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### Viewing cable 10LONDON92, United Kingdom: Investment Climate Statement 2010

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
10LONDON92 | 2010-01-15 17:05 | 2011-02-04 21:09 | UNCLASSIFIED | Embassy London

`

    VZCZCXRO9798
    PP RUEHIK
    DE RUEHLO #0092/01 0151727
    ZNR UUUUU ZZH
    P 151727Z JAN 10
    FM AMEMBASSY LONDON
    TO RUEHC/SECSTATE WASHDC PRIORITY 4643
    INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
    RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
    RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
    RUCPDOC/USDOC WASHDC PRIORITY
    RUCPCIM/CIMS NTDB WASHDC PRIORITY
    RUEHBL/AMCONSUL BELFAST PRIORITY 1489
    RUEHED/AMCONSUL EDINBURGH PRIORITY 1246

` `

    UNCLAS SECTION 01 OF 12 LONDON 000092

    SIPDIS

    DEPT FOR EB/IFD/OIA
    DEPT ALSO FOR USTR

    E.O. 12958: N/A
    TAGS: ECON EFIN ETRD EINV OPIC KTDB USTR UK
    SUBJECT: United Kingdom: Investment Climate Statement 2010

    REF: 09 State 124006  LONDON 00000092  001.3 OF 012   1.  In response to reftel, the following is the 2010 Investment Climate Statement for the United Kingdom.  The information is updated as of January 1, 2010.  UNITED KINGDOM: 2010 INVESTMENT CLIMATE STATEMENT --------------------------------------------- ----  A.1. Openness to Foreign Investment  The UK was the world's fourth largest recipient of foreign direct investment in 2008, receiving U.S. $96.9 billion, according to the United Nations Conference on Trade and Development (UNCTAD), latest available figures.  The UK attracted 19 percent of all FDI inflows into the European Union (EU). The stock of U.S. foreign direct investment in the UK totaled $421 billion at year end 2008.  With a few exceptions, the UK does not discriminate between nationals and foreign individuals in the formation and operation of private companies.  U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders, although at least one director of any company registered in the UK must be ordinarily resident in the UK.  Once established in the UK, foreign-owned companies are treated no differently from UK firms.  Within the EU, the British Government is a strong defender of the rights of any British registered company, irrespective of its nationality of ownership.  Market entry for U.S. firms is greatly facilitated by a common language, legal heritage, and similar business institutions and practices.  Long-term political, economic, and regulatory stability, coupled with relatively low rates of taxation and inflation make the UK particularly attractive to foreign investors.  The Labour government continues its commitment to economic reforms, including privatization, deregulation, and support for competition.  Local and foreign-owned companies are taxed alike.  Inward investors may have access to certain EU and UK regional grants and incentives that are designed to attract industry to areas of high unemployment, but no tax concessions are granted.  The UK taxes corporations 28 percent on profits over 1.5 million GBP.  Small companies are taxed at a rate of 21 percent for profits up to GBP 300,000 and marginal tax relief is granted on profits from 300,001-1,500,000 GBP.  Tax deductions are allowed for expenditure and depreciation of assets used for trade purposes.  These include machinery, plant, industrial buildings, and assets used for research and development.  A special rate of 20 percent is given to unit trusts and open-ended investment companies.  The UK has a simple system of personal income tax.  The basic income tax rate is 20 percent on income less than GBP 37,400.  The higher rate of income tax, payable on income over GBP 37,400 is 40 percent.  From the start of the 2010-2011 tax year, income tax on all income over GBP 150,000 will increase from 40 to 50 percent.  A temporary bank payroll tax of 50 percent was applied to discretionary bonuses above GBP 25,000 awarded by banks between December 9 2009 and April 5 2010.  UK citizens also make mandatory payments of about 11 percent of income into the National Insurance system, which funds social security and retirement benefits.  Effective April 2008, the UK requires non-domiciled residents of the UK to either pay tax on their worldwide income or a flat rate of GBP 30,000 after seven years of residence.  The Scottish Parliament has the power to increase or decrease the basic income tax rate in Scotland, currently 20 percent, by a maximum of 3 percentage points. Although the Scottish government has this power, it has never been used, and the mechanism for collection and disbursement is unclear.  The UK imposes few impediments to foreign ownership.  The UK subscribes to the OECD Committee on Investment and Multinational Enterprises' (CIME) National Treatment Instrument and the OECD Code on Capital Movements and Invisible Transactions (CMIT).  U.S. companies have found that establishing a base in the UK is an effective means of accessing the European Single Market, and the abolition of most intra-European trade barriers enables UK-based firms to operate with relative freedom throughout the EU.  Many U.S. companies have operations in the UK, including all of the top 100. The UK hosts more than half of the European, Middle Eastern and African corporate headquarters of American-owned firms.   LONDON 00000092  002.3 OF 012   British Overseas Territories  The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn Islands, St. Helena and its dependencies Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus.  The BOTs retain a substantial measure of responsibility for their own affairs.  Local self-government is usually provided by an Executive Council and elected legislature.  Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security.  However, the UK imposed direct rule on the Turks and Caicos Islands in August 2009 after an inquiry found evidence of corruption and incompetence.  Its Premier was removed and its constitution was suspended.  The UK now rules directly through its Governor.  The UK's Department for International Development (DFID) is committed to meeting the "reasonable assistance needs" of the BOTs. Many of the territories are now broadly self-sufficient.  However, DFID maintains development assistance programs in St. Helena, Montserrat and Pitcairn, including budgetary aid to meet the islands' essential needs and development assistance to help encourage economic growth and social development.  Other BOTs receive small levels of assistance through "cross-territory" programs for issues such as environmental protection, disaster prevention, HIV/AIDS and child protection.  