general provisions of the bilateral investment agreements 
include: the promotion and reciprocal protection of investments; 
nondiscrimination; the free transfer of capital, payments and 
earnings; freedom from expropriation and nationalization; and, 
recognition of the principle of subrogation. 
 
Taxation: tQ Philippines has a tax treaty with the United States 
for the purpose of avoiding double taxation, providing procedures 
for resolving interpretative disputes, and enforcing taxes of both 
countries. The treaty also seeks to encourage bilateral trade and 
investments by allowing the exchange of capital, goods and services 
under clearly defined tax rules and, in some cases, preferential tax 
rates or tax exemptions. 
 
Most Favored Nation Clause (royalties): Pursuant to the most favored 
nation clause of the Philippine-U.S. tax treaty, U.S. recipients of 
royalty income may avail of the preferential rate provided in the 
Philippine-China tax treaty, which went into effect in January 2002. 
That treaty allows a lower rate of 10 percent with respect to 
royalties arising from: the use of (or right to use) any patent, 
trademark, design, model, plan, secret formula, or process; or, the 
use (or right to use) industrial, commercial, and scientific 
equipment, or information concerning industrial, commercial, or 
scientific experience. 
Permanent establishments: A foreign company that renders services to 
Philippine clients without setting-up a branch office is considered 
a "permanent establishment" liable to pay Philippine taxes if the 
services rendered to a Philippine client requires its personnel stay 
in the country for more than 183 days (for the same or a connected 
project) in a twelve-month period. Bureau of Internal Revenue 
rulings on the taxation of permanent establishments have been 
inconsistent. In some rulings, the Philippine government has applied 
the corporate income tax rate on net taxable income, a treatment 
that applies to resident foreign corporations. In others, it has 
applied the corporate income tax rate on gross income, a treatment 
that applies to non-resident foreign corporations. 
 
Tax Treaty Relief Rulings: To use preferential tax treaty rates and 
treatment, a tax treaty relief ruling must be secured from the 
Bureau of Internal Revenue's International Trade Affairs Department. 
According to tax lawyers, the process can be subject to delay, with 
some tax treaty relief applications reportedly pending for from 
several months to over a year. 
Inter-Company Transfer Pricing: The Tax Code authorizes the Bureau 
to allocate income or deductions among related organizations or 
businesses, whether or not organized in the Philippines, if such 
allocation is necessary to prevent tax evasion. The Bureau has yet 
to finalize draft regulations on transfer pricing, a contentious 
issue between multinational companies and the Bureau, but declared 
in early 2008 that, as a matter of policy, it subscribes to the 
Organization for Economic Cooperation and Development's transfer 
pricing guidelines.  In anticipation of the release of the final 
Bureau regulations, multinational companies have undertaken, or are 
preparing, transfer pricing studies and/or benchmarking for their 
related-party transactions. 
Value Added Tax: The GRP implemented an expanded value added tax law 
in November 2005 to increase revenues. The amendments to the Tax 
Code reduced the list of VAT-exempt goods and services (including 
exemptions previously enjoyed by the fuel and electricity sectors). 
A 12 percent tax rate applies on domestic sales of goods and 
services and on imports.  The 2005 amendments to the Tax Code also 
temporarily raised the corporate income tax rate from 32 percent to 
35 percent until the end of 2008.  A lower 30 percent corporate 
income tax rate took effect in January 2009. 
 
Optional Standard Deduction:  Republic Act 9504 -- issued in June 
2008 mainly to provide tax relief to minimum wage earners and 
individual taxpayers -- included a provision allowing domestic and 
foreign resident companies subject to the regular corporate income 
tax to opt for a 40 percent standard deduction against gross 
sales/receipts.  Prior to R.A. 9504, the optional standard deduction 
(previously set at 10 percent) applied only to the self-employed and 
those engaged in the practice of professions. 
 
Stock Transfer Tax: A February 2007 Bureau of Internal Revenue 
ruling involving a Singaporean investor contradicted previous 
rulings which exempted from stock transaction tax sales of shares in 
publicly-listed companies in the stock exchange by virtue of tax 
treaty provisions granting exemption from capital gains tax. In 
1994, amendments to the Tax Code replaced a capital gains tax 
imposed on shares sold through the stock exchange with a stock 
transfer tax.  The February 2007 ruling concluded that a Singapore 
resident does not qualify for tax exemption under the 
Singapore-Philippines Tax Treaty for shares sold through the stock 
exchange because stock transfer tax, as an ad-valorem transaction 
tax and not an income tax, cannot be considered an identical or 
substantially similar tax on income in place of the capital gains 
tax imposed under the previous law. This recent interpretation could 
be used by the Bureau of Internal Revenue as a precedent for 
resolving future tax treaty relief applications by U.S. and other 
foreign investors. 
 
