NIRC Tax Research Journal 3 Vol. XXV.5 September-October 2013 | PROFILE AND TAXATION OF THE . PHILIPPINE FAST FOOD INDUSTRY I. INTRODUCTION Filipinos love to eat. For this reason, a vast number of entrepreneurs in the country ventures into food and beverage service businesses. The most popular and fastest growing type of food and beverage service business in the Philippines is the so-called “fast food” business, “Fast foods” refer to types of food that can be prepared and served very quickly. They are characterized as easy to prepare, accessible and cheap alternatives to home-cooked meals. Fast food chains, also known as “quick service restaurants”, serve these types of food to customers packaged for immediate consumption, either on or off the eating premises. Fast food customers normally order at the counter and pay before eating. The study examines its contribution to the economy as well as the taxes imposed thereon. It also seeks to identify opportunities for growth and the challenges that fast food chain owners face to further improve the industry performance. I, THE PHILIPPINE FAST FOOD INDUSTRY A. Gross Value Added The fast food industry is under the “Hotels and Restaurants” industry of the “Other Services” sector of the National Accounts of the Philippines. The gross value added (GVA) of the hotels and restaurants industry registered an average annual share of 17.42% to the total Other Services sector for the period 2008-2012, third to education (43.03%) and recreational, cultural and sporting activities (17.79%). Both the Other Services sector and the Hotels and Restaurants industry grew at almost the same pace of 10.18% and 10.19%, respectively. As to the industry’s contribution to the country’s Gross Domestic Product (GDP), hotels and restaurants showed positive annual increases but this remained to be less than 2% over the years under review or an average annual share of 1.63%. (Table 1) * Prepared by Elizabeth D. Bautista, Tax Specialist Il, reviewed and approved by Monica G. Rempillo, Economist V, Economics Branch, NTRC. Profile and Taxation of the Philippine Fast Food Industry _ 1NITRC Tax Research Journal Vol. XXV.5 September-October 2013 Table 1. GVA OF HOTELS AND RESTAURANTS INDUSTRY: 2008-2012 (Amounts in Billion PhP at Current Prices) A ae: Hotel & Restaurants? Sane cpp | Serves | ,,Hotels & | | Percentage Share To seoeras GVA Gib Gpp | Other Services’ | Rate GVA 2008 7,720.90 692.67, 121.36 [157 17.52 = 2009 8,026.14 758.31 129.53 [161 17.08, 6.73 2010 9,003.48 838.66 145.24 | 161 17.32, 12.12 2011 9,706.27 912.50 161.34 | 1.66 17.68 11.09) 2012 | 10,564.89 | 1,020.46 178.80 [1.69 17.52 10.82 ‘Average | 9,004.34 844.52 147.25 | _1.63 17.42 10.19 Sources of basic data: National Statistical Coordination Board (NSCB). 7 B. Number of Fast Food Establishments Based on the 2009 Survey of Tourism Establishments in the Philippines (STEP) conducted by the National Statistics Office (NSO) released on February 16, 2012, the country had a total of 13,119 establishments engaged in food and beverage service activities. Of the total number, fast food chains ranked second with 2,535 establishments next to restaurants with 6,917 establishments. Other establishments included refreshments stands, kiosks and counters (1,997), bars and cocktail lounges (759), cafeteria (680), coffee shops (149), day and night clubs (75) and other eating places (7). (Figure 1) Figure 1. NUMBER OF FOOD AND BEVERAGE ESTABLISHMENTS CY 2009 Fetrestments ——oayandighcan Comers sts hes ase ateeria Counters osm, S781 ‘oso ‘oor i (amy. S22) ter Eating and Drinking Paces Cote shops. we Source: 2009 STEP, NSO. 2 ___ Profile and Taxation of the Philippine Fast Food Industry |NIRO Tax Research Jounal Vol. XXV.5 September-October 2013 | Meanwhile, a report made by the Euromonitor International’ shows that as of 2010 the total number of food service units/outlets in the Philippines reached 160,263 of which 5,411 were in the fast food sector. Thus, although based on two different available sources, the figures show that the country’s fast food