Planning Your Investment

Before a foreign corporation can do business in the Philippines, it must register with the Securities and Exchange Commission (SEC) to acquire status as legal persons with all the rights, benefits and privileges of a corporate citizen.

Those who wish to avail of investment incentives should first seek approval from the Board of Investments (BOI) or the Philippine Economic Zone Authority (PEZA) before filing an application with the SEC.
Businesses operating in one of the 39 cities and towns that are defined as “Ecozones” by the Special Economic Zone Act , are entitled to additional incentives.


Ownership

Since the liberalization of the foreign investments law, 100% foreign equity may be allowed in all areas of investment, except financial institutions and those included in the fifth regular Foreign Investment Negative List *link (effective October 22, 2002).


Setting up a Legal Office

With the emphasis of government placed squarely on the need to attract more foreign investment into the country, the Philippines is now seeking to compete with Hong Kong and Singapore as a preferred location for regional headquarters of multinational corporations (MNCs). Among the MNCs that have already established their base in the country is America Online (AOL), which employs hundreds of highly skilled Filipino technicians and programmers in its office based in Clark Field, Pampanga in the Philippines.

While the Philippine government offers tax incentives to foreign investors, it is the abundant supply of quality but cheap skilled labor that remains the country's strongest selling point. Foreign corporations establishing local operations have to pay only 10 to 20 percent for highly skilled and English-speaking Filipino workers compared to the wages paid to similar workers in the United States.

For many such corporations, the Philippines is carving out a role as a "back-office." Business lines that foreign investors commonly pursue in the Philippines include the fields of payroll accounting and inventory management; software development and systems maintenance; website design and maintenance; call centers, data warehousing and data conversion; insurance claims processing; medical transcription; and content development.
The Philippine Congress recently (2001) approved Republic Act 8756, which allows the regional headquarters of MNCs to derive local income from their Philippine operations. Prior to this, such regional headquarters were allowed to act only as administrative branches for international operations and were not allowed to conduct local business that involved commercial transactions.

The new law also grants expatriates working at regional headquarters special multiple-entry visas, tax breaks such as exemption from payment of income taxes and the local (10 percent) value-added tax. Under certain conditions, supplies imported by these regional headquarters can be exempted from customs duties, internal revenue taxes, export taxes and other local taxes.
 
The Philippine government requires regional headquarters (RHQ) and regional operating headquarters (ROHQ) of an MNC to submit certificates of remittance to the Securities and Exchange Commission (SEC), within 30 days of receipt of its certificate of registration. The initial funding requirement for an RHQ is US$50,000 while the ROHQ is required to remit initially the amount of US$200,000 or an equivalent amount in other foreign currencies. An ROHQ is a foreign business entity, which is allowed to derive income in the Philippines, by providing qualifying services to its affiliates, subsidiaries, or branches.

Apart from cheap and quality labor available, the country's friendly ambiance to foreign culture helps attract foreign investors, not only to establish an office but also to live in the Philippines.

In its 1999 survey, PERC Limited said that most expatriates rated the Philippines as the country with the best living conditions among the 12 Asian countries surveyed including Japan, Hong Kong and Singapore.



Business Structures

There are a number of business entities that foreign investors may use to establish their operations in the Philippines and which they may form on their own or in partnership with local investors.
Based on provisions determined by the Foreign Investment Act of 1991, a foreign corporation may establish itself in the Philippines through one of several means.

Representative Office . A representative office's activities are limited to promotion and information dissemination regarding the products and services of the company it represents. A representative office cannot trade but it can oversight a local agent.

Branch Office . A branch office may conclude sales contracts with local entities in its own name and engage in income-producing activities in the same manner as its parent company. In such situations, the head office of the company provides the capital to its branch; likewise, it oversees branch management and is accountable for all branch operations and obligations. Its mode of formation, operation and procedures for liquidation are similar to those of a domestic corporation.

Domestic Subsidiary . While incorporated and existing under Philippine laws, a domestic subsidiary (domestic corporation) is either wholly owned or at least majority-owned by a foreign parent corporation. However, the liability of the parent corporation to creditors of the subsidiary is limited to its shareholdings in the domestic subsidiary. Establishment of a domestic corporation is the most common form of business organization used by foreign investors. A corporation may be wholly foreign-owned or may have local participation.

Under the Corporation Code of the Philippines, corporations may be formed for any lawful purpose by at least five shareholders of whom at least two must be nationals of the Philippines including .the person nominated as the company secretary. Foreigners with the correct residence visas can be nominated as company treasurers or as "treasurers in trust" prior to the appointment of a Philippine national as treasurer in situations where visa conditions do not allow a foreign shareholder to hold such a position.

The Code also requires a minimum paid-in capital for stock corporations of at least P5,000. Some investment areas have higher minimum paid-in capital requirements.

Regional Headquarters . A regional headquarters acts as a center for supervision, communications and coordination for the company's subsidiaries, branches or affiliates in the Asia-Pacific Region. Special incentives are available to companies that establish their regional headquarters in the Philippines.

