Some business owners are happy to continue outsourcing in the more traditional sense, working with home-based workers over a never-ending length of time. Others