industry is rapidly growing. Out of the total number of fast food outlets, 4,902 (or 90.59%) were franchised” outlets while 509 (or 9.41%) were independently-owned establishments. (Table 2) Table 2. NUMBER OF FOOD SERVICE ESTABLISHMENTS, BY TYPE OF OWNERSHIP: CY 2010 Type of Ownership Outlets Independent | % | Chained/ | % Total Dist. | Franchised | Dist. Full-Service Restaurants 17,168 | 94.21 | 1,055, 5.79 18,223 Fast Food I soo] 941| 4,902| 90.59] 5.411 Cafes/Bars | 15,208 | 96.35 576|_3.65| 15,784 Street Stalls/Kiosks 29,863 | 79.71 | 7,600 | 20.29 | 37,463 Consumer Food Service 63,143 | 79.52 16,260 | 20.48 | 79,403 Pizza Consumer Food Service S05 | 34.66 952 | 65.34 1,457, 100% Home Delivery/Takeaway 395 | 15.66 2,127| 84.34] 2,522 Total 126,791 33,472 | 160,263 Source of basic data: Euromonitor, Food Service in the Philippines, January 2012. C, Employment Generation Based on NSO data, the entire food and beverage service activities generated a total employment of 230,914 in 2009. Restaurants were the biggest contributors, hiring 109,886 employees (47.59%) followed by fast food chains with 91,240 employees (39.51%), refreshment stands, kiosks and counters with 11,032 personnel (4.78%); bars and cocktail lounges with 10,064 staff (4.36%), and other types of establishments, the remaining 8,692 staff. (Table 3) ' Established in 1972, Euromonitor Intemational is the world leader in strategy research for consumer markets. 2 Franchising is the method of practicing and using another business’ perfected philosophy and concept (htip//wwrw.pfa.ore.phiindex.php?0 8 emide37) ( Profile and Texation ofthe Philippine Fast Food Industry 3[NERC Tax Research Jounal Val XXV.S Sepiember October 2013 Table 3. EMPLOYMENT GENERATED BY FOOD AND BEVERAGE SERVICE ACTIVITIES: CY 2009 Industry Sub-Class | ___Smmployment: Total__| % Share 1. Restaurants 109,886 2. Fast Food Chains - 91,240 3. Coffee Shops 2,877 4, Cafeterias [4,758 i | 5. Refreshment stand, Kiosk and Counters 11,032 6. Day and Night Clubs 955_| Bars and Cocktail Lounges 10,064 | 8. Other Eating and Drinking Places, n.cc._| 102 Total 230,914 | 100.00 Source of Basic Data: 2009 STEP. D. Top 10 Fast Food Chains Among the popular fast food chains in the country are Jollibee, McDonald's, Chowking, Mang Inasal, KFC, and Greenwich. Four (4) of these fast food chains which are owned by various franchisees and six (6) which are owned by the ‘companies themselves constitute the top 10 fast food chains, They hold, on the average, about 80% share of the total market value of the entire fast food industry. In particular, Jollibee accounted for over 40%, McDonald’s, 15%, Chowking, 12%, and the rest by Mang Inasal, KFC and Greenwich. Mang Inasal became a segment driver in 2010 because of its aggressive expansions resulting to a significant increase in market value share from 2.9% in 2009 to 4.3% in 2010. This was brought about by Jollibee’s acquiring majority control (70%) over Mang Inasal. (Table 4) In 2010, fast food transactions reached 636 million compared to 496 million transactions made in 2005 or a 28% increase over the five-year period. In 2015, the country’s fast food transactions are projected to increase by 12.6% or to 716 million transactions with a projected value of USS2.9 billion, 35.6% higher than the USS2.1 billion value of transactions recorded in 2010. The number of units/outlets of fast food establishments is likewise expected to rise by 19.5% in 2015 or an additional 1,056 units/outlets compared to 5,411 in 2010. (Table 5) & : Profile and Taxation ofthe Philippine Fast Food TnduasiryNIRC Tax Research Journal Vol. XXV.5 September-October 2013 Table 4. TOP 10 FAST FOOD CHAINS AND THEIR CORRESPONDING MARKET VALUE PERCENT SHARES: CY 2007-2010 ‘Brand Name ‘Company Name 2007 | 2008 | 2009 | 2010 | Average Jollibee ‘Various franchisees 220 | 219 | 215 | 219 | 218 Jollibee Jollibee Foods Corp. is9 | 190 | 192 | 195 | 192 MeDonald’s _| Golden Arches Dev. Corp. 102 | 104 | 95 | 95 99 McDonald’s_| Various franchisees ai | 43 | 30 | 56 48 Chowking | Various franchisees 79 | so | 75 | 69 | 76 Chowking | Fresh ‘N” Famous Foods inc. 4s | 45 | 42 | 38 43 Mang Inasal_| Mang Inasal Phils. Inc. os | 17 | 29 | 43 24 KFC ‘Ramear Inc. 3s [39 | 42 | 40 40 | Greenwich | Fresh ‘N’ Famous Foods Ine. 36 | 33 | 34 | 34 34 Greenwich | Various franchisees 28 | 25 | 25 | 26 26 ‘Total Market Value Percent Share 73.9 | 795 | 79.9 | 81.5 | 80.0 Source: Euromonitor, January 2012, Table 5. PHILIPPINE FAST FOOD MARKET SIZE: 2005, 2010 AND 2015 2015 | ‘% Change ype 2ous | 2010 latency [2005-2010 | 2010-2015 Transactions (in millions) 496 636 716 28.23 | 12.58 Values (in million USS-Current | | | | Prices-Fixed 2010 Exchange Rates) _ 45 4} 2,148 | 2,914 48.04 35.65 Units/Outlets 3,876 | 5,411 | 6.467 | 39.6 | 19.52 Source of basic data: Euromonitor, Market Size Statistics, as of January 2012. Wl. TAXATION OF THE FAST FOOD INDUSTRY A. Types of Taxes Imposed The fast food industry, just like any ordinary business, is subject to the following national taxes under Republic Act (RA) No. 8424 (National Internal Revenue Code (NIRC), as amended) and local taxes under RA 7160 (Local Government Code of 1991): Income Taxes Regular Corporate Income Tax (RCIT) - An income tax of 30% is imposed upon the taxable income derived during each taxable year from all Profile and Taxation of the Philippine Fast Food IndustryNIRC Tax Research Journal Vol. XXV.5 September October 2015 sources within and outside the Philippines by every domestic corporation. If itis a branch of a foreign corporation, it is treated as a resident foreign corporation and as such subject to income tax on its Philippine-sourced income only. On the other hand, if it is a subsidiary, it is considered as a domestic corporation subject to income tax on its worldwide income, i.e., income from all sources within and without the Philippines. Minimum Corporate Income Tax (MCIT) - An MCIT of 2% of the gross income is imposed beginning on the fourth taxable year immediately following the year in which a company commenced its business operations. The MCIT is payable when it is greater than the computed RCIT and shall be paid in lieu of the RCIT. Any amount of the MCIT paid in excess of the RCIT shall be carried forward and credited against the RCIT for the three immediately succeeding years. Final tax on all payments made to the franchisor (including initial franchise fee) - The franchise fee and the monthly royalty payments by the franchisee to the franchisor are subject to a 20% final tax. Franchise fee refers to the initial fee paid to the franchisor. The franchise fee usually includes training, site selection and evaluation assistance, and the rights to use the franchisor’s trademark and business system. On the other hand, royalty fee refers to the fee paid to the franchisor for continuing use of the trademark and in exchange for the franchisor’s ongoing support services. This is usually a percentage of the franchised outlet’s sales and is typically paid ona monthly basis. Dividends tax - Cash and/or property dividends paid by a subsidiary to its foreign parent company are subject to a final withholding tax (FWT) of 15% subject to “tax sparing”.’ If, however, the recipient of the dividends is a resident of a country with whom the Philippines has a treaty, the applicable preferential treaty raie will govern. Branch Profit Remittance Tax (BPRT) - Profits remitted by a branch to its head office are subject to a FWT of 15%. If however, the recipient of the profits is a resident of a country with whom the Philippines has a treaty, the applicable tax treaty provisions will apply. Fringe Benefits Tax (FBT) - A 32% tax is imposed on grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank-and- file employees) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). Tax sparing is a provision where a country applies a tax credit against taxes owed on foreign income that is equivalent to the tax exemption provided by the foreign country. (s Profile and Taxation of the Philippine Fast Food Industry[NERC Tax Research Joumal Vai SOV September Ootober 2015 ] 5. Improperly