Doing Business in the Philippines - EY

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Doing Business in the Philippines - EY
Doing Business
in the
Philippines

                 A member firm of Ernst & Young Global Limited
Doing Business in the Philippines - EY
A message from the Secretary of   A message from His Excellency
    the Department of Trade           President Rodrigo Roa Duterte
    and Industry

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Doing Business in the Philippines - EY
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Doing Business in the Philippines - EY
Doing Business in the Philippines

                                                                                           Why you should
                                                                                           invest in the Philippines
                                                                                           Teeming with natural resources and boasting of staggering
                                                                                           landscapes, the Philippines does not disappoint those who go the
                                                                                           extra mile to reach it. Indeed, nothing compares to the abundance
                                                                                           of diverse natural resources offered by the Philippines. However,
                                                                                           it is the Filipino that makes the country truly wonderful. Even
                                                                                           when faced with adversity, Filipinos remain to be one of the most
                                                                                           ebullient and easygoing people around. They are memorable
                                                                                           thanks to their courtesy, warm hospitality, and most of all, their
                                                                                           abundant talent. The Filipino worker is highly competent, holds
                                                                                           a diverse set of skills, and exhibits reliable work ethic. With their
                                                                                           innate dedication, diligence, educational level and bilingual
                                                                                           flexibility, Filipinos epitomize an educated, multicultural, and
                                                                                           bilingual work force.

                                                                                           In the 2018 World Bank – International Finance Corporation Doing
                     Gross Regional Domestic product growth rates (in percent) 2016-2017   Business Report, the Philippines garnered the 113th rank.

                                                                                           The 2018 report measured regulatory factors that had an impact
                                                                                           on the areas of the life of a business. The Philippines boosted its
                                                                                           ranking in protecting minority investors, dealing with construction
                                                                                           permits, paying taxes and enforcing contracts. The country also
                                                                                           sustained its position in registering property and trading across
                                                                                           borders. These indicators show that the Philippines has a low-cost,
                                                                                           economically sound, and cosmopolitan environment in which to do
                                                                                           business.

                                                                                           Source: The World Bank

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Doing Business in the Philippines - EY
Doing Business in the Philippines

Economic
overview
The Philippine economy grew 6.1% in the third quarter of 2018.
The posted growth is fueled by higher investment opportunities
and consumption as well as the growth of manufacturing, trade,
real estate and renting business activities. It has enjoyed a string
of upgrades in recent years from credit raters recognizing the
country’s improving fundamentals. The Philippines continues to
enjoy investment grade status since its upgrade by Fitch Ratings,
Standard & Poor’s (S&P), and Moody’s Investor Service in 2013.                         Source: National Economic Development Authority

In December 2017, growing domestic demand was attributed as                            Labor force                                                 There are 11 international airports in the country with
                                                                                                                                                   several slated for major renovations via Public Private
the main growth driver which was backed by steady remittances
                                                                                                                                                   Partnerships (PPPs). Key gateways include those in
from foreign workers. In terms of major sectors, the industries                        In July 2018, the preliminary results of the Annual
                                                                                                                                                   Manila, Cebu, Davao, Clark, and Laoag. The Ninoy
                                                                                       Estimates of Labor Force Survey showed a 94.6%
is still the fastest growing sector at 6.2% followed by services,                      employment rate with a 42.8 million economically active
                                                                                                                                                   Aquino International Airport is the country’s main
which grew by 6.9%. In September 2018, Philippine external trade                                                                                   airport. It has five terminals, some servicing domestic
                                                                                       population. The services sector accounted for 57.5% of
                                                                                                                                                   routes, and other servicing international flights to Asia,
in goods reached US$15.58 billion, a 13.5% increase from the                           the total employed persons, followed by the agriculture
                                                                                                                                                   the Middle East, Europe, and North America.
                                                                                       sector at 23.1% and industries at 19.4.%.
recorded value in September 2017. Electronic products continue to
lead as the country’s top export growing 7% in August 2018. Other                      The labor force participation rate was reported at
                                                                                                                                                   The country has been upgraded to a Category 1
                                                                                                                                                   rating in Aviation Safety by the US Department of
products also increased including mineral products (21.8%), special                    60.1%, given the labor force population of 71.6 million.
                                                                                                                                                   Transportation’s Federal Aviation Administration,
transactions (5.8%) while forest products increased by 7.5%. Hong                      Meanwhile, the unemployment rate is at 5.4%.
                                                                                                                                                   allowing local airline companies to expand their
Kong is now the top destination of Philippine-made goods, followed                     Source: Philippine Statistics Authority
                                                                                                                                                   operations in the US.
by the United States and Japan. The Cordillera Administrative
                                                                                                                                                   The European Union (EU) has also allowed local
Region’s (CAR) economy grew the fastest at 12.1% in 2017.                              Offshoring and outsourcing                                  carriers, Philippine Airlines and Cebu Air, Inc., to fly
National Capital Region (NCR), Region IV-A: CALABARZON, and                                                                                        into European airspace as recognition of the airlines’
Region III: Central Luzon largely contributed to the 6.7% GDP                          The Philippines is among the world’s top outsourcing        commitment to safety and full compliance with
                                                                                       destinations, thanks in large part to low business costs    international aviation safety standards.
growth rate — with NCR’s share accounting for 36.4%.                                   and a large pool of university educated, English-speaking
                                                                                       and highly adaptable workers.
The top five residential and commercial project list are
CALABARZON, Central Luzon, Region VII: Central Visayas,                                Source: Philippine Economic Zone Authority
NCR and Region IX: Zamboanga Peninsula.                                                                                                                   The Philippine economy
                                                                                       Tourism                                                              has enjoyed a string
                                                                                       Tourism is another bright spot in the economy. The
                                                                                                                                                           of upgrades in recent
                                                                                                                                                          years from credit raters
Source: National Economic and Development Authority, Philippine Statistics Authority
                                                                                       Philippine Department of Tourism has reported 5.4
                                                                                       million inbound visitors from January to September
                                                                                       2018, an 8.32% increase from 4.9 million in 2017.
                                                                                                                                                         recognizing the country’s
                                                                                                                                                         improving fundamentals.
                                                                                       Also, inbound visitor receipts totaled to PhP146.34
                                                                                       billion for January–June 2017. This is 14.9% higher than
                                                                                       PhP127.4 billion for the same period from the
                                                                                       previous year.

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Doing Business in the Philippines

