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What are my options for setting up a foreign owned company in the Philippines?

Philippine laws allow foreigners to hold shares or control in the following legal entities:

  • Branch
  • Representative office
  • Domestic corporation

Most popular option by far among the foreign investors is to set up a domestic corporation. This is mainly for the following reasons:

  • Liability is limited to the equity of the company
  • Setup time is much faster and easier compared to branch
  • Unlike representative offices, domestic corporations can earn revenue in the Philippines

Requirements for the domestic corporation in the Philippines

Domestic corporations with foreign ownership will have to comply with the following requirements:

  • Minimum 5 natural shareholders/incorporators (legal persons are not allowed) that each owe at least one share in the company.
  • Majority of the incorporators (but not shares) have to be residents of the Philippines. Residents don’t have to be citizens.
  • 5-15 directors/trustees that all have to own at least one share. Majority of them have to be residents of the Philippines.
  • Minimum paid up capital of $US200,000 unless the company qualifies for the reduced capital requirements.

Note that some industries are in the Negative Investment List which reduces the maximum foreign ownership for certain business classifications. Consult our consultants to understand exactly the restrictions for your industry.


The Philippines is an amazing country.  This week, the Philippines was deemed the "best country to invest in," based on rankings released by US News and World Report.  The study gauged the countries based on 65 attributes and included 21,000 respondents worldwide. US News and World Report said it used criteria developed by The Wharton School of the University of Pennsylvania and Y&R's BAV Group.

Despite this, The Philippines has a mere four percent share in the FDI figures as against topnotcher Singapore’s 52 percent and second placer Indonesia’s 13 percent.  The Philippines has also been ranked sixth in terms of “tax regimes and overall competitiveness,” the statistics also said.

It’s amazing how much there are parallels between tax reform in the Philippines and in the USA.  Both countries have populist leaders who advocate economic nationalism.   Driven by the Executive, in December 2017, both nations somewhat hastily and controversially passed legislation that promised to dramatically change the tax landscape.

I’ve already spoken about US tax reform here –

Individuals - http://www.derrenjoseph.com/2018/01/an-act-to-provide-for-reconciliation.html

Corporations - http://www.derrenjoseph.com/2018/02/us-exposed-owner-of-international.html

In the Philippines, the Comprehensive Tax Reform Program (CTRP) aims to raise revenues for the administration's infrastructure programs.  The administration’s priorities are build, build, build.  The Tax Reform for Acceleration and Inclusion (Train) Law or Republic Act No 10963 took effect on January 1, 2018.  Or more accurately package 1 (or Train 1) took effect from January 1st as the government seeks to overhaul the outdated National Internal Revenue Code (NIRC) which was adopted 20 years ago.  It is expected that the tax code would be reformed using 6 or so Train packages.  Package 1 dealt with individual taxes and excise duties.  Package 2 should deal with corporate tax reform.

Train relatively decreases the tax on personal income, estate, and donation.  However, it also increases the tax on certain passive incomes, documents (documentary stamp tax) as well as excise tax on petroleum products, minerals, automobiles, and cigarettes.  The Train law also imposes new taxes in the form of excise tax on sweetened beverages and non-essential services (invasive cosmetic procedures) and removes the tax exemption of Lotto and other PCSO winnings amounting to more than P10,000.

To international investors however, there has been some concern over –

  1. The veto on the 15% special tax rate for employees of Regional Headquarters (RHQ), Regional Operating Headquarters (ROHQ), Offshore Banking Units, and Petroleum Service Contractors and Subcontractors.  These employees will be taxed using the regular income tax table
  2. The veto on the excise tax exemption of petroleum products used as input, feedstock, or as raw material in the manufacturing of petrochemical products, or in the refining of petroleum products, or as replacement fuel for natural gas fired combined cycle power plants.
  3. The veto on the zero rating of sales of goods and services to separate customs territory and tourism enterprise zones, specifically, the areas under the Tourism Infrastructure Enterprise Zone Authority (Tieza).

Impact on Expatriates in the Philippines:

  1. Possible reduction in the number of topmost managerial positions of regional operating headquarters (ROHQs).  High earning ROHQ employees (earning PHP975,000 and up) have been disallowed from enjoying a 15% special tax rate, putting them in the regular tax schedule at par with non-alien resident taxpayers.
  2.  Possible adjustments to housing budgets of expatriates. Affected companies may become creative on relocation packages – i.e. ratios between house rental and monthly utilities.
  3. Probable rise in housing choices.
  4.  Possible requests for increased salaries from domestic help and drivers.
  5. Surge in rental car services and rates.
 

Package 2 or Train 2 was laid before Congress this week.  It proposes to gradually lower the Corporate Income Tax (CIT) rate from 30 to 25 percent while modernizing incentives for companies to make these “performance-based, targeted, time-bound, and transparent”.  At the moment, the Philippine Economic Zone Authority (PEZA) has much autonomy in negotiating incentives for inbound investors.  Going forward, the government takes more control of the process.  There is much concern about the extent to which a shift in, or elimination of incentives, would affect investor sentiment and behavior.

Will this range of reform impact on investment in the Philippines.  Time will tell but there is a hope that while tax is considered by investors, there are more important criteria.

Taxation in Philippines

The sections below provide the basic information on taxation in Philippines.