Accumulated Earnings Tax (IAET) - A 10% tax is imposed on. improperly accumulated earnings of a corporation, except in the case of publicly held corporations, banks, and other non-bank financial intermediaries and insurance companies. When a corporation allows its earnings or profits to accumulate beyond its reasonable needs, it shall be assumed that the purpose is to avoid tax on stockholders, unless proven to the contrary, Value Added Tax (VAT) - A fast food restaurant with gross annual sales and receipts of PhP1,919,500.00 shall be subject to a 12% VAT. 7. Percentage Tax On Non-VAT Taxpayer - A fast food restaurant is subject to a 3% percentage tax if the gross annual sales and receipts do not exceed PhP1,919,500.00. 8, Documentary Stamp Tax (DST) — Applicable DST is imposed upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, including leases of land or buildings, loan agreements, original issuance and sales/transfer of shares, among others. 9. Local Taxes Local Business Tax (LBT) - The rate of LBT depends on the local tax ordinance enacted by the city or municipality where the fast food restaurant is situated. However, the rate should not exceed 2% for a municipality or 3% for a city based on annual gross receipts, Real Property Tax (RPT) — A fast food restaurant is liable to basic RPT imposed by the province, or city or municipality within Metropolitan Manila on real property owned by it such as land, building, machinery and other improvements located in its jurisdiction. The rate is fixed by the concemed LGU as follows: (a) For provinces — not exceeding 1% of the assessed value of the property; and (b) For cities or municipalities within Metro Manila area —not exceeding 2% of the assessed value of the real property. Special Education Fund (SEF) Tax — An additional 1% tax on real property is imposed to accrue to the SEF created under RA 5447. B. Number of BIR-Registered Food Establishments As of December 2012, the number of BIR-registered restaurants, cafes and fast food centers reached 32,689 from 23,328 in 2007, or an increase of 40.13% in six years. Although the number of BIR-registered restaurants, cafes and fast food centers increased in absolute terms, its growth rate, however, was decelerating at an average of 6,99% annually during the period. (Table 6) [Profite and Taxation of the Philippine Fast Food Industry |NIRC Tax Research Journal ‘Vol. XXV.5 September-October 2013 Table 6. NUMBER OF BIR-REGISTERED RESTAURANTS, CAFES AND FAST FOOD CENTERS: CY 2007-2012 eae ‘Total No. of Registered | Growth Rate ‘Taxpayers (In Percent) 2007 23,328 - 2008 25,128 772 2009 27,287 8.59 2010 29,071 6.54 2011 30,852, 6.13 2012 32,689 5.95 Average 28,059 6.99, Source of basic data: BIR. It may be noted, however, that not all BIR-registered restaurants, cafes and fast food centers in the Philippines from 2007-2012 paid tax to the BIR. For instance, out of 32,689 registered establishments in 2012, only 10,512 establishments or less than one-third paid income tax and almost the same number paid business tax (either VAT or the percentage tax whichever is applicable) and other taxes. (Table 7) Table 7. NUMBER OF BIR-REGISTERED RESTAURANTS, CAFES AND FAST FOOD CENTERS WITH TAX PAYMENTS BY TYPE OF TAX: CY 2007-2012 Mase | Seems aE ACCES | See eee 2007 7,272 3,732 | 3,688, 7,460 2008 7,964 3,781 4,340 8,157 2009 3523 | 3.877 4,760 9,035 2010 9,623 | 4,191 5,616 | 11,245 2011 9,770 4,143, 5,621 | 10,730 2012 10,512 4,352 6.219 11,746 Average 8,944 4103 | 5,041 9,729 Source of basic data: BIR. According to the BIR, the low number of BIR-registered restaurants, cafes and fast food centers with tax payments was because some establishments only achieved a “break-even” or ended up with net losses, while some had no recorded operation/transaction during a specific year. Others were considered stop filers, * Stop filers refers to registered taxpayers who failed to file the required tax return within the prescribed period. B Prag and Taxation ofthe Philippine Fast Food indus[NTRC Tax Research Journal Vol. XXV.3 September-October 2013 