The Mactan International Airport in Cebu has regular                        Construction
flights from Busan, Doha, Taiwan, Hong Kong, Singapore
and various other cities in Korea, China and Japan. The
                                                                            The construction sector remains a top growth
Davao International Airport has regular flights from
                                                                            contributor on the back of strong private real estate
Indonesia and Singapore, and seasonal flights from
                                                                            development activity as well as the government’s PPP
Macau. The Clark International Airport in Clark has
                                                                            program, strategic infrastructure projects, and disaster
regular flights from Hong Kong, Doha, Dubai, Macau,
                                                                            reconstruction.
Singapore and various cities in Korea and Malaysia. The
Subic International Airport in Zambales has regular
                                                                            In the third quarter of 2018, the construction industry
flights from Korea and Macau, while Laoag International
                                                                            grew by 16.1%, driven by the acceleration of public
Airport in Ilocos Norte has regular flights from Macau.
                                                                            and private construction. The Philippine construction
Kalibo International Airport in Aklan has regular flights
                                                                            industry’s nominal value is expected to double by 2022.
from Taiwan and various cities in China and Korea. Other
international airports in the country are the Puerto
                                                                            The government intends to spend US$158 billion
Princesa International Airport in Palawan, Zamboanga
                                                                            on its Build, Build, Build program in the next five
International Airport and General Santos International
                                                                            years. Through heavy investment on the country’s
Airport, which are both in Mindanao.
                                                                            infrastructure, the government believes it can
By sea, major cruise ships and international container                      achieve sustained, robust and holistic socioeconomic
vessels call at the port of Manila. Inter-island ships                      development.
connect Manila to major ports in other provinces.
                                                                            The program is composed of 75 flagship projects which
Sources: Manila Bulletin, Philippine Statistics Authority, Business World   includes a variety of transport facilities and public ways
                                                                            that will improve efficiency in moving goods, help bring
Manufacturing                                                               down cost of production and ultimately encourage
                                                                            countryside investments. Other infrastructures planned
The manufacturing industry is one of the fastest                            are energy facilities, water resource projects and
growing industries in the Philippines posting a 4%                          irrigation systems, flood control facilities and urban
growth in the third quarter of 2018. This is a result of                    redevelopment programs.
the governments’ interagency Philippine Manufacturing
Industry Roadmap, which aims to have the industry                           Sources: Philippine Statistics Authority, Public-Private Partnership
account for 30% value added to the economy and                              Center, Senate Economic Planning Office
generate 15% of total employment by 2025 compared to
22% and 8%, respectively, back in 2012.
                                                                            Mining
Phase I of the roadmap from 2014–2017 focuses
on automotive and aerospace parts, electronics,
garments, food, resource-based industries, chemicals,
                                                                            According to the Philippine Department of Environment                   Renewable energy                                           Agriculture
                                                                            and Natural Resources (DENR), the country’s estimated
furniture, tool and die, and shipbuilding. Phase II, from                   mineral reserves are placed at about 14.5 billion metric
2018–2021, shifts to high value added activities and                                                                                                The 2012-2030 Philippine Energy Plan prepared by the       The Philippines has about 10 million hectares of
                                                                            tons of metallic minerals and about 67.66 billion                       government estimates that under a low carbon scenario,     agricultural land and is a major exporter of banana,
investments in upstream industries such as chemicals,                       metric tons of non-metallic minerals. It is also the fifth
iron and steel, med-tech basic and fabricated metal,                                                                                                renewable energy’s contribution to the country’s total     coconut, pineapple and fishery products. Sugarcane and
                                                                            mineralized country in the world, third in gold reserves,               power mix will grow by an annual average of 3.2% and       coconut are major sources of renewable biofuels such as
link and integrate industries, small and                                    fourth in copper and fifth in nickel.
medium-sized enterprises and large firms, and the                                                                                                   comprise a 37.1% share. The Philippines is already         bioethanol and coco-diesel. Also, the agriculture sector
innovation ecosystem. From 2022-2025, Phase III will                                                                                                the world’s second largest producer of geothermal          accounts for 25.4% of the total labor force.
                                                                            In the mining statistics released by the Mines and                      energy, with a still untapped resource potential of
move to high-tech activities, transport, electronics                        Geosciences Bureau in July 2017, the gross production
and chemicals, as well as participate as manufacturing                                                                                              2,600 megawatts. Also, there is an untapped potential      The growth of the sugarcane (30%), rubber (7.1%),
                                                                            value in mining amounted to a total of PhP108.63 billion.               of 70,000 megawatts for wind energy and 13,097             coconut (6%), poultry (5.4%), agricultural activities
hubs in regional and global production networks for
automotive, electronics, machinery, garments and food.                                                                                              megawatts for hydropower.                                  and services (4.9%) and mango (4.5%), among others,
                                                                            The Philippines currently hosts 48 operating metallic                                                                              positively contributed to the Agriculture industry.
In May 2018, foreign direct investment (FDI) in the                         mines consisting of 30 nickel mines, eight gold mines                   A total of 831 renewable energy service contracts with
Philippines registered US$1.6 billion net inflows with                      (with silver as coproduct), three copper mines,                         aggregate potential capacity of 21,937 megawatts
reinvestment of earnings growing by 5.7%. Singapore,                        three chromite mines and four iron mines.                               were awarded as of the first half of 2017, while the       Source: Philippine Statistics Authority
Japan, Netherlands, United States and Luxembourg                                                                                                    total installed capacity was 4,710 megawatts. Of these
                                                                            Source: Mines and Geosciences Bureau, Philippine Statistics Authority
largely contributed to the US$257 million gross in                                                                                                  contracts, 445 were hydropower projects and 202 were
equity capital infusions. These were mainly invested                                                                                                solar projects, 186 of which were on-grid and 16 were
in manufacturing, real estate, wholesale and retail                                                                                                 own-use.
trade, information and communication, and arts,
entertainment and recreation activities. The Philippines’                                                                                           The Philippines has a high-profit potential from
sound macroeconomic fundamentals and growth                                                                                                         biodiesel exports and is a large producer of coconut and
prospects make the country a favorable                                                                                                              sugarcane, two major sources of biofuels.
investment destination.
                                                                                                                                                    Source: USDA Foreign Agricultural Service
Sources: Philippine Statistics Authority, Bangko Sentral ng Pilipinas

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Doing Business in the Philippines

                                                                       Foreign Investments Act (FIA) of                             BOI-Registered enterprises enjoy both
                                                                       1991 (or Republic Act No. 7042 as                            fiscal and non-fiscal incentives
                                                                       amended by RA No. 8179)
                                                                                                                                    Fiscal incentives include an income tax holiday for six
                                                                                                                                    years for newly registered pioneer projects, four years

Investment policy
                                                                       The Foreign Investments Act (FIA) of 1991 liberalized
                                                                                                                                    for non-pioneer firms, and three years for expansion or
                                                                       the entry of foreign investments into the Philippines.
                                                                                                                                    modernization projects, income tax deduction for labor
                                                                                                                                    expenses, tax credits and special exemptions,
                                                                       Under the FIA, foreign companies are generally
                                                                                                                                    among others.
                                                                       allowed to conduct business in the Philippines subject
                                                                       to restrictions spelled out in the Foreign lnvestments

and incentives
                                                                                                                                    For non-fiscal incentives, BOI-registered companies can
                                                                       Negative List (FINL), which the government periodically
                                                                                                                                    enjoy simplified customs procedures; unrestricted use of
                                                                       updates. The FlNL is a shortlist of areas of economic
                                                                                                                                    consigned equipment; and the option to employ foreign
                                                                       activities where foreign investments are restricted or
                                                                                                                                    nationals, among others.
                                                                       limited. It has two components:

                                                                            List A contains areas of activities reserved to         Special Economic Zone Act of 1995
                                                                            Philippine nationals by mandate of the Constitution     (RA No.7916, as amended by
Investments are most welcome in the Philippines. There are                  and other specific laws.
                                                                                                                                    RA No. 8748)
only certain areas of economic activity where foreign ownership
                                                                            List B contains the areas of activity and enterprises
restrictions apply.                                                         where foreign ownership is limited pursuant to          This law was passed in 1995 to encourage economic
                                                                            law. Among these are defense or law enforcement-        growth through the development of special economic
Philippine laws and regulations guarantee the basic rights of all           related activities and those with implications on       zones called Ecozones. The Philippine Economic Zone
                                                                            public health and morals. This list includes small      Authority (PEZA) implements this law and also grants
investors and enterprises, including the following:                                                                                 incentives to qualified enterprises that locate in the
                                                                            and medium-sized domestic market enterprises
                                                                            with paid in equity capital less than the equivalent    Ecozone.
• Freedom from expropriation without just compensation                      of US$200,000, unless they involve advanced
                                                                            technology as certified by the Department of            Ecozones are areas earmarked by the government
• Right to remit profits, capital gains, and dividends within the                                                                   for development into balanced agricultural, industrial
                                                                            Science and Technology or they employ at least 50
  guidelines of the Bangko Sentral ng Pilipinas, the country’s              direct employees, in which case a minimum paid-up       commercial, and tourist/recreational regions. These
  monetary authority                                                        capital of US$100,000 is allowed.                       include industrial estates, export processing zones, free
• Right to repatriate the proceeds of the liquidation of investments                                                                trade zones, tourism ecozones, and IT buildings and
                                                                                                                                    parks.
• Right to obtain foreign exchange to meet principal and interest
                                                                       Omnibus Investments Code of 1987
  payments on foreign obligations                                                                                                   Each Ecozone is to be developed as an independent
                                                                       or Executive Order (EO) No. 226, as                          community with minimum government interference. It
                                                                       amended by Republic Act (RA)                                 shall administer its own economic, financial, industrial,
There are a number of laws governing investments in the                                                                             and tourism development without help from the national
Philippines. At present, there are proposals to consolidate all
                                                                       No. 7918                                                     government. It shall also provide adequate facilities to
the incentive laws into one law to rationalize the grant and                                                                        establish linkages with surrounding communities and
                                                                       Implemented by the Board of Investments (BOI),               other entities within the country.
administration of fiscal and non-fiscal incentives given by various    the Omnibus Investments Code of 1987 provides a
incentive bodies.                                                      comprehensive set of incentives for local and foreign        The enterprises that may be located in Ecozones include
                                                                       enterprises engaged in activities considered by the          export enterprises, free trade zone enterprises, service
                                                                       government as high priority for national development.        enterprises, pioneer enterprises, utilities enteprises, and
The major investment laws are discussed as follows.                                                                                 IT enterprises, among others.
                                                                       To qualify for BOI incentives, an enterprise must
                                                                       engage in an area of activity listed in the government’s
                                                                       Investment Priorities Plan (IPP). The IPP for
                                                                       2017-2019 is currently being finalized by the
                                                                       government and will focus on the development and                    Ecozones are areas
                                                                       promotion of innovative, inclusive industries, enhance
                                                                       employment, entrepreneurship under a modern
                                                                                                                                            earmarked by the
                                                                       incentives regime.                                                    government for
                                                                       Previously, if an enterprise is not listed in the IPP, it       development into balanced
                                                                       is also entitled to incentives if either of the following
                                                                       criteria is met:
                                                                                                                                         agricultural, industrial,
                                                                                                                                        commercial, and tourist/
                                                                          • At least 50% of production is for export
                                                                           (for Filipino-owned enterprises)
                                                                                                                                          recreational regions.
                                                                          • At least 70% of production is for export
                                                                           (for enterprises with more than 40% foreign equity)