Local information

  • Tax AuthorityBureau of Internal Revenue (BIR)
  • Websitewww.bir.gov.ph
  • Tax Year1 January to 31 December
  • Tax Return due date15 April
  • Is joint filing possibleYes
  • Are tax return extensions possibleNo

Tax rates

2016/17 income tax rates for residents

Taxable Income Band National Income Tax Rates
1 - 10,000 5%
10,001 - 30,000 10%
30,001 - 70,000 15%
70,001 - 140,000 20%
140,001 - 250,000 25%
250,001 - 500,000 30%
500,001 + 32%

Net taxable compensation and business income of resident and non-resident citizens, resident aliens, and non-resident aliens engaged in a trade or business are consolidated and taxed at the above rates.

For non-resident aliens engaged in a trade or business in the Philippines, dividends, shares in profits of partnerships taxed as corporations, interest, royalties, prizes in excess of PHP10,000 and other winnings are subject to final withholding tax at a rate of 20% of the gross amount. Royalties on musical compositions, books and other literary works are subject to a final withholding tax at a rate of 10%.

Non-resident aliens not engaged in a trade or business in the Philippines are subject to a final withholding tax of 25% on gross income, including fringe benefits, from all sources in the Philippines.

Additional information

Who is liable?

Resident citizens are subject to tax on worldwide income. Non-resident citizens, resident aliens and non-resident aliens are subject to tax on income from Philippine sources.

Bureau of Internal Revenue (BIR) Ruling 517-2011 declared that employees of a Philippine entity who are working abroad for most of the tax year but remain on the local payroll are not non-resident citizens. Accordingly, payments to them are subject to withholding tax in the Philippines.

Income subject to tax

Gross income includes compensation, income from the conduct of a trade, business or profession, and other income, including gains from dealings in property, interest, rent, dividends, annuities, prizes, pensions and partners’ distributive shares.

Employment income - Employment income includes all remuneration for services performed by an employee for his or her employer under an employer-employee relationship. The name by which compensation is designated is immaterial. It includes salaries, wages, emoluments and honoraria, allowances, commissions, fees including director's fees for a director who is also an employee of the firm, bonuses, fringe benefits, taxable pensions and retirement pay and other income of a similar nature. Emergency cost-of-living allowances received by employees are also included in their compensation income.

Employment income received for services provided in the Philippines is subject to tax in the Philippines regardless of where the compensation is paid. Remuneration for services remains classified as compensation even if paid after the employer-employee relationship is ended.

Business income - Gross income from the conduct of a trade or business or the exercise of a profession may be reduced by certain allowable deductions and by personal and additional exemptions. However, an individual who has both compensation and business income may claim personal and additional exemptions only once.

Professional fees are subject to a 15% creditable expanded withholding tax if such fees for the year exceed PHP720,000. Otherwise the rate is 10%.

Under certain circumstances, self-employed persons may carry forward business losses for three years, unless a 25% change in the ownership of the business occurs. Carry-backs are not permitted.

Directors' fees - Directors' fees derived by individuals who are employees of the same company are taxed as income from employment and are subject to creditable withholding tax on wages. Directors' fees derived by individuals who are not employees of the same company are included in the recipients' business income and are subject to a creditable withholding tax. The rate of withholding tax is 15% if the gross income for the current year exceeds PHP720,000. Otherwise, the rate is 10%. Directors' fees derived by non-resident aliens deemed to be not engaged in a trade or business are subject to a final withholding tax at a rate of 25%.

Investment income - In general, interest on peso deposits and yields, or any other monetary benefit derived from deposit substitutes, trust funds and similar arrangements, is subject to a final 20% withholding tax. However, interest on certain long-term deposits or investments evidenced by qualifying certificates is exempt from the final 20% withholding tax. Final tax is imposed at rates ranging from 5% to 20% on the income from long-term deposits if the investment is withdrawn before the end of the fifth year. Interest received by residents on foreign-currency deposits is subject to a final 7.5% withholding tax. Interest received by non-resident individuals on foreign-currency deposits is exempt from tax.

Cash or property dividends actually or constructively received by citizens and resident aliens from domestic corporations, as well as a partner's share in the after-tax profits of a partnership (except a general professional partnership), are subject to final withholding tax at a rate of 10%. Non-resident aliens engaged in a trade or business in the Philippines are subject to final withholding tax on these types of income at a rate of 20%. For non-resident aliens not engaged in a trade or business in the Philippines, investment income is generally taxed at a rate of 25%, except for gains from sales of real estate and sales of shares of domestic corporations.

Rental income - Rental income is considered business income and is taxed at the standard rates.

Taxation of employer-provided stock options - In general, employer-provided stock options are taxable to the employee as additional compensation at the time the option is exercised. This has been the trend in the treatment of stock options regardless of whether the recipient employee was a rank-and-file employee, or a supervisory or managerial employee. This trend ensued despite the introduction of the fringe benefit tax (FBT) on certain benefits received by supervisory or managerial employees. In other rulings, the BIR subjected the stock options to fringe benefits tax.

Tax filing and payment procedures

An income tax return must be filed, and the tax due paid, on or before 15 April for income derived in the preceding year. If tax due exceeds PHP2,000, it may be paid in two equal instalments, the first at the time of filing the return and the second by 15 July following the end of the relevant tax year.

In prior years, the BIR allowed the manual filing of income tax returns. However, with the issuance of RR 5-2015, which amends RR 6-2014, it is now mandatory for taxpayers enumerated under RR 6-2014 to use the eBIR Forms facility. This means that the tax returns, including individual income tax returns (BIR Forms 1700 and 1701), must be prepared using eBIR Forms. The returns must be filed through the online eBIR Forms System. A penalty of PHP1,000 is imposed for each return not filed electronically. The taxpayer is also liable for a surcharge amounting to 25% of the tax due to be paid. Other individual taxpayers who do not fall in the categories in RR 6-2014 or are exempted may still file manually by using the printed BIR Form or using the form generated from the Offline eBIR Forms either manually or electronically by online submission or e-Filing.