thus, were subject to BIR-audit. Also, some establishments filed their tax returns jointly with parent company. C. Taxes Paid From 2007-2012, total taxes collected from the BIR-registered restaurants, cafes and fast food centers amounted to PhP58.94 billion or an average of PhP9.82 billion annually. Of the total amount, PhP28.85 billion (48.9%) were income tax payments, PhP27.88 billion (47.3%) from VAT. PhP1.64 billion (2.8%) from percentage tax, and PhP0.58 billion (1.0%) from other taxes. (Table 8 and Figure 2) ‘Table 8. AMOUNT OF TAXES PAID BY RESTAURANTS, CAFES AND. FAST FOOD CENTERS BY TYPE OF TAX: CY 2007-2012 (Amounts in Million PhP) esi Income | Value-Added | Percentage | Other Total Tax Tax Tax Taxes | Collection 2007 3,465 3,596 176 55 7,292 [2008 3,935 3,654 201 116 7,906 2009 3,977 4,358 260 88 8,683 2010 6.071 5,826 348 106 12,351 2011 5,427 4911 304 M1 10,753 2012 5.971 5,531 348 107 11,957 Tot 28,846 27,876 1,637 583 58,942 Average | 4,808 | 4,646 273 o7 9,824 Source of basic data: BIR. Figure 2, DISTRIBUTION OF TAXES PAID BY FOOD ESTABLISHMENTS BY TYPE OF TAX: CY 2007-2012 onerTasey en Percentage Tax SS shee (Profit and Taxation ofthe Phippine Fast Food Industry 3NIRC Tax Research Journal Vol. XXV 5 September-October 2013 The share of restaurants, cafes and fast food centers to BIR total collection on corporate income tax, VAT, percentage tax, and other taxes for the period covering 2009-2011 were 2.08%, 2.73%, and 2.15%, respectively. (Table 9) Table 9. SHARE OF RESTAURANTS, CAFES AND FAST FOOD CENTERS TO TOTAL BIR TAX COLLECTION: CY 2009-2011 (Amounts in Billion PhP) aa an Crean | iit | lis | Sate | Econ yf | Ste | Etim | Set | Total 431.63 399 | 208 | 45304 1236 | 273 | 49934 tors | aus cove | sss | se | saa | aizn | sor | soo | ssoon | sas | a0 vat | vinige [age | an Lage [ae oe are | at ae eae | 2s | 00 | 4501 | 035 | os | 472i 030 | 0.63 Lomertexes | 0074 | 009 | 0.09 | 112.00 ou | oso | 1178 oi | 009 ‘Notes: 2009 collection as of January 21, 2011 2010 collection as of March 5, 2012 2011 collection as of January 15, 2013 Other Taxes consist of franchise tax, DST and non-VAT Registration Fee Source of basic data: BIR. D. Top Fast Food Business Taxpayers In 2009, there were three (3) fast food restaurants included in the Top 500 Non-Individual Taxpayers based on the income tax returns they filed with the BIR, namely Jollibee Foods Corp, Golden Arches Development Corporation, and the Philippine Pizza, Inc. From these three fast food chains alone, the BIR was able to collect PhP509.51 million in income tax. In 2010, there were five (5) fast food chains included in the list with the addition of Freemont Foods Corp. and International Family Food Services, Inc., contributing PhP802.88 million in income tax. In 2011, there were six (6) fast food chains in the list with the addition of Mang Inasal Phils. Inc. Their income taxes paid reached PhP951.59 million during the period. (Table 10) 10 Profile and Taxation of the Philippine Fast Food Industry |‘NIRC Tax Research Journal Vol. XXV.5 September-October 2013 Table 10. FAST FOOD CHAINS INCLUDED IN THE TOP 500 NON-INDIVIDUAL, TAXPAYERS: CY 2009-2011 Based on Income Tax Returns Filed) (Amounts in Million PhP) ae) 200 \ “| Taeome | ot Brand Name Company Name rane | | ean | eee ‘otal Due Jollibee Jollibee Foods Corp. _79__| 242.65 | 107_| 225.03 743.00 MeDonald's | Golden Arches Devt. Com. 95 | 206.11 | 66 | 391.67] 79 | 341.24] 939.02 Pizza Hut Philippine Pizza, Inc. 279 | 60.75 225 | 97.16 | 168 | 139.78 | 297.69 Jollibee __| Freemont Foods _j | | 382 sois| an | 68.13) 118.26 Shakey Piz In Family Food Services, ln a 3999) 379 | ssa | 9400 Mang Inasal nis9|__71.99 Source of basic data BIR, E. The top fast food chains taxpayers listed in Table 10 were also included in the Business World’s “Top 1,000 Corporations in the Philippines” from 2009-2011 Those that were consistently in the list were Jollibee Foods Corp., Golden Arches Development Corp., Fresh N’ Famous Foods, Inc., Freemont Foods Corp., Philippine Pizza, Inc., Mang Inasal, and International