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Doing Business in the Philippines                                                                                           Investment Policy and Incentives

Incentives available to ecozone                              Clark Special Economic and Freeport Zone                       ROHQs are branches established in the Philippines by       Investor’s Lease Act (RA No. 7652)
                                                             In 2007, RA No. 7227 was amended by RA No.                     multinational companies that are allowed to derive
enterprises                                                  9400 to include additional special economic zones              income by providing qualifying services to their
                                                                                                                                                                                       RA No. 7652 allows foreign investors to lease
                                                             including the Clark Special Economic and Freeport              affiliates in the region. These services include general
Ecozone enterprises are entitled to a number of                                                                                                                                        commercial lands in the Philippines for a maximum of 75
                                                             Zone (CSEFZ) covering the lands occupied by the Clark          administration and planning, business planning and
favorable incentives, depending on the nature of their                                                                                                                                 years (previously 50 years).
                                                             Military reservations and its contiguous extensions as         coordination, sourcing/procurement of raw materials
activities. These include a special tax rate of 5% of        embraced, covered and defined by the 1947 Military             and components, and corporate finance advisory
modified gross income in lieu of all national and local                                                                                                                                Under this law, any foreign investor infusing capital into
                                                             Bases Agreement between the Philippines and the                services, among others.
taxes after the income tax holiday, tax- and duty-free                                                                                                                                 the country can lease private lands, in observance of
                                                             United States, as amended, located within the territorial
importation of equipment, raw materials and other                                                                                                                                      Philippine laws and the following:
                                                             jurisdiction of Angeles City, municipalities of Mabalacat      RAHQs are branches established in the Philippines by
supplies; income tax holiday; additional deductions and      and Porac, Province of Pampanga, and the municipalities        multinational companies and whose headquarters do not
exemptions, among others.                                                                                                                                                              1. Lease contract shall first be for 50 years, renewable
                                                             of Capas and Bamban, Province of Tarlac.                       earn or derive income from the Philippines. They act as
                                                                                                                                                                                          only once for another 25 years.
                                                                                                                            supervisory, communications, and coordinating centers
                                                                                                                                                                                       2. Leased area will be used solely for investment.
                                                             Similar to the SSEFZ, the CSEFZ is a former US military        for their subsidiaries, affiliates, and branches in the
Bases Conversion and Development                             facility converted into civilian use. The intention was to     region.
                                                                                                                                                                                       3. Lease contract will conform with the Comprehensive
Act of 1992 (RA No. 7227)                                                                                                                                                                 Agrarian Reform Law and the Local
                                                             utilize the 4,400-hectare main zone and 27,600-hectare
                                                                                                                                                                                          Government Code.
                                                             sub zone as a progressive urban center targeting IT-           RWs may engage in serving as a supply depot for
Subic Special Economic and Freeport Zone                     enabled industries, aviation, logistics tourism and            the storage, deposit, safekeeping of spare parts,
Passed in 1992, this law created the Bases Conversion        related enterprises. The CSEFZ includes the Clark              components, semi-finished products, and raw materials;
and Development Authority, the Subic Bay Metropolitan        International Airport.                                         in filling up transactions and sales made by their head    Export Development Act of 1994
Authority (SBMA), and the Subic Special Economic                                                                            offices or parent companies; and in serving as a storage   (RA No. 7844)
and Freeport Zone (SSEFZ) consisting of the City of          Registered enterprises in these special economic zones         or warehouse of goods purchased locally by the home
Olongapo and the Municipality of Subic, Province of          enjoy various investment incentives including access to        office for export abroad.
                                                                                                                                                                                       This law provides incentives to exporters to encourage
Zambales, the lands occupied by the former Subic             first-class commercial, residential, and tourist facilities;
                                                                                                                                                                                       investments in the export sector. Exporters are generally
Naval Base and its contiguous extensions as embraced,        tax- and duty-free importation; and a special tax rate of      The RHQ license and the ROHQ license of non-banking
                                                                                                                                                                                       defined as earning at least 50% of their normal operating
covered, and defined by the 1947 Military Bases              5% of modified gross income in lieu of national and local      and non-financial institutions are secured from the
                                                                                                                                                                                       revenue from the sale of products or services abroad.
Agreement between the Philippines and the United             taxes.                                                         SEC, upon the favorable recommendation of the BOI.
States of America, and within the territorial jurisdiction                                                                  Banks and financial institutions secure the ROHQ
of the Municipalities of Morong and Hermosa, Province                                                                       license from the SEC and the BSP, also upon favorable      Features of the Export Development
of Bataan. The vision for the 67,000-hectare Subic Bay       Act providing for the terms,                                   recommendation of the BOI. The primary implementing
                                                                                                                                                                                       Act (EDA)
Freeport (SBF) is to create a self-sustaining industrial,    conditions, and licensing requirements                         agency for the establishment and supervision of RWs
commercial, financial, and investment center in addition                                                                    outside the Ecozones is the BOI.
to its international seaport, which can anchor 600 ships.
                                                             of RAHQs, ROHQs,                                                                                                          The following are the key features of EDA:
                                                             and RWs (RA No. 8756)
                                                                                                                            Tax treatment and incentives of                            • Institutionalization of the Export Development Council
                                                             RA No. 8756 signed into law on 23 November 1999,                                                                            (EDC) to direct the export offensive
                                                             provides, among others, the rules and guidelines on            RAHQs and ROHQs                                            • Privatization of export promotion functions that can
                                                             the establishment and maintenance of multinational                                                                          be undertaken by the private sector, including the
                                                             companies’ Regional or Area Headquarters (RAHQs),              RA No. 8756 provides favorable tax treatment and             establishment of world-class Philippine Trade Centers
                                                             Regional Operating Headquarters (ROHQs), and Regional          other non-fiscal incentives for both the RAHQs/ROHQs
                                                                                                                                                                                       • Setup of a privately led export financing institution
                                                             Warehouses (RWs).                                              and their non-Filipino and Filipino employees. These         whose services shall be devoted to supporting the
                                                                                                                            incentives include exemption from all kinds of local         financing needs of the export sector
                                                                                                                            taxes, fees, or charges imposed by a local government
                                                                                                                                                                                       • Granting to exporters of much needed fiscal incentives,
                                                                                                                            unit, except real property tax on land improvements and      most of them patterned after, but not as extensive as
                                                                                                                            equipment, as well as tax- and duty-free importation of      those in newly industrializing economies
                                                                                                                            equipment and materials for training and conferences
                                                                                                                            needed solely used for the RHQ/ROHQ functions, and
                                                                                                                            which are not locally available, subject to prior BOI
                                                                                                                            approval. Expatriate employees of RHQs and ROHQs will
                                                                                                                                                                                       Incentives available to exporters
                                                                                                                            enjoy incentives such as a multiple-entry visa, tax- and   registered under EDA
                                                                                                                            duty-free importation of personal and household effects
                                                                                                                            and travel tax exemption.                                  EDA incentives are granted in addition to existing
                                                                                                                                                                                       incentives from other government agencies such as the
                                                                                                                                                                                       BOI and PEZA.