Joint Venture . Foreign and domestic corporations may enter into a joint venture and form a new domestic corporation, which is to perform a single, specific undertaking or project with each of the partners contributing to its performance. Unlike in some other countries, a joint venture in the Philippines does not have a legally separate, recognizable identity.

Other modes . A foreign company may purchase shares in an existing corporation. (2) A foreign-owned domestic subsidiary can merge or consolidate with a domestic corporation. (3) A technology transfer arrangement involving licensing of computer software and transfer of systematic knowledge for a product's manufacture, among other things, may be entered into by domestic and foreign countries. (4) A foreign corporation may enter into a five-year management contract that enables it to manage all of the business of a domestic corporation not involved in wholly or partially nationalized enterprises.

Partnerships . This may be formed by two or more persons acting as partners with the partnership having a separate legal personality from each of the partners. By contributing capital, foreign investors may join a partnership. Partnerships are often used by professional firms as the preferred form of association.
Repatriation of Capital and Profits - The Bangko Sentral ng Pilipinas or BSP ensures that the repatriation of capital and the remittance of dividends, profits and earnings can be made using foreign exchange from the banking system.



Security Concerns

While in some parts of the country security concerns remain an issue such concerns rarely influence a company's decision as to whether to locate to the Philippines or not. Overall, the security situation is no more and no less problematic than in other Asian centers. Indeed in the locations generally preferred by the international business community, local security is of a high standard.

The government of the Philippines is making a strident effort to combat terrorist activity in the rore remote areas but the problem is unlikely to be fully resolved until a significant dent is made on the endemic poverty that pervades much of the country .In the meantime business people working in or traveling to remote areas will need to take sensible precautions and be aware of the risks.


Insurance Issues

Currently there are 115 companies in the Philippines offering insurance products to corporations and individuals and the market is considered to be over serviced. The most important thing to note if you are relocating your business to the Philippines is that you will be required to insure locally. Non-Admitted Insurance - the practice of taking insurance offshore to cover domestic risk - is prohibited in this country and heavy penalties apply for non-compliance. In theory the penalty can be as high as the value of the asset insured.

In regard to insurance, companies in the Philippines generally follow international practice but with a few local variants for good measure. The legal system governing the industry is a mixture of Spanish, Islamic and Anglo/American codes so it is wise to read the small print just to be sure you know what you are getting. An arbitration clause is compulsory in all policies.


Types of Insurance

Automobile: Third Party Bodily Injury Liability is compulsory but limits apply. Passengers in a vehicle are considered to be "third parties." Cover is provided in relation to licensed persons driving a vehicle and/or insured parties. Rates are subject to a strictly observed tariff and compulsory premiums cannot be discounted.

Business Interruption: Available on standard UK and/or US forms. This segment of the market is not controlled by tariffs.

Construction Insurance: Generally is available on an "all risks" basis.

General/Product Liability: Coverage can be written on either UK or US forms.

Marine and Inland Transit: Protection as well as Indemnity coverage is written locally but is almost 100% reinsured in London. There exists a local hull pool whose objective is to maintain a reasonable hull rate for smaller craft. Limits are low and the association does not have a great influence over larger risks.

Inland Transit coverage is available on both UK and US forms. Ocean cargo is covered on the standard UK forms.

Property Damage: Policies may be written on a reinstatement value, blanket cover or stock declaration basis. Premiums may be discounted for specific extinguishing appliances. Full value cover is normal with standard policies available with the usual exclusions.

Employee Benefits: There are a number of schemes operating in the market, some of which are mandated on employers to provide with or without employee contributions. Such schemes include:

• Retirement and Pension schemes: The Department of Social Security provides a monthly pension benefit. Employers provide a defined benefit pension that is based on final salary and length of service.

• Death / Life Coverage: The Social Security system provides for a monthly spouse pension while many employers provide a group life policy;

• Disability insurance: Social Security provides a basic Medicare program that offers cash sickness benefits for short-term illness and a monthly pension for total and permanent disability. Accidental death and dismemberment as well as permanent disability riders are often included with a group life policy.

• National Health Insurance (NHIP): The NHIP provides partial coverage for medical expenses. Employer sponsored medical plans are commonly provided. Larger industrial employers often provide an on-site clinic for employees.

• Allowances and Other Benefits: The Labor Code mandates specific minimum benefits on termination of employment . The precise nature of the benefits will depend on the reason for termination as well as other factors including length of service and contract type. Book Four of the Labor Code deals with Health, Safety and Social Welfare Benefits and should be consulted in each case. A skilled HR Manager will also be familiar with the conditions that apply.

Workers Compensation and Employer Liability: Workers Compensation is included within the Social Security Scheme. Employers Liability is available but is not commonly purchased because of the social security system.
 

 

Copyright © 2002 MCA Virtual Philippines Inc. Reproduced with permission
Political and Economic Risk Consultancy Ltd. – a Hong Kong group that conducts surveys on Political and Economic Risk.