Family Food Services, Inc. On the other hand, Epicurean Partners Exchange, Inc., Yellow Cab Food Corp., and ‘Tropical Hut Inc. were also included in the Top 1,000 Corporations in one or two years but not listed among the Top Taxpayers. (Table 11) Effective Tax Rates of Top Fast Food Business Taxpayers The effective tax rates (ETRS) of the top fast food chains ranged from a low of 0.9% to 3.8% for the period 2009-2011. In particular, Golden Arches Development Corp registered the highest ETR of 3.8% in 2010 but this declined to 3.0% in 2011. Meanwhile, Philippine Pizza, Inc. showed an increasing ETR of 1.6% in 2009 to 3.3% in 2011. On the other hand, Jollibee Foods Corp. consistently recorded the lowest ETR of 0.9% to 1.1% in 2009-2011 despite continuous increases in gross sales in the same period. The ETRs of Freemont Foods Corp. and Mang Inasal Phils. Inc. were even higher at 1.4% and 1.9%, in 2011, respectively. Similarly, International Family Food Services, Inc. has an ETR of 1.7% in 2011, which was way below Philippine Pizza, Inc.’s ETR of 3.3% despite having more or less similar line of business. These companies may therefore be subjected to audit by the BIR. (Table 12) (Profile and Taxation of the Philippine Fast Food Industry i‘NIRC Tex Research Journal Vol. XXV.5 September-October 2013 | Table 11. FAST FOOD CHAINS INCLUDED IN THE TOP 1,000 CORPORATIONS: CY 2009-2011 (Amounts in Million PhP) Net | Net Gross | income Rank OT | income (Loss) Company Ty Net Name” | Rank SFO | Income Rank ] 2009 T 2010 I 2011 Brand Name | Revenues Revenues | G00) Less) | { Toilibee Jolibes ] | ‘lal alee’ 37 | 2664 2924 | 307/39] MeDonalds | Golden | Arches Botiopment | 129| 9455, 453] 139, 10.749] 718] 149) 608 | 623 E& Corp | Greenwich | Fresh | and Chowking | Famous ris) tos 60s | 134] roger | 443] 159) tits 308 Piacns Foods, Inc? |_| eel Jollibee Freemont ] Foods 329, 3,882] 57 328| aao7| tis 350] 5,001 | 5s | Corp. | Pizza hut Philippine | le [perme | 37, 3.882] 140| 352] . aos] 231] 393] 44a] 330 Mang Inasal | Mang Inasal | Philippines, | | 440) 3943) 157 Ine! Shakey's Totemational Pizza Family Pood | Services, Inc Tropical Hut | Tropical Hut Food Market, ie. Yellow Cab | Yellow Cad ” | Food Corp” Kenny Rogers | Epfeurean | Partners Exchange, Line! 31854] 3,821 sms} 2010) 113 s32| 2835 ts7| son) 3,268 2s 1,886 (46) Total 55,884 | 3,972 | 66,600 | 5.307 | 74,643 __5,610 1/ The local franchisee of MeDonald’s 2/ A wholly owned subsidiary of Jollibee Foods Corp (IFC). Operator of Chowking and Greenwich restaurants 3/ A wholly owned subsidiary of JFC. Involved in the development and operation of quick service restaurants under the “Follibee” trade name namely in the Visayas and Mindanao. 4/, Franchise owner and operator of Pizza Hut restaurants. 5/, 70% stake owned by JEC. 6/. Exclusive franchise holder of the Shakey's Pizza restaurant business in the Philippines. 7 Acquired by Pancake House, Inc. on September 9, 2011. 8/ The local franchisee of the Kenny Rogers brand, Notes: Top 1,000 corporations is based on gross revenues derived from “parent company” financial statements submitted to the Securities and Exchange Commission and the BIR every year, which are distinct from “consolidated financial statements” routinely disclosed by publicly listed companies. Source: Business World, “Top 1,000 Corporations in the Philippines". 2 Profile and Taxation of the Philippine Fast Food IndustryNIRC Tax Research Journal ‘Vol. XXV.S September-October 2013 ‘Table 12. EFFECTIVE TAX RATES OF TOP FAST FOOD CHAINS: 2009-2011 (Amounts in Million PhP) Brana == Gross Sales Tocome Tax Pald _[Errective Tax Rate 4) 2000 | 2010 | 2011 | 2009 | 2010 | 2011 | 2009 | 2010 | 2011 Jolibee Jollibee Foods Com. 22,848 | 25.200 | 27,475 | 243 | 225| 275] 11] 09] 10 MeDonald’s_| Golden Arches Devt. Com. 9.258 | 10,305 | 11,308 | 207| 392| 3e1| 22| 38| 3.0 Pizza Hut __| Philippine Pizza, Ine. 3,865 | 078| 4238| 61] 97| 140] 16| 24] 33 Jolibee Freemont Foods Corp. 4382 | 4971 so| 68, ai] 14. Shakeys | Intl Family Food Services, nc 2.453 |_ 3,168 39) ss} | ie] 17 | Mang Inasal_| Mang Inasal Phils. Ine 3.879. 