                                                                                                                                                                                       Amended Build-Operate-Transfer
                                                                                                                                                                                       (BOT) Law (RA No. 7718)
                                                                                                                                                                                       The BOT Law spells out the policy and regulatory
                                                                                                                                                                                       framework for the participation of private sector entities
                                                                                                                                                                                       in the development of infrastructure projects and the
                                                                                                                                                                                       provision of services that are normally the responsibility
                                                                                                                                                                                       of the government.

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                                                                 Proposed comprehensive tax reform
                                                                 The current administration has also proposed a comprehensive tax reform plan that is expected to be legislated
                                                                 within a four to five-year time frame (beginning 2017 until 2021) in order to improve the efficiency of the tax
                                                                 system and raise much-needed funds to support massive investment goals. This proposed tax reform consists of

Taxation
                                                                 four tax packages or proposals (with RA No. 10963 as the first tax package focusing on personal income tax).
                                                                 The remaining tax packages will cover reduction of corporate income tax, harmonization of incentives along with
                                                                 proposed offsetting measures.

                                                                 Income Taxation
The Philippine Constitution mandates that the rule of taxation   Corporations
shall be uniform and equitable, and that Congress shall evolve
                                                                  Classification
a progressive system of taxation. The Tax Reform Act of 1997
(Republic Act No. 8424) was passed to promote sustainable         Domestic corporations, which are corporations               to residents other than FCDUs and OBUs are subject
                                                                  incorporated under the laws of the Philippines, are         to a final tax of 10%. International carriers are subject
economic growth by rationalizing the Philippine Internal          taxed on their worldwide net taxable income. Resident       to 2.5% final tax on Gross Philippine Billings but they
                                                                  foreign corporations are taxed on net taxable income        would be exempted if their home countries would
Revenue System, including tax administration. Amendments to       derived from Philippines sources. Non-resident foreign      provide a similar tax exemption to Philippine carriers.
the Tax Reform Act of 1997 have been made, the most recent        corporations, on the other hand, are taxed on gross         Regional or area headquarters of multinational
                                                                  income derived from the Philippines. A resident foreign     companies are exempt from income tax while the
and significant of which is RA No. 10963 (the Tax Reform for      corporation is an entity created under the laws of a        regional operating headquarters of multinational
Acceleration and Inclusion or ‘TRAIN’), which reduced personal    foreign jurisdiction that is engaged in trade or business   companies are subject to 10% tax on net taxable income.
                                                                  in the Philippines. Any other foreign corporation is
income, estate and donor’s tax rates and expanded the VAT and     considered as a non-resident.                               Tax incentives like income tax holiday or preferential
                                                                                                                              tax rates (5% on gross income) are available for
excise tax base.                                                  Income tax rates for domestic and resident                  enterprises in the Ecozones, the Subic Bay Special
                                                                  foreign corporations                                        Economic and Freeport Zone and the Clark Special
                                                                                                                              Economic and Freeport Zone.
                                                                  The corporate income tax rate is 30% of net taxable
                                                                  income. However, part of the ongoing tax reform is a        Branch profit remittance tax (BPRT)
                                                                  proposal to lower the rate to 25%. Royalties, interest,
                                                                  dividends, and other passive income of domestic and         Remittances by branches of foreign corporations in
                                                                  resident foreign corporations are subject to different      the Philippines (except those activities registered with
                                                                  rates.                                                      the PEZA and other companies within the special
                                                                                                                              economic zones such as the Subic Bay Metropolitan
                                                                  Special income tax rates for certain domestic and           Authority and Clark Development Authority) to their
                                                                  resident foreign corporations                               head offices are generally subject to 15% BPRT.

                                                                  Proprietary educational institutions and non-profit         Other taxes imposed on corporations
                                                                  hospitals are subject to 10% tax on net taxable
                                                                  income. Foreign currency deposit units (FCDUs) and          Corporations are also liable for minimum corporate
                                                                  offshore banking units (OBUs) are exempt from all           income tax, fringe benefits tax and improperly
                                                                  taxes on income from foreign currency transactions          accumulated earnings tax.
                                                                  with non-residents, and other FCDUs and OBUs, local
                                                                  commercial banks, and branches of foreign banks
                                                                  duly authorized by the Bangko Sentral ng Pilipinas
                                                                  (the Philippines’ Central Bank). The interest income of
                                                                  FCDUs and OBUs from foreign currency loans granted

                                                                                                                                                                                         16
Doing Business in the Philippines - EY
Doing Business in the Philippines                                                                                        Taxation

Minimum corporate income tax (MCIT) Tax on non-resident corporations                                                     Individuals                                                      Tax treaties
A 2% MCIT on annual gross income is imposed on               Generally, non-resident foreign corporations are taxed       For income tax purposes,         Resident aliens                Specific types of income are exempt from income tax or
corporations with zero or negative taxable income or         at 30% of the gross amount of Philippine source income       individuals are classified as:
                                                                                                                                                                                          subject to preferential tax rates under treaties binding
whose regular corporate income tax (RCIT) liability is       such as dividends, rents, royalties, compensation, and                                        Resident aliens are taxed
                                                                                                                          Resident citizens                only on income derived         on the Philippine government, subject to prior filing of
less than the MCIT beginning on the fourth taxable year      remuneration for technical services. This tax is withheld
                                                                                                                                                           from sources within the        an application for availment of exemption or preferential
following the year they started business operations.         at source. There are preferential income tax rates for
                                                                                                                          Resident citizens are taxed      Philippines.                   tax treaty rates with the Bureau of Internal Revenue
Any excess of the MCIT over the RCIT shall be carried        some types of non-resident corporations, as well as
                                                                                                                          on their compensation,                                          (BIR). The tax treaties of the Philippines with the
forward and credited against the RCIT for the three          those entities that are covered by specific tax treaty       business and other income        Non-resident aliens            following countries are in force:
immediately succeeding taxable years.                        rates entered into by the Philippines.                       derived from sources             engaged in trade or
                                                                                                                          within and outside of the        business in the Philippines    Australia                     Malaysia
However, the Secretary of Finance may suspend the                                                                         Philippines.                                                    Austria                       Netherlands
imposition of the MCIT upon the submission of                                                                                                              Non-resident aliens engaged    Bahrain                       New Zealand
proof by the applicant-corporation, verified by the                                                                       Non-resident citizens            in trade or business in the    Bangladesh                    Nigeria
Commissioner of Internal Revenue’s authorized                                                                                                              Philippines are taxed in the   Belgium                       Norway
representative, that the corporation sustained                                                                            Non-resident citizens,           same manner as citizens and
substantial losses on account of a prolonged labor                  The Tax Reform Act                                    including those working and      resident aliens but only on
                                                                                                                                                                                          Brazil
                                                                                                                                                                                          Canada
                                                                                                                                                                                                                        Pakistan
                                                                                                                                                                                                                        Poland
                                                                                                                          deriving income from abroad      Philippine-source income.
dispute, force majeure, or legitimate business losses.
                                                                   of 1997 (Republic Act                                  such as overseas contract                                       China
                                                                                                                                                                                          Czech Republic
                                                                                                                                                                                                                        Qatar
                                                                                                                                                                                                                        Romania
                                                                                                                          workers and seamen who           Non-resident aliens
Fringe benefits tax                                                No. 8424) was passed                                   derive compensation for          not engaged in trade or        Denmark                       Russia
                                                                                                                          services rendered abroad as      business in the Philippines    Finland                       Singapore
Fringe benefits granted to supervisory and managerial             to promote sustainable                                  members of a complement                                         France                        Spain
                                                                                                                          of vessels engaged               Non-resident aliens not        Germany                       Sweden
employees are subject to a 35% tax on the grossed
up-value of the fringe benefit.
                                                                    economic growth by                                    exclusively in international     engaged in trade or business   Hungary                       Switzerland
                                                                                                                          trade, are taxed only on         in the Philippines are taxed
                                                                rationalizing the Philippine                              income derived from sources      on the gross amount of
                                                                                                                                                                                          India                         Thailand
Improperly accumulated earnings tax                                                                                       within the Philippines.          Philippine-source income.      Indonesia                     Turkey

