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Setting up a business 07
Country overview
The Philippines is a unique mosaic of East and West. Filipinos Entities doing business in the Philippines must operate under
are basically of Malay descent, although over the centuries the laws at the national and local levels. These laws govern antitrust
population has been enriched by infusions of Chinese, Arabic, and securities matters, labor relations, banking and finance,
Spanish and American blood. This varied ancestry can be insurance, product safety and quality requirements, advertising and
discerned in the physical features of the people and in their sales practices, and environmental standards. National laws also
cultural values, customs and traditions, songs, dances, food and govern such matters as corporation and partnership structures and
festivals. More than 90 percent of Filipinos are Christian, and operations.
the large majority (82.9 percent) of the Christian population is
Catholic. The remaining 10 percent practice Islam or Language
indigenous religions. The country’s official national language is Filipino, although
English is almost universally understood and is the medium of
Geography and population communication in business, schools and government. There are
Situated in Southeast Asia, the Philippines is one of the largest eight major dialects spoken by the majority of Filipinos:
archipelagos in the world, composed of some 7,107 islands Tagalog, Cebuano, Ilocano, Hiligaynon or Ilonggo, Bicolano,
grouped into three geographic regions: Luzon in the north, Waray, Pampango, and Pangasinense. There are about 76 to 78
Visayas in the middle, and Mindanao in the south. Manila, the major language groups, with more than 500 dialects. Spanish,
national capital, is on the island of Luzon. Based on the results Chinese and Arabic are also spoken by small minorities. Dates
of the May 2010 Census of Population and Housing, the are written MM/DD/YY. A full stop (period) is used for the
Philippines has an estimated population of 92.34 million. The decimal point, and long numbers are written with a comma
average population annual growth rate from 2000-2010 was 1.9 (99,999,999.00).
percent.
Business hours/time zone
Political and legal system Normal business hours are for eight hours, generally from
The constitution provides for a presidential system of 8:00 a.m. to 5:00 p.m., Monday to Friday, with lunch break
government composed of three separate and equal branches: from noon to 1:00 p.m. Some private enterprises are open on
the bicameral legislative branch composed of the House of Saturdays. Commercial banks are generally open for client
Representatives and the Senate; the executive branch headed by transactions from 9:00 a.m. to 3:00 p.m., and savings banks
the president; and the judicial branch headed by the Supreme from 9:00 a.m. to 5:00 p.m. (Monday to Friday), although
Court. The three branches of government operate technology has enabled certain services to be available 24 hours
independently under a system of checks and balances. a day, seven days a week. Philippine time is eight hours ahead
of the Greenwich Mean Time (GMT) and 12 hours ahead of
The country consists of regions, provinces, chartered cities, the U.S. Eastern Standard Time (EST).
municipalities, and barangays (villages). The Philippines has 17
regions, 80 provinces, 138 chartered cities, 1,496 municipalities,
and 42,026 barangays. The barangays are the smallest political
unit. Local governments are responsible for these smaller
political units and are similar to the executive branch in
structure and function. A province is headed by a governor,
while a city or municipality is headed by a mayor. A city or
municipality is composed of barangays, each headed by a
barangay captain. All heads of local government are assisted by a
board of councilmen.
Doing business in the Philippines for BPO companies 2
Cost of living
Living costs vary widely; the cost of living in Metro Manila is
Business etiquette
the highest in the entire country. But no matter where you are
in the Philippines, the cost of living will be dramatically lower • Have a mutual friend or close business associate facilitate
than in a comparable area in a Western nation. Based on the initial negotiations
• Face-to-face meetings are preferred over phone or e-mail
2011 Cost of Living Survey by Mercer, Manila is among the
• Make appointments three or four weeks in advance
cheaper cities, ranking 134th out of 214 major cities, with the and reconfirm a few days prior to the meeting
costliest cities ranked higher. Asian cities in the survey include • Arrive promptly for meetings and dress conservatively
Tokyo (2nd), Osaka (6th), and Singapore (8th), which are among • A friendly and informal handshake is the standard greeting
for both men and women
the costliest cities in the region. Southeast Asian cities in the
• The guest should offer his or her business card first
survey include Jakarta (69th), Bangkok (88th) and Hanoi (136th). with two hands so the recipient can read it
• Use courtesy titles such as “Mr.” or “Ms.” or professional
As published by CB Richard Ellis Philippines, Inc., the average titles such as “Doctor” or “Attorney” followed by the
person’s surname when addressing new business
rental rate of condominiums located in the Philippines’ premier
associates
city centre is US$1,800 for a 40- to 80-square meter • Many Filipinos have multiple names (e.g., Enrique Jose or
one-bedroom unit. Luxury residential condominiums and Maria Isabel), so ask what they prefer to be called but note
houses in the same location rent for about US$5,200. that you should use a person’s given name only when
invited to do so
• Accept food or drink offered during a meeting; rejecting the
Upscale condominium stats offer might cause the host to lose face
• Expect to engage in some small talk at the start and end of
Village/District Size (sqm) Lease Range (PhP) Average (PhP) your meeting. Don’t be surprised if you are asked about
your family or other personal matters. It isn’t that your
Legaspi Village business contact is being nosy; rather, it is a reflection of
1 bedroom 40 - 80 60k - 100k 60k - 100k what is important to Filipinos
2 bedroom 110 - 150 75k - 150k 75k - 150k • Filipinos are generally non-confrontational, so avoid
3 bedroom 150 - 250 150k - 220k 150k - 220k raising your voice, never interrupt while someone
is speaking and avoid excessive direct eye contact
Salcedo Village • Be patient when dealing with different subordinates
2 bedroom 110 -150 100k - 125k 115k before you reach a key decision maker
3 bedroom 150 - 250 150k - 185k 160k • Expect a detailed and drawn out decision
making process
Rockwell Center
1 bedroom 75 - 85 70k - 90k 80k
2 bedroom 125 - 157 100k - 140k 120k
3 bedroom 197 - 247 150k - 200k 175k
The Philippines achieved another milestone after the country To boost the development of the BPO industry, the
overtook India to become the contact center capital of the government has earmarked a P500-million fund to provide
world. According to the Everest Research Institute, the short-term training for the voice, software development,
Philippines has become the acknowledged leader for animation and health-care services to ensure the continued
voice-based customer support and sales to become the call supply of qualified labor for the industry.