2 Lo Total 35971 | 46,418 | ss.039 | _si1|_803 | _ 951 Average 11,990 |_9,284| 9173 | 170| 161| 159] 1.6| 20] 20 Source of basic data: BIR. IV. GROWTH AND CHALLENGES OF THE PHILIPPINE FAST FOOD INDUSTRY A number of factors and strategies, both external and internal to the fast food industry, are contributing to its continuing growth. The demand side drivers of the fast food industry, such as growing population, economic growth, fast changing lifestyle, among others, push the fast food sector to bigger opportunities and greater heights. The Philippines has a very young population where people with ages ranging from 1 to 29 comprise about 61% of the 2010 total population.’ Said age group favors the fast food industry as the sector generally appeals to the younger crowd. The overall economic growth of the country likewise propels the growth of fast food industry. For example, the robust business process outsourcing (BPO) industry fuels growth of the fast food chains in areas near BPO centers. Also, the remittances from abroad continue to contribute significantly to the income of many households which translate to higher personal expenditures particularly on food. The expansion of malls and supermarkets around the country is another plus factor for the fast food industry. The offer of competitive prices or value pricing by fast food chains makes eating outside the home more affordable. Low-priced food is the major reason why people prefer cating in fast food restaurants. Marketing strategies such as the unlimited rice offer ‘of some stores also prove to be effective in enticing customers. # National Statistics Office [Profile and Taxation of the Philippine Fast Food Industry, 13]NRO Tax Research Journal VoL RXV.5 September October 2013] The introduction of “muitiple-branding”® also encourages growth and competition in the fast food sector. Fast food chains see this as an effective way to draw more customers by offering a large number of items served by several fast food chains located side by side.” Although these brands eat into each others’ sales, multi- brand strategy works by obtaining bigger shelf space and leaving little for competitors’ products, Moreover, it caters to brand-switchers users who like to experiment with different brands. Also, the scheme of some banks in tying up with fast food stores where credit card owners can redeem promotional freebies based on amount charged to their credit cards not only enhances repeated usage of credit cards but also increases fast food store visits. Lastly, the fast changing lifestyle is also a big factor that spurs the development of the local fast food industry. Convenience, which is an innate characteristic of a fast food, makes eating outside the home a practical option for Filipino households. It becomes extremely popular particularly among urban residents who lead busier lifestyles. Figures from the Family Income and Expenditure Survey (FIES) reveal the households’ gradual shift to food consumption outside the home where its share to total expenditure continuously increased from 5.0% in 2002 to 6.1% in 2009 while expenditure for food prepared at home declined from 38.6% in 2000 to 36.5% in 2009. (Table 13) Table 13. DISTRIBUTION OF TOTAL FAMILY FOOD EXPENDITURE: 2000-2009 T Items | 2000 | 2003 | 2006 | 2009 | Total Expenditure (TE) (PhP billion) 1,794.1 | 2,038.5 | 2,561.4 | 3,239.2 Food Expenditure (PhP billion) 782.2 | 878.2 | 1,059.6 | 1,380.3 Food Expenditure (% of TE) 43.6] 43.1| 41.4] 42.6 Food consumed at home (% of TE) 38.6| 37.7] 35.6] 36.5 Food consumed outside the home (% of TE) 5.0 54 5.8 6.1 ‘Source: FIES, NSO Although the fast food industry is robust as well as fast developing, it is not without problems and challenges. Economic downturn, increasing commodity prices, stiff competition, and customers’ move to healthier lifestyles are some of the threats facing the industry today. © “Multiple-branding” is the act of marketing two or more similar and competing products by the same firm under different and unrelated brands. 