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Doing business in the Philippines

How quickly can I set up a business?

It depends on what kind of business one is going to set-up and how fast one can comply with the list of requirements imposed by the regulatory agencies. As to business structure, one may set up a business in the form of single proprietorship, partnership or corporation. In one article, it says, the process to register a business in the Philippines could take some time. On the average it takes between 2 to 4 months.

What is the minimum investment needed?

The law governing foreign investment in the Philippines is the Foreign Investments Act (FIA) of 1991 (or Republic Act. No. 7042 as amended by RA No. 8179). The Foreign Investments Act (FIA) of 1991 liberalized the entry of foreign investments into the Philippines. Under the FIA, foreign companies are generally allowed to conduct business in the Philippines subject to restrictions spelled out in the Foreign lnvestments Negative List (FINL), which the government periodically updates. The FlNL is a shortlist of areas of economic activities where foreign investments are restricted or limited. It has two components:

List A contains areas of activities reserved to Philippine nationals by mandate of the Constitution and other specific laws.

List B contains the areas of activity and enterprises where foreign ownership is limited pursuant to law. Among these are defence or law enforcement related activities and those with implications on public health and morals. This list includes small and medium-sized domestic market enterprises with paid in equity capital less than the equivalent of US$200,000, unless they involve advanced technology as certified by the Department of Science and Technology or they employ at least 50 direct employees, in which case a minimum paid-up capital of US$100,000 is allowed.

How can I raise finance?

The government prefers foreign equity investments to foreign borrowings. In general, foreign borrowings require prior approval of and/or registration with the BSP in order that repayment of principal and remittance of interest may be serviced using foreign exchange purchased from the Philippine banking system. Under present rules, loans that may qualify for prior BSP approval/registration are those intended to finance the following types of projects:

a) Export-oriented projects;
b) BOI-registered projects;
c) Projects listed in the Investments Priorities Plan;
d) Projects listed in the Medium-Term Public Investment Program; and
e) Other projects that may be declared priority under the country’s socio-economic development plan by the National Economic Development Authority or by Congress.

All the above loans, regardless of maturity, shall exclusively finance foreign exchange requirements of eligible projects, provided that loans of direct and indirect exporters and public sector borrowers may finance both foreign exchange costs and up to 50% of the total peso costs component of their respective projects. Foreign companies may also resort to peso borrowings only upon prior certification by the BSP Inter-Agency Committee that they meet the guidelines prescribed by the Monetary Board. Foreign loans which may have been sourced without prior BSP approval shall be reported just the same to the BSP otherwise, appropriate sanctions may be meted out.

All enterprises registered with the Board of Investments (BOI) are required to maintain a debt-to equity ratio of at least 75:25 during the entire duration of their registration with the concerned government agency.

A foreign company can borrow from a private individual or private non-financial institution.

What are the legal requirements for setting up my business?

Before a foreign corporation can engage in business in the Philippines, it must first secure the necessary licenses or registration certificates from the appropriate government agencies. Generally, the registration process starts with the Securities and Exchange Commission (SEC). The SEC is the government agency responsible for the registration, licensing, regulation, and supervision of all corporations and partnerships organized in the Philippines, including foreign corporations licensed to engage in business or to establish branch offices in the Philippines. Registration with the SEC grants the entity with the corporate franchise or juridical personality to operate and transact business in the Philippines. The processing and approval of the papers generally take around 15 working days from official acceptance of the application.

After registration with SEC, the business should also be registered with the Bureau of Internal Revenue (BIR), Local Barangay Office and the Social Security System. Documents can be downloaded online, but in some cases, the applicant needs to visit the offices of the relevant authorities in person.

To register a foreign owned corporation in the Philippines, the following documents are required:

1. Relevant forms (F103 or 104);
2. Authenticated board resolution authorizing the opening of an office or branch in the Philippines;
3. Articles of incorporation;
4. Financial records
5. Proof of minimum inward payment

What structure should I consider?

The Congress has passed may legislations to help promote foreign investments in the Philippines. Being one of the considerations, it is highly recommended for a foreign investor to venture into corporation as a business structure. Such corporations may register with the Board of Investments, Philippine Economic Zone Authority and other Investment Promotion Agencies to avail of certain fiscal incentives.

What advice can you give me in regards to payroll and taxation requirements?

Deciding where to locate a business has always been important. Location plays a huge role in attracting and retaining the best employees, many of whom keep a close eye on where they’re based in order to optimize work-life balance. Good location decisions can significantly boost a company’s long-term performance. In one article, it says, the best places to start a business in the Philippines are:

1. Makati Central Business District;
2. Ortigas Central Business District;
3. Quezon City Business District;
4. Cebu;
5. Davao;
6. Cagayan de Oro;
7. Pampanga;
8. Taguig;
9. Pasay; and
10. Alabang

In the Philippines most employees work a 40 hour week – eight hours a day from Monday to Friday. In some industries though, employees are expected to work 48 hours each week. If they work six days straight, employees must then have a 24 hour break.

Employees in the Philippines are entitled to a minimum of 13 days of annual leave each year. After three years of work in a company, this should go up one day per year, up to 18 days. In addition to this, there are 17 days of paid national/public holidays. If an employee has to work on a national or public holiday, they are entitled to double pay.

Workers are also allowed up to 12 days of paid sick leave, with an additional day per year being given after two years at a company. This is capped at 15 days of paid sick leave.

Maternity leave is around 120 days (four months), during which women are paid their full salary through the country’s social security scheme. Fathers can also take up to seven days off with full pay.

Employers need to be aware of the local law about corporate and personal tax. Employees do not get taxed if their salary is below 250,001 PHP ($4812 USD). After this, the tax rate starts at 20%, and then increases with a cap of 35% on salaries of 8,000,000 ($154,000 USD) PHP and above.

In the Philippines, individuals must file their taxes every year with the Philippine Bureau of Internal Revenue. This should be done on or before the 15th April, using BIR Form 1700. All residents, resident aliens, and non-resident aliens who carry out business in the Philippines and receive any kind of income from this, must all file their taxes.

Businesses operating in the Philippines are all subject to tax. Domestic companies are subject to tax on their entire worldwide income, whereas foreign companies are only subject to tax on their income gained from Filipino sources.

The amount of corporate income tax (CIT) can vary. Usually CIT is 25% of a company’s net income. However, after four years of trading, it can change to 1% of a company’s gross income (known as MCIT, or minimum corporate income tax) if this amount is more than 25% of net income.

Is there anything else that I should know?

As a foreign investor, there are many reasons why starting a business in the Philippines is a wise choice. Among them are the following:

• Quality Manpower. The country’s priority in education puts it at an advantage by having a high functional literacy rate of 91.6%. English is also taught in schools and is widely spoken throughout the country, eliminating the complication of language barriers.
• Developing Infrastructure. The Philippine economy is open to innovations and ideas by improving various areas for investors. The government’s “Build, Build, Build” program aims to cover areas such as disaster mitigation, social and tourism, industry and trade, highways, and transportation to help drive its infrastructure to the future.
• Confidence of Filipino Consumers. Filipinos love to spend their money on new items such as clothing, vacations (local and international), investments, and more.
• Strategic Location. Being at the heart of Asia, it’s located close to its major financial hubs like Hong Kong, Singapore, Taipei, Tokyo, Bangkok, etc.

Depending on the type of business you want to establish, it is best to have these factors in mind and use them to your advantage.

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