Establishing your business in the Philippines

Why do business in the Philippines?

Any business looking to trade within the ASEAN Free Trade Agreement should seriously consider the Philippines as a base of operations. The country is ideally located from a geographical perspective and is hugely welcoming to overseas investment.

The local workforce is also well-educated, with over 350,000 new graduates every year. You’ll need a strong stomach for bureaucracy – it takes time to get things done in the Philippines. These potential frustrations are tempered by strategic advantages, excellent infrastructure and beautiful surroundings, though.

Territory Data 

How to set up payroll in the Philippines

Setting up a business in the Philippines is a long process – it will likely be at least 16 weeks, possibly closer to 20, before you are ready to start making hires. You’ll need a local bank account before you go any further, and appropriate capital. Once you have paid this capital into your business account and gained a certificate of proof, you will need to follow these steps.

• Register with the Securities and Exchange Commission (SEC)
• Gain a Community Tax Certificate (CTC) and a license to trade from the district mayor
• Register with the Bureau of Internal Revenue (BIR) to pay taxes and gain permission to raise invoices
• Register with the Social Security System (SSS), Home Development Mutual Fund (HDMF) and Philippines Health Insurance Corporation (PHIC) to pay benefits to your employees

After this, you can start making hires. It’s advisable to choose from the local talent pool, as anybody without a Philippines passport will need a work permit and visa. That’s more expense and administration for you to manage. Naturally, your employees will also need to pay income tax. This will be assigned as follows:

• Salary below 10,000 Philippine pesos (P) – 5%
• Salary of P10,000 – P29,999 – 10%
• Salary of P30,000 – P69,999 – 15%
• Salary of P70,000 – P139,999 – 20%
• Salary of P140,000 – P249,999 – 25%
• Salary of P250,000 – P499,999 – 30%
• Salary of P500,000 or higher – 32%

These taxes are withheld from an employee’s salary and filed with the Bureau of Internal Revenue. The tax year in the Philippines runs from January 1 to December 31, with any payments due by April 15 the following year.

Philippines employment law and HR considerations

Take the time to brush up on the Labour Code of the Philippines. Issued by the Department of Labour and Employment (DOLE), this legal doctrine offers many protections to employees. For example, any employee asked to work longer than 8 hours in a single day is automatically entitled to overtime pay of 25% per hour. It’s also very difficult to terminate contracts in the Philippines without good reason, so hire carefully.

Benefits packages are hugely important to Filipino employees, so do not skimp on these. Expect to multiply an employee’s salary by up to 1.5 when accommodating the expense of a new hire once benefits are taken into consideration. 

Mandatory benefits for employees in the Philippines include:

• 11.36% of a salary paid as social security contributions. The vast majority of this is paid into the national pension fund 
• Health insurance payments to the government-run Philippine Health Insurance Corporation
• Payments to the Home Development Mutual Fund (HDMF) of the Department of Human Settlements and Urban Development, which acts as a savings fund so employees can purchase a home
• An additional, “13th month” payment of 1.5 times an employee’s monthly salary. This can be paid instalments throughout the calendar year or as a lump sum on or before December 24
• At least 5 days of personal holiday per year (plus public holidays) after one year of service
• At least 5 days of sick pay per year after one year of service
• 105 days of paid maternity leave
• 7 days of paid paternity leave (only applicable to married employees with 4 children or fewer)
• 7 days of additional paid parental leave for single parents

These are just the mandatory benefits – most employers offer additional perks. It’s advisable to seek professional advice before drawing up an employment contract in the Philippines. Benefits are so important that failing to provide an appropriate package will often be the difference between attracting employees and not.

Setting up a subsidiary entity in the Philippines

Opening a business in the Philippines is a little different from the west. The concept of a Limited Liability Company is not in operation in the Philippines. Instead, if not opening a branch of an overseas business, you will be invited to launch a corporation. These fall into two categories – Filipino or foreign-owned domestic.

Despite the use of the word corporation, these are still private businesses. The sole difference is in ownership. To qualify as a Filipino corporation, a business must be at least 60% owned by local partners. If not, the business will be a foreign-owned domestic corporation. 

Either entity will need to be registered with the Securities and Exchange Commission (SEC). The main difference is that a foreign-owned domestic corporation will also need a minimum capital of US$200,000 (GBP£145,000). However, a foreign-owned domestic corporation can also apply for tax breaks via the Philippine Economic Zone Authority. The flat business tax rate in the Philippines is 30%, irrespective of the business model.

Opening a branch of a parent company remains an option. Naturally, this negates any sense of independence – the fortunes of the Philippine branch will be tied directly to those of the parent company. A branch will also need to be an additional 15% of tax on any profits repatriated to a parent company. It can be a little faster and easier to start trading, though. A branch may be up and running, ready to make hires, in less than the 16-20 weeks a corporation will need to wait.

Country nuances

If you want to trade in the Philippines, you’ll need two things in abundance – patience and capital. If you’re prepared to wade through the red tape involved in doing business in this country (authorities in the Philippines love bureaucracy, so everything takes far longer than you may be used to) and have a minimum of US$200,000 to get your business started, there are few restrictions on overseas businesses. 

The only exception to this is industries listed on the Philippine Foreign Investment Negative List (FNL). This is a legal doctrine that forbids or restricts foreign ownership of businesses that operate in certain sectors. You will find the details of the FNL here.

If you wish to attract talented employees in the Philippines – which is advisable, as obtaining work permits and visas for foreign nationals is time-consuming and expensive – offer a comprehensive benefits package. The Philippines is the biggest spender on employee benefits in Asia, so these perks will attract the best and brightest employees to your business.

When doing business in the Philippines, always respect hierarchy. It will be considered a waste of time trying to negotiate with mid-level staff – always attempt to get a meeting with a key decision-maker. This does not mean that Filipino business associates are rude, though. Quite the opposite. 

Hospitality, respect and kindness are hugely important in the Philippines, and conflict will be avoided wherever possible. Keep things light, avoid anything that would be considered aggressive – while ensuring that you remain professional at all times. Do not push for a straight answer at a meeting, either. You’ll rarely walk away with a firm yes or no in your pocket. Be prepared to play the long game when negotiating.