Doing Business in Philippines

Establishing an entity

There are 5 legal structures available for foreign businesses wishing to operate in the Philippines: (a) subsidiary, which is registered under the Philippine law and treated as a Philippine domestic corporation, (b) branch office, (c) representative office, (d) Regional or Area Headquarters (RHQ) and (e) Regional Operating Headquarters (ROHQ).

A local subsidiary of a foreign corporation is a legally independent unit, governed exclusively by Philippine laws. It is treated as a separate entity from the parent foreign corporation and exists separately, in fact and in law, from its foreign parent.

A branch office and a representative office are treated as resident foreign corporations, and are seen as an extension of their head offices. They are organised and exist under foreign laws.

A branch office carries out the business activities of its head office and may derive income from the Philippines. On the other hand, a representative office may not derive income from the Philippines and may be established to deal directly with its head office’s clients and may only undertake information dissemination, promotion of the company’s products as well as quality control. A representative office is fully subsidized by its head office and must have an initial inward remittance of USD 30,000 to fund its operations.

A multinational company may establish an RHQ to serve principally as a supervision, communication and coordination centre for its subsidiaries, affiliates and branches in the Asia Pacific Region. It cannot derive income in the Philippines and may not participate, in any manner, in the management of any subsidiary or branch office in the Philippines. It also cannot solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries or any other company. To fund its operations in the Philippines, its head office must initially remit into the Philippines at least USD 50,000.

An ROHQ, unlike an RHQ, can derive income in the Philippines. An ROHQ can perform the following qualifying services to its affiliates, subsidiaries and branches in the Philippines:

• General administration and planning
• Business planning and coordination
• Sourcing/procurement of raw material 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
• Business development

Registration of the above foreign corporations as Philippine Branch, Representative Office, RHQ and ROHQ requires a Resident Agent.

The incorporation of a local subsidiary requires at least 5 but not more than 15 incorporators; the majority of whom must be residents of the Philippines. Each of the incorporators must own or be a subscriber to at least 1 share of the capital stock of the company. At least 25% of the authorised capital stock, as stated in the articles of incorporation, must be subscribed at the time of incorporation, with at least 25% of the total subscription paid upon subscription.

Foreign business restictions

The 1987 Philippine Constitution and specific laws restrict the level of foreign ownership in certain business activities. RA No. 7042, also known as the Foreign Investments Act of 1991 (as amended by RA 8179), classifies investment areas/activities that have foreign equity restrictions into 2 lists: Negative List A (foreign ownership is limited by mandate of the Constitution and specific laws) and Negative List B (foreign ownership is limited for reasons of security, defence, risk to health and morals and protection of small and medium-sized enterprises).

Negative List A includes investment in mass media, practice of all professions, advertising, ownership of private lands, and operation and management of public utilities. Negative List B includes manufacture, repair, storage and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) and Department of National Defense (DND) clearances; all forms of gambling except those covered by investment agreements with the Philippine Gaming and Amusement Corporation (PAGCOR) operating within special economic zones and administered by the Philippine Economic Zone Authority (PEZA), and domestic market enterprises with paid-in equity capital of less than USD 200,000.

All areas of investments other than those provided in Negative Lists A and B and banking and financial institutions, which are governed and regulated by the Bangko Sentral ng Pilipinas (BSP) or the Philippine Central Bank, may be allowed 100% foreign equity,provided that the minimum capitalization requirement of USD 200,000 is met.

The Commonwealth Act (CA) No. 108, as amended, otherwise known as the Anti- Dummy Law, is an act which prohibits evasion of the laws on the nationalisation of certain rights, franchises or privileges enshrined in the Philippine Constitution and other laws. Penal sanctions and payment of fines may be imposed in the case of any violation of this law.

Investment incentives

Foreign investors who wish to benefit from investment incentives may register with either the PEZA or the Board of Investments (BOI). The PEZA grants incentives to businesses engaged in exports that are located within identified economic zones. The BOI, on the other hand, administers the grant of incentives to businesses engaging any of the investment priority areas provided under the Investment Priorities Plan (IPP). Incentives that are also available for businesses that wish to operate in special economic and free port zones, such as those located in Subic and Clark, Pampanga.