The UK also lends to the BOTs as needed, up to a pre-set limit, but assumes no liability for them if they encounter financial difficulty.  Many of the BOTs, particularly those in the Caribbean, have been hit hard by the financial crisis.  In the Cayman Islands, the British Virgin Islands, the Turks and Caicos and Anguilla, decreases in financial services activity and tourism have resulted in falling output and government revenue.  Fisheries and tourism activity in the Falkland Islands have fallen while the government revenues of Gibraltar, with its more diversified economy, have been resilient. To mitigate the impact of the crisis, the territories are reprioritizing government expenditure and looking at ways to increase revenue.  Additionally, BOTs may request higher borrowing limits from the UK.  Seven of the BOTs have financial centers: Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands.  In April 2009, during the London G20 Summit, all of these territories were placed on the OECD's "grey list" of jurisdictions that have committed to the internationally agreed tax standard, developed by the OECD, but have not yet substantially implemented it by signing the 12 tax information exchange agreements.  As of January 11, 2010, all but Anguilla and Montserrat were listed on the OECD's list of jurisdictions that have substantially implemented the internationally agreed tax standard.   -- Anguilla: Anguilla is a neutral tax jurisdiction.  There are no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction.  The territory has no exchange rate controls.  Non-Anguillian nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax.  -- Bermuda: See independent Investment Climate Statement.  -- British Virgin Islands:  The government of the British Virgin Islands welcomes foreign direct investment and offers a series of incentive packages aimed at reducing the cost of doing business on the islands.  These range from relief on customs duties on imported capital goods to relief from corporation tax payments over specific periods.  Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License.  Company tax is 15 percent on chargeable income.  Personal income taxes are payable at the rate of three percent on the first $2,500 of income, six percent on the next $5,000, ten percent on the next $7,500, 15 percent on the next $10,000 and 20 percent on income exceeding $25,000.  -- Cayman Islands: There are no direct taxes in the Cayman Islands. The government charges stamp duty of six percent on the value of real estate at sale and there is a one percent fee payable on mortgages of less than CI$300,000, and one and a half percent on mortgages of CI$300,000 or higher.  There are no controls on the  LONDON 00000092  003.3 OF 012   foreign ownership of property and land.  Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.  -- Falkland Islands:  Companies located in the Falkland Islands are charged corporation tax at 21 percent on the first GBP one million and 26 percent for all amounts in excess of GBP one million.  The individual income tax rate is 21 percent for earnings below GBP 13,000 and 26 percent above this level.  -- Gibraltar:  The government of Gibraltar encourages foreign investment.  Gibraltar is a low-tax jurisdiction (no capital or sales taxes) with a stable currency and few restrictions on moving capital or repatriating dividends.  It is a member of the EU and offers EU funding for projects that improve the island's economic development.  -- Montserrat: The government of Montserrat welcomes new private foreign investment.  Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license.  Foreign investment in Montserrat is subject to the same taxation rules as local investment, and is eligible for tax holidays and other incentives.  Montserrat has preferential trade agreements with the United States, Canada and Europe.  The government allows 100 percent foreign ownership of businesses but the administration of public utilities remains wholly in the public sector.  -- St. Helena: The island of St. Helena is open to foreign investment and welcomes expressions of interest from companies wanting to invest.  Its government operates an Approved Investor scheme, which offers concessions to businesses that meet a set of criteria outlined in the government's Economic Development Ordinance and Tourism Policy - particularly tourism projects that will be trading at the time of the opening of the St. Helena airport.  All applications under the scheme are processed by the St. Helena Development Agency.  -- Pitcairn Islands: The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 15.  The territory does not have an airstrip or safe harbor.  Residents exist on fishing, subsistence farming, handcrafts and postage stamps.  -- The Turks and Caicos Islands: The islands operate an "open arms" investment policy.  Through the policy, the government commits to: a streamlined business licensing system; a responsive immigration policy to give investment security; access to government owned land under long term leases; and a variety of duty concessions to qualified investors.  The islands have a "no tax" status.   Measure     Year  Index/Rating         for the UK -------     ----  ------------ TI Corruption Index   2008  Sixteenth/7.7 Heritage Economic Freedom 2009  Tenth/79 World Bank Doing Business 2009  Fifth  A.2. Conversion and Transfer Policies  The British pound sterling is a free-floating currency with no restrictions on its transfer or conversion.  There are no exchange controls restricting the transfer of funds associated with an investment into or out of the UK.  All exchange controls were repealed in 1987.  The UK is not a member of the Euro area.  Prime Minister Gordon Brown has said he is in favor of joining, but only after a national referendum and the British public votes to adopt the Euro.  The date of this referendum is contingent on a government assessment based on five economic tests, which are sustainable convergence, sufficient flexibility, effect on investment, impact on financial services, and effect on employment.  Once these tests are passed, the government must then seek Parliamentary approval for a national referendum. Given the current lukewarm support for the Euro among the British people and the economic downturn, a referendum is not likely to occur in the near future.  The Finance Act 2004 repealed the old rules governing thin capitalization, which allowed companies to assess their borrowing capacity on a consolidated basis.  Under the new rules, companies who have borrowed from a UK or overseas parent need to show that the loan could have been made on a stand-alone basis or face possible transfer pricing penalties.  