A separate return must be filed, and any tax due paid, within 30 days after each sale of shares not traded on a local stock exchange; a final consolidated return must be filed by 15 April for all stock transactions of the preceding year. For a sale of real property, a separate return must be filed, and any tax due paid, within 30 days after each sale.

Non-resident aliens engaged in trade or business must file income tax returns.

For income subject to final withholding tax, the taxpayer is not required to file a tax return if such income is their sole income from the Philippines. The withholding agent is responsible for reporting the income and remitting the tax withheld.

Residence status for tax purposes

For foreign nationals, residence is determined by the length and nature of an individual's stay in the Philippines. An alien who comes to the Philippines for a definite purpose that is promptly accomplished is not deemed to be resident. However, if an alien makes their home temporarily in the Philippines because an extended stay may be necessary for the accomplishment of the alien's purpose for coming to the Philippines, the alien becomes a resident even though it may be the alien's intention at all times to return to the alien's domicile abroad when the alien consummates or abandons the purpose of the stay in the Philippines. Aliens who reside in the Philippines with the intention to remain permanently are considered resident. Aliens who acquire residence in the Philippines remain residents until they depart with the intention of abandoning that residence.

Non-resident aliens are classified as either engaged or not engaged in trade or business in the Philippines. A non-resident alien who stays in the Philippines for more than a total of 180 days during any calendar year is deemed to be engaged in trade or business in the Philippines; any other non-resident alien is deemed to be not engaged in trade or business in the Philippines.

Capital gains and losses

In general, capital gains are included in an individuals’ regular taxable income and are subject to tax at the usual rates. The gain is the excess of the amount realised from the disposal of the asset over the adjusted basis. If the asset is held for 12 months or less prior to disposal, the entire gain or loss is reported. For assets held longer than 12 months, 50% of the gain or loss is reported. The holding period rules do not apply to capital gains derived from the sale of real property in the Philippines or shares of stock in a domestic corporation.

Capital losses are deductible only to the extent of capital gains. Losses carried over are treated as short-term capital losses. Losses incurred from wash sales of stocks or securities are not deductible, unless incurred by a dealer in the ordinary course of business. This rule does not apply to shares of stock in a domestic corporation or to sale of real property described below.

A final tax of 6% is imposed on capital gains derived from transfers of real property located in the Philippines. The tax is based on the higher of the gross sales price and the fair market value.

Capital gains derived from the sale of shares in unlisted domestic corporations are taxed at a rate of 5% on the first PHP100,000 of the gain and at a rate of 10% on the excess over PHP100,000. The amount of the taxable gain is the excess of the sale price over the cost of the shares.

Gains derived from the sale of listed shares are exempt from capital gains tax. However, a percentage tax (stock transaction tax) is imposed at a rate of 0.5% on the gross selling price of the shares.

Gains derived by resident citizens from the sale of shares in foreign corporations are taxed as capital gains, subject to the regular income tax rates.

Estate and gift taxes

An estate tax is imposed at graduated rates ranging from 5% to 20% on the transfer of a decedent's net estate valued in excess of PHP200,000. Citizens, regardless of whether resident at the time of death, and resident aliens are taxed on their worldwide estates.

For estate tax purposes, only that part of a non-resident alien decedent's estate located in the Philippines is included in the taxable estate. Under specified conditions, deductions may be permitted for certain items, including expenses, losses, indebtedness, taxes and the value of property previously subject to estate or gift tax or of property transferred for public use.

Estate tax rates range from 0% to 20%. To prevent double taxation of estates, the Philippines has concluded an estate tax treaty with Denmark.

Residents and non-residents are subject to gift tax, which is payable by the donor on total net gifts made in a calendar year. Citizens and resident aliens are subject to gift tax on worldwide assets. Non-resident aliens are subject to gift tax on their Philippine assets only. Gift tax rates range from 0% to 15% for relatives by consanguinity, up to the fourth degree of relationship in the collateral line. Other donees and beneficiaries are considered strangers and are taxed at a flat rate of 30%.

Social security

All individuals working in the Philippines must pay social security contributions. The employee's contribution is approximately 3.69% of salary and is withheld by the employer. The employer's contribution is approximately 7.67% of employees' salaries. Self-employed persons must be covered. The minimum monthly salary subject to social security contributions is PHP1,000. The maximum monthly contributions are PHP1,208.70 for employers and PHP581.30 for employees, which apply to employees receiving monthly compensation of PHP15,750 or more.

Employees age 60 or younger and their employers are compulsorily covered by the Social Security System (SSS). Individuals who are covered by the SSS are compulsorily covered by the Philippine National Health Insurance Program (Philhealth) and the Home Development Mutual Fund (HDMF). Compulsory contributions to the SSS, Philhealth and HDMF are deductible from the gross income of an individual. Voluntary contributions to these institutions in excess of the amount considered compulsory are not deductible and, accordingly, not exempt from income tax and withholding tax.

For the 2017 calendar year, the employee’s total maximum compulsory monthly contribution to these entities amounts to PHP1,118.80. The monthly contribution varies depending on the salary bracket of the individual.

Double tax relief and tax treaties

Foreign taxes paid or incurred in connections with a taxpayer's profession, trade or business may be deducted from gross income, subject to exceptions. Resident Filipino citizens may claim a credit for income tax due to any foreign country; the credit may not exceed the Philippine income tax payable on the same income multiplied by a fraction, the numerator of which is the taxable income from foreign countries and the denominator of which is worldwide taxable income.

