in the - BMG Accountants

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DOING BUSINESS IN THE PHILIPPINES
Business process outsourcing & other industries
Introduction
As the world moves to a Global Economy and with rapid technological advances Business Outsourcing is
becoming a key strategy for many organizations large and small.
The benefits of outsourcing are not only financial but there are also other benefits both geographic and
strategic.
BMG Accountants began our journey many years ago and have developed our strategy, tried various
options, made mistakes and now successfully operate a Business Outsourcing company in the Philippines.
We have worked through the legal minefields, understand the International tax challenges, created
successful skill sets and most of all enjoyed the journey with our team.
We look forward to continue to build our business and team and offer something back to this rapidly
developing nation and its people.
Begin  Manage  Grow
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Virtual Assistant vs. Permanent Establishment
Many businesses start by engaging a VA to help in various aspects of their business. A VA can virtually do
anything that a fulltime in-house employee can do.
The primary advantage of using VA’s is cost. The VA will work from home usually providing their own
computer, desk & chair and pay their own electricity. Also their wages are often lower as many employers
do not pay Employee tax, health, insurance, etc.
There are also many disadvantages of having a VA vs. an in-house employee including loyalty, reliability,
supervision and security. Many VA’s live in areas where there are constant power failures and poor internet
connection. They may unknown to you be working two or more jobs just to make ends meet. They may
become ill and unable to work leaving you with a gap to fill.
BMG Accountants have experienced the benefits and problems created by hiring VA’s and can advise and
provide solutions to the issues that may arise.
As with any business decision it is important to have a clear strategy and sound business model.
Hiring a VA or setting up a permanent establishment for the wrong reasons is risky.
Remember, “cheaper” does not necessarily mean “cheaper in the long run”.
BMG Accountants can assist you with your strategy and implementation. We can advise on your
International Tax obligations, streamline your set up, systemize your business processes and oversee your
corporation.
We can arrange a trial to allow you to see what works for you, whether a home based VA, a BMG
Accountants in-house VA or establishing your own corporate…
… speak to BMG Accountants.
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Economy
The Philippines has a free market economy with an active private sector. The Government has already
privatized many government owned or controlled entities and continues to pursue structural reforms,
liberalizing imports, deregulation of key industries and relaxing investment rules.
The government is looking to be a global competitor and is actively seeking to encourage investments from
outside the country to participate in the domestic economy.
Key Economic Data
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Ranked 46th largest world economy (2010 World Bank Statistics)
Goldman Sachs predicts 14th largest world economy by 2050
2011 estimated GDP $227.58 billion
GDP per capita estimate $2,329
6.4% annual GDP growth to March 2012
Population Estimate 2012 is 103,775.002 (12 largest)
Approximate exchange rate 42 PHP = $1AUD
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Employment Data
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61% of population aged 15 – 64 (62,202,170).
Labor force 40,005,000.
Estimated unemployment rate 7% (2,814,000).
Estimated underemployed rate 18% (7,163,000).
Estimated average annual salary $5,800 AUD, minimum salary in a National Capital Region is currently
less than $11AUD per day.
 Most English speaking and highly trainable.
Living Standards
 The Philippines ranks highly in international surveys of expatriates including climate, air quality, health
services, housing, utilities, social leisure facilities, infrastructure , personal safety and political tensions.
 Mix of western culture and Asian traditions making it easier to interact and adapt.
 Value for money, Manila most expensive city with regional centres considerably cheaper.
 Reasonable residential rental costs from approximately $500 AUD per month.
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Growth of Business Process Outsourcing (BPO)
 One of the fastest growing and dynamic industries in the Philippines today
 BPO incorporates back office processing, contact centres, software and internet development, data
processing, data transcription, engineering and design, animation, etc
 Manila is the major destination for BPO’s but other cities; Cebu, Davao and now Clark are become
increasingly popular.
 The government is looking for 15% year on year growth for the industry in both employment and
revenue
Other Export Related Industries
 The government has extended incentives to other export related industries including manufacturing.
 With cheap land and labor together with flexible work places and accessible port facilities and markets,
The Philippines offers a great alternative
Government Regulations
 Restrictions on foreign ownership were largely lifted in 1991 but remain in some instances where there
may be health or security reasons. Foreign ownership is allowed up to 100% provided the corporation
is not engaged in an economic activity falling under the Foreign Investment Negative List. In some
instances foreign ownership can also be restricted to less than 100%.
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Government Approvals and Registration
 Corporations and partnerships must be registered with the Securities & Exchange Commission (SEC) to
secure their primary license or certificate of registration. Individual proprietorships must register with
the Bureau of Trade Regulation and Consumer Protection of the Department of Trade and Industry
(DTI).
 If the Entity is qualified for certain incentives then it will also be required to register with the
government agency implementing the incentive or law.