These rules were not established to  LONDON 00000092  004.3 OF 012   limit currency transfers, but rather to limit attempts by multinational enterprises to present what is in substance an equity investment as a debt investment to obtain more favorable tax treatment.  A.3. Expropriation and Compensation  Expropriation of corporate assets or nationalization of an industry requires a special Act of Parliament, as seen in the February 2008 nationalization of Northern Rock.  In the event of nationalization, the British government follows customary international law, providing prompt, adequate, and effective compensation.  A.4. Dispute Settlement  International disputes are resolved through litigation in the UK Courts or by arbitration, mediation, or some other alternative dispute resolution (ADR) method.  Over 10,000 disputes a year take place in London, many with an international dimension, reflecting its strong position as an international center for legal services. Most of the disputes center on the maritime, commodities, financial services, and construction sectors.  The London Court of International Arbitration and the International Chamber of Commerce's International Court of Arbitration are the leading administrators of international arbitrations.  The Stock Exchange Panel on Takeovers and Mergers mediates takeover bid disputes, and there is a further right of appeal to the Stock Exchange Appeals Committee.  As a member of the International Center for Settlement of Investment Disputes, the UK accepts binding international arbitration between foreign investors and the state.  As a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the UK permits local enforcement on arbitration judgments decided in other signatory countries.  A.5. Performance Requirements/Incentives  UK business contracts are legally enforceable in the UK, but not U.S. or other foreign ones.  Performance bonds or guarantees are generally not needed in British commerce, nor is any technology transfer, joint venture, or local management participation or control requirement imposed on suppliers.  Government and industry encourage prompt payment, but a tradition does not exist of providing an additional discount to encourage early settlement of accounts.  The UK offers a wide range of incentives for companies of any nationality locating in depressed regions of the country, as long as the investment generates employment.  Grants for Business Investment (GBI) are available from the central government for qualifying projects in parts of the UK needing investment to revitalize their economies.  Grants are the main type of assistance, and the level of grant is based on capital expenditure costs and expectations of job creation.  In addition to GBI, assistance can be obtained through the EU Structural Funds available from 2007 to 2013.  The UK will receive approximately 9.4 billion in structural funds including: approximately 2.6 billion in convergence funding for the UK's poorest regions; approximately 6.2 billion in competitiveness and employment funding for other regions; and approximately 0.6 billion in cooperation funding for cross-border and trans-national activities.  Assistance is offered to companies that meet the government's objectives for convergence, cooperation, competitiveness and employment.  Convergence funding is available to companies that locate in areas with GDP per capita below 75 percent of the EU average.  In the UK, these regions are Cornwall, the Isles of Scilly, West Wales and the Welsh Valleys.  Local authorities in England and Wales also have power under the Local Government and Housing Act of 1989 to promote the economic development of their areas through a variety of assistance schemes, including the provision of grants, loan capital, property, or other financial benefit.  Separate legislation, granting similar powers to local authorities, applies to Scotland and Northern Ireland.  Where available, both domestic and overseas investors may also be eligible for loans from the European Investment Bank.  A.6. Right to Private Ownership and Establishment  The Companies Act of 1985, administered by the Department for Business, Innovation and Skills (BIS), governs ownership and  LONDON 00000092  005.3 OF 012   operation of private companies. On November 8, 2006 the UK passed the Companies Act of 2006 to replace the 1985 Act.  The law simplifies and modernizes existing rules rather than make any dramatic shift in the company law regime.  BIS uses a transparent code of practice that is fully in accord with EU merger control regulations, in evaluating bids and mergers for possible referral to the Competition Commission.  The Competition Act of 1998 strengthened competition law and enhanced the enforcement powers of the Office of Fair Trading (OFT). Prohibitions under the act relate to competition-restricting agreements and abusive behavior by entities in dominant market positions.  The Enterprise Act of 2002 established the OFT as an independent statutory body with a Board, and gives it a greater role in ensuring that markets work well.  Also, in accordance with EU law, if deemed in the public interest, transactions in the media or that raise national security concerns may be reviewed by the Secretary of State of BIS.  Only a few exceptions to national treatment exist.  For example, foreign (non-EU or non-EFTA, European Free Trade Association) ownership of UK airlines is limited by law to 49 percent. Registration of shipping vessels is limited to UK citizens or nationals of EU/EFTA member states resident in the UK. For some of these companies, restrictions of foreign ownership of ordinary shares apply.  Citizenship requirements for certain senior executive and non-executive posts also apply for these enterprises.  Foreign investment in financial services that are not covered by EU Directives on banking, investment, services, and insurance may be subject to a bilateral agreement.  The privatization of state-owned utilities is now essentially complete.  With regard to future investment opportunities, the few remaining government-owned enterprises or remaining government shares in other utilities are also likely to be sold off to the private sector, when market conditions improve.  The privatization of London's extensive underground rail network was completed in 2005 but suffered a setback in 2007 when the privatized company went bankrupt and returned to public ownership.  The government continues nevertheless to push Public Private Partnerships (PPP).  