Doing Business in the Philippines

The Philippines continues to lag behind its ASEAN neighbors in terms of attracting foreign direct investments.

Of all the Asian (not just ASEAN) countries, the Philippines is the most westernized. Foreign investors will not totally feel away from home in the Philippines.

Admittedly, the perceived presence of terrorism and threat of communist and islamic fundamentalist rebels make the Philippines unattractive for foreign investors.

But consider the following:

1. Our country is now beefing up security against terrorists nationwide. The recently-passed Anti-Terrorism Law is proof that the country is serious in solving the problem of terrorism.

2. The islamic fundamentalist rebels are found strictly in a remote island in the southernmost part of the Philippines.

3. Likewise, Communist rebels are concentrated only in very few remote places

4. Investments in business process outsourcing (BPO) have been increasing yearly for the last 5 years. The BPO industry is expected to be a US$10 billion industry by 2010.

The safety concerns of the prospective foreign investor will be met by:

1. Locating the business inside one of many economic zones (ecozones), nationwide, like Subic Bay and Clark Air Field, or

2. Locating the business in key cities, outside Manila.

Aside from BPO, one promising area of foreign investment here is mining. One consultant compared assessed the potential of mining in the Philippines – if call centers were retail stores, mining companies are shopping malls.

Incentives from the Philippine Economic Zone Authority

INVESTMENT INCENTIVES FOR ECOZONE DEVELOPERS / OPERATORS

1. Income Tax Holiday
2. Incentives under the Build-Operate-Transfer Law, which includes government support for accessing Official Development Assistance and other sources of financing
3. Provision of vital off-site infrastructure facilities
4. Option to pay a special 5% Gross Income Tax, in lieu of all national and local taxes
5. Permanent resident status for foreign investors and immediate family members
6. Employment of foreign nationals
7. Assistance in the promotion of economic zones to local and foreign locator enterprises

INCENTIVES FOR ECOZONE AND IT LOCATORS

1. Income Tax Holiday (ITH) or Exemption from Corporate Income Tax for four years, extendable to a maximum of eight years; After the ITH period, the option to pay a special 5% Tax on Gross Income, in lieu of all national and local taxes
2. Exemption from duties and taxes on imported capital equipment, spare parts, supplies, raw materials. Also breeding stocks and / or genetic materials or the equivalent tax credit on these items, when sourced locally
3. Domestic sales allowance equivalent to 30% of total sales
4. Exemption from wharfage dues and export taxes, imposts and fees
5. Permanent resident status for foreign investors and immediate family members
6. Employment of foreign nationals
7. Simplified import and export procedures
8. Other incentives under Executive Order 226 (Omnibus Investment Code of 1987), as may be determined by the PEZA Board

Incentives from the Board of Investment

Fiscal Incentives

Fiscal incentives includes the following:

• Income Tax Holiday
• Exemption From Taxes And Duties On Imported Spare Parts
• Exemption From Wharfage Dues And Export Tax, Duty, Impost And Fees
• Tax Exemption On BreedingStocks And Genetic Materials
• Tax Credits
• Additional Deductions from Taxable Income.

A. Income Tax Holiday (ITH)

1. BOI-registered enterprise shall be exempt from the payment of income taxes reckoned from
the scheduled start of commercial operations, as follows:

a. New projects with a pioneer status for six (6) years;
b. New projects with a non-pioneer status for four (4) years;
c. Expansion projects for three (3) years. As a general rule, exemption is limited to
incremental sales revenue/volume;
d. New or expansion projects in less developed areas (LDAs) for six (6) years, regardless
of status;
e. Modernization projects for three (3) years. As a general rule, exemption is limited to
incremental sales revenue/volume.
2. The ITH is limited in the following cases:

1. Export traders may be entitled to the ITH only on their income derived from the following:
   • Export of new products, i.e. those which have not been exported in excess of US$100,000 in any of the two (2) years preceding the filing of application for registration, or
   • Export to new markets, i.e., to a country where there has been no recorded import of a specific export product in any of the two (2) years preceding the filing of the application for registration.
2. Mining Activities
   • The exploration and development of mineral resources are not entitled to an ITH;
   • Mining and/or quarrying without mineral processing is not entitled to an ITH;
   • Mining and processing of aggregates is not entitles to ITH.

3. New registered pioneer and non-pioneer enterprises and those located in LDAs may avail themselves of a bonus year in each of the following cases:

1. the indigenous raw materials used in the manufacture of the registered product must at least be fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension unless the Board prescribes a higher percentage; or
2. the ratio of total imported and domestic capital equipment to the number of workers for the project does not exceed US$10,000 to one (1) worker; or
3. the net foreign exchange savings or earnings amount to at least US$500,000 annually during the first three (3) years of operation. In no case shall the registered pioneer firm avail of the ITH for a period exceeding eight (8) years.
   