A 10% tax is imposed on the improperly accumulated
                                                                      Internal Revenue                                                                                                    Israel
                                                                                                                                                                                          Italy
                                                                                                                                                                                                                        United Arab Emirates
                                                                                                                                                                                                                        United Kingdom
earnings of domestic corporations, except in the case of           System, including tax                                 Income tax rates for individuals under                           Japan                         Northern Ireland
publicly held corporations, banks, and other non-bank                                                                    RA No. 10963                                                     Korea                         United States of America
financial intermediaries and insurance companies. When                 administration.                                                                                                    Kuwait                        Vietnam
a corporation allows its earnings or profits to accumulate                                                               Citizens, non-resident citizens, resident aliens and
beyond its reasonable needs, it shall be assumed that                                                                    non-resident aliens engaged in trade or business in              Withholding tax system
the purpose is to avoid tax on stockholders, unless                                                                      the Philippines are generally subject to graduated tax
proven to the contrary.                                                                                                  rates from 20% to 35% on income above PhP250,000.                Creditable withholding        Employers are, however,
                                                                                                                         Compensation paid by OBUs, regional or area                      tax (CWT)                     required to furnish the
                                                                                                                         headquarters, regional operating headquarters of                                               BIR with the Employer’s
                                                                                                                         multinational companies, and petroleum contractors and           Certain income payments       Certificate of
                                                                                                                         subcontractors to qualified non-Filipino employees and,          made by a resident to         Compensation Payment/
                                                                                                                         in certain cases, to Filipino employees are now subject          another resident are          Tax Withheld from their
                                                                                                                         to the same graduated tax rates. Non-resident aliens             subject to specified          employees.
                                                                                                                         not engaged in trade or business in the Philippines are          withholding tax rates. The
                                                                                                                         generally subject to a flat income tax rate of 25% on            tax withheld is creditable    Final withholding tax
                                                                                                                         gross income.                                                    against the income tax        (FWT)
                                                                                                                                                                                          liability of the income
                                                                                                                         Generally, an individual is taxed on two main categories         recipient.                    Under the FWT system,
                                                                                                                         of income: income from employment and income from                                              the amount of income
                                                                                                                         business or exercise of a profession. Royalties, interest,       Withholding tax on            tax withheld by the
                                                                                                                         dividends and other passive income of individuals are            wages                         withholding agent is
                                                                                                                         subject to different tax rates.                                                                constituted as a full and
                                                                                                                                                                                          This is the tax withheld      final payment of the
                                                                                                                                                                                          from individuals receiving    income tax due from the
                                                                                                                         Additional Exemptions                                            purely compensation           payee on the said income.
                                                                                                                                                                                          income. Employers are         For instance, dividends,
                                                                                                                         Citizens and resident aliens are entitled to a maximum           required to withhold          interest or royalties paid
                                                                                                                         of PhP90,000 exemption on 13th month pay and other               the tax due on salaries       to non-residents are
                                                                                                                         benefits received.                                               and wages paid to their       subject to FWT.
                                                                                                                                                                                          employees. Subject
                                                                                                                                                                                          to certain conditions,
                                                                                                                                                                                          employees may no longer
                                                                                                                                                                                          be required to file income
                                                                                                                                                                                          tax returns at the end of
                                                                                                                                                                                          the taxable year.

                                                                                                                                                                                                                                                18
Taxation

Value-added tax (VAT)
In general, sale of goods, sale of services and lease of properties, as well as importation of goods are subject to 12%

                                                                                                                                     The Investments
VAT. The Tax Code also provides for transactions that are subject to 0% VAT as well as transactions that are exempt
from VAT.
 Excise tax                                                         Documentary stamp tax (DST)

 Excise taxes are imposed on certain goods (such as                 The DST is an excise tax on documents, instruments,

                                                                                                                                     Priorities Plan
 cigarettes, liquor, petroleum products, mineral products           loan agreements, lease agreements, shares of stocks,
 and motor vehicles) manufactured or produced in the                bonds, mortgage, insurance policies, and papers, and
 Philippines for domestic sale or consumption or for any            on acceptances, assignments, sales and transfers of the
 other disposition. Excise taxes are also imposed on certain        obligation, right or property incident thereto. This tax is
 imported goods, in addition to the VAT and customs duties.         imposed on the maker, signor, issuer, accepter or transferor
 Under RA No. 10963, excise tax rates were increased for            of the document.
 cigarettes, petroleum products, automobiles and mineral
 products. Excise tax was also imposed on sweetened                 Certain industries, including banks and select financial         The 2017 Investments Priority Plan (IPP) was approved by the
 beverages and non-essential cosmetic procedures and                institutions, shipping and airline companies, pre-need
 surgeries.                                                         companies and educational institutions are mandated to use       President Rodrigo Duterte in Memorandum Order No. 12 dated 28
                                                                    the web-based eDST System beginning 1 July 2010.                 February 2017, and took effect 15 days after its publication on 3
 Percentage tax
                                                                    RA No. 9648 exempts from DST any sale, barter or exchange        March 2017.
 Persons or entities not subject to VAT, including domestic         of shares of stock listed and traded through the PSE.
 common carriers of passengers, international carriers on
 their transport of cargo from the Philippines to another           RA No. 10963 introduced new DST rates for transactions           The Board of Investments (BOI) has identified 10 preferred
 country, and those in the amusement business, are subject          enumerated in RA No. 9243, or the Act Rationalizing the          activities for investments in line with the President’s zero+10-point
 to percentage tax on gross receipts or gross income.               Provisions of the DST.
                                                                                                                                     SocioEconomic Agenda, Ambisyon Natin 2040, and the Philippine
 Stock transaction tax (STT)                                        Customs duty                                                     Development Plan 2017-2022.
 The STT is imposed on the sale, barter, exchange, other than       Goods imported into the Philippines are generally subject
 the sale by a dealer in securities at the rate of six-tenths       to customs duty (aside from 12% VAT and excise tax on            Significant adjustments from the 2014 IPP have been introduced
 of 1% of the gross selling price or gross value in money of        certain goods). For customs purposes, the value of imported      in the new IPP with the inclusion of more Micro-Small-Medium
 the shares of stock sold, bartered, exchanged or otherwise         goods is generally based on their transaction value, (i.e.,
 disposed.                                                          the price paid or payable for the goods when sold for export     Enterprise (MSME)-oriented, innovation-driven, and health and
                                                                    to the Philippines) with certain specified adjustments. The      environment conscious activities. The 2017 IPP also reflects the
 Initial public offering (IPO) tax                                  applicable duty rate (most-favored nation [MFN] rate) will
                                                                    depend on the appropriate classification of the goods under      administration’s industrial policy to bring investments outside of
 A tax is also imposed on the sale, barter, exchange, or other      the Customs Modernization and Tariff Act (CMTA) of 2016,         Metro Manila, to favor new players in the industry, and to promote
 disposition through the IPO of shares of stock in closely held     which adopted the classification provisions of the Tariff
 corporations in accordance with the proportion of shares of        and Customs Code of the Philippines (TCCP). The duty rate
                                                                                                                                     inclusive and participative economic growth across various sectors.
 stock sold through the IPO. A closely held corporation is any      generally ranges from 0% to 30%. Preferential rates under
 corporation of which at least 50% in value of the outstanding      the ASEAN Trade In Goods Agreement (formerly AFTA),              The list of preferred activities continues to prioritize investments in
 capital stock or at least 50% of the total combined voting         among other free trade agreements, are generally lower
 power of all classes of stock entitled to vote is owned directly   than the MFN rates.                                              manufacturing particularly in industrial goods and agro-processing.
 or indirectly by or for not more than 20 individuals.                                                                               Commercial production includes not only agriculture and fishery,
                                                                    Certain importations are exempt from the imposition of
 The IPO tax shall be at the following rates, in accordance         custom duty, such as conditionally free and duty-exempt          but also forestry products. Priority strategic services now include
 with the proportion of shares sold, bartered, or exchanged to      importations, items entered into a customs bonded                telecommunications and state of the art engineering, procurement
 the total outstanding shares of stock after the listing in the     warehouse, and importations under special laws. Under
 local stock exchange:                                              the CMTA, importers and their brokers are required to keep       and construction (EPC) with the exclusion of ship repair. For
                                                                    records of importations within three years from the date         housing, the price ceiling was reduced from PhP3 million to PhP2
                                                                    of importation of the goods. The Bureau of Customs may
                                                                    conduct a post-clearance audit on the importers’/brokers’
                                                                                                                                     million. Priority on health facilities now include drug rehabilitation
           Up to 25%                              4%
           Over 25% but not over 33.33%           2%                books for a period of three years to determine compliance        centers. Pipeline projects for oil and gas were also added in priority
           Over 33.33%                            1%                with customs rules and to assess any deficiency customs          infrastructure.
                                                                    duty and taxes on importation.