Under the Private Finance Initiative (PFI), British and foreign-owned companies may bid for long-term franchises to build, run, and improve existing public-sector services in areas such as education, health care, road traffic management, passenger rail, defense, production of coins and currency, port operations, air and water monitoring and cleanup, land use planning, and building control.  The government's goal is to provide cost-effective and higher-quality services in partnership with private sector investment capital providers.  A.7. Protection of Property Rights  The UK legal system provides a high level of intellectual property rights (IPR) protection. Enforcement mechanisms are comparable to those available in the United States.  The UK is a member of the World Intellectual Property Organization (WIPO).  The UK is also a member of the major intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works; the Paris Convention for the Protection of Industrial Property; the Universal Copyright Convention; the Geneva Phonograms Convention; and the Patent Cooperation Treaty.  The UK has signed and, through various EU Directives, implemented both the WIPO Copyright Treaty (WCT) and WIPO Performance and Phonograms Treaty (WPPT), known as the internet treaties.  In August 2004, the UK published its first "intellectual property crime strategy."  The national strategy, led by the UK Intellectual Property Office (UK IPO) represents important advancements in intelligence sharing and coordination among UK government agencies to combat IP crime, along with a commitment to improve training for customs enforcement agents.  On December 6, 2006, HM Treasury published the independent Gowers Review of Intellectual Property. The Gowers Review supports the national strategy and, in particular, UK IPO's development of a central IP crime database, TellPat that brings together information on IP crime and the criminals involved from industry and enforcement agencies.  One of the Gowers Review recommendations is for the UK Home Office to recognize IP crime as a component of organized crime in order to better educate the public about the wider dangers of IP crime and to elevate it as a priority for police action.  The Gowers Review made 53 additional recommendations in the 150-page report that the government plans to consider. In October 2008, the UK government began consultations on  LONDON 00000092  006.3 OF 012   a few of the Gowers Review suggestions. In January 2009, the Parliamentary All-Party IP Group released a follow-on report that looked at the government's accomplishments two years after the release of the Gowers' report.  The results showed that only half of the recommendations had been implemented, and of those that had, many only partially so.  Patents:  Many of the key features of the UK Patents Act 2004 entered into effect on January 1, 2005.  The Act is designed to bring UK patent law into line with the updated European Patent Convention (2000).  The Act lifts restrictions on filing patent applications from abroad, with exceptions made for military technology and applications whose contents could affect UK national security.  The Act expands options for non-binding, written opinions on patent infringement to be issued by the UK Patent Office.  The legislation also lays out significant changes to the process of approaching alleged infringers (sometimes known as "threats").  The changes are designed to aid genuine attempts to settle infringement disputes while providing protection -- particularly to small and medium enterprises -- against frivolous threats.  A UK patent application requires that an invention must be new, involve an innovative step, and be capable of industrial application.  A patent cannot be granted in the UK for any invention used for offensive, immoral, or anti-social purpose, for any variety of animal or plant, or for a biological process used in its production. In September 2007, the UK IPO and the U.S. Patent and Trademark Office (USPTO) began a 12-month pilot of the Patent Prosecution Highway (PPH) scheme, which allowed patent applicants who have received a report by either the UK IPO or the USPTO to request accelerated examination of a corresponding patent application filed in the other country.  Copyright:  The Copyright, Designs and Patents Act of 1988 grants the originator the exclusive right to assign those rights or to exploit them through copying, dissemination, publication, or sale. Computer programs and semiconductor internal circuit designs are included as works that are protected by this act.  Under the terms of an EU Directive, which took effect in January 1988, databases are also protected in each EU-member country by the national legislation that implements the Directive.  Trademarks:  The UK submits to the WIPO system of international registration of marks, as governed by the Madrid Agreement and the Madrid Protocol.  The UK Trade Marks Act of 1994 is the current law providing for the registration and protection of trade marks in the UK, and has been harmonized with EU Directive No 89/104/EEC. Trademarks are considered personal property in the UK, and are normally registered for a period of 10 years with an option to renew.  However, trademarks may be removed from the register if a period of five years has elapsed, during which time there has been no bona fide use of the trademark in relation to the goods by the proprietor.  Trade Secrets/Confidential Test Data:  Commercially sensitive information is not itself specifically subject to legal protection, but the misappropriation of such information from business premises may be subject to criminal law.  Action under employment law may also be taken against an employee who, by disclosing information, breaches a contract with his or her employer.  In addition, confidential test data, submitted in conjunction with a registered application for pharmaceuticals or veterinary products, enjoys 10 years of exclusive protection from the date of authorization, provided the product is marketed in the UK.  A.8. Transparency of the Regulatory System  U.S. exporters and investors generally will find little difference between the U.S. and UK in the conduct of business.  Common law prevails in the UK as the basis for commercial transactions, and the International Commercial Terms (INCOTERMS) of the International Chambers of Commerce are accepted definitions of trading terms.  In terms of accounting standards and audit provisions, as of January 1, 2005 firms in the UK must use the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB) and approved by the European Commission.  