Pros and Cons of Starting Foreign Companies in the Philippines

Infographic summarizing the Pros and Cons for foreign companies in the Philippines

Like it or not, today’s business landscape is incredibly competitive and will continue to be so. It’s no wonder that companies scramble to build, maintain, and expand their edge over competitors. To get that proverbial edge, the savviest of entrepreneurs are exploring strategies that they have never pursued before.

Among these strategies is establishing businesses overseas. After all, one can make money anywhere in the world. In recent years, the Philippines has become a favored destination for aspiring moguls and tycoons. Opening foreign companies in the Philippines allows them to be successful even outside of their home countries.

Any businessman worth his salt would do his research before investing his hard-earned money in another country. After all, doing business in the Philippines is not for the faint-hearted. If you have ever thought of branching out abroad, you must be aware of the benefits and risks of doing so. To guide you, here is a short list of the pros and cons of starting your own business in the Philippines as a foreigner:

Pros:

Cons:

Pros of Starting Foreign Companies in the Philippines

A Large Market

With a population of over 100 million, the Philippines offers numerous opportunities for any enterprising businessman to sell his products and services. Filipinos have an affinity for Western culture and are famously consumer-driven. Foreigners would have an easier time adjusting here compared to other Southeast Asian countries like Thailand and Indonesia.

Despite the great income disparity between population sectors, a smart entrepreneur can profit by honing in on and marketing to specific segments. In addition, locating your business in the Philippines allows you to take advantage of the greater ASEAN and Asia-Pacific markets.

Low-Cost, Talented Labor

Naturally hardworking, Filipinos are the dream employees of every company. Each year, the country’s universities and colleges add thousands of graduates to an already large labor pool. This has been – and still is – a boon to the business process outsourcing (BPO) sector, with the average Filipino’s good command of the English language and excellent communication skills.

Salaries in the country are also much lower compared to North America and European countries. With the exchange rate hovering at around PhP 50 to USD 1, foreign companies in the Philippines definitely get more bang for their (payroll) buck.

Good-Enough Infrastructure

Despite being an archipelagic country, the main islands of the Philippines are surprisingly well-connected to each other and the outside world. Large cargo shipments mostly utilize the seaports, while smaller ones go through the various airports dotting the major cities.

Within the greater metropolitan Manila area, the key business hubs are Makati City, Bonifacio Global City (BGC), and Ortigas Center. Rivaling the likes of Hong Kong and Singapore, these places boast of state-of-the-art, eco-friendly communities that bring residents and businesses together.

While there remains a lot to be done to improve the country’s infrastructure, President Rodrigo Duterte has recently initiated the “Build, Build, Build” program to fast track major infrastructure projects that would benefit both local and foreign companies in the Philippines.

Incentives from the Government

The Philippine government, through the Board of Investments (BOI) and Philippine Economic Zone Authority (PEZA), provides several incentives to attract foreign investments, especially into priority areas and industries marked for development.

Fiscal incentives include income tax holidays, tax exemptions and deductions, and preferential rates on the final tax of gross income (for PEZA-registered companies). Among the non-tax incentives are simplification of customs procedures for imported products, issuance of resident visas to foreign investors and their families, and the privilege to operate a bonded trading or manufacturing warehouse.

If it’s your first time to open an foreign-owned company in the Philippines, don’t forget to avail of these goodies!

Cons of Starting Foreign Companies in the Philippines

More Holidays in the Philippines

The Philippines has 18 official non-working holidays. Many of these are of great cultural significance, such as Christmas, New Year, the Christian Holy Week, and All Souls’ Day.

On the other hand, these holidays provide a ready-made, annually-occurring boon to consumer-oriented businesses. Marketing your products and services could not become any easier, with the extended Christmas season in the Philippines that unofficially starts in September and ends in February.

The Law Favors the Laborer

Most of the labor laws in the Philippines are geared to favor employees over management. For example, companies cannot simply fire underperforming employees at will. Before fully terminating someone, the employer has to prove first that the staff member concerned was at fault or failed to pass the standards of his/her probationary period. Companies are also mandated by Philippine law to provide severance pay and 13th-month pay.

These conditions may seem unfair to some, but overall such laws have contributed to higher morale and a lower turnover rate among Filipino employees compared to their foreign counterparts. That is something any smart businessman would appreciate.

Heavy Traffic

Sad to say, the Philippines lacks any kind of efficient mass transportation system. According to the Asian Development Bank, Metro Manila tops the list of 278 most congested cities in developing Asia. The sheer volume of public utility buses, jeepneys, and private vehicles on its roads during work hours leads to slow-moving traffic at best and outright gridlock at worst.

The good news is that various skyways and expressways, as well as a new train line in the northern part of Metro Manila, are being built to ease the traffic situation. It may take some time, but things are bound to get better.

Despite the government-provided incentives mentioned above, some foreign businessmen still hesitate to shortlist the Philippines as an investment destination because of the restriction on foreign ownership of land. They may, however, own 40 percent of a corporation that owns land. Most businesses are allowed to be 100% foreign-owned. The Foreign Investment Negative List contains the limitations of foreign ownership mandated by the constitution and specific laws.

It must be noted that 100% foreign ownership of a company catering to the Philippine local market is allowed, subject to having a minimum paid-in capital of USD 200,000.00. An exemption may be obtained for foreign companies in the Philippines that employ a minimum of 50 direct employees or use advanced technology, for a minimum paid-in capital of USD 100,000.00.

Need Help with Starting Your New Business?

You may be discouraged by some of the cons we enumerated, but don’t be. The Philippines has been one of the fastest-growing economies in Asia, and it will continue to expand in the coming years. With its friendly people and climate, you have even more incentives to build your dream business here.