center capital of the world. In IBM’s Global Locations Trend
Annual Report (October 2010), the Philippines was ranked Based on BPAP data, the BPO industry earned US$11 billion in
number one for the first time for business support functions, 2011. In the same year, the IT-BPO industry employed 638,000
such as shared services and BPO, with labor cost as one of the full-time employees which represents a 22 percent increase from
country’s comparative advantages. 2010. The industry is targeting a goal of US$25 billion in annual
revenues, and 1.3 million labor workforce by 2016.
5 Doing business in the Philippines for BPO companies
Government regulations in
general
Restrictions on foreign ownership Import and export controls
Starting in 1991, with the enactment of the Foreign Invest- The Philippines has been liberalizing its markets through a
ments Act (FIA), investments have been substantially liberal- progressive tariff reduction program and a shift to a tariff
ized. The few restrictions that remain generally arise because of quota system as part of its commitments under the General
constitutional limitations and health and security reasons. Under Agreement on Tariffs and Trade (GATT) Uruguay Round. The
the FIA, foreign ownership in a domestic corporation is allowed import duties on most products are now significantly lower than
up to the extent of 100 percent, provided that the corporation in the past, when the government’s policy was oriented towards
is not engaged in an area of economic activity falling under the protectionist import substitution.
Foreign Investment Negative List (FINL). The FINL
enumerates specific areas of economic activity that are reserved Most goods are freely exportable, unless the trade is prohibited
only to Philippine nationals, as well as those where foreign under international agreements. Certain commodities are
equity or participation is allowed but limited to a certain regulated or prohibited from being imported for reasons of
percentage. In particular, BPO services are not included in the public health and safety, national security, international
FINL and can thus be wholly foreign-owned, subject to commitments, and development of local industry. Regulated
minimum capitalization requirements on domestic market commodities require clearances from government agencies prior
enterprises. to their importation. Prohibited commodities may not be
imported under any circumstance.
Government approvals and registration
Corporations and partnerships must be registered with the All commodity exporters may retain 100 percent of the foreign
Securities and Exchange Commission (SEC) to secure their exchange proceeds from exports and may freely use these for
primary license or certificate of registration. Single any purpose.
proprietorships must register with the Bureau of Trade
Regulation and Consumer Protection of the Department of Price controls
Trade and Industry (DTI). Price controls are generally not imposed on commodities.
However, under Republic Act 7581 or the Price Act, the
If the entity is qualified to avail of incentives based on President can impose a price ceiling on basic commodities if
particular laws, registration with the government agency any event causes artificial and unreasonable increases in the
implementing the incentive law is also required for the prices of basic or prime commodities. The Price Act also
incentives to apply. empowers the DTI to procure, purchase, import, or stockpile
any basic or prime commodity and to devise ways and means of
Post-SEC registration requirements distributing these goods at reasonable prices in areas where
After registration with the SEC, the corporate entity must there is a shortage of supply or a need to effect changes in
register with the tax authority, i.e., the Bureau of Internal prevailing prices.
Revenue (BIR), the local government unit (LGU) of the city or
municipality where it will do business, Social Security System
(SSS), Home Development Mutual Fund, Pag-IBIG
(government mandated housing fund for employees), and
Philippine Health Insurance (government mandated health
insurance for employees).