The UK's Accounting Standards Board provides guidance to firms on accounting standards and works with the IASB on international standards.  An example of differences between UK law (as well as EU law) and foreign law applies to commercial agents, who are self-employed intermediaries.  Often sales are undertaken in the UK by means of appointed distributors, licensees, or "agents" using standard form agreements, or sometimes with no agreement at all.  Under UK law, no distribution or licensing arrangements are terminable "at will," and  LONDON 00000092  007.3 OF 012   reasonable notice (ranging from 1 to 12 months) is usually required.  In addition, the agent is entitled to at least one year's commission in damages when agency agreements are terminated.  Many standard form software license agreements have invalid clauses prohibiting copying because they breach the EU Copyright Directive. Non-EU court judgments, apart from those for judgment debts, are often not enforceable in the UK unless a contract between the parties specifically states that U.S. or other country judgments are enforceable. UK law, like other European laws, imposes severe restrictions on exclusions and limitations of implied warranties and liability.  There is an exception within UK law that removes most of these restrictions where both parties are overseas, which makes UK law and courts a very favorable compromise choice for corporations contracting elsewhere in Europe.  Statutory authority over prices and competition in various industries is given to independent regulators.  These include the Office of Communications (OFCOM), the Office of Water Regulation (OFWAT), the Office of Gas and Electricity Markets (OFGEM), the Office of Fair Trading (OFT), the Rail Regulator, and the Financial Services Authority (FSA).  These regulators work to protect the interests of consumers while ensuring that the markets they regulate are functioning efficiently.  Most laws and regulations are published in draft for public comment prior to implementation.  The government's declared intent is to introduce more business competition and to reduce the administrative burden on companies by reducing unnecessary red tape.  In December 2008, the government published an update to the Better Regulation Simplification Plan, aimed at reducing the administrative burden on business by 25 percent by 2010.  The plan includes cross-cutting simplification initiatives across government departments and leads efforts to promote the success of the EU better regulation agenda.  An example of one simplification project is the formation of an International Trade Single Window, which is aimed at helping importers and exporters by enabling speedier transactions, reduced paperwork and easier access to import rules.  A.9. Efficient Capital Markets and Portfolio Investment  The City of London houses one of the world's largest and most comprehensive financial centers.  London offers all forms of financial services: commercial banking; investment banking; insurance; venture capital; private equity; stock and currency brokers; fund managers; commodity dealers; accounting and legal services; as well as electronic clearing and settlement systems and bank payments systems.  London has been highly regarded by investors because of its solid regulatory, legal, and tax environment, a supportive market infrastructure, and a dynamic and highly-skilled workforce.  The financial services industry contributes approximately 8 percent to UK GDP, down from 10 percent in 2007, and employs more than 300,000 people.  While banks are concerned that excessive regulation in the wake of the financial crisis will drive business from London, the UK is expected to maintain its position as a top financial hub.  UK banks have been particularly hard-hit by the global financial crisis.  Large-scale lay-offs have been common over the past year and business conditions in financial services in 2010 are expected to remain difficult.  Mergers, nationalizations, and bank failures, have left a consolidated playing field.  In February 2008, the Government nationalized the UK mortgage lender, Northern Rock, to stop a retail run on the bank.  It later nationalized troubled bank Bradford & Bingley.  The government has developed plans for the re-privatization of Northern Rock, reviewed by the EU's Competition Commission, but this will be a multi-year process.  The Government also announced a series of "bank rescue measures" including taking large equity stakes in two key banks, the Royal Bank of Scotland and Lloyds Banking Group.  Government stakes are managed at arm's-length by the newly created body, UK Financial Investments.  The UK economy, which has been in recession since the third quarter of 2008, is expected to see slight economic growth in 2010, with continued recovery in 2011 and 2012.  Property values have fallen 25 percent, and are slowly rising, though UK economists believe residential property prices are still overvalued.  Unemployment has peaked at levels not seen in decades, the pound sterling has fallen significantly in value against the dollar, and credit remains limited and costly as compared with the boom years.  Working within budget constraints, the Government introduced a temporary fiscal stimulus package to get the economy growing again. The Bank of England also pursued an aggressive, expansionary  LONDON 00000092  008.3 OF 012   monetary policy by lowering the key interest rate to a record low of 0.5 percent while embarking on a GBP 200 billion quantitative easing program.  In all circumstances, foreign investors, employers, and market participants have been treated equally and benefit from government initiatives equally.  There are no signs of increased protectionism against foreign investment, and none are expected.  Government policies are intended to facilitate the free flow of capital and to support the flow of resources in the product and services markets.  Foreign investors are able to obtain credit in the local market at normal market terms, and a wide range of credit instruments are available.  The principles involved in legal, regulatory, and accounting systems are transparent, and they are consistent with international standards.  In all cases, regulations have been published and are applied on a non-discriminatory basis by a single regulatory body, the Financial Services Authority.  The London Stock Exchange is one of the most active equity markets in the world.  London's markets have the advantage of bridging the gap between the day's trading in the Asian markets and the opening of the U.S. market.  This bridge effect is also evident as many Russian and Central European companies have used London stock exchanges to tap global capital markets.  