B. Exemption From Taxes And Duties On Imported Spare Parts
A registered enterprise with a bonded manufacturing warehouse shall be exempt from customs duties and national internal revenue taxes on its importation of required supplies/spare parts for consigned equipment or those imported with incentives.

C. Exemption From Wharfage Dues And Export Tax, Duty, Impost And Fees
All enterprises registered under the IPP will be given a ten (10) year period from the date of registration to avail of the exemption from wharfage dues and any export tax, impost and fees on its non-traditional export products.

D. Tax Exemption On Breeding Stocks And Genetic Materials
Agricultural producers will be exempted from the payment of all taxes and duties on their
importation of breeding stocks and genetic materials within ten (10) years from the date of
registration or commercial operation.

E. Tax Credits

1. Tax credit on tax and duty portion of domestic breeding stocks and genetic materials.
A tax credit equivalent to one hundred percent (100%) of the value of national internal revenue taxes and customs duties on local breeding stocks within ten (10) years from date of registration or commercial operation for agricultural producers.

2. Tax credit on raw materials and supplies A tax credit equivalent to the national internal
revenue taxes and duties paid on raw materials, supplies and semi-manufacture of export
products and forming part thereof shall be granted to a registered enterprise.

F. Additional Deductions from Taxable Income.

1. Additional deduction for labor expense (ADLE) For the first five (5) years from registration, a registered enterprise shall be allowed an additional deduction from taxable income equivalent to fifty percent (50%) of the wages of additional skilled and unskilled workers in the direct labor force. The incentive shall be granted only if the enterprise meets a prescribed capital to labor ratio and shall not be availed simultaneously with ITH. This additional deduction shall be doubled if the activity is located in an LDA.

2. Additional deduction for necessary and major infrastructure works. Registered enterpriseslocating in LDAs or in areas deficient in infrastructure, public utilities and other facilities may deduct from taxable income an amount equivalent to the expenses incurred in the
development of necessary and major infrastructure works. The privilege, however, is not granted to mining and forestry-related projects as they would naturally be located in certain areas to be near their sources of raw materials.

Non-Fiscal Incentives

Non-fiscal incentives are as follows:

 

1. Employment Of Foreign Nationals

   A registered enterprise may be allowed to employ foreign nationals in supervisory, technical or advisory positions for five (5) years from date of registration. The position of President, General Manager and Treasurer of foreign-owned registered enterprises or their equivalent shall however not be subject to the foregoing limitations.

2. Simplification of customs procedures for the importation of equipment, spare parts, raw materials and supplies and exports of processed products.
3. Importation of consigned equipment for a period of 10 years from date of registration, subject to posting of a re-export bond.
4. The privilege to operate a bonded manufacturing/trading warehouse subject to Customs rules and regulations.

The Philippines is fast becoming the preferred haven for foreign investments in the Asia-Pacific region. Its investment climate is conducive more than ever to foreign investors.

It has a continuing economic and financial reform program to be more competitive in the international market. It has rid itself of excessive government regulations and has liberalized all sectors of its economy.

Telecommunications, shipping, oil, banking, and insurance industries have been deregulated. Strategically located, the Philippines provides a natural gateway to other Asia-Pacific economies. It has flourishing trade links with its Asian neighbors due to shared history, cultures, and tradition.

Democracy is at its best with true checks and balances in the Executive, Legislative, and Judicial branches of government. Freedom of speech is upheld at all times and the Philippine press remains the freest and most open in Asia if not in the world.

Economic reforms are in place and continues to be improved. Business is liberalized, promotional and less regulatory, and attuned for global competition.

Basic rights and guarantees of investors include repatriation of investments, remittance of earnings, access to foreign loans and contracts, freedom from expropriation and non-requisition of investments.

Full (100%) foreign ownership of enterprises.

Facilitative assistance and simplified investment procedures.

Priority investment projects are in export-oriented industries, among others.

Abundant supply of quality labor with a large pool of knowledge-based, multi-skilled, highly-educated, highly-trainable, literate, English-speaking workforce. Low employment turnover (less than 1%), high productivity yields, highly adaptable to model changes, and familiar to quality work needs.

Foreigner-friendly people. Culturally adaptable people. World-renowned for their hospitality.

Ideal place for expatriates and their families. Availability of quality primary, secondary and tertiary education. Housing facilities meet western standards at very reasonable rates. Availability of quality health care services. Best sporting and recreational facilities.

A market composed of 76.5 million Filipino consumers.

GSP Advantage. Under the Generalized System of Preferences (GSP), the Philippines continues to enjoy tariff preferences when exporting various products to developed countries such as the United States and those in Europe. In contrast, many of the neighboring countries in Asia no longer enjoy this advantage, thus giving the Philippines an edge in competing for the export market. What is also significant is that the country is still a long way from being graduated from these GSP privileges, so investors can look forward to enjoying them for some time to come.

(from peza.gov.ph)