If you don’t know where (and how) to start, we at DAYANAN Business Consultancy are here to help. Contact us today.

PEZA BOI Comparison

PEZA vs BOI Registration for your Company     PEZA Philippines Economic Zone Authority

The Government of the Philippines has put in place several incentive programs and tax breaks to attract foreign and local investors. The two main agencies implementing those incentives are  BOI and  PEZA. Dayanan Business Consultancy will assist you in choosing and registering with the correct agency for your business to receive the appropriate benefits. There are several things to take into consideration, such as whether your main activities will be export or domestic oriented, if they are part of the Investment Priorities Plan (IPP)  in effect, and where your project will be located and operated.

Requirements and Registration Procedure

  • Corporate Location:
    In order to register with PEZA a company must be located in one of the PEZA assigned Ecozones, whereas the BOI does not have any location requirements (if not part of the IPP program).
  • Registration :
    • PEZA:
      • Required Documents part of PEZA application:
      • Project brief
      • Anti-graft certificate
      • Board Resolution commissioning the designation of a representative
      • SEC Certificate of Registration
      • Project feasibility study
      • Evaluation of Application, this step can be relatively quick depending on the availability of the the board.
      • Presentation to PEZA for review by the board, which will decide on the exact incentives granted to the project.
    • BOI:
      • Required Documents part of BOI application:
      • Three copies of the BOI application Form 501
      • Three copies of the project report and supporting documents
      • Feasibility Plan
      • 5 year financial outline
      • Preparation of Project Evaluation report by the Project Evaluation and Registration Department Project (PERD) and its presentation to the BOI management committee
      • The registration procedure can take from 2 to 3 weeks depending on the project.

Filing Fees
Required application fees:

  • PEZA
    • Application of a New Non-Pioneer Project                     P3,600.00
    • Application of a New Pioneer Project                              P6,000.00
    • Additional registration fee for all new projects              P6,000.00
  • BOI
    There are both an application and a registration fee to be paid, the amounts of which depend of the size of the initial investment for the project. Application fee summary:

    • Project cost below P3 million                                                              P1,500.00
    • Project cost exceeding P3 million (but not over P4million)            P1,500.00
    • Project cost exceeding P4 million (but not over P20 million)        P3,000.00
    • Project cost exceeding P20 million (but not over P50 million)      P4,500.00
    • Project cost exceeding P50 million                                                     P6,000.00

Export Commitment
In order to register with the PEZA or BOI there are some specific export commitments to respect.

  • PEZA
    • For an IT company there is no export commitment required
    • A company majority owned by Filipino citizens, must export a minimum of 50% of its total service/products annually
    • A company majority owned by foreigners, must export a minimum of 70% of its services/products annually
  • BOI
    • For Filipino owned companies there is no export commitment necessary
    • A business that is majority foreign owned (40% and more), must export at a minimum of 70% of its services/products annually
    • A business engaged in pioneer activities has no export commitment and hence may sell all of its services/products in the Philippines, as long as it complies with the Foreign Investment Act’s (FIA) requirements.

Tax Incentives
A company registering with the PEZA or the BOI can avail from a number of tax incentives and benefits.

  • PEZA
    • Offshore profit remittances, which is not subject to remittance tax.
    • Income Tax Holiday (ITH) for 4 years for Non-Pioneer IT Enterprises, or 6 years for Pioneer IT Enterprises.
    • After the ITH period is over, companies can opt  to pay a special 5% tax on gross income instead of all national/local taxes.
    • This does not apply to real property taxes for developers-owned land.
    • Exemption on import duties/taxes on imported machinery, equipment and raw materials.
    • Supplementary deduction equivalent to 50% of training expenses, which is chargeable against the 3% share of the national government of the special 5% tax on gross income;
    • Permanent resident status is granted to foreign investors when they make an initial investments of US$50,000.00 or more.
    • Exemption from Branch Profit Remittance tax for PEZA-registered branches of foreign firms.
    • Other incentives can also be granted as determined by the PEZA Board.
  • BOI
    • 3 to 8 years Income Tax Holiday (ITH)
    • 4 to 6 years exemption from local business taxes for pioneer and non-pioneer industries
    • Exemption from Taxes and Duties on imported spare parts
    • Exemption from Wharf Dues, Export Tax, Duty, Impost and Fees
    • Tax Exemption on Breeding Stocks and Genetic Materials
    • Tax Credits
    • Additional Deductions from Taxable Income

Industries Supported
PEZA and BOI each want to attract investments from the following industries in order to expand  the economic development of the Philippines.
The industries supported are :

  • PEZA
    • Software Development and Application
    • IT-enabled Services (Call centers, Data Encoding, Transcribing and Processing, Directories…)
    • Content Development for the Internet and other forms of media
    • Knowledge Based and Computer Enabled Support Services (Engineering, Architectural design services, and Consultancies)
    • Business Process Outsourcing (BPO)
    • IT research and other IT related services
  • BOI
  • Investment Priority Plan (IPP):
  • Agriculture/Agribusiness and Fishery
  • Infrastructure
  • Manufactured Products
  • Business Process Outsourcing (BPO)
  • Creative Industries
  • Strategic Activities
  • Green Projects
  • Disaster Prevention, Mitigation and Recovery Projects
  • Research and Development and Innovation
  • Mandatory List:
  • Forestry
  • Mining
  • Printing, Publication and Content Development of Books or Textbooks
  • Downstream Oil Industry
  • Ecological Solid Waste Management
  • Clean Water
  • Magna Carta for Disabled Persons
  • Renewable Energy
  • Tourism
  • Export Activities:
  • Production and Manufacture of Export Products
  • Export Services
  • Activities in Support of Exporters