How to do business in the Philippines

“It’s more fun in the Philippines”

It’s the sales pitch used by travel agents to supposedly entice foreigners to make a trip to the large cluster of islands in South East Asia: the Philippines.

And the saying couldn’t be more true, but to understand just why its more fun in the Philippines, you really have to go there. It is more than a seemingly innocuous statement tossed around by airplane advertisements. It’s true.

It’s not always readily apparent why the Philippines is awesome, but once you get it, you get it. You really need to be introduced to the Philippines. To the untrained eye, the Philippines could easily be written off as dirty, crowded, and hole in the wall of SE Asia with bad food.

I could see how people could think that, but I would completely disagree. The Philippines has a hidden beauty that you might not catch at first glance.

The Philippines is an amazing country teaming with possibility.

It’s not obvious why it’s worth going, but trust me, if you are in the area, make a visit to the Philippines. If you want to stay, start a business in the Philippines – it may be the easiest place in Asia to conduct business as a foreigner.

The following post describes:

1. Overview of the Philippines
2. Detailed breakdown of doing business in the Philippines
3. What corporate entity is best to form as a foreigner doing business
4. The tax implications of different legal entities in the Philippines.

The Philippines

An archipelago of over 7000 islands, the Philippines is a unique place to live and do business in Asia.

As a long term residence, you could do much worse. The country is very easy to stay long term, and the Visa system is the most relaxed I’ve seen in Southeast Asia. Don’t quote me on this, but its quite possible to ignore the Visa laws and just pay the overstay fine. The overstay fine is a flat rate, and doesn’t increase per day like in Thailand.

Overall, the country has a very inviting feel for foreigners, so much so that you don’t feel like you are in Asia at some points. In addition to over 100 different dialects, the main one being Tagalog, the Philippines is full of English speaking people.

When you fly into the Philippines, you’ll probably land at Clark International Airport. If you have a flight from within Asia, try to land in the domestic terminal, as that one is much, much nicer than the international terminal. Details are hazy, but apparently, when the terminal was being constructed, the deal dropped through and domestic airlines secured a sweetheart deal to scoop up the newly constructed terminal.

Manila

Walking down one of the busiest ‘tourist’ streets, you can’t help but notice – there’s no one here.

The capital city of Manila is a huge metropolis with high end malls, and sprawling slums just outside the main city. Manila has 1.6 million people, but in the surrounding areas – Metro manila has over 20 million, making it the 5th largest city in the world. The Philippines has 90 million official residents. That doesn’t include people living off the books, who never received a birth certificate. The government estimates about 10 million of these people reside in the shanty homes throughout the 7000 islands.

The Pearl of the Orient

Manila started as an Indian kingdom, then invaded by Brunei and Islamicized until the 15th century where the Spanish showed up and made it a key trade route between Latin America and Asia and coined the name “Pearl of the Orient”. After Several Chinese insurrections, numerous local revolts, a short lived British Occupation, and later a Sepoy mutiny and Philippine revolution, then the Americans showed up and helped plan the urban development only to have – WWII strike, destroying much of the original city and almost all colonial architecture. Now an independent voice, the Philippines is a relatively new culture.

PHP and PHP

The Philippines is a beautiful country, but it has a good deal of poverty in most places. Your money will likely go far when converted into the Philippine Peso, or PHP and it’s quite easy to live well in the Philippines.

The Philippines absolutely ripe for business, and it has all the pieces to the puzzle, but no one seems to have figured out how to put them all together. People don’t seem very serious, and the vibe of the country is very blasé.

There is an opportunity for successful foreign investment in the Philippines. Indeed, I know several Westerners who have cut out a good niche in local business here. The country is filled with college educated, English speaking citizens. Besides vast natural resources and cheap human capital, the tax system and government are somewhat amenable. These factors can quickly offset the cost of 35,000 it takes to capitalize a company in the Philippines.

The Philippines has gained recent momentum as a spot for internet entrepreneurs, as the citizens are decent with computers, plugged into western society, and can speak English, and are mostly college educated. It is typical for Pinoy to begin university at age 16 or 17.

Business in the Philippines isn’t fully fleshed out, in that it still feels young and full of potential. It seems like the only markets thriving at the moment are outsourcing – call centers, and other internet based content like writing, or SEO. I’ve found where they really excel are lower level task management, research, and basic English writing that doesn’t requisite much creativity. For developers or higher level computer programming, look elsewhere.