 The IPO tax shall be paid by the issuing corporation in a          Local taxes                                                      The ARMM List did away with consumer manufactures but added
 primary offering or by the seller in a secondary offering.
 The tax base shall be the gross selling price or gross value in
                                                                    Under the Local Government Code, local government units          banking, non-bank financial institutions and facilities, and energy in
                                                                    (LGUs) such as provinces, cities and municipalities are given
 money of the shares of stock sold, bartered, exchanged or
                                                                    the authority to tax certain activities and business conducted   its priority activities.
 otherwise disposed of.
                                                                    within their jurisdiction unless otherwise expressly exempt by
                                                                    law. LGUs are also authorized to levy an annual ad valorem
                                                                    tax on real property such as land, building, machinery, and
                                                                    other improvements, as well as transfer tax on the sale,
                                                                    donation, barter, or on any other mode of transfer of real
                                                                    property. However, the taxing powers of LGUs do not extend
                                                                    to the levy of income tax, custom duties, DST, estate tax, and
                                                                    gift tax, among others.

19
Doing Business in the Philippines                                                                                    The Investments Priority Plan (IPP)

Priority investment areas                                     4. Healthcare Services including Drug Rehabilitation   II. Export activities
                                                                 Centers Subject to positive list of locations as
                                                                 endorsed by the Department of Health (DOH)              1.    Production and manufacture of export products
I. Preferred activities                                                                                                  2.    Services exports
  1. All Qualified Manufacturing Activities including         5. Mass Housing (Development of mass housing units               Contact centers and non-voice business
     Agro-Processing                                             based on a price ceiling of PhP2,000,000)                     processing activities that will be located in
                                                                                                                               Metro Manila may no longer be qualified for
     • Manufacture of industrial goods                           Only mass housing projects outside Metro                      incentives by the year 2020.
     • Processing of agricultural and fishery products,          Manila may qualify for registration, except for         3.    Activities in support of exporters
       including Halal and Kosher food into                      in-city low-cost housing projects for lease.
       semi-finished/intermediate goods or finished                                                                  III. Special laws
       products                                               6. Infrastructure and Logistics, including Local
     • Manufacture of modular housing components                 Government Unit Public-Private Partnership              1.    Industrial Tree Plantation (Presidential Decree
       and machinery and equipment including parts               (LGU-PPP) Projects                                            (PD) No. 705 – Revised Forestry Code of the
       and components                                                                                                          Philippines)
                                                                 • Airports and seaports                                 2.    Mining (Republic Act (RA) No. 7942 - Philippine
     Except for modernization projects, only projects
                                                                 • Air, land and water transport                               Mining Act of 1995) - limited to capital
     located outside Metro Manila may qualify for
                                                                 • Liquefied natural gas (LNG) storage and                     equipment incentive
     registration.
                                                                   regasification facilities                             3.    Publication or Printing of Books/Textbooks
                                                                 • Pipeline projects for oil and gas                           (RA No. 8047 - Book Publishing Industry
  2. Agriculture, Fishery and Forestry                           • Bulk water treatment and supply                             Development Act)
                                                                 • Training facilities                                   4.    Refining, Storage, Marketing and Distribution
     • Commercial production of agricultural, fishery            • Testing laboratories                                        of Petroleum Products (RA No. 8479 -
       and forestry products                                     • Domestic Industrial Zones                                   Downstream Oil Industry Deregulation Act of
     • Production of seeds and seedlings                         • PPP projects                                                1998)
     • Establishment of nurseries and hatcheries                                                                         5.    Rehabilitation, Self-Development and Self-
     • Other support services and infrastructures such        7. Innovation Drivers                                            Reliance of Persons with Disability (RA No.7277
       as facilities for drying; cold chain storage; blast                                                                     - Magna Carta for Persons with Disability)
       freezing; bulk handling and storage; harvesting,          • Research and development                              6.    Renewable Energy (RA No. 9513 - Renewable
       plowing, spraying and dusting; packing houses;              (R&D) activities                                            Energy Act of 2008)
       trading centers; ice plants in less developed             • Conduct of clinical trials                            7.    Tourism (RA No. 9593 - Tourism
       areas; AAA slaughterhouse; and AAA dressing               • Establishment of Centers of Excellence,                     Act of 2009)
       plant.                                                      innovation centers, business incubation
                                                                   hubs and fabrication
     Except for modernization projects for                         laboratories/co-working spaces                    IV. ARMM list
     agricultural support services and infrastructure,           • Commercialization of new and emerging
     only projects located outside Metro Manila may                                                                    The 2017-2019 ARMM List contains the following
                                                                   technologies and products of the Department
     qualify for registration.                                                                                         priority investment areas:
                                                                   of Science and Technology (DOST) or
                                                                   government-funded R&D
  3. Strategic Services                                                                                                1.     Export Activities
                                                              8. Inclusive Business Models
     • Integrated circuit design                                                                                              • Export trader and service exporters
     • Creative industries/knowledge-based services              Medium and large enterprises (MLEs) in                       • Support activities for exporters
           a. IT business process management for the             agribusiness and tourism sectors that provide
                                                                 business opportunities to micro and small             2.     Agriculture, Agri-business/Aquaculture
              domestic market (i.e. contact centers,
                                                                 enterprises (MSEs) as part of their value chains.            and Fishery
              data analytics)                                                                                          3.     Basic Industries
           b. Animation, software development,                                                                         4.
                                                              9. Environment or Climate Change-Related                        Infrastructure and Services
              game development, health information                                                                     5.
                                                                 Projects                                                     Industrial Service Facilities
              management systems and                                                                                   6.     Engineering Industries
              engineering design                                                                                       7.
                                                                 • Manufacture/assembly of goods and                          Logistics
           c. Digital or technological start-ups/activities                                                            8.     BIMP-EAGA Trade and Investment Enterprises
     •   Maintenance, repair and overhaul of aircraft              establishment of energy
                                                                                                                       9.     Tourism
     •   Charging/Refueling stations for alternative               efficiency-related facilities
                                                                 • Green ship recycling based on                       10.    Health and Education Services and Facilities
         energy vehicles, except LPG-run vehicles                                                                      11.    Halal Industry
     •   Industrial Waste Treatment                                international standards
                                                                 • Establishment of privately-owned materials          12.    Banking, Non-Bank Financial Institutions and Facilities
     •   Telecommunications (only new players may                                                                      13.    Energy
         qualify for registration)                                 recovery facility
     •   State-of-the-art engineering, procurement,
         and construction                                     10. Energy

                                                                 • Power generation projects utilizing
                                                                   conventional fuels, waste heat and other wastes
                                                                 • Establishment of battery energy storage
                                                                   systems

21
Doing Business in the Philippines

The ASEAN
Economic
Community
The Philippines is one of the five founding members of the
Association of Southeast Asian Nations (ASEAN), along with
Indonesia, Malaysia, Singapore and Thailand. The country assumed
the chairmanship of the ASEAN and served as the ASEAN Summit
host in 2017 to commemorate the 50th anniversary of the group.