Some of the incentives granted are exemptions from the payment of tariff and customs duties and other taxes and fees, Income Tax Holiday (ITH) and reduced tax rates.

Work permits and visas

To promote foreign involvement in the economic development of the country, the Philippine government has liberalized the visa requirements for certain types of foreigners.

The visas that may be granted to foreigners who will work, or render services in the Philippines are as follows:

1. Treaty Trader’s/Investor’s Visa under Section 9(d) of the Philippine Immigration Act
2. Prearranged Employee’s Visa under Section 9(g) of the Philippine Immigration Act
3. Special Non-immigrant Visa under Section 47(a)(2) of the Philippine Immigration Act
4. Special Non-immigrant Visa under Executive Order (E.O.) No. 226
5. Special Non-immigrant Visa under Presidential Decree (P.D.) No. 1034
6. Special Subic Work Visa

Taxation

The main taxes imposed on corporations in the Philippines are Corporate Income Tax, Value-Added Tax (VAT) and Withholding Tax (WT). Other taxes include Percentage Tax (generally for activities not subject to VAT), Excise Tax, Documentary Stamp Tax, Local Business and Real Property Taxes.

Corporate Income Tax of 30% is imposed on taxable income. In the 4th year of operations, the tax imposed is either 2% of gross income or 30% of taxable income, whichever is higher. For entities covered by special laws (e.g. PEZA entities), a 5% income tax is imposed on the gross income. ROHQ, on the other hand, are entitled to an income tax rate of 10% on taxable income. Quarterly income tax returns should be filed and the payment should be made, on or before the 60th day following the close of each of the quarters of the taxable year. The annual income tax return shall be filed and the payment made on or before the 15th day of April of each year covering taxable income for the preceding taxable year.

VAT at the rate of 12% is imposed on the sale, barter, exchange or lease of goods or properties and services in the Philippines, including the importation of goods. Being an indirect tax, the VAT can be passed on to the buyer or end user of the goods and/ or services.

The VAT returns must be filed and the corresponding payment (if any) made within 20 days following the end of each month (for monthly VAT returns) and 25 days following the close of the taxable quarter (for quarterly VAT returns) unless the filer is enrolled under the Electronic Filing and Payment System (EFPS).

The withholding tax system is a means of collecting tax in advance. Withholding tax is a deduction on income payments (e.g. goods, services, rentals, interest, royalties, and dividends). Tax rates range from 1% to 30%, depending on the nature of the payment. However, income payments to foreign entities may be subject to lower preferential tax treaty rates provided that a Certificate of Residence for Tax Treaty Relief Form has been accomplished before the payment of income is made. This form applies only to income payments for dividends, interests and royalties. Except for those enrolled under the EFPS, WT returns shall be filed and payment must be made on or before the 10th day of the month following the month of withholding.

Local business taxes, fees and charges are also levied by local government units (LGUs).

Audit and accounting

All legal entities are required to prepare annual financial statements in accordance to/ with the applicable financial reporting framework that is acceptable in the Philippines [i.e. either full compliance with the Philippine Financial Reporting Standards (PFRS) or PFRS for small and medium-sized enterprises (SMEs), depending on the criteria prescribed by the SEC]. PFRS and PFRS for SMEs are broadly aligned with International Financial Reporting Standards (IFRS) and IFRS for SMEs.

The annual financial statements are required to be audited by the local independent external auditors before submitting to the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). The performance audit is in accordance with the Philippine Standards on Auditing (PSA) and is also aligned with International Standards on Auditing (ISA).

Country quirks

• In the 4th year of operations, the corporate tax imposed is either 2% of gross income or 30% of taxable income, whichever is higher.
• Withholding tax rates range from 1% to 30%, depending on the nature of the payment.

Visit Mazars Philippines for more information on the services available to help you set up your business.