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
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
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
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.
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
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
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.
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.
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
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.
Generally is available on an "all risks" basis.
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
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
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
• 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
• 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.
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.