The Philippines has entered into double tax treaties with 44 countries, and is negotiating tax treaties with a further seven countries.


Working Permits for Foreigners in the Philippines

Foreign nationals who want to work in the Philippines have to obtain not just the appropriate visa, but a work permit as well. Working without a permitcould result in heavy fines for both the employee and the employer.

Not all foreigners who come to the Philippines to work need a permit. The following are exempted from this rule:

• Members of a corporate board with voting rights, but without any position in the company

• Owners and representatives of a POEA-registered foreign company who come to the Philippines to interview job applicants

• Foreign nationals who were invited for teaching or research jobs, as part of an agreement between a foreign and local institution, or between a foreign government and the Philippine government

• Members of the diplomatic services or accredited officials of foreign governments

• Officers and employees (and their spouses) of an international organization, of which the Philippines is a member

• Any foreign national exempted by Philippine special laws

• Foreign nationals with permanent or temporary/probationary resident visas

There are three kinds of work permits for foreign nationals: Special Work Permit, Alien Employment Permit, and Provisional Work Permit.

Special Work Permit

A Special Work Permit is granted to those who will be working in the country for only six months or less. They include:

• Professional athletes who will be competing or participating in an event for less than six months

• Foreigners with special merits and abilities who have been invited to the country for specific temporary activities

• The crew of a movie or TV show to be shot in the country

• Reporters who come to the country to cover an event or person

• Artists who will be performing in the country for a limited time

 

Alien Employment Permit

An Alien Employment Permit (AEP) is required for foreign nationals who want to work in the Philippines for more than 6 months. It is granted only if it can be established that the job requires skills thatare not available locally.

Here are some details about the AEP:

• Application for one may be done personally by the foreign worker or by the company petitioning for his services

• Application has to be filed with the Department of Labor and Employment office with jurisdiction over the area where the foreign national will principally be assigned

• An AEP has an initial validity of one to five years, renewable for another five years

• The AEP is a prerequisite for a working visa, such as a 9(g) or 9(d) visa

Provisional Work Permit

A Provisional Work Permit is required for foreign nationals who want to start working in the country prior to receiving an AEP. It is valid for three months or until the issuance of the AEP, whichever comes first.

Alien Certificate of Registration Card

The Alien Certificate of Registration Immigration (ACR-I) card is not a permit to work, but is required for foreign nationals who stay in the Philippines longer than 59 days. It is given by the Bureau of Immigration, and serves as the holder’s re-entry permit and special return certificate. It is also needed to get an Emigration Clearance Certificate, which is required from leaving foreigners who have stayed in the country for more than 6 months.

Holders of an ACR-I card get a number of privileges, including the ability to open a local bank account, get a local driver’s license, or register a car or motorbike.

 


POLITICAL ENVIRONMENT

U.S.-PHILIPPINES RELATIONS

The United States recognized the Philippines as an independent state and established diplomatic relations with it in 1946. Except for the 1942-45 Japanese occupation during World War II, the Philippines had been under U.S. administration since the end of the Spanish-American War in 1898.

The U.S.-Philippines Bilateral Strategic Dialogue advances discussion and cooperation on bilateral, regional, and global issues. U.S.-Philippines relations are based on strong historical and cultural links and a shared commitment to democracy and human rights. The United States has designated the Philippines as a Major Non-NATO Ally, and there are close and abiding security ties between the two nations. The Manila Declaration signed in 2011 reaffirmed the 1951 U.S.-Philippines Mutual Defense Treaty as the foundation for a robust, balanced, and responsive security partnership. There is also a focus on economic, commercial, and people-to-people ties. There are and estimated four million U.S. citizens of Philippines ancestry in the United States, and more than 220,000 U.S. citizens in the Philippines, including a large presence of United States veterans. An estimated 650,000 U.S. citizens visit the Philippines each year. Many people-to-people programs exist between the Unites States and the Philippines, including Fulbright, International Visitor Leadership Program, and the Kenney-Lugar Youth Exchange and Study program.

Manila is home to the only VA benefits office and healthcare clinic outside the United States, and the American Cemetery in Manila is the largest American military cemetery outside the United States.

U.S. ASSISTANCE TO PHILIPPINES

The U.S. government’s goal in the Philippines is to partner with the country to become a stable and prosperous nation. The 2011 Partnership for Growth Statement of Principles reinforced a shared interest in promoting inclusive and sustainable economic growth in the Philippines. U.S assistance to the Philippines fosters broad-based economic growth: improves the health and education of Filipinos; promotes peace and security; advances democratic values, good governance, and human rights; and strengthens regional and global partnerships. Department of State, Department of Defense, and the U.S. Agency for International Development (USAID) programs in conflict-affected areas of Mindanao aim to strengthen the foundation for peace and stability in the area. U.S. assistance, including from the Millennium Challenge Corporation, seeks to intensify cooperation through a whole-of-government approach, using a wide range of assistance and other foreign policy tools. The United States has had a Peace Corps program in the Philippines for over 50 years.

Over the last decade, disaster relief and recovery has also become an increasingly important area of assistance to the Philippines. The United States has provided over $143 million in assistance to date to people of the Philippines in relief and recovery efforts after Typhoon Haiyan/Yolanda devastated the country in 2013. The United States continues to support long-term reconstruction and rebuilding efforts.

BILATERAL ECONOMIC RELATIONS

The United States and the Philippines have a strong trade and investment relationship, with over $25 billion in goods and services traded. The United States is one of the largest foreign investors in the Philippines, and is the Philippines’ third largest trading partner. The Philippines has been among the largest beneficiaries of the Generalized System of Preferences program for developing countries, which provides preferential duty-free access to the U.S. market.