International Financial Reporting Standards: Bureau of Internal 
Revenue rules/regulations for tax accounting purposes have not been 
fully harmonized with the recording and recognition of  transactions 
for financial accounting and reporting purposes prescribed under 
Philippine Financial Reporting Standards (patterned after standards 
issued by the International Accounting Standards Board).  The 
disparities between reports for financial accounting versus tax 
accounting purposes can be an irritant between taxpayers and tax 
collectors. The Bureau of Internal Revenue requires taxpayers to 
maintain records reconciling figures presented in financial 
statements and income tax returns. 
 
OPIC And Other Investment Insurance Programs 
 
The Philippines currently does not provide guarantees against losses 
due to inconvertibility of currency or damage caused by war. The 
Overseas Private Investment Corporation can provide U.S. investors 
with political risk insurance for expropriation, inconvertibility 
and transfer, and political violence, based on its agreement with 
the Philippines. The Philippines is a member of the Multilateral 
Investment Guaranty Agency. 
 
Labor 
 
Labor Force: American managers operating in the Philippines will 
find a large, highly motivated work force that is easy to recruit 
and train. The July 2008 labor force survey revealed that the labor 
force is estimated at 37.3 million. In 2008, the official 
unemployment rate increased to 7.4 percent from 6.3 percent in 2007. 
This figure includes employment in the informal sector and does not 
capture the substantial underemployment in the country. 
 
Plant managers are generally pleased with Filipino workers and often 
cite productivity and receptivity to training as positive factors. 
The existence of Special Economic Zones and low wages are other 
positive factors for investors. 
High Trainability: Literacy in both English and Filipino is 
relatively high. However, English proficiency appears to be 
declining. The Department of Education, under its National English 
Proficiency Program, continues its effort to strengthen English 
language training including through school-based mentoring programs 
for public elementary and secondary school teachers, aimed at 
improving public school teachers' English language skills and 
competence. 
 
High productivity: Employers find that Filipino workers generally 
respond well to productivity goals and wage incentives for 
increasing their output. Exceptions can often be attributed to lack 
of equipment, poor training, and job insecurity. 
Special Economic Zones: Special Economic Zones continue to play a 
significant role in attracting new investors to the country. The 
zones normally include their own labor centers for assisting 
investors with recruitment, coordinating with the Department of 
Labor and Employment and Social Security Agency, and mediating labor 
disputes. The zones have helped produce rapid growth in new jobs as 
both Philippine and foreign firms seek the tax and other advantages 
of these areas devoted to fostering export industries. As of 
November 2008, an estimated 1.53 million employees were working in 
zones under the Philippine Economic Zone Authority 
(www.peza.gov.ph). 
 
Low Wages: Multinational managers report that their total 
compensation packages tend to be comparable with those in 
neighboring countries, a good value for their mid-level management 
and skilled staff in the Philippines. In the call center industry, 
average labor cost is between $1.60 and $1.90 per hour. 
 
Regional Wage and Productivity Boards meet periodically in each of 
the country's 16 administrative regions to determine minimum wages. 
In recent years, the regional boards have adjusted the minimum wage 
rate about once annually. The National Capital Region Board sets the 
national trend. As of August 2008, the daily minimum wage in Metro 
Manila was pegged between PHP345 and PHP382 ($7 to $8). While the 
Philippine government maintains a minimum wage of PHP382 per day for 
what it calls "non-agricultural workers," employees in agriculture, 
private hospitals, retail service, and manufacturing in fact receive 
PHP345. Cost of living allowances are given across the board. Most 
other regions set their minimum wage at about PHP62 to PHP149 less 
than Manila's. Some provinces in the Autonomous Region of Muslim 
Mindanao and Bicol region have daily minimum wages as low as PHP 
¶196. The regional boards grant various exceptions, depending on the 
type of industry and number of employees at a given firm. 
 
