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.
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
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.
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.
Setting up in the Philippines FAQ
What are the entry options for foreign companies wanting to set up in the Philippines?
An overseas business has three entry options for generating revenue in the Philippines.
• Opening a branch of an overseas company
• Opening a Filipino corporation
• Opening a foreign-owned domestic corporation
If natives of the Philippines own 60% of the business or more, it is considered a Filipino corporation. Anything else will be a foreign-owned domestic corporation.
Do not be fooled by the use of the word, “corporation” – these entities are completely independent businesses and do not need to be floated on the stock exchange.
How long does it take to set up an entity in the Philippines?
Be aware that setting up a business entity in the Philippines is not a fast process. It could be as long as 20 weeks before your business is ready to make a hire.
What is the total cost of employment to hire an employee in the Philippines?
It typically costs between 1.3 and 1.5 times an employee’s annual salary to make a hire in the Philippines.
What is the minimum share capital required to establish an entity in the Philippines?
A new business in the Philippines – including a local branch of an overseas parent company – will need a minimum capital investment of US$200,000 (around GBP£145,000), payable into a local bank account. This is halved to US$100,000 (GBP£72,500) if the business hires at least 50 local employees or is directly linked to advancing technology in the Philippines.
Do you need to set up a local bank account in the Philippines?
Yes, you will need a local business account in the Philippines to trade in this country. Like most matters of business in the Philippines, this can be a lengthy and time-consuming venture. Make a start on the paperwork as early as possible.
What is the standard working week in the Philippines?
The working week in the Philippines differs a little from the western world. Most employees will be contracted to a 48-hour working week, split over 6 days rather than 5. Employees must be granted at least one full rest day after completing 6 days of work.
The Labour Code of the Philippines is strict in stating that employees should not exceed 8 working hours per day, including a one-hour break. Any longer than this entitles an employee to an additional 25% of pay per hour as a standard overtime wage.
There is a loophole, though – this only applies to work completed on-site. There are no restrictions on home working, so many senior employees in the Philippines continue their working day away from an office without extra pay.
What are common supplementary employee benefits in the Philippines?
In addition to mandatory benefits, many employers in the Philippines also offer life, accident and medical insurance packages, in addition to flexible working hours and sponsored training for self-improvement and career progression.
In the Philippines, can employment contracts be terminated at will by the employer?
The Labour Code of the Philippines is heavily skewed toward protecting employees, so contracts cannot be terminated at will. You will need to provide a justifiable reason for terminating an employee’s contract.
• Gross misconduct (including wilful disobedience and insubordination)
• Gross incompetence or neglect of duty
• Criminal activity – particularly, but not limited to, fraud against the company
Contracts can also be terminated for business reasons, including redundancy, business downsizing or replacing human employees with labour-saving machinery. In such cases, the employee must be granted a minimum of 30 days’ notice and a severance payment. This will vary, depending on the length of service.
Is there any standard annual leave entitlement in the Philippines?
Employees in the Philippines are entitled to a minimum of 5 personal vacation days per year, once they have completed 12 months of service. The Philippines also observes 21 public holidays each year, though only 9 of these are mandatory non-working days.
Can you establish a branch of your company in the Philippines?
Yes, if your parent company has obtained a License to Do Business in the Philippines from the Securities and Exchange Commission. The Philippines has a double tax treaty agreement with the UK, but a 15% profit remittance tax is payable on any profits repatriated to the parent company.
What are the requirements to work in the Philippines?
Any employee that does not hold a Philippine passport will need to obtain a visa from the Bureau of Immigration and an Alien Employment Permit from the Department of Labour and Employment to work in the Philippines.
What work permits or visas are required in the Philippines?
Any foreign national hoping to work in the Philippines must first obtain an Alien Employment Permit. The employee will need a job offer to qualify for this permit, which takes up to 3 weeks to process and lasts between 1 and 3 years. The duration of the AEP will be based on the length of an employment contract.
Once an employee has an AEP, they can apply for a working visa. There are 3 main options here.
• 9g pre-arranged commercial visa – the most common visa for foreign workers in the Philippines, permitting the holder to come and go from the country as long as they are employed
• 9g pre-arranged non-commercial visa – as above, but for missionary, medical or social employment
• Special non-immigrant visa – a short-term visa that allows the holder to remain in the country and work for a period of up to one year
How much is a work visa for foreign workers in the Philippines?
An Alien Employment Permit is 8,000 Philippine Pesos, which is around GBP£120. If the permit is to last longer than a year, prepare to pay an extra P3,000 (GBP£45) for each additional year.
Expect to pay around P100,000 (GBP£150) for a one-year 9g visa. As the process is so slow and bureaucratic, additional administrative processing fees may be incurred throughout the application.