Key imports from the Philippines are semiconductor devices and computer peripherals, automobile parts, electric machinery, textiles and garments, wheat and animal feeds, coconut oil, and information/technology business process outsourcing services. Key U.S. exports to the Philippines are machinery, cereals, raw and semi-processed materials for the manufacture of semiconductors, electronics, and transport equipment. The two countries have a bilateral Trade and Investment Framework Agreement, signed 1989, and a tax treaty.

The embassy is working to advance several key Environment, Science, Technology, and Health issues. The Philippines is an important partner on climate change and submitted an “intended nationally determined contribution” (INDC) prior to the December 2015 COP 21 meetings in Paris. USAID is providing key technical assistance to help ensure the Philippines’ INDC is meaningful and science-based.

PHILIPPINES’S MEMBERSHIP IN INTERNATIONAL ORGANIZATIONS

The Philippines and the United States belong to a many of the same international organizations, including the United Nations, ASEAN Regional Forum, Asia-Pacific Economic Cooperation (APEC) forum, International Monetary Fund, World Bank and World Trade Organization. The Philippines is also an observer to the organization of American States. The Philippines serves as chair and host of ASEAN for 2017.

BILATERAL REPRESENTATION

The U.S. Ambassador to the Philippines is Sung Y. Kim; other principal embassy officials are listed in the Department’s Key Officers List.

The Philippines maintains an embassy in the United States at 1600 Massachusetts Avenue NW, Washington, DC 20036 (tel. 202-467-9300).


Demography of the Philippines records the human population, including its population density, ethnicity, education level, health, economic status, religious affiliations, and other aspects. The Philippines annualised population growth rate between the years 2010-2015 was 1.72%. According to the 2015 census, the population of the Philippines is 100,981,437. The first census in the Philippines was held in the year 1591 which counted 667,612 persons.

The majority of Filipinos are made up of various ethnolinguistic Austronesian groups, while the Aetas, as well as other highland groups form a minority. The indigenous population is related to the indigenous populations of the Malay Archipelago. Ethnic groups that have been in the Philippines for centuries before European and American colonial rule have assimilated, such as Japanese, Han Chinese and Indians form part of the population. Due to Spanish colonization, many Filipinos have Spanish and Latin American ancestry.

The most commonly spoken indigenous languages are Cebuano and Tagalog, each with more than 20 million native speakers. Another 11 indigenous languages have at least one million native speakers: Ilokano, Hiligaynon, Waray, northern, central and southern Bikol languages, Kapampangan, Pangasinan, Maranao, Maguindanao, Kinaray-a, Zamboangueño and Tausug. One or more of these are spoken as a mother tongue by more than 93% of the population. Filipino and English are the official languages but there are between 120 and 170 distinct indigenous Philippine languages (depending on expert classifications).


Overview

The Philippine ICT industry is expected to continue its upward trajectory due to opportunities from the financial, telecommunications, Business Process Management (BPM), and health IT sectors.  Increased consumer spending, low PC penetration, and small and medium enterprise (SME) modernization will also contribute to its growth.  Business Monitor International (BMI) forecasts total IT spending for 2016 to be US$4.4 billion, an 8.3 percent increase from 2015.  BMI expects the annual growth rate in this sector to increase to 10.6 percent and reach US$6.6 billion in total spending by 2020.
 
The financial sector is one of the vertical industries expected to leverage ICT to deliver better and more secure customer service.  The BPM industry is expected to employ 1.3 million people and generate US$25 million in revenue by 2016.  The BPM industry is driving the growth of the hardware, software, services, and cloud opportunities as more offices are opened. 
 
Philippine SMEs now prefer cloud services as a lower cost alternative to more expensive software licenses.  The cloud is now considered as a great equalizer in the Philippines as it makes technology solutions more affordable and available to SMEs. 
 
Other sectors that are expected to increase IT spending are retail, consumer goods, and health IT.  The International Data Corporation (IDC) issued a press release stating that Philippine healthcare IT spending is expected to reach US$60 million in 2019, with a four percent annual growth rate from 2016 to 2019.  IDC indicated that the largest investors in IT are healthcare providers, including hospitals.  This group accounted for 88 percent of healthcare IT expenditures in 2015.  Hardware spending ranked highest with a 79 percent share, followed by services and software.  IDC analysts consider this trend as being consistent with ASEAN where the priority is focused on upgrading existing IT infrastructure.  However, IDC Philippines commented that there is a clear distinction between the private and public sector in healthcare IT.  Privately-owned hospitals are more aggressive in IT adoption in order to stimulate the growth of medical tourism.  Public /Government hospitals are still focused on developing basic healthcare services and making them more accessible.  IDC expects increased demand in mobility, tele-health and CRM solutions for the healthcare industry.
 
The Department of Science and Technology’s Information and Communications Technology Office (DOST-ICTO) launched the “Free Wi-Fi Internet Access in Public Places” project in late 2015 with a budget of US$66 million.  TV white space spectrum wireless technology will be used for last-mile connectivity in areas lacking broadband infrastructure. All participating internet service providers will peer with PhOpenIX, the country's only third-party, non-profit, publicly funded internet exchange point.
 
Filipinos are prolific users of social media.  Estimates this year show that there are 48 million active social media users from the Philippines.  Of this number, 42.1 million are on Facebook; 13 million on Twitter and 3.5 million are LinkedIn users.
 