You can get a decent web design, php or html coding. However, don’t expect to find any python programmers in the Philippines.

Beaches in the Philippines

If you aren’t focused solely on business, the natural environment of the Philippines is amazing. The beaches are very impressive, and overall its not polished. But the natural beauty is amazing. And unlike places in Thailand, or Bali, where its hard to find a deserted spot at times, the Philippines give you almost too much choice. What the Philippines may lack in world class quality, they more than make up for in abundant quantity.

Thailand Or the Philippines

I thought that Thailand would be like the Philippines are when I first arrived. I expected (quite arrogantly in hindsight) to be greeted with open arms, doing business to be a breeze, opportunities abound. Quite the contrary, as business opportunities in Thailand, are actually quite difficult to locate.

Instead, I found Thailand as a country with people reluctant to do business with foreigners, a visa system that was impossible to negotiate, and company laws that were quite literally, in a different language. But the biggest pain point of all in Thailand is the Visa system.

Now, this isn’t to say Thailand isn’t an amazing and unique place, because it is. Only, it takes some flexibility to live there, and if you want to stay long term in Thailand and you are under 50 – the difficulties are compounded.

If you want to stay in Thailand, its actually easier to start a business, but this requisites that you can get past the language barrier and complicated employment laws. At the end of the day, you are going to have to fit into a system which already seems to have figured things out, or at least figured out the way the Thai’s want them figured out.

Thailand doesn’t need any help, and they are fine to have foreigners in their country, as guests. But stay for a certain amount of time, and then get out of the kingdom.

The Verdict

The first time I went to the Philippines, I was surprised at how much I enjoyed it. I was introduced by a friend who knew all of the right spots to visit. The Philippines is an amazing country in some respects, but they country just can’t seem to pull it together in other ways.

For instance, despite their sheer quantity of arable land and bountiful farm space, they actually import rice.

Want to know how many other south eastern Asian countries are net importers of rice? None.

The culture here is still young, a mesh of what used to be distinct tribal islands, colonized by the Spanish, claimed by the Americans for a brief stint, and then granted independence. Although their citizens are superb and renowned musicians, it seems like the Philippines are still trying to find their voice, and their vocal tonality cracks awkwardly in a conversation like a pubescent teenager.

The Philippines has a tremendous presence around the world, with people in vast numbers wordwide. Hotel maids in Dubai, cooks in Hong Kong can be found all around the world – but their chief export seems to be just that – hotel bands and maids. Even the Pinoy themselves understand that they could aim a bit higher – as detailed on this insightful blog – Get Real Philippines.

Playgrounds Flag

Nothing seems very expensive in the Philippines, with the exception of gasoline. The cheapest good in the country seems to be alcohol. Beer costs just $1.

The only world class amenities in the Philippines are the malls, which are so ornate, they almost seem out of place. Besides that, you are hard pressed to find anything that is near first rate. The service is lackluster, the attitude is never serious, and communication, even though it takes place in English, is difficult. You want to root for the Philippines, but they just can’t get it right.

Eating out at a nice restaurant, the food won’t be any better – you are merely paying for air conditioning and atmosphere.

At the highest level of government, there seems to always be bickering, power games, dissent, and no cohesive unification. Obviously, this may have something to do with the fact that the country is over 7000 islands.

If the country were to offer something as radical as a transparent program for citizenship by investment, the Philippines would see an overnight boom in high net worth investors.

The Philippines are a great place to foreigners cut a life for themselves. As discussed earlier in this post – the visa system is friendly, as are the people. Everyone speaks English, and the country is absolutely ripe for foreign investment. So far, the outsourcing is the only real market. Time will tell if another industry or clever entrepreneurs can find a use of the countries vast resources.

Business in the Philippines

The Philippines are one of the few places on earth where Americans are still welcomed graciously. Particularly in the financial sector in other countries, Americans have become a toxic asset on banks balance sheets.

Setting-up a business in the Philippines to be 100% foreign-owned

Covered, in general, the foreign investment structure needed to enable the entities’ capital to be 100% foreign owned. The memo will then discuss in details the options available for your prospective company.

Option A: Which involves setting-up a branch office (where a United Arab Emirates Offshore company will set-up business in the Philippines) and

Option B: Which involves setting up a Philippine subsidiary will be discussed together for comparison purposes.