Labor-Management Relations: The Constitution enshrines the right of 
workers to form and join trade unions. The mainstream trade union 
movement recognizes that its members' welfare is tied to the 
productivity of the economy and competitiveness of firms. The impact 
of globalization and free trade continues to force unions to modify 
their bargaining and organizing approach. Frequent plant closures 
have made many unions more willing to accept productivity-based 
employment packages. The number of firms using temporary contract 
labor continues to grow. 
 
The number of strikes has declined from 25 in 2004 to 5 strikes in 
2008, through September. There are 17,105 recognized unions, with a 
membership of more than 1.9 million workers (about 5 percent of the 
workforce). As of June 2008, 1,437 unions have existing collective 
bargaining agreements that cover 218,639 workers. Mainstream union 
federations typically enjoy a good working relationship with 
employers, including those in Special Economic Zones. 
 
In May 2007, a new labor law lowered the requirements for union 
registration. Under the new law, unions tied to federations are no 
longer required to maintain a minimum membership of 20 percent of 
the workers in a bargaining unit. However, independent unions are 
required to meet the 20 percent membership requirement. By the end 
of December 2008, however, the Department of Labor and Employment 
had not yet issued the required implementing rules and regulations 
for the new law to take effect. 
 
Worker Rights: Although the Philippines is a signatory to all 
International Labor Organization conventions on worker rights, it is 
not in full compliance with all of their requirements. Illegal 
discovery tactics and dismissal of union members are alleged as 
barriers to organization. The quasi-judicial National Labor 
Relations Commission reviews allegations of intimidation and 
discrimination in connection with union activities, although 
effectiveness of enforcement is reportedly questionable. In cases 
involving the national interest, which can include cases where 
companies face strong economic or competitive pressures, the 
Secretary of the Department of Labor and Employment has the 
authority to end strikes and mandate a settlement between the 
parties.  Although labor laws apply equally to special economic 
zones, relatively few unions exist in them, to the consternation of 
many trade union leaders. 
 
Violation of minimum wage standards is common. As of March 2008, 18 
percent of the 13,147 commercial establishments inspected by the 
Philippine Department of Labor and Employment were not in compliance 
with the prevailing minimum wage. However, the Department estimates 
that the actual percentage of non-compliant businesses may be much 
higher. Non-payment of social security contributions, bonuses, and 
overtime is particularly common. The law provides for a 
 
comprehensive set of occupational safety and health standards, 
although workers do not have a legally protected right to remove 
themselves from dangerous work situations without risking loss of 
employment. The Department of Labor and Employment has 
responsibility for safety inspection, but a severe shortage of 
inspectors makes enforcement extremely difficult. There have been 
instances of forced labor in connection with human trafficking. 
 
Foreign Trade Zones/Free Trade Zones 
 
The Special Economic Zone Act (R.A. 7916, 1995) grants preferential 
tax treatment to enterprises located in special economic zones (also 
referred to as ecozones). Ecozones include export processing zones, 
free trade zones, and certain industrial estates. The Philippine 
Economic Zone Authority manages five government-owned 
export-processing zones and administers incentives available to 
firms located in more than 170 privately owned and operated zones, 
technology parks and buildings. Any person, partnership, 
corporation, or business organization, regardless of nationality, 
control and/or ownership, may register as an export processing zone 
enterprise with the Authority. Enterprises located in ecozones that 
are designated export processing zones are considered to be outside 
the customs territory of the Philippines and are allowed to import 
capital equipment and raw material free from customs duties, taxes, 
and other import restrictions. Goods imported into free trade zones 
may be stored, repacked, mixed, or otherwise manipulated without 
being subject to import duties. Goods imported into both export 
processing zones and free trade zones are exempt from the GRP's 
Selective Preshipment Advance Classification Scheme. While some 
ecozones have been designated as both export processing zones and 
free trade zones, individual businesses within them are only 
permitted to receive incentives under a single category. 
 
Incentives for firms in export processing and free trade zones 
include: income tax holiday or exemption from corporate income tax 
for four years, extendable to a maximum of eight years; after the 
expiration of the income tax exemption, a special five percent tax 
rate on gross income in lieu of all national and local income taxes 
(with the exception of land owned by developers, which is subject to 
real property tax); tax and duty-free importation of capital 
equipment, raw materials, spare parts, supplies, breeding stocks, 
and genetic materials; exemptions from wharfage dues, export taxes, 
imposts and other fees; a tax credit on domestic capital equipment; 
tax credits on domestic breeding stocks and genetic materials; 
additional deductions for incremental labor costs and training 
expenses; unrestricted use of consigned equipment; remittance of 
earnings without prior approval from the central bank; domestic 
sales allowance equivalent to 30 percent of total export sales; 
permanent resident status for foreign investors and immediate family 
members; permission to hire foreign nationals; exemption from local 
business taxes; and simplified import and export procedures. 
 