The Philippine telecommunications industry remains very robust and is a major contributor to the country’s economy. Continuous capex for the upgrade of communications equipment contributes to the growth of the ICT industry.  Below are growth projections for the telecommunications industry:

  • Mobile: As of the end of 2015, there are 116.8 million subscribers with a penetration rate of 116 percent.  BMI forecasts a 119.8 percent penetration by 2020. 

  • Broadband: There is tremendous growth potential for broadband with wireless subscriptions accounting for 80 percent of all subscriptions.  Smartphone ownership is increasing as it becomes more affordable along with the growing demand for high-speed Internet access.  Smartphone penetration is estimated to be about 40 percent.  BMI forecasts 16.5 million broadband subscriptions by 2020.

The challenge for the Philippines is to continue to upgrade its telecom infrastructure to keep up with the growing demand for broadband.  According to Akamai’s “State of the Internet Report” for the fourth quarter of 2015, the average internet speed in the Philippines is 3.2 megabytes per second (MBPS), the second slowest in Asia Pacific.

  • Fixed Line: fixed line penetration is around four percent with an estimated four  million subscribers. This sub-sector is expected to remain stagnant.

The Philippine Long Distance Telephone Company (PLDT) and Globe Telecom are the two major telecommunication carriers in the country. PLDT, through its mobile group, SMART Communications and Sun Cellular, controls 70 percent of the mobile market, with Globe accounting for 30 percent. The current Philippine cellular infrastructure is Global System for Mobile Communications (GSM). 3G service was launched in 2006. 4G was made available in 2010. More recently, SMART and Globe launched long-term evolution (LTE) networks in 2012.
 
PLDT has an existing digital fiber optic connecting the entire country, as well as an existing digital microwave radio system and a data network. Globe Telecom also has fiber optic cables and was the first to offer Worldwide Interoperability for Microwave Access (WiMax).  SMART announced in April 2016 that it is deploying the country’s first LTE-Advanced (LTE-A) service. LTE-A allows for higher data speeds of up to 250 Mbps.