7 This is the case of Jolibec beside Chowking, Greenwich, and Red Ribbon. Ramear group have also started co-branding where ¢ Mister Donut kiosk is in a KFC store. 14 Profile and Taxation of the Philippine Fast Food industry |IRC Tax Research Journal Vel KRW Sepiomber October 2013 Fast food, although viewed to be a cheaper means of dining out, is not immune from economic slowdown, A long-term recession can make fast food restaurants vulnerable to losses if consumers will prefer to eat at home more often to save money. While some players such as big fast food chains can do better than others and may be able to cope by intensifying corporate promotion and advertising to lure consumers, smaller chains may not have the financial capacity to do the same to protect their profits. Increasing prices of commodities being used for the production of fast food would definitely have an impact on their profits. A parallel price increase in fast food may not be a wise move as this could mean losing a market share in favor of newcomers and competitors. Lastly, as people are slowly becoming health conscious, the increasing preference of customers for low calorie food over unhealthy fast food can hurt the sales performance of fast food chains. V. CONCLUSION AND RECOMMENDATION The fast food industry is a robust and fast growing business. Its immense contribution to the country's economic development, employment generation, and tourism cannot be over-emphasized. In relation to taxes, however, the study reveals that there is a wide discrepancy between the number of restaurants, cafes and fast food establishments that paid taxes and the number of BIR-registered food establishments. In particular, only about one-third of the BIR-registered food establishments paid the income tax, VAT or percentage tax, whichever is applicable and other taxes. Moreover, the number of BIR-registered food establishments was scant when compared to the count of Euromonitor International on the number of food service establishments in the country which means that many are escaping the ambit of taxation. Moreover, the study reveals that there are food establishments that are consistently included in the Top 1,000 Corporation and yet are not among the Top Taxpayers of the BIR. In terms of taxes paid, the study likewise shows that despite the continuous increase in gross revenue and net income and high gross profit margins, the ETRs of some fast food establishments remained low. In particular the ETR ranged from 0.9% to 3.8% even if they belong to the same line of business. This only implies that some fast food establishments were able to evade taxes and may therefore be flagged for audit by the BIR. Lastly, there is worldwide awareness and concern on the bad effect of eating fast food to the body. While personal responsibility for maintaining a healthy and active lifestyle is important, the government and the consumer industries must also be held to account for the significant role they need to play in balancing the promotion and development of the fast food industry without compromising the health of the citizenry. The Department of Health (OH), together with the Food and Drug Administration (FDA), are mandated to ensure the safeness of the food being sold and distributed to the general public for their consumption. Thus, they should strictly monitor/regulate the quality of food that fast food stores are [Profit and Taxation of the Philippine Fast Food Industry 15,NIRC Tax Research Journal Vol. XXV.5 September October 2013 producing and make sure that these are safe for human consumption. The goverment may also explore the possibility of imposing a “fat tax” or “health tax” on fast food similar to the tax being charged by many European countries like Denmark, Romania, Hungary, Finland, France, Great Britain and Scotland and some States in America like New York and Alabama. The revenue that shall be collected therefrom may be exclusively used for the provision of health care services. 16 Profile and Taxation of the Philippine Fast Food Industry |