Option C: Regional Operating Headquarters

Option D: Offshore Company + Philippines Company (not discussed)

Foreign Investment Structures in the Philippines

Under the FIA, a non-Philippine national may own a business up to one hundred percent (100%) of its capital, provided:

• it is investing in a domestic market enterprise which will be engaged in activities not listed in the Foreign Investments Negative List and provided that the US$200,000 minimum paid-up capital is complied with; or

• it is investing in an export enterprise which exports at least 60% of its products or services.

For purposes of these rules, a “domestic market enterprise” is defined as an enterprise which produces goods for sale, renders service or otherwise engages in any business in the Philippines. An “export enterprise”, on the other hand, is defined as an enterprise wherein a manufacturer, processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a trader purchases products domestically or exports sixty percent (60%) or more of such purchases.

A Business Process Outsourcing company that has sixty percent (60%) of such services are for clients abroad can be 100% foreign owned (either by individuals or by a foreign parent company).

Option A: BRANCH vs. Option B: SUBSIDIARY

Juridical Personality

• A branch is considered part of the operational organization of the parent company or the head office and is established in the Philippines because the head office or the parent company desires to extend its corporate personality into the country. As such, a branch has no juridical personality separate and distinct from the head office. Therefore, liabilities of the branch are deemed those of the head office. The head office is, as such, not insulated from the liabilities of the Philippine branch.

• A subsidiary, on the other hand, has a separate juridical personality distinct from its parent company, the latter being merely a stockholder of the subsidiary. Thus, the parent company is insulated from the liabilities of its subsidiary, its liability as a stockholder of the subsidiary is limited only to the extent of its equity contribution or shareholdings in the subsidiary.

Capital Requirement

As a rule, in establishing a business in the Philippines, either a branch or a wholly owned subsidiary, an initial assigned capital or minimum paid-up capital in the amount of US$200,000.00 is required of foreign investors.

However, in the case of a branch or wholly-owned subsidiary considered as an export enterprise such as in the case of the prospective company, the US$200,000 minimum paid-up capital does not apply. The initial capital may be any reasonable amount needed for the initial operations of the corporation.

Taxes in the Philippines

Income tax

A branch is taxed at 30% of its net income (i.e., gross income less allowable deductions) derived from Philippine sources.

For purposes of computing the branch’s net taxable income, the head office can allocate to the branch, subject to the requirements of BIR regulations, a ratable part of those unallocable expenses, interest payments, losses and other deductible items that are effectively connected with the trade or business conducted in the Philippines. The parent company cannot allocate part of its overhead expenses to its subsidiary, although some form of sharing in expenses can be effected. Generally, such sharing should be covered by contracts.

If you have worldwide expenses, you really need a qualified Philippines accountant to make these deductions. Don’t worry – most Filipino accountants are smart and inexpensive.

A subsidiary, being a domestic corporation, is taxed at 30% of its net income derived from worldwide sources (as against a branch which is taxed only on income from Philippine sources).

Please note that a branch or a subsidiary is required to file its annual audited financial statements with the Bureau of Internal Revenue (together with its tax returns) and the Securities and Exchange Commission. The audited financial statements must be prepared by an external auditor accredited with both the Bureau of Internal Revenue and the Securities and Exchange Commission.

Low Tax in the Phills

Irrespective of other taxes, 2% of the gross income as of the end of the taxable year is imposed on existing domestic and resident foreign corporations. However, for new corporations, MCIT (minimum corporate income tax) is imposed on the fourth taxable year. The 2% MCIT must be paid by the corporation if the MCIT computed is greater than the income tax computed using the regular tax rate imposed on domestic corporations, in lieu of the latter.

Improperly Accumulated Earnings Tax (“IAET”)

There is another tax you should know about – a 10% IAET that applies to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. However, a branch of a foreign corporation is not subject to the IAET.

Please note, however, that under Section 4 of RR No. 2-01, the following corporations are exempted from the IAET:

• Banks and other non-bank financial intermediaries;
• Insurance companies;
• Publicly-held corporations;
• Taxable partnerships;
• General professional partnerships;
• Non- taxable joint ventures; and

Any free trade zone company.

Enterprises duly registered with the Philippine Economic Zone Authority (“PEZA”) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.