Doing business in the Philippines for BPO companies 6
Setting up a business
Registration with the Securities and Exchange c. ROHQ
Commission (SEC) An ROHQ is a branch of a foreign entity but it is limited
Companies intending to set up BPOs in the country are to performing the following qualifying services to its
required under Philippine laws to register with the SEC to affiliates, subsidiaries, or branches in the Philippines, in
obtain a corporate or juridical personality and/or license to the Asia Pacific region, and in other foreign markets:
transact business within the Philippines. The SEC is the primary
government agency administering the registration and operation − General administration and planning
of corporations under the Corporation Code. − Business planning and coordination
− Sourcing/procurement of raw materials and
Business entities available to BPOs components
BPOs in the Philippines may take the form of either a − Corporate finance advisory services
subsidiary or a branch. In the case of a branch office, it can be − Marketing control and sales promotion
set up either as a regular branch or a regional operating − Training and personnel management
headquarters (ROHQ). − Logistics services
− Research and development services, and product
1. Legal attributes development
− Technical support and maintenance
a. Subsidiary − Data processing and communication
A subsidiary is a stock corporation organized under − Business development
Philippine laws and as such, is deemed a domestic
corporation even if its capital stock is foreign-owned. It has An ROHQ cannot offer qualifying services to entities
a legal and juridical personality separate and distinct from its other than its affiliates, branches or subsidiaries. It cannot
parent company. The liability or exposure of the parent engage, directly or indirectly, in solicitation or marketing
company is limited to its investment in, or subscription to, of goods and services, whether on behalf of its mother
the capital stock of the subsidiary. The properties and assets company, branches, affiliates, subsidiaries or any other
of the parent company are not directly exposed to potential company.
liabilities of the subsidiary.
b. Branch
Corporations organized and registered under the laws of
any foreign country may establish a Philippine branch by
securing a license to do business in the Philippines. A
branch is merely an extension of the legal and juridical
personality of the foreign head-office. It does not exist
independently of the head office and as such, the assets
and properties of the foreign head office may be exposed
to the liabilities of the branch.
Doing business in the Philippines for BPO companies 8
vii. For call centers: Business plan/modus operandi and • Documentary Stamp Tax (DST)
list of prospective clients Upon incorporation of the subsidiary, DST at the rate
of .5 percent of the shares subscribed shall be paid
viii. Additional requirements based on the kind of within five days after the close of the month when the
payment of subscription corporation was incorporated.
9 Doing business in the Philippines for BPO companies
• Required investment
An ROHQ is required to have an initial investment
equivalent to US$200,000.
• Taxes on importation
However, with respect to purchases of depreciable
assets, the aggregate acquisition cost of which, in a Import duties will be imposed on goods, equipment,
calendar month, exceeds PhP1 million regardless of the machineries, supplies and other articles to be imported by
acquisition cost of each capital good, the input taxes the Philippine entity into the Philippines in accordance with
from these purchases should be spread evenly over the the rates prescribed in the Tariff and Customs Code.
period of 60 months or the useful life of the capital In addition, 12 percent VAT shall be imposed on
goods, whichever is shorter.1 importations based on the total value used by the Bureau
of Customs (BOC) in determining tariff and customs
b. Output VAT duties, plus customs duties, excise taxes, if any, and other
Generally, sale of services shall be subject to 12 percent charges. The VAT on importation shall be paid by the
VAT. However, export sales of services may either be importer prior to the release of such goods from customs.
zero-rated or VAT-exempt. A zero-rated sale of goods or
services is a taxable transaction for VAT purposes, but the
same shall not result in any output tax as the applicable
tax rate is zero.
1
Section 4.110-3 of RR 16-2005, the Consolidated VAT Regulations, as amended.
Doing business in the Philippines for BPO companies 14
Spouses and unmarried children below 21 years old are • Content development for multi-media or internet
permitted to enter and reside in the Philippines during the purposes
employment period.
• Knowledge-based and computer-enabled support
g. Simplification of customs procedures services, including engineering and architectural design
services, consultancies, etc.
h. Unrestricted use of consigned equipment under re-export
bond • Business process outsourcing using e-commerce
i. Exemption from wharfage dues and any export tax, • IT research and development
impost and fees on its non-traditional exports for ten
years from the date of registration • Other IT related service activities as may be identified
and approved by the PEZA Board
17 Doing business in the Philippines for BPO companies
There are currently 159 PEZA-registered IT parks and d.Tax and duty free importation of construction materials
centers in the Philippines where BPOs can locate to avail of the
PEZA incentives. The latest list of PEZA IT parks/centers is e. Tax and duty free importation of specialized office
attached for reference. equipment and furniture.
Technical
919.09
functions (IT)
Non-captive BPO
(Associate) 459.54
Support functions
(HR, Finance) 344.66
21 Doing business in the Philippines for BPO companies
Eleanor L. Roque
Division Head, Tax Advisory & Compliance
T +63 2 887-9457
E Lea.Roque@ph.gt.com
Lina P. Figueroa
Principal, Tax Advisory & Compliance
T +63 2 887-9458
E Lina.Figueroa@ph.gt.com
Edward L. Roguel
Partner, Tax Advisory & Compliance
T +63 2 887-9464
E Wowie.Roguel@ph.gt.com
www.punongbayan-araullo.com