Post SEC Registration Requirements
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Once the entity is trading in the Philippines it must also register with other government agencies
The tax authority the Bureau of Internal Revenue (BIR)
The local government authority (LGU) of the city or municipality where it will do business
Social Security System (SSS)
Home Development Fund, Pag-IBIG (government mandated housing fund for employees) and,
The Philippine Health Insurance (government mandated health insurance for employees)
Annual auditing and filing of accounts is much stricter than in Australia’s self-assessing regime. The
independent audit requirement means that most entities outsource their accounting and compliance
obligations to accounting firms. It is also imperative that all BIR (tax) receipts are maintained as they
will be required by the auditor and other authorities.
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Import and Export Controls
The government is generally reducing tariffs in line with the GATT principles adopted at the Uruguay round.
 Most goods are freely exportable unless the trade is prohibited under international agreements.
 Certain commodities are regulated on health and national security grounds.
 Regulated commodities require clearances from government agencies.
Price Controls
Price controls are generally not imposed on commodities.
 The President can impose a price ceiling on basic commodities if any event causes artificial or
unreasonable increases in prices.
Use of Land
 Ownership of private land is limited to Filipinos or corporations where at least 60% of the capital is
owned by Filipino citizens.
 Foreigners are allowed to lease private land for a period of up to 75 years.
 Foreigners are also allowed to buy up to 40% of the total available condominium units and townhouses
in a single proprietary block.
 It is generally necessary to obtain approvals from the local government for new construction,
renovations or changes in land use.
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Exchange Controls
 The Bangko Sentral ng Pilipinas (BSP) the Philippine Central Bank implements foreign exchange policies
that have been largely liberalized allowing movement of capital and remittances more freely.
 Foreign currency movements are also covered under the Anti-Money Laundering Act.
 Foreign currency can be freely bought and sold outside of the banking system and thru agents.
 Certain foreign currency loans are still regulated by BSP.
 Foreign exchange receipts, acquisitions or earnings may be sold for pesos, retained or deposited in
foreign currency accounts (whether in the Philippines or abroad) or used for any other purpose.
Registration of Foreign Investment with BSP
 The registration of foreign investment with the BSP is not mandatory.
 If the foreign exchange needed to fund the repatriation of capital or profits is sourced from the
Philippine banking system then the banks will require a BSP certificate of Registration.
Government Incentives
 The Philippine government offers various incentives to encourage investment in export orientated
businesses, businesses that locate in less developed areas and for those businesses registered with the
Philippine Economic Zone Authority (PEZA).
 Monetary incentives include income tax holidays, flat rate of tax, additional tax deductions and
exemptions.
 Non monetary incentives include simplification of customs procedures for imports and exports.
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Setting up the Business Structure
The options for a foreigner establishing an operating entity in the Philippines are:
 Establish a Branch
 Regional Operating Headquarters (ROHQ)
 Subsidiary
Establishing a Branch
 Any corporation that is organized and registered under the laws of any foreign country may establish a
Philippine branch.
 The company must secure a license for its branch to do business in the Philippines, obtained through
the SEC.
 The branch is merely an extension of the judicial personality of the foreign head office, it does not exist
independently of the head office and as such, the assets and property of the head office may be
exposed to the liabilities of the branch.
 Must have an assigned capital of at least US$200,000. However this can be reduced subject to the
same conditions applicable to a subsidiary (preferred for SME entities).
 The SEC filing fee is 1% of the assigned capital plus 1% of the computed fee for a SEC research fee.
 A branch must also lodge within 60 days a security deposit in the form of government bonds or
securities in approved corporations to the value of 100,000PHP.
 Additional securities are required to be lodged each year depending on the licensee’s share value or
turnover.
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Regional Operating Headquarters
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An ROHQ is required to register with the Board of Investments (BOI).
An ROHQ is required to have an initial investment of at least US$200,000.
BOI Filing Fee P4,500 plus 1% legal research fee.
SEC filing fee of 1% of actual remittance plus 1% legal research fee.
An ROHQ is restricted to providing qualified BPO services for its affiliates, subsidiaries and branches
any where in the world.
Subsidiary
 A subsidiary is a stock corporation organized under Philippine laws and as such, is deemed a domestic
corporation even if a majority of its capital stock is foreign owned.
 It is a separate legal entity to its parent company, limiting the liability of the parent company to its
investment in the subsidiary.
 A subsidiary is registered with the SEC.
 Must have at least 5 and not more than 15 individuals who are known as Incorporators.
 The incorporators are responsible for filing with SEC the Articles of Incorporation specifying the
companies name, purpose, principal office, and capital ownership.
 Other information required to be lodged includes By-Laws, Treasurers Affidavit, Affidavit of
Incorporator or director undertaking to change corporate name.
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 Corporations with foreign ownership must also lodge proof of funds, and with corporations with more
than 40% foreign ownership, a form No F-100.
 There are additional requirements when the corporation is seeking to be registered under a relevant
economic zone, PEZA, etc.
 Call centres also have additional requirements.
 At least 25% of the authorized capital stock must be subscribed at the time of incorporation and at
least 25% of the total subscribed capital must be paid up.