DOING BUSINESS IN THE PHILIPPINES

MARKET OVERVIEW

Discusses key economic indicators and trade statistics, which countries are dominant in the market, the U.S. market share, the political situation if relevant, the top reasons why U.S. companies should consider exporting to this country, and other issues that affect trade, e.g., terrorism, currency devaluations, trade agreements. Key Economic Indicators and Trade Statistics
  • The Philippines has the twelfth largest population in the world (about 100 million) and is the fourth largest English-speaking country. It also has one of the youngest populations in the world with more than two-thirds under the age of 35. Relatively high population growth (nearly two percent annually) will help drive economic growth for the next several years, while also increasing the strain on the country’s infrastructure
  • Philippine GDP growth slowed for a second consecutive year to 5.8 percent in 2015 due mainly to climate/weather-related damage to farm output and lethargic exports but nevertheless remained among Asia’s top performers. Most economists project the economy will grow around the six percent mark in 2006, buoyed in part by election-related spending.
  • Consumer spending, supported by remittance from overseas Filipinos and a growing middle class, remains the major GDP growth driver. Although still lagging behind regional peers, fixed capital investments and manufacturing output have accelerated with improved business confidence under the Aquino government.
  • Helped by soft global oil prices, average year-on-year consumer price inflation slowed markedly from 4.1 percent in 2014 to 1.4 percent in 2015, well below the 2-4 percent range targeted by the Philippine Central Bank. Average inflation will likely accelerate in 2016 due partly to food-supply pressures from a severe and prolonged drought but is expected to remain within the government’s 2-4 percent target band.
  • The Philippines reserved from a US$2.9 billion balance of payments (BOP) deficit in 2014 (its first BOP deficit in nearly 10 years) to a $2.6 billion surplus in 2015. The merchandise trade gap widened but resilient remittances from Filipino workers and immigrants (up 4.4 percent year-on-year to $28.5 billion) and rapidly expanding Business Process Outsourcing revenues (up more than 15% to nearly $22 billion) kept the current account in surplus for a thirteenth consecutive year. Significantly smaller net outflows in the financial account—reflecting a drop in residents’ offshore net direct investments, net withdrawals by residents of currency and deposit placements abroad, non-residents’ repayment of loans owed to local banks, and net foreign loan proceeds—more than offset the smaller current account balance, pushing the overall BOP position to surplus territory. These also more than made up for larger net outflows of portfolio capital as both local and foreign investors repositioned investments from emerging economies due to uncertainties over global economic prospects and the U.S. Fed funds rate lift-off.
  • Net foreign direct investment (FDI) inflows were flat at $5.7 billion in 2014 and 2015 but have generally increased under the Aquino government, growing from $1.1 billion in 2010 when President Aquino assumed office. The Philippines nevertheless remains among the region’s FDI laggards, with barely three percent of the total FDI stock in the region.
  • The Philippines Central Bank’s gross international reserves (GIR) increased by 1.4 percent to US$80.7 billion between the end of 2014 and the end of 2015, equivalent to more than ten months’ worth of goods and service imports and nearly four times the Philippines’ short-term foreign debt – well above international benchmarks.
  • The national government’s fiscal deficit ended 2015 at 0.9 percent of GDP, higher than in 2014 (0.6 percent of GDP) but still well below the government’s target of two percent a year. The ratio of Taxes to GDP – which remains among the lowest regionally – improved slightly from 13.6 percent to 13.7 percent but fell short of the government’s 15.3 percent target, making it unlikely for the government to meet the 16 percent tax-to-GDP goal by the end of President Aquino’s term in 2016. Unwelcome shortfalls in targeted expenditures, including infrastructure spending, have been more than offsetting, reflecting problems in spending and implementation of projects. More vigorous efforts to untangle spending bottlenecks have yielded emerging improvements since the second half of 2015. Boosting tax collection remains a critical challenge moving forward to finance still large infrastructure gaps and the needs of a growing population, about a quarter of whom live in poverty.
  • The overall improvement in macroeconomicstability, resilience to domestics and external shocks, and debt management efforts has been recognized by the “big three” credit rating agencies- Fitch, S&P, and Moody’s – investment grade ratings. S&P and Moody’s currently rate the Philippines’ long-term foreign currency sovereign ratings a notch above minimum investment grade, the highest achieved thus far in the Philippines’ credit-rating history.
  • The Philippines has improved in various competitiveness rankings, including the World Economic Forum’s (WEF) Global Competitiveness Report (September 2015), rising 38 spaces since 2011 to 47th place – on the fringes of the government’s goal to climb to the top third in the rankings. However, the inadequate state of infrastructure remains a weak spot and investors also continue to cite government red tape, regulatory uncertainties, a slow judicial system, and corruption challenges to doing business in the country.
  • The generally good economic news has been diminished by the relatively modest progress in addressing high unemployment (officially 6.5 percent in 2015) and underemployment (18.5 percent of the employed).
  • S. – Philippines bilateral trade has grown by over 44 percent since 2009, amounting to nearly $18.1 billion in 2015.
  • In 2015, Philippines ranked as the 32nd largest export destination for U.S. products and the 30th largest source of U.S. merchandise imports. The U.S. trade deficit with the Philippines was at $2.3 billion in 2015.
Other major importing counties include Taiwan, Singapore, and the Republic of Korea.
  • External events notably speculation over the timing and pace of an anticipated Fed funds rate, triggered further volatility in the foreign exchange market. The Philippines peso began weakening in mid-2013 with U.S. QE- tapering signals and developments and averaged 45.50 Philippine pesos (PhP) to the U.S. dollar during 2015, a 2.5 percent depreciation from the 2014 average rate. The peso closed 2015 at 47.06 to the U.S. dollar, almost five percent weaker from the end of 2014 (PhP44.82 per U.S. dollar). Tracking the regional uptrend, the peso has recovered some of its value, trading at stronger than 47 pesos to the U.S. dollar since the second week of March 2016.
  • The Philippine Stock Exchange Index (PSEi) climbed further to new record highs until the second week of April 2015 but, like emerging markets elsewhere, subsequently succumbed to unsettling external news, the specter of higher interest rates, and repositioning of financial assets from emerging markets. The benchmark index closed 2015 down 3.9 percent year-on-year, pausing from six years of consecutive gains, although it began inching up in March 2016 due in part to more dovish interest rate signals from the U.S. Federal Reserve Board. As of March 2016, the PSEi had closed 4.5 percent higher than at the end of 2015 and also mustered a slight increase from the end of 2014.
Political Situation and Other Issues that Affect Trade
  • The political situation in the Philippines is stable. Philippine voters elected President Benigno S. Aquino III on May 10, 2010 to single six-year term. In the May 9, 2016, general election, Filipinos elected Davao Mayor Rodrigo Duterte as president with around 39% of the vote. Mr. Duterte ran on a flat form of cracking down on crime and illegal drugs, curbing corruption, and shifting Philippines to a federal system of government. The transition from the Aquino Administration to Duterte Administration will take effect on June 30, 2016 and is expected to be smooth.
  • The peace process between the Philippine government and the Moro Islamic Liberation Front (MILF), the largest Muslim separatist group in the country, is currently stalled following the failure of Congress to pass legislation to implement a 2014 peace deal. The incoming administration will determine the next steps. For now, both the government and the MILF have agreed to continue to adhere to the ceasefire.
  • The Philippine is one of just four countries selected to join the Partnership for Growth (PFG), a “whole of government” effort established by President Obama to unlock the growth potential of partner countries towards becoming the next generation of emerging markets. Signed in 2011, the U.S. government is working with the Philippines to help address the most binding constraints to growth and development, identified through rigorous analysis as weak governance, constrained public finances, inadequate infrastructure, and weak human resources. Within these broad areas, the U.S. and the Philippines are working together to, among others; improve regulatory quality, rule of law, anti-corruption enforcement, revenue collection and expenditure management, and human capacity development in health and education.
  • The U.S. and the Philippine signed a five year Millennium challenge Corporation (MCC) Compact, effective 2011, to reduce poverty through economic growth. The grant funds three categories of projects focused on road infrastructure, community-level infrastructure and social services, and tax administration reform. Project activities are in the final stages of completion as the Compact is due to finish in May 2016 and initial implementation of sustainability plans in coordination with the Government of the Philippines has commenced. In December 2015, MCC’s Board reselected the Philippines as eligible to develop a second Compact program, and initial efforts are underway to identify economic constraints and a potential program of project which could address the identified constraints.

