• location_on Twelfth Floor, 139 Corporate Center, 139 Valero Street, Salcedo Village, Makati City 1227, Philippines

Doing Business in the Philippines

WHAT IS THE BASIC PROFILE OF THE PHILIPPINES?
The Philippines is an archipelagic country in Southeast Asia which is comprised of 7,107 islands. The islands are categorized into three main groups: Luzon, where the capital city of Manila is located, Visayas and Mindanao. The country has a tropical climate dominated by rainy season, dry season and cool season. The official languages of the Philippines are Filipino and English. English is widely used in education, business and government communications in the country making the Philippines the third largest English speaking country in the world. The latest official census of population conducted by the government in 2007 placed the Philippine population at 88.7 million.
According to the labor force statistics of January 2009, the labor force of the Philippines is estimated to be at 37.1 million.  The currency of the country is the Philippine peso. In the last three years, the exchange rate of the Philippine peso to the United States Dollar ranged from P46.1484 to P47.7478.

The Philippines is a democratic republican state. There are three branches of the government: Executive, Legislative and Judiciary. The Executive branch is headed by the President, who is elected by popular vote to a six-year term. The Legislative Branch is bicameral composed of the Senate and the House of Representatives. The Judiciary is composed of the Supreme Court, headed by the Chief Justice, and the lower courts.

WHAT IS THE STATE POLICY ON FOREIGN INVESTMENTS?
It is a state policy to attract, promote and welcome productive investments from foreign individuals and entities.

ARE THERE ANY RESTRICTIONS TO FOREIGN INVESTMENTS?
As a general rule, there are no restrictions on the extent of foreign ownership of export enterprises.

However, in domestic market enterprises, foreigners can invest as much as one hundred percent (100%) equity except in areas included in the foreign investment negative list. The negative list states the certain investment areas or activities which are reserved to Philippine nationals. The negative list also prescribes percentage limits of foreign equity in other investment areas or activities. A Philippine national includes a corporation organized under Philippine laws, at least sixty percent (60%) of the capital stock of which is owned or held by citizens of the Philippines.

WHAT ARE THE DIFFERENT WAYS OF DOING BUSINESS IN THE PHILIPPINES?
Under Philippine law, business can be conducted through any of the following business organizations: Corporation, Sole Proprietorship, Partnership, Subsidiary, Branch Office, Representative Office, Regional or Area Headquarters or Regional Operating Headquarters.

Different capitalization and government licenses are required for the establishment and operation of each business organization. Every type of business organization has its advantages and disadvantages.  The best form of business organization for a foreign investor will depend on the nature and demand of the business undertaking.

WHAT ARE THE INCENTIVES TO DOING BUSINESS IN THE PHILIPPINES?
There are certain fiscal and non-fiscal incentives granted by the government to business entities registered with the Board of Investments. Fiscal incentives are, among others, in the form of income tax holiday, additional deduction for labor expense, tax and duty exemption on imported capital equipment and its accompanying spare parts. Non-fiscal incentives include simplification of customs procedures. A business may register with the Board of Investments if it proposes to engage in a pioneer project as defined in the Omnibus Investments Code.

Further, businesses which are intended to be principally engaged in the export of products may establish their operations within any of the special economic zones in the Philippines. Such would require registration with the Philippine Economic Zone Authority (PEZA). Aside from the incentives discussed in the paragraph above, a business entity registered with the PEZA is entitled to additional incentives such as exemption from local taxes and licenses.

CAN INVESTORS USE LAND IN THE PHILIPPINES?

Foreign investors may lease private lands up to the maximum period of 75 years subject to certain conditions. Foreigner nationals may own condominium units subject to the maximum limit of 40% of the condominium project.

WHAT ARE THE GENERAL TAX CONSEQUENCES FOR A CORPORATION INVESTING IN THE PHILIPPINES?
Domestic corporations are subject to tax on their worldwide income – income derived from sources within and without the Philippines. Foreign corporations are only taxed on income derived from all sources within the Philippines. The tax rate for domestic corporations and resident foreign corporations is thirty percent (30%) of their taxable income for the taxable year starting January 1, 2009 subject to a minimum corporate income tax of two percent (2%) of the gross income for the taxable year.

The regional or area headquarters are not subject to income tax. On the other hand, regional operating headquarters are subject to a tax of ten percent (10%) of their taxable income for the taxable year.

As a general rule, nonresident foreign corporations are liable for an income tax of thirty percent (30%) of the gross income for the taxable year from all sources within the Philippines.

Special tax rates apply for certain types of income received by domestic corporations, resident foreign corporations and non-resident foreign corporations.

Several tax treaties have been entered into by the Philippines for the purpose of avoiding double taxation and preventing fiscal evasion with respect to income taxes. To be entitled to the special rates under the tax treaties, an application for a tax treaty relief must be filed with the International Tax Affairs Division of the Bureau of Internal Revenue.

WHAT ARE THE GENERAL TAX CONSEQUENCES FOR AN INDIVIDUAL INVESTING IN THE PHILIPPINES
Income derived by Philippine citizens from all sources within and without the Philippines is subject to the following graduated income tax rates subject to the allowance of personal exemptions. Income derived by resident aliens and non-resident alien doing business in the Philippines from all sources within the Philippines are likewise subject to the same graduated rates.

Taxable range Marginal Rates
Not over P10,000 5%
Over P10,000 but not over P30,000 10%
Over P30,000 but not over P70,000 15%
Over P70,000 but not over P140,000 20%
Over P140,000 but not over P250,000 25%
Over P250,000 but not over P500,000 30%
Over P500,000 32%

 

Special tax rates apply for certain types of income received by the said individuals. Special income tax rates also apply to alien individuals employed by regional or area headquarters and regional operating headquarters, offshore banking units and by petroleum service contractor and subcontractor. A non-resident alien individual is engaged in trade or business in the Philippines if such individual stayed in the country for an aggregate period of more than one hundred eighty (180) days during any calendar year.

As a general rule, income derived by non-resident aliens not engaged in trade or business from all sources within the Philippines is subject to an income tax of twenty five percent (25%) of the gross income. Special tax rates apply for certain types of income received by the said individuals.