The Philippine Economic Zone Authority's Guidelines for the 
Establishment and Operation of Information Technology Parks defines 
information technology as a collective term for various technologies 
involved in processing and transmitting information, which include 
computing, multimedia, telecommunications, and microelectronics. 
Information technology parks located in the National Capital Region 
(Metropolitan Manila) may serve only as locations for service-type 
activities, with no manufacturing operations. As of December 2008, 
there were more than 170 economic zones operating in the country 
under the Authority, of which 5 are government-owned ecozones 
located in Mactan, Bataan, Baguio, Cavite, and Pampanga. Another 88 
have been approved by the Authoeirt but are not yet operational. 
Moreover, there are 5 zones under the Bases Conversion Development 
Authority, namely: Subic Bay Freeport and Special Economic Zone; 
Clark Special Economic Zone; John Hay Special Economic Zone; Poro 
Point Special Economic and Freeport Zone; and, the Morog Special 
Economic Zone. Two other privately-owned ecozones are independent of 
Authority oversight: the Zamboanga City Economic Zone and Freeport, 
located in Zamboanga City, Mindanao; and the Cagayan Special 
Economic Zone and Freeport, covering the city of Santa Ana, Cagayan 
Province, and adjacent islands. The incentives available to 
investors in these zones are provided for by R.A. 7903 and 7922, 
respectively, and are very similar to those provided by the 
Philippine Economic Zone Authority under R.A. 7916. 
 
The economic zones located inside the two principal former U.S. 
military bases in the Philippines are independent of the Philippine 
Economic Zone Authority and subject to separate legislation under 
the Bases Conversion Development Authority (created under R.A. 
7227). These are the Subic Bay Freeport Zone in Subic Bay, Zambales, 
and the Clark Special Economic Zone in Angeles City, Pampanga. Firms 
operating inside the zones are exempt from import duties and 
national taxes on imports of capital equipment and raw materials 
needed for their operations within the zone. Both zones are managed 
as separate customs territories. Products imported into the zones 
are exempt from the GRP's Selective Preshipment Advance 
Classification Scheme, with the exception of products imported for 
sale at duty-free retail establishments within the zones. Firms 
operating in the zones are required to pay only a five percent tax 
based on their gross income. Both zones have their own international 
airports, power plants, telecom networks, housing complexes, and 
tourist facilities. 
 
-- CAPITAL OUTFLOW POLICY: 
 
Outward capital investments from the Philippines do not require 
prior central bank approval when the outward investments are funded 
by withdrawals from foreign currency deposit accounts; the funds to 
be invested are not purchased from the banking system; or, if 
sourced from the banking system, the funds to be invested do not 
exceed $30 million per investor per year. 
Outward investments exceeding $30 million funded with foreign 
exchange purchases from the local banking system are subject to 
prior central bank approval and registration. Applications to 
purchase foreign exchange from the local banking system for overseas 
investments should be accompanied by supporting documents and a 
written undertaking to inwardly remit and sell for pesos to 
authorized agent banks the dividends, earnings, and divestment 
proceeds from the outward investments. Current regulations require 
that the foreign exchange proceeds from profits/dividends and 
capital divestments from such outward capital investments be 
remitted within 15 banking days from receipt overseas and sold for 
pesos to authorized banks within three banking days from receipt in 
the Philippines. 
 
Foreign Direct Investment Statistics 
 
The Securities & Exchange Commission, Board of Investments, National 
Economic and Development Authority, and the Bangko Sentral ng 
Pilipinas each generate their own respective direct investment 
statistics. Central bank data (which records actual rather than 
approved investments based on balance of payments 
concepts/methodologies, and which is readily available in US dollar 
terms) is widely used as a convenient and reasonably reliable 
indicator of foreign investment stock and foreign investment flows. 
The Central bank publishes annual data on net foreign direct 
investment flows broken down by country and by industry.  The 
central bank is currently working to improve measurement of foreign 
direct investment stock. 
 
The formatted tables have been e-mailed to the Department 
separately.  Those needing a copy may request one from the Economic 
Section at Embassy Manila at RovinskyDJ@state.gov. 
 
Kenney