The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, growing companies.  The AIM has a more flexible regulatory system than the Main Market and has no minimum market capitalization requirements. Since its launch, the AIM has raised approximately GBP 34 billion ($51 billion) for more than 2,900 companies.  The UK banking sector is the largest in Europe, with 361 banks authorized to do business in the UK, retail deposits of GBP 2.4 trillion ($4.2 trillion - average 2008 exchange rate) and an estimated 50 percent of all the EU's investment banking activity. The total assets of the UK banking sector were about 7.5 trillion GBP ($12.4 trillion) in September 2008, with domestic banks accounting for about half of the total.  A.10. Competition from State-Owned Enterprises (SOEs)  There are approximately 30 state-owned, or partly-owned, enterprises in the UK, with a combined turnover of about GBP 21 billion.  The UK's state-owned enterprises are spread across a wide range of sectors.  They range from large, well known companies such as the Royal Mail and Northern Rock, to small trading funds like the UK Hydrographic Office which supplies marine navigational information and services.  The UK's Shareholder Executive, within the Department for Business, Innovation and Skills (BIS), works with government departments and management teams to help these companies perform effectively.  It advises government ministers and officials on a wide range of shareholder issues including objectives, governance, strategy, performance, monitoring, board appointments and remuneration.  It sets overall objectives for the businesses and agrees on a strategic plan with the board for delivering those objectives; the board is then accountable for delivery.  Where appropriate, it appoints the Chair and actively participates in other board appointments.  It sets compensation principles, works with the business to agree dividend policy, and monitors performance.  Under the terms of the Government-Owned Business Framework, the UK government must provide all external financing for state-owned business.  Businesses are charged at the market rate to ensure they do not receive any commercial advantage from the ability to borrow at, or below, the market rate.  During 2008 and 2009, the UK government nationalized two banks, Northern Rock and Bradford & Bingley, and took significant stakes in the Royal Bank of Scotland (RBS) and Lloyds Banking Group.  The government's stake in these banks is managed, at arm's-length, by UK Financial Investments (UKFI), a company wholly owned by HM Treasury.  With the exception of Bradford & Bingley (which will be wound down), UKFI will execute an investment strategy for disposing of the investments through sale, redemption or buy-back.  The UK government does not intend to be a permanent investor in UK financial institutions.  The rescue packages were authorized by the European Commission under EC Treaty state aid rules, which ensures state aid packages do not result in significant market distortions.  At the end of 2009, the European Commission approved state aid measures for RBS and Lloyds but insisted on substantial divestments to limit market distortions.  A.11. Corporate Social Responsibility  LONDON 00000092  009.3 OF 012    Businesses in the UK are accountable for some activities that fall under corporate social responsibility - such as human resources, environmental issues, sustainable development, health and safety practices - through a wide variety of existing guidelines at national, EU and global levels.  There is a strong awareness of corporate social responsibility principles among UK businesses, promoted by UK business associations such as the Confederation of British Industry and the UK government.  The UK government has signed up to the OECD's guidelines for Multinational Enterprises.  The government is committed to the promotion and implementation of these guidelines and encourages UK multinational enterprises to adopt high corporate standards involving all aspects of the guidelines.  The UK has established a National Contact Point (NCP) to promote the guidelines and to consider allegations that a multinational enterprise's behavior is inconsistent with them.  The NCP is staffed by officials from the Department for Business, Innovation and Skills.  A Steering Board was established in 2007 to monitor the work of the UK NCP and provide strategic guidance.  It is composed of representatives of relevant government departments and four external members nominated by the Trades Union Congress, the Confederation of British Industry, the All Party Parliamentary Group on the Great Lakes Region of Africa, and the NGO community.  A.12. Political Violence  The United Kingdom is politically stable, with a modern infrastructure, but shares with the rest of the world an increased threat of terrorist incidents. On June 29 and 30, 2007, terrorists unsuccessfully attempted to bomb a nightclub area in London and the Glasgow airport. In August 2006, the UK government heightened security at all UK airports following a major counterterrorism operation in which individuals were arrested for plotting attacks against U.S.-bound airlines.  On July 7, 2005, a major terrorist attack occurred in London, as Islamic extremists detonated explosives on three Underground trains and a bus in Central London, resulting in over 50 deaths and hundreds of injuries.  Following the attacks, the public transportation system was temporarily disrupted, but quickly returned to normal.  A similar, but unsuccessful attack against London's public transport system took place on July 21, 2005.  UK authorities have identified and arrested people involved in these attacks.  These attacks do not seem to have significantly impacted investment in the UK.  In Northern Ireland, the re-establishment of a devolved power-sharing government and the decommissioning of most paramilitary organizations have improved the political situation. In November 2009, however, the Independent Monitoring Commission (IMC) reported that the dissident republican threat in Northern Ireland was at its highest level in six years.  The IMC said that the two main dissident republican groups, the real IRA and the Continuity IRA, were increasing the threat posed to security forces.  Attacks by these groups have focused primarily on police and military targets, and involved the use of firearms and explosives. It is anticipated that these types of attacks will continue in the future.  