Branch Profit Remittance Tax Withholding Tax on Dividends

In general, dividends remitted to a non-resident foreign corporation are subject to the 30% tax. However, if the parent company of the Philippine subsidiary is based on a country with a tax treaty with the Philippines, it can avail of the provisions of the tax treaty to reduce the tax imposed on dividends. We provide below a summary of the tax rates on dividends for several countries, which the Philippines have entered into a tax treaty:

The following table summarizes the treaty rates for dividends with other countries for individuals:

DUAL TAX TREATIES

INDIVIDUAL –> where the beneficiary owner is an individual taxpayer

Dividends in %

• Australia 25
• Austria 25
• Bahrain 15
• Bangladesh 15
• Belgium 15
• Brazil 25
• Canada 25
• China 15

COMPANY – TAX TREATIES –>where the beneficiary owner is a company

Dividends in %

• Czech Republic 15
• Denmark 15
• Finland 15
• France 15
• Germany 15
• Hungary 20
• India 20
• Indonesia 20
• Israel 15
• Italy 15
• Japan 25
• Korea, South 25
• Malaysia 25
• Netherlands 15
• New Zealand 25
• Norway 25
• Pakistan 25
• Romania 15
• Russia 15
• Spain 15
• Singapore 25
• Sweden 15
• Switzerland 15
• Thailand 20
• United Kingdom 25
• United States 25
• Vietnam 15

Aside from those mentioned above, we confirm also that the Philippines and the United Arab Emirates (“UAE”) have entered into a tax treaty. For dividends, the preferential tax rate is 10% if the UAE parent company holds at least 10% of the capital of the paying company. The rate for dividends tax is 15% for all other situations.

In order to avail of the preferential tax rate, the foreign parent company as the recipient of any dividends is required to file with the Bureau of Internal Revenue (“BIR”) a Tax Treaty Relief Application to confirm the tax treatment of a particular transaction.

Value Added Tax (“VAT”)

Whether the entity is structured as a branch or a subsidiary, it will, as a general rule, be subject to the 12% VAT on

• (a) Importations of goods into the Philippines,
• (b) On sales of goods and services in the Philippines, and
• (c) Leases of goods and properties and
• (d) Royalty payments.

Sale of goods or services may be subject to 0% VAT. Under Section 106(A)(2) of the Tax Code, as amended, the following sales by VAT-registered persons shall be subject to the 0% rate:

Export Sales. – The term ‘export sales’ means:

1. The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (“BSP”)
2. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;
3. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;

4) Sale of gold to the BSP shall be subject to the 0% rate:

5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and

6) The sale of goods, supplies, equipment and fuel to persons engaged in International shipping or international air transport operations.

• (b) Foreign Currency Denominated Sale. – The phrase ‘foreign currency denominated sale’ means a sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.
• c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

On the other hand, under Section 108(B) of the Tax Code, as amended, the following services performed in the Philippines by VAT- registered persons shall be subject to the 0% rate:

a) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;

b) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;

c) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;

d) Services rendered to persons engaged in iinternational shipping or international air transport operations, including leases of property for use thereof;

e) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production;

f) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and

g) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

Local Business Taxes

In general, a business in the Philippines, either a branch or a subsidiary will be subject to annual local business taxes which are based on gross sales or receipts for the preceding calendar year. The local business tax rates are graduated and depend on the local tax ordinance of the municipality or city where the business will be located. These can largely be avoided if set up in a free trade zone, discussed later.

SEC Security Deposit

After the SEC releases to the branch its license to do business in the Philippines, the branch is required to deposit with the SEC securities with an actual market value of at least P100,000. Within 6 months after each fiscal year, the branch is also required to deposit additional securities equivalent in actual market value to 2% of the amount by which the branch’s gross income for the fiscal year exceeds P5,000,000. This deposit is required for the benefit of present and future creditors of the branch in the Philippines.

The securities may consist of bonds or other evidences of indebtedness of the Philippine government or of government owned or controlled corporations, or shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies, and bonds, or any combination of these securities. Any interest or dividends on such securities accrue to the branch. Such securities will be returned to the branch when it withdraws from business in the Philippines.

This is essentially a bond to transact business in the Philippines and is a surety on the liability of the business, a subsidiary is not required to make such security deposit.

Option C: Regional Operating Headquarters

Another option for business owners and entrepreneurs is a regional operating headquarters (“ROHQ”). This is usually established in the Philippines to centralize services. Often used for financial management, business management, joint-venture management, this is used in conjunction with a foreign parent company and offshore operations.

An ROHQ of a multinational company is a branch office established in the Philippines engaged in any one of the following qualifying services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication; and business development.

