Written by Gregory Unruh and Fernanda Arreola
The Philippine Islands are an ethnically diverse Asian nation and an historic cultural crossroads. Once a Spanish colony, the territory was ceded to the United States following the 1898 Spanish-American War. Only recently has the Philippines established itself as an independent nation, achieving that milestone in 1946. Standing at a strategic location for Asian business, the Philippines draws global investors interested in growing opportunities in the tourism and service sectors. Despite the potential, corruption and scandals are a persistent challenge for business people seeking opportunities in this beautiful country.
Global Compliance In The Philippines
The archipelago of the Philippines was discovered by Europeans during Magellan’s expedition across the Pacific Ocean in 1521. The islands soon became a Spanish colony, bringing Christianity as the official religion. Following the Spanish-American war, the US controlled the country until 1946, when the Philippines gained independence.
Since the time of Magellan, the country has been seen as a strategic point for doing business in Asia. Its location, natural endowment and diversity provide competitive advantages for companies willing to establish here. From independence until the beginning of the regime of Ferdinand Marcos in the 1970s, the economy experienced sustained growth. The poor economic policies, corruption and human rights issues associated with the Marcos regime slowed the development of the country. Even though Marcos was forced to exile in 1986, subsequent administrations have been unable to restore pervious economic dynamism. Government corruption is often highlighted as a persistent drag on the country’s development. In 2011, for example, President Gloria Macapagal was arrested on charges of corruption and election tampering for which she is undergoing an impeachment trail.
Corruption is thus one of the main concerns of local and international investors interested in doing business in the Philippines. According to Transparency International’s Corruption Perception Index Report, Philippines ranks as 134 out of 178 countries. Current President Benigno Aquino’s stated intentions are to eradicate corruption – his campaign slogan was “if there’s no corruption, there is no poverty” – but progress on this goal has been slow. His efforts to create a Truth Commission, for example, were blocked by the Supreme Court. Beyond corruption, the country confronts issues of poor law enforcement, environmental degradation and excessive concentrations of wealth that hinder policy advances.
There are encouraging developments, however. A strengthening of US-Philippine relations is seen by many as a positive development for the region. Credit agencies, including Standard & Poors and Fitch, have recently upgraded the country’s credit rating to BB+, which is one level below investment grade. The country also benefits from a large number of citizens working abroad, whose remittances represent an opportunity to improve the economic conditions. To accelerate these developments, the government has focused on infrastructure and tourism as key investments. Policies now also encourage closer business involvement through public-private partnerships.
Regional and international agreements are also helping to promote stability and development for the Philippines. Relations with the US will remain of paramount importance in the years to come, from both a commercial as well as a military point of view. In addition, the Philippines is a member of the Association of South East Asia Nations (ASEAN) and a signatory of the ASEAN Free Trade Area (AFTA) which provides special tariffs and trading preferences to neighboring countries like Singapore, Malaysia, Vietnam, Thailand and Indonesia. Developments like these point to a brightening economic outlook for the Philippines, explaining the World Bank’s forecast of 4.2% growth in 2012.
Five Compliance And Ethics Issues To Consider
Corruption is a primary compliance issue for doing business in the Philippines. The problem has touched most civic institutions including the military, industry groups and government. Massive scandals including a $300 million overpricing scheme with a Chinese telecom firm and as scandal that ended with the suicide the former head of the Armed Forces illustrates the prevalence and magnitude of corruption challenges.
Deal with it
The detention and accusation of several top political leaders including former president Arroyo, should be seen as an attempt to send a strong message throughout the population with regards to corruption. While there are prospects for improvement, companies will still need to protect their business from corruption. It is important to pay special attention to any contributions that are made to local authorities, especially in the form of donations to political parties, to avoid even the perception of impropriety. Individuals and business need to avoid “owing” or “requesting” special favors to government officials. Efforts to increase transparency in transactions and expenses, especially through the use of electronic transactions that are tracked, can help minimize corruption risks.
Labor and human rights
Given its large population and the fact that English is an official language, the Philippines have been an attractive destination for companies looking to outsource manufacturing and support activities. There has been a recent trend, however, of companies offering temporary contracts to employees to avoid providing full employment benefits. Likewise, regulatory enforcement has not provided sufficient safeguards for those working occupations such as mining and household work.
Deal with it
As soon as a foreigner decides to invest in the Philippines it is important that he becomes aware of the different working conditions that apply to employees in the country. For instance, women are not allowed to work at night, unless they obtain a government exemption. These and other unusual laws may pose concerns for a company’s international employment standards and policies. Firms in manufacturing or extractive industries should also implement regularly on-site audits to ensure compliances health, safety, environment and human resources policies.
Compliance with codes and regulations
The most recent earthquake, which affected parts of Visayas and Mindanao and lead to substantial human and material loss, has brought to light the issue of non-compliance with the National Building Codes. These preventable tragedies have raised the public’s awareness, not only to the corruption connected to construction permits, but also to the extent to which existing codes and regulations are inadequate to protect the public’s interest.