A continuing problem involves UK animal rights activists who employ violent tactics and harassment techniques to disrupt legitimate scientific research; however, the situation is improving with increased government enforcement.  The activists forced the shelving of plans for one new research center and severely delayed construction of another.  They target existing research centers that use laboratory animals, as well as any company that does business with them.  The government has passed legislation to give police stronger authority to crack down on protesters, and courts have begun to use their powers to clarify the line between lawful protest and harassment. In mid-December, four animal rights activists were convicted of blackmailing companies that supplied an animal testing laboratory. Sentencing is scheduled for late January 2009.  These actions by activists have the potential to impair the UK's position as one of Europe's leading research and development R&D centers.  Environmental pressure groups in the UK have been involved with numerous protests against a variety of business activities including airport expansion, bypass roads, offshore structures, wind farms, civilian nuclear power plants, and petrochemical facilities.  These protests tend not to be violent but are disruptive and work toward obtaining maximum media exposure.  A.13. Corruption  LONDON 00000092  010.3 OF 012    The Prevention of Corruption Act makes bribery of domestic or foreign public officials a criminal offense.  The maximum penalty under this act is imprisonment for up to seven years, and/or a fine not exceeding GBP 5,000 ($8,000).  Corrupt payments are not deductible for UK tax purposes.  Although isolated instances of bribery and corruption have occurred in the UK, U.S. investors have not identified corruption of public officials as a factor in doing business in the UK.  The UK formally ratified the OECD Convention on Combating Bribery in December 1998.  Part 12 of the Anti-terrorism, Crime and Security (ATCS) Act of 2001, which came into force on February 14, 2002, includes legislation on bribery and corruption to deter UK companies and nationals from committing acts of bribery overseas.  The act gives UK courts jurisdiction over crimes of corruption committed wholly overseas by UK nationals and by bodies incorporated under UK law.  In addition to the OECD Convention, the UK is also actively involved in the Council of Europe's Group of States Against Corruption (GRECO), which helps its members develop effective anti-corruption systems.  The UK also signed the UN Convention Against Corruption in December 2003 and ratified it on February 8, 2006.  The UK has launched a number of initiatives to reduce corruption overseas.  In December 2006, the UK's Serious Fraud Office (SFO) abandoned the bribery investigation into BAE Systems Plc and its 20-year, GBP 40 billion ($64bn) defense contract with Saudi Arabia opened the government up to questions regarding its credibility with respect to foreign corrupt practices.  Two UK non-governmental organizations challenged the decision in UK courts.  In April 2008, the High Court ruled the decision to abandon the investigation unlawful, but in July 2008, the House of Lords, the UK's highest body of judicial review, overturned this ruling on appeal, ending the judicial challenge on BAE's deals with Saudi Arabia.  However, investigations into BAE contracts with six other countries - Chile, the Czech Republic, Romania, South Africa and Tanzania - also opened in 2005, continued.  On October 14, 2009, the SFO announced it had failed to come to a negotiated settlement with BAE over these allegations. The SFO is currently conducting further investigations.  The OECD Working Group on Bribery (WGB) has criticized the UK's implementation of the Anti-Bribery convention.  In March 2007, the WGB decided to, "conduct a further examination of the UK's efforts to fight bribery," and "reaffirmed its serious concerns about the United Kingdom's discontinuance of the BAE Al Yamamah investigation and outlined continued shortcomings in UK Anti-Bribery legislation."  Following this out-of-cycle review of UK practices, in October 2008, the WBG said it was, "disappointed and seriously concerned with the unsatisfactory implementation of the [OECD Anti-Bribery] Convention by the UK."  In 2007, the UK Law Commission began a consultation process to draft a Bribery Bill that met OECD standards.  A report was published in October 2008 and consultations with experts from the OECD were held in early 2009.  A draft bill was published in March 2009 and was announced as one of the government's priorities in the Queen's speech, November 18, at the State Opening of Parliament.  The bill has received support from the Conservative opposition party and is currently being examined in the House of Lords.  Secretary of State for Justice, Jack Straw, has repeatedly and publicly stated his personal commitment to see the Bribery Bill passed into law before the end of his term in office.  A.14. Bilateral Investment Agreements  The U.S. and UK have no formal bilateral investment treaty relationship, although a Bilateral Tax Treaty reviewed in 2008 specifically protects U.S. and UK investors from double taxation. The UK has its own bilateral tax treaties with more than 100 (mostly developing) countries and a network of about a dozen double taxation agreements.  The UK has concluded 106 Bilateral Investment Treaties (known in the UK as Investment Promotion and Protection Agreements) with other countries, of which 94 are in force.  These countries are:  Albania, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bolivia, Bosnia & Herzegovina, Bulgaria, Burundi, Cameroon, Chile, China, Congo, Cote D'Ivoire, Croatia, Cuba, Dominica, Ecuador, Egypt, El Salvador, Estonia, Georgia, Ghana, Grenada, Guyana, Haiti, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kazakhstan, Kenya, Korea, Kyrgyzstan, Laos, Latvia, Lebanon, Lesotho, Lithuania, Malaysia,  LONDON 00000092  011.3 OF 012   Malta, Mauritius, Mexico, Moldova, Mongolia, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Romania, Saint Lucia, Senegal, Serbia, Sierra Leone, Singapore, Slovenia, South Africa, Sri Lanka, Swaziland, Tanzania, Thailand, Tonga, Trinidad & Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, UAE, Uruguay, Uzbekistan, Venezuela, Vietnam, and Yemen.  A.15. OPIC and Other Investment Insurance Agreements  OPIC does not operate in the UK.  Export-Import Bank (Ex-Im Bank) financing is available to support major investment projects in the UK.  A Memorandum of Understanding (MOU) signed by Ex-Im Bank and its UK equivalent, the Export Credits Guarantee Department (ECGD), enables bilateral U.S.