MARKET CHALLENGES

Learn about barriers to market entry and local requirements, i.e., things to be aware of when entering the market for this country.
  • Graft and Corruption: The Philippine Government has made major strides in fighting graft and corruption, though some key officials of the Aquino Administration have been embattled with corruption issues despite making anti-corruption efforts a flagship program of the government. Corruption, a constraint to business and outside investment, is a pervasive and long-standing challenge in the Philippines. The country’s ranking in Transparency International’s Corruption Perceptions Index declined from 85 in 2014 to 95 in 2015.
  • Ineffective Judicial System: The Philippines’ complex, slow, and complicated judicial system can inhibit the timely and fair resolution of commercial disputes. Most cases take many years to reach a final verdict.
  • Limited Ownership: The Philippines has restricted foreign ownership in selected industries, including utilities and the media. See the Investment Climate Statement for more information on these restrictions. The Government also lists several professions where foreign participation is not allowed.
  • Regulatory System: Product registration, product standards, and environmental and labeling requirements place restrictions on certain products. See Trade Regulations for additional information.
  • Value-Added tax (VAT): The VAT is a 12 percent tax levied on the sale of all goods and services, including the imports of goods into the Philippines. The VAT is an indirect tax which is generally passed on to the buyer/consumer.
  • Infrastructure: The Philippines lags behind many of its neighbors in infrastructure development. Major improvements are needed in transport infrastructure. While renovation is underway, overcapacity at the Ninoy Aquino International Airport (NAIA), the primary international gateway in the country, presents a significant impediment to development and tourism. Port congestion, especially at the Port of Manila, and customs processing can significantly delay the entry of goods in the country. The Aquino administration has instituted a Public-Private Partnership (PPP) program to address the country’s pressing infrastructure needs.
  • Highly Price-Sensitive Market: S. products are generally known as being high quality, but more costly. U.S. exporter should not expect to apply their U.S. pricing strategy in this market. Distributors and customers will request payment terms.
  • Philippine Government Procurement: There are significant procurement opportunities with the Philippine Government. However, the governing law for government procurement, Republic Act (RA) 9184, generally requires foreign vendors to work with local representatives, has arduous paperwork requirements, limits advance payment to a maximum of 15 percent, and only allows 90 percent payment upon delivery of goods. The remaining 10 percent is withheld until after the warranty period is completed. See U.S. Selling Products and Services for additional information.
  • Customs: S. exporters need to ensure that their Philippine consignee has the proper accreditation to receive imports. In addition, specific products require special licenses and permits prior to shipment. U.S. exporters may contact CS Philippines to determine if their goods require import permits. The Customs Bureau has implemented the National Single Window (NSW) to simplify the formal entry process. See Customs Regulations for additional information.
  • Tariff/Non-Tariff Barriers and other Trade Regulations:See Trade Regulations, Customs and Standards.

MARKET OPPORTUNITIES

Overview of best prospect sectors, major infrastructure projects, significant government procurements and business opportunities.
  • Best prospects for U.S. companies in the Philippines are infrastructure, energy, (including renewable energy, renewable fuels and smart grid), information and communication technology (ICT), defense, medical, and water resources.
  • ICT companies in particular may find opportunities in providing equipment and services to the growing business process outsourcing (BPO) sector, which is growing at a rate of 15 percent a year. U.S. medical technology is widely used in private hospitals in the Philippines. Energy production, conservation and efficiency are top priorities as the country is presently operating on low reserve margins and at high rates, with many remote areas suffering blackouts. Companies in water/wastewater management will also find opportunities in the Philippines.
  • Many of these sectors are in the government’s Public-Private Partnership (PPP) program targeting those projects of priority to the government. The Government of the Philippines actively seeks foreign participation to promote economic development of these PPP projects. Some foreign companies have partnered with local groups on large projects. Twelve projects, covering transport, education, water and the medical sector, have been awarded, and several more are in bidding stage for airports, roads, water, port, prison facility and information technology projects.
  • Other promising sectors include franchising, aviation, and security.
  • The Philippines ranks in the top 10 markets in the world for U.S. food and beverages and continues to be a promising market for U.S. companies in the sector.

Top U.S Export Categories to the Philippines - 2015

Electric Machinery $3.3 billion
Cereals $538 billion
Food Industry Residue; Animal Feed $395 billion
Optical or Medical Instruments $345 billion
Seeds, Grains, Fruits, and Plants $325 billion
Aircraft and Aircraft Parts $295 billion
Dairy Products $237 billion
Plastics $170 billion
Beverages and Spirits $163 billion
Meats $155 billion
  Asian Development Bank
  • The Asian Development Bank, Asia’s premier multilateral development institution, is headquartered in Manila. U.S. firms are advised to explore the lucrative business opportunities that are derived from the US$27 billion that the ADB awards its 45 developing member countries annually. The ADB has a goal of 50 percent private sector participation in ADB-financed projects 2020.
  • Major sectors financed by the ADB include energy, transport, water supply, education, agriculture, and other development-related initiatives. ADB also lends directly to the private sectors throughits Private Sector Department. U.S. firms are competitive in bidding for ADB projects and have won nearly US$9 billion in ADB contracts since 1966.

MARKET ENTRY STRATEGY

Generalizes on the best strategy to enter the market, e.g., visiting the country; importance of relationships to finding a good partner; use of agents.
  • Agents and distributors are commonly used in the Philippines and are essential for most U.S. companies. See section on using agents and distributors for more information.
  • Government procurement requires a local partner, with certain exceptions. See Section 23.5 – Eligibility Criteria of the Revised Implementing Rules and regulations of Republic Act No.9184 or The Government Procurement Act.
  • It is recommended that U.S. companies visit their agents and distributors to strengthen these relationships and assess the local companies’ abilities. If possible, they should also visit existing and potential clients with their agents and distributors to promote their product lines and/or better understand the clients’ requirements.
  • S. companies should be patient and yet diligent in pursuing contracts, particularly projects with the Philippine Government.
  • S. firms seeking agents or distributors in the Philippines are encouraged to use the services of the U.S. Commercial Service Philippines (CS Philippines). For more information, visit http://export.gov/philippines and click “Services for U.S. Companies.” U.S. firms may also contact CS Philippines or a local U.S. Export Assistance Center or send an email to businessphilippines@trade.gov.