Deal with it
Institutions in the Philippines are at this point appear unable to appropriately regulate, control and enforce regulatory codes. Thus companies may find responsibilities to ensure that construction, education, health, environmental and other business standards are being met. For liability and other reasons many international companies follow the guidelines from their home country. In addition many seek out international law and consulting firms to provide appropriate interpretations of laws and corruption risks.
Intellectual Property Rights
Early this year a scandal broke when one of the nation’s presidential advisors was caught purchasing pirate DVDs, highlighting the issue of intellectual property rights protection. The Philippines is on the Office of the United States Trade Representative’s watch list due to its inadequate protection of IPR and is therefore an issue for companies with valuable patents or trade secrets.
Deal with it
It is important to take extra care to avoid violating IPR rules. If you are establishing a new office make sure to buy all software and hardware from authorized dealers and request documentation involving all licenses. It is also wise to implement a secure information management system for all confidential matters and take measures to ensure that employees are aware of intellectual property risks.
The Philippines’ system of taxation faces a number of problems. From a business perspective, the local system tends to favor national firms with tax laws that do not honor many international commercial agreements. On the individual side, a large proportion of the population evades taxes shifting the tributary burden to those that comply with legislation.
Deal with it
Improving the taxing system is one of the main goals of President Aquino. Last year’s tax revenues amounted to 13% of GDP, which is low when compared the country’s neighbors. The government is coming up with clever ways to confront tax evasion including a Facebook page that invites citizens to report suspicious individuals. On the business side, the government has shown willingness to adjust corporate and industry taxes to international standards. For example, the government announced it plans to comply with a WTO ruling regarding differentiated taxes for foreign produced distilled spirits. While things are improving, enforcement is still inconsistent so companies to ensure compliance all business-related taxes. Systematic records keeping, obtaining all proofs or purchase is vital, as well as facilitating tax reporting by employees and contractors.
Five Etiquette Tips You Should Know Before You Go
Greetings in the Philippines are hearty, with men greeting each other with an energetic handshake and with women often sharing hugs with acquaintances. Business people always greet counterparts with a handshake followed with a genuine smile. Although most Filipino men do not shake hands with local woman, they are likely to do so with foreign female business people. It is important to refer to people by official titles. Also, elders are treated with respect, so pay close attention to the seniority and age of others and act accordingly. As you get to know your hosts you are likely to be invited to call them by first name, or even a nickname.
When exchanging business cards you should offer yours first and present it with both hands. People of higher ranks may not provide a business card to lower level employees and assistants. Even if you do not receive a card, offer yours and make sure it includes your title and position. Spending some time examining the card is a good way to show respect and set a new relationship on the right foot. You may find general managers or government authorities leave their contact information off of their business cards. This is intentional and suggests they will be the ones that will initiate any further contact.
Business people should expect initial business meetings in the Philippines to be very formal. Therefore women and men are advised to wear suits, arrive on time and if possible send their intended agenda prior to arriving to the meeting. The seniority and position of representatives attending the meeting will determine the pace of the conversation and the extent to which decisions can be made. If you are the one hosting the meeting, it is advisable to make arrangements at a nicely decorated room, as this will inform your local colleagues of your status. Serving sophisticated refreshments can also enhance your image. Before the meeting starts, allow some time for socializing. Philippine tradition is captured by the concept of Pakikisama, a cultural value that calls for camaraderie and group understanding. Keep in mind the importance of saving face in the culture and expect a manager to leave a room if directly confronted or placed in a tough spot. For many Filipinos a “yes” can actually mean “maybe”, as in “yes, that is worth considering.” If you notice negotiations are not going as expected it is helpful to suggest a break and take some time to work on building personal relationships outside the meeting.
Dinners and Social Events
Filipinos enjoy being good hosts and use business entertainment as a way to display their personal status. Dinners may include long hours of fine dining, followed by karaoke singing and even nightclubbing. Singing is especially important and accepting a request to perform can score you points with your hosts. It is normal to have a drink before sitting down at the dining table, and it is unlikely that business topics will arise in the conversation at the beginning of the get-together. It is advisable to ask about any special seating arrangements, as hosts often choose seating that allows them to best address all attendees. If you are visiting a private home, arrive 15 to 30 minutes late and bring small gifts like sweets or flowers. Remember to never refer to your host’s wife as the hostess.
Gift giving is an important part of the local culture and facilitates the building relationships. Small gifts including souvenirs from your home country or innovative stationary items are customarily exchanged. This is especially true if you travel to the Philippines around Christmas time. You should always wrap your presents in colorful paper and expect that people will not open them in front of you. Be sure to bring enough presents for everyone you will be meeting. If receiving a gift, you should accept it with the right hand or both hands. When a deal is actually signed it is customary to offer higher quality gifts such as liquor or chocolates. However, be aware of your company’s compliance rules and always avoid the perception that your gifts are an attempt to bribe your counterpart.