An ROHQ is prohibited from offering qualifying services to entities other than its affiliates, branches or subsidiaries as will be declared in its registration with the SEC. Neither is it allowed to directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company.

Section 50 of the Tax Code provides that “in the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the BIR is authorized to distribute, apportion, or allocate gross income or deductions between or among such organization, trade or business in Philippines, if it determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trades, or businesses.”

Thus, considering that the ROHQ will be dealing with other affiliates, the transfer pricing strategy adopted must comply with the arm’s length standard and must be supported by sufficient documentation to avoid any issues which may be raised in an audit by the BIR. A ROHQ can be very useful for these sort of transactions, although other jurisdictions (such as a Uruguayan company) may also present a favorable outcome.

Capital Requirement

A ROHQ is required to initially have an assigned capital of US$200,000 or its equivalent in other foreign currencies. Within 30 days from receipt of its certificate of registration, the multinational corporation must submit to the SEC a certificate of inward remittance from a local bank showing that it had remitted US$200,000.

Taxes

• Income Tax

ROHQs are subject to the preferential income tax rate of 10% on their taxable income. It must be noted, however, that the 10% preferential tax rate is only applicable to its income from qualifying services. Any income derived from services other than ROHQ qualifying services is subject to the regular corporate income tax rate of 30%.

ROHQs are only allowed to offer qualifying services only to its affiliates, branches or subsidiaries as declared in its registration with the SEC. Otherwise, any income derived from services rendered to non-affiliates will be likewise subject to 30% income tax.

• BPRT

Profit remittances by an ROHQ to its head office is subject to the 15% BPRT which is based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof.

• Preferential Tax for Certain Employees

Filipinos and alien individuals occupying managerial and highly technical positions in the ROHQ of multinational companies shall be taxed at 15% of their gross income.

• Other Incentives

An ROHQ is entitled to the following incentives:

a. Exemption from all kinds of local taxes, fees and charges except for real property tax on land improvements and equipment;

b. Tax and duty free importation of training materials and equipment; and

c. Importation of motor vehicles subject to the payment of corresponding taxes and duties.

• Expenses

For purposes of taxation of the income of the ROHQ, the parent foreign corporation can allocate to its ROHQ a proportional part of its expenses, losses, interest payments and similar expenses relating to the conduct of business in the Philippines.

• Liabilities

A foreign corporation that does business through an ROHQ, which is a branch, is liable for all damages and/or other liabilities that may be incurred. Theoretically, the assets of the head office may be made to answer for the liabilities incurred by the branch.

• Establishment and Registration Costs
• SEC
• Filing fee equivalent to 1% of the assigned capital of the branch.
• Legal research fee of 1% of the filing fee.
• BIR
  • Minimal amount of fees for Tax identification number, VAT and Withholding Tax Agent’s Registration if applicable, BIR registration of books of account.
  • Minimal amount of fees for post incorporation government permits such as the mayor’s permit, barangay clearance, community tax certificate, and other miscellaneous tariffs.

Could your foreign branch could be in an way held civilly liable for actions in the Philippines?

Probably not.

Considering that an ROHQ is a branch office, however, the parent corporation may be held responsible for any liability of the branch in excess of its investment. Even though the Philippines would like to hold your foreign branch liable for debts and obligations in the Philippines in practice this is almost impossible. Court proceedings in the Philippines (although conducted in English, with a derivative of Common law) take a notoriously long time to process.

This is just one reason why it might make sense for you to set up multiple entities in order to transact business in the Philippines. Contact me for more info.

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Overall, tax residency and business in the Philippines are great options. It is very difficult to achieve citizenship in the country unless you have a Filipina wife, even still the process can take 5 years of permanent residency – officially. However, it may do you well to explore all of your options before taking action in this jurisdiction. Contact me and we can discuss your Worldwide Company Formation options.

The Philippines might be dismissed by some as a strategic location business flag – as the culture, the workers, and life in general isn’t always serious on these islands. However, don’t be so quick to correlate the flippant attitudes with an innappropriate place to do business. Not only does the archipelago afford an amazing value in terms of quality of life by money spent, the Philippines is accessible. The Philippines feels like it could be won over. Its not refined – perhaps the opposite of a place like Switzerland, but it is young, moldable, prone to influence. The Philippines is an amazing place to spend time, where real power still rules, and the rules are meant to be bent, or broken.

Not for the meek, but always a good time, it’s more fun in the Philippines.