 The minimum paid up capital for a corporation must be at least P5,000.
 If the subscriber is an alien or a non resident foreign corporation, the amount subscribed must be fully
paid up.
 If foreign equity in a domestic market enterprise (DME) is greater than 40%, it is required to have a
minimum paid up capital of US$200,000 (may be reduced in some circumstances). To avoid being a
DME the corporation must consistently export more than 60 of its output.
 SEC filing fee is 20% of 1% of the entities authorized capital stock plus 1% SEC legal research fee.
 There is stamp duty of 0.5% of the shares subscribed when the company is incorporated.
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Labor & Employment in BPO’s
 Attractive daily minimum wages and well qualifies work force.
 Social Security (SSS) covers employees for disability, sickness, old age and death.
 Holiday, vacation and sick pay. There are 11 regular and 3 special non working holidays. After one year
employees are entitled to 5 days annual leave on full pay. Most companies give two weeks leave in
addition to the statutory public holidays. Most companies, although not mandatory, also give two
weeks sick leave, non cumulative.
 Annual payment of a 13th month pay is mandatory, usually paid at Christmas time. This is proportioned
for part year service and also payable on termination.
 Maternity Leave is payable to female employees and later reimbursed by the SSS. The payment is a
fraction of the normal salary and calculated to various formulas. Most employers advance the full
salary and carry the difference on what is reimbursed from the SSS.
 Paternity Leave is payable to the father for 7 days for up to 4 births. This is not reimbursed by the SSS.
 Solo parents, as defined by the Solo Parents Welfare act are entitled to 7 days paid parental leave per
year after one years service.
 Healthcare is automatic and compulsory for SSS members. In addition, employers receive a tax
deduction for employee health insurance or additional health costs that they my reimburse.
 Individual employee rights are protected by the Labor Code. There are currently no unions in the BPO
area.
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 Foreign nationals require an employment permit if they are seeking employment in the Philippines.
Most foreign nationals can stay in the Philippines for up to 21 days without a visa or 59 days
extendable to 6 months with a temporary visa. A Philippine company wishing to employ a foreign
national must apply for a permit on behalf of the person showing that they have the necessary skills for
the position and that no Filipino is able or willing to fulfill the role.
Compliance - Ongoing
 Annual audit of you company financials is mandatory, this places additional onus on the business
owners and record keeping requirements.
 All receipts must be retained and properly recorded.
 The necessary reports and payments to the various government agencies can be time consuming and
confusing to non Filipino’s.
 Most corporations will engage an external accounting company to maintain the records and ensure
they are in order prior to the annual audit. The minimum cost of this service is around 30,000PHP per
month and an annual charge of around 40,000PHP for the preparation of the annual financial accounts.
The external audit will cost from 10,000PHP. Fixed price agreements are available.
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Conclusion
As Australian businesses continue to experience cost increases due to salary & wage pressure, outsourcing
provides an opportunity to stay competitive.
The first step is to ensure your strategy is sound and that outsourcing will both suit your requirements and
also deliver the benefits that you are require.
BMG Accountants encourage their clients to take the following steps:
 Review their business, mission statement and vision
 Review their processes and implement/improve systemisation
 Decide on what existing processes can be outsourced
 Identify new opportunities to improve the business by outsourcing
 Cost/benefit analysis of outsourcing and various other options
Based on the findings of the above process the client can make informed decisions on the level and type of
outsourcing service they require.
As with many business decisions, proper planning and research will potentially save time and dollars in the
future, learn from mistakes made by others, see what works and benefit from the opportunities available.
Whether it is a VA or establishing your own corporation, BMG Accountants can advise.
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Annex - A
SOCIAL SECURITY SYSTEM (www.sss.gov.ph)
The Social Security System is an agency established
to provide meaningful protection to members and
their families against contingencies resulting in
temporary loss of income or financial burden and to
contribute to the socio-economic development of
the country through a viable social insurance
program.
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Annex - B
PHILHEALTH ( www.philhealth.gov.ph )
The enactment of RA 7875, known as the National Health
Insurance Act of 1995, established the Philippines Health
Insurance Corporation (PhilHealth) replacing the old
Medicare, to administer and manage a sustainable
program that will not only ensure better benefits at an
affordable cost but also to extend quality and relevant
health care services to a broader membership base that
will lead to universal coverage.
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Annex - C
BUREAU OF INTERNAL REVENUE (wwwbir.gov.ph )
Every employer making payment of compensation shall
deduct and withhold from such compensation a tax
determined in accordance with the prescribed Revised
Withholding Tax Tables (Annex C) which shall be used
starting January 1, 2009.
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Annex - D
PAG-IBIG (www.pagibigfund.gov.ph )
A Home Mutual Development Fund was earlier created by the government under PD 1752, and
subsequently amended by RA 7742, otherwise known as the Pag-IBIG fund. Except for employees/ workers
receiving a monthly salary of less than P4,000.00, membership with the Fund is mandatory for all SSS or
GSIS members.
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in the - BMG Accountants

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