-UK consortia, intending to invest in third countries, to seek investment funding support from the country of the larger partner. This removes the need for each of the two parties to seek financing from their respective credit guarantee organizations.  A.16. Labor  The UK's labor force of over 30 million people is the second largest in the European Union (EU). As of October 2009, UK employment was 28.93 million, and the unemployment rate was 7.9 percent, lower than the EU average of 9.5 percent.  But the effects of the economic downturn are starting to be felt on employment levels.  Some analysts predict that unemployment could peak at 10 percent in 2010. The employment level (the proportion of working age people in work) is also high in the UK at 72.5 per cent. By sector, the largest proportion of the workforce was placed in the education, health, and public administration sector with 8.237 million people or 27 percent of the total, followed by the distribution, hotels and restaurants Sector with 6.830 million people or 22 percent; the finance and business services sector came third with 6.375 million people or 21 percent, followed by manufacturing with 2.84 million or 9 percent of the UK workforce.  The most serious issue facing British employers is a skills gap derived from a high-skill, high-tech economy outpacing the educational system's ability to deliver work-ready graduates.  The government has placed a strong emphasis on improving the British educational system in terms of greater emphasis on science, research and development, and entrepreneurship skills.  The UK's skills base remains mediocre by international standards, but is improving: the proportion of the population aged 20 to retirement without any formal educational qualifications has fallen by nearly a third over the last decade, from 18 percent in 1997 to 12 percent in 2008.  About 25 percent of full time UK employees belong to a union, a low proportion by UK historical standards, but still quite high to an employer used to a much lower American percentage.  Public-sector workers have a much higher share of union members -- nearly 60 percent -- while the private sector is about 15 percent. Manufacturing, transport, and distribution trades are highly unionized.  Unionization of the workforce in the UK is prohibited only in the armed forces, public-sector security services, and police forces.  Union membership has been relatively stable in the past few years, although the trend has been slightly downward over the past decade.  Once-common militant unionism is less frequent, but occasional bouts of industrial action, or threatened industrial action, can still be expected.  Most British unions have adapted to the reality of a globalized economy in which jobs are contingent on the competitiveness of their employers.  Privatization of traditional government entities has accelerated such thinking.  The Trades Union Congress (TUC), the British AFL-CIO equivalent, encourages union-management cooperation as do most of the unions likely to be encountered by a U.S. investor.  As of December 2009, the minimum wage is GBP 5.80 ($9.28) for adults (those 22 and over) and GBP 4.83 ($7.73) for young people (18-21) and GBP 3.57 ($5.71) for workers aged 16 and 17.  Much of the employment legislation currently affecting the UK labor market is based on EU regulations and directives.  EU regulations affect working patterns, wage structures, and employee protection rights.  For example, the European Working Time Directive creates an entitlement to minimum daily and weekly rest periods, an average work-week limit of 48 hours, and restrictions on night work.  It also entitles workers who meet the qualifying criteria, including part-time and seasonal workers, to a minimum of 28 working days  LONDON 00000092  012.3 OF 012   annual paid holiday.  The universal application of labor regulations across respective EU borders undermines British competitiveness to the extent that the UK has made its historically more flexible labor market a major selling point to investors.  As it has implemented EU directives, however, the UK government has been proactive in maintaining its flexibility and competitiveness.  For example, it negotiated a special provision under the Working Time Directive that allows employees to opt out of the work week limitations and has favored changes to the rules on temporary workers.  The 2006 Employment Equality (Age) Regulations make it unlawful to discriminate against workers, employees, job seekers and trainees because of age. The regulations cover recruitment, terms and conditions, promotions, transfers, dismissals and training.  They do not cover the provision of goods and services.  The regulations also removed the upper age limits on unfair dismissal and redundancy.  It sets a national default retirement age of 65, making compulsory retirement below that age unlawful unless objectively justified.  Employees have the right to request to work beyond retirement age and the employer has a duty to consider such requests.  A.17. Foreign Trade Zones/Free Ports  The cargo ports and freight transshipment points at Liverpool, Prestwick, Sheerness, Southampton, and Tilbury that are used for cargo storage and consolidation are designated as Free Trade Zones. No activities that add value to the commodities are permitted within the Free Trade Zones, which are reserved for bonded storage, cargo consolidation, and reconfiguration of non-EU goods.  The Free Trade Zones offer little benefit to U.S. exporters or investors, or any other non-EU exporters or investors.  A.18. Foreign Direct Investment Statistics  The UK was the fourth largest recipient of foreign direct investment (FDI) globally in 2008 according to the United Nations Conference on Trade and Development (UNCTAD). According to data published by UNCTAD, the stock of outward UK FDI totaled $1,511 billion in 2008 (or 56.7 percent of GDP), down from $1,841 billion in 2007.  The stock of inward UK FDI at yearend 2008 was $982 billion (or 36.9 percent of GDP), down from $1,264 billion in 2007.  Direct investment outflows in 2008 totaled $111 billion, down from $275 billion in 2007, while inflows decreased to $96.9 billion in 2008 from $183 billion in 2007.  The United States remained the most favored location for UK direct investment abroad in 2008, continuing the strong investment partnership between the two countries.  In 2008, UK direct investment into the United States accounted for 23 percent of UK-owned assets abroad.  Other EU member states attracted much of the remaining outward UK FDI.
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