                                                                   Established on 8 August 1967, the ASEAN is guided           Initially released by the ASEAN Secretariat in
                                                                   by its basic principles of cooperation, amity and non-      November 2007, the AEC Blueprint sets out
                                                                   interference and seeks to:                                  broad and comprehensive directions to guide the formal
                                                                        • Accelerate economic growth, social progress, and     establishment of the AEC on 31 December 2015. The
                                                                          cultural development in the region                   Blueprint is mainly built on four pillars: (a) a single
                                                                        • Promote regional peace and stability                 market and production base, (b) a highly competitive
                                                                        • Promote active collaboration and mutual              economic region, (c) a region of equitable economic
                                                                          assistance on matters of common interest             development, and (d) a region fully integrated into the
                                                                        • Provide assistance to each other in the form of      global economy.
                                                                          training and research facilities
                                                                        • Collaborate more effectively for the greater         The first pillar seeks to create a single market and
                                                                          utilization of agriculture and industry, the         production base through the free flow of goods,
                                                                          expansion of trade, the improvement of               services, investment, skilled labor and free flow of
                                                                          transportation and communications facilities and     capital. The second pillar aims to foster business-friendly
                                                                          the raising of the living standards of the people    and innovation-supporting regional environment through
                                                                        • Promote Southeast Asian studies                      the implementation of common frameworks, standards
                                                                        • Maintain close and beneficial cooperation with       and mutual cooperation across many areas, such as in
                                                                          existing international organizations with similar    agriculture and financial services, competition policy,
                                                                          aims and purposes                                    intellectual property rights and consumer protection.
                                                                                                                               It also reinforces enhanced transport connectivity and
                                                                   The launch of the ASEAN Economic Community (AEC) in         infrastructure networks. The third pillar seeks to fulfill
                                                                   pursuit of the region’s goals gives rise to the formation   equitable economic development by reducing barriers
                                                                   of an economic powerhouse. Collectively, at US$2.55         between and among Member States, and to achieve
                                                                   trillion, they are ranked as the sixth largest economy in   higher levels of economic dynamism through creative
                                                                   the world and the third largest in Asia.                    initiatives that encourage small and medium enterprises
                                                                                                                               to participate in regional and global value chains. The
                                                                   The region’s GDP grew at 4.8% in 2016, while total trade    fourth pillar involves an outward perspective of the AEC
                                                                   amounted to US$2.2 trillion. The region is also the fifth   to fully integrate into the mainstream global economy
                                                                   biggest recipient of foreign direct investment in the       through a coherent approach towards external economic
                                                                   world with a share of 5.6%.                                 relations, and with improved participation in global
                                                                                                                               supply networks.

                                                                                                                                                                                      24
Doing Business in the Philippines                                                                                        The ASEAN Economic Community

AEC 2015: Milestones                                          AEC 2016-2025: Looking Ahead
The ASEAN Secretariat reports the following key               The need to maintain relevance in today’s evolving
achievements under AEC 2015:                                  global economy led to the establishment of the AEC in                                                Population
                                                              2015. To sustain the AEC 2015 dynamic process, the
  1. More liberalized market: Intra-ASEAN import              AEC Blueprint 2025 has been incorporated to serve as
     tariffs have been virtually eliminated and formal        a guide for ASEAN economic integration from 2016 to
     restrictions in the services sector gradually            2025. It forms part of ASEAN 2025: Forging Ahead
     removed, providing its peoples with greater              Together.
     opportunities in trading and doing business within
     the region.                                              The new Blueprint is envisioned to strengthen
  2. Reduced trade costs: Cross-border trading                AEC by 2025 with the following characteristics
     processes have been simplified, including                and indicators:
     in customs procedures and rules of origin,
     harmonization of technical regulations and mutual          1. A Highly Integrated and Cohesive
     recognition arrangements.                                     Economy – trade in goods and services,
  3. Improved investment regimes: ASEAN                            investment environment, financial integration,
     has become a more attractive investment                       inclusion and security, facilitating movement of
     destination for international and domestic                    skilled labor and business visitors, and enhancing
     investors alike.                                              participation in global value chains.
  4. Enhanced mobility of skilled people: Cross-border          2. A Competitive, Innovation, and Dynamic
     movement of skilled people and professionals has              ASEAN – effective competition policy, consumer             Source: ASEAN Secretariat
     been facilitated.                                             protection, strengthening intellectual property
  5. Free trade and comprehensive economic                         rights cooperation, productivity-driven growth,
     partnership agreements: ASEAN businesses are                  innovation, research and development, and
     provided with more opportunities to expand their              technology commercialization, taxation
     reach in the external markets, and strengthen
     their role in regional and global value chains.
                                                                   cooperation, good governance, effect, efficient,                                       Major Trading Partners
                                                                   coherent and responsive regulations and good
  6. A business-friendly and innovation-supportive                 regulatory practice, sustainable economic
     environment: This is achieved through the                     development, and global megatrends and
     adoption of common frameworks, standards                      emerging trade related issues.
     and mutual cooperation in various areas, such              3. Enhanced Connectivity and Sectoral
     as in agriculture and financial services, and in              Cooperation – transport, information and
     competition policy, intellectual property rights,             communications technology, e-commerce,
     consumer protection as well as SME development.               energy, food, agriculture and forestry,
  7. Physical improvements in transportation                       tourism, healthcare, minerals,
     and other infrastructure networks: These                      and science and technology.
     improvements have facilitated cross-border                 4. A Resilient, Inclusive and People-Oriented,
     transportation and contributed to the reduction of            People-Centered ASEAN – strengthening the role
     overall costs of doing business, providing ASEAN              of MSMEs, and the private sector, PPPs, narrowing
     peoples and businesses with the opportunity to                the development gap, contribution of stakeholders
     work together more productively.                              on regional integration efforts.
  8. Narrowing the development gap: Along with the              5. A Global ASEAN – more strategic and
     process of regional integration, initiatives that help        coherent approach towards external economic
     narrow the development gap among and within                   relations, review existing FTAs, enhance economic
     ASEAN Member States have also been put in place.              partnerships, engage with regional and global
                                                                   partners, continue supporting multilateral
                                                                   trading system and promoting global and regional
                                                                   institution engagements, and actively participating
The AEC Blueprint is mainly built                                  in regional fora.
on four pillars: (a) a single market
                                                               In the years to come, ASEAN, with the help of
and production base, (b) a highly                              the post-2015 agenda, will aim to continue what AEC
  competitive economic region,                                 2015 has started. Furthermore, aside from expecting
                                                               new challenges and opportunities, ASEAN will ensure
      (c) a region of equitable                                the success of the community building process
   economic development, and                                   through efficient institute, adequate resources, and
                                                               effective planning and monitoring.
 (d) a region fully integrated into
        the global economy.
                                                                                                                              Source: ASEAN Statistical Yearbook 2016/2017

25                                                                                                                                                                                 26
The ASEAN Economic Community

                                                                                                                         Setting up a
                                                                                                                         business in
                                                                                                                         the Philippines
                                                                                                                         The new administration is committed to setting up businesses in
                                                                                                                         the Philippines by reducing red tape and streamlining processes,
                                                                                                                         making it faster and easier. The requirements for setting up a
                                                                                                                         business will depend on the type and location of the entity. It
                                                                                                                         will also require registration with various government agencies,
                                                                                                                         including the Securities and Exchange Commission (SEC), the
                                                                                                                         Department of Trade and Industry (DTI), the Bureau of Internal
                                                                                                                         Revenue (BIR) and local government units, as appropriate. If the
                                                                                                                         business qualifies for incentives, it must also be registered with
                                                                                                                         incentives promotion agencies such as the Philippine Economic
                                                                                                                         Zone Authority and the Board of Investments as
                                                                                                                         discussed on page 12.

      Source: ASEAN Economic Community Chartbook 2017, ASEAN Statistical Highlights 2018

EY ASEAN Leaders
                                                                                       ASEAN Tax Leader
ASEAN Regional Managing                   ASEAN Assurance Leader                       Yeo Eng Ping
Partner                                   Rauf Rashid                                  Email: eng-ping.yeo@my.ey.com
Max Loh                                   Email: abdul-rauf.rashid@my.ey.com           Tel: +6 012 271 5215 (Malaysia)
Email: max.loh@sg.ey.com                  Tel: +6 037 495 8728 (Malaysia)
Tel: +65 9637 2881 (Singapore)                                                         ASEAN Financial Services
                                          ASEAN Transaction Leader                     Organization Leader
ASEAN Advisory Leader                     Vikram Chakravarty                           Nam Soon Liew
Chow Sang Hoe                             Email: vikram.chakravarty@sg.ey.com
                                                                                       Email: nam-soon.liew@sg.ey.com
Email: sang-hoe.chow@my.ey.com            Tel: +65 6309 8809 (Singapore)
                                                                                       Tel: +65 6309 8092 (Singapore)
Tel: +6 012 388 7016 (Malaysia)

27
Doing Business in the Philippines                                                                                          Setting Up Business in the Philippines

Securities and Exchange                                      Among the services of the DTI-NCR is the                      Competitive human capital
                                                             registration of business names as provided under
Commission (SEC)                                             RA No. 3883. Business name registration involves              resources
                                                             the submission of copies of the corporation’s articles
The SEC is the government agency responsible for             of incorporation, by-laws, and SEC certificate of             The Philippines offers a highly educated and literate
registering, licensing, regulating, and supervising          registration to the DTI and the payment of a registration     workforce, with most people having a good command
all corporations and partnerships organized in the           processing fee. A business name registration is valid for     of the English language. The UNESCO Institute for
Philippines, including foreign corporations licensed to      five years.                                                   Statistics records an adult literacy rate of 98.11% among
engage in business or to establish branch offices in the                                                                   Filipinos aged 15 years and older while according to the
Philippines.                                                                                                               UN Population Division, the median age is 24.2.
                                                             Bureau of Internal Revenue (BIR)                              The country’s labor market is one of the most
The SEC is mandated to implement the following                                                                             competitive in the world, ranked 4th out of 61 economies
                                                             The BIR is tasked to administer the collection of internal    in the 2017 International Institute of Management
Philippine laws among others:                                                                                              Development (IMD) World Competitiveness Report. In
                                                             revenue taxes pursuant to the Tax Code.
                                                                                                                           the latest World Talent Report also released by the IMD,
  PD No. 902-A and the Securities Regulation Code                                                                          which focuses on countries’ ability to develop, attract
  (SRC)                                                      All taxpayers are required to secure from the BIR a
                                                             unique Taxpayer Identification Number (TIN) which will        and retain talent based on three factors, the Philippines
  PD No. 902-A dealt with the reorganization of the SEC                                                                    ranked 11th in the readiness factor. Among all criteria,
  and conferred upon it the power to hear and decide         be indicated on all tax returns filed with the BIR.
                                                                                                                           the country performed well in terms of the availability
  on cases involving corporate fraud,                                                                                      of skilled labor (4th), the availability of competent
  intra-corporate disputes, election cases involving         Taxpayers will also have to register with the BIR Revenue
                                                             District Office (RDO) having jurisdiction over the place of   senior managers (17th), language skills (13th), and the
  officers and directors, suspension of payments                                                                           international experience of senior managers (23rd).
  proceedings, and rehabilitation proceedings.               business of the taxpayer. The book of accounts, invoices,
                                                             and receipts of a taxpayer will have to be registered with    It also ranked in the upper half of economies when it
                                                             the RDO before these are used.                                comes to the sufficiency of apprenticeships (29th) and
  With the enactment of the Securities Regulation                                                                          the importance given to employee training in companies
  Code, however, Rule 5.2, Title II thereof removed                                                                        (34th) under the appeal factor.
  all jurisdiction of the SEC over all cases enumerated
  above and transferred jurisdiction to hear and             Local government                                              Out of 138 countries, the country ranked well in
  decide these cases to the regular courts. With the                                                                       the higher education and training pillar of the World
  realignment of its powers, the SEC then                    The Philippines is divided into provinces, municipalities,    Economic Forum’s Global Competitiveness Index
  shifted its focus to the promotion of capital market       and chartered cities, each enjoying a certain degree of       2016-2017, with the extent of staff training (38th),
  development, in accordance with the mandate of the         local autonomy. The barangay is the basic political unit.     quality of management schools (38th), quality of
  Securities Regulation Code.                                                                                              the education system (46th), and local availability of
                                                             Republic Act No. 7610, otherwise known as the                 specialized training services (43rd) as contributing
  Corporation Code of the Philippines                        Local Government Code of 1991, provided for a                 factors. It is also on track to meet its Philippine
  (Batas Pambansa Blg. 68)                                   more responsive and accountable local government              Development Plan targets related to enhancing the
  The Corporation Code is the primary law that               structure. Local governments were given more powers,          knowledge and skills of the workforce as higher
  governs the relationship of a corporation with its         authority, responsibilities and resources through a           education graduates as well as technical vocational
  shareholders from the setting up of the corporation to     system of decentralization. Each unit is allowed to levy      education and training (TVET) graduates continue to
  its dissolution. It provides the basic rules under which   and collect taxes and other fees, in accordance to the        increase.
  a private corporation as an investment vehicle             power delegated to them under the Code. All business
  is governed.                                               establishments are required to get licenses and permits       Priority courses or degree programs were identified
                                                             from the barangay, municipality or city and province          and are being promoted by the Commission on Higher
                                                             where the business is located. The local government           Education (CHED) based on national development plans
Express registration                                         unit imposes taxes, fees or charges to generate revenue       and manpower demands until 2018 as well as a study by
                                                             through an appropriate ordinance. Each municipality           the Department of Labor and Employment determining
To facilitate registering new corporations, the              or city has its own revenue code which provides for the       the 275 in-demand and 102 hard-to-fill occupations
SEC operates an “express lane,” with application forms       registration procedures and taxation of businesses in the     aligned with the future employment requirements of
specially prepared for specific types of business.           locality.                                                     key industries until 2020. These are in the fields of
Filing normally takes one day, provided all necessary                                                                      agriculture, engineering, science and math, information
documents and prior clearances from other agencies are       Local government units also have the power to impose          technology, teacher education, health sciences, arts and
submitted in the morning.                                    and collect real property taxes from real property            humanities, social and behavioral sciences, business
                                                             owners or those enjoying the use of real properties.          administration, architecture, maritime industry and
Department of Trade and Industry (DTI)                                                                                     communication.

                                                                                                                           For 2014-2016, Technical Education Skill and
After registration with the SEC, all corporations                                                                          Development Authority’s institution-, enterprise- and
organized under the Corporation Code are encouraged                                                                        community-based programs, and online programs
to register their business name with the DTI.                                                                              produced 6,066,673 TVET graduates. These graduates
                                                                                                                           have been certified as highly qualified to work both in
The DTI-National Capital Region (DTI- NCR) is one of the                                                                   the Philippines and abroad.
primary government agencies tasked with the promotion
as well as the registration of the trade and industry                                                                      Sources: UN Population Division, Technical Education and Skills
sector in the Metro Manila area.                                                                                           Development Authority, Philippine Statistics Authority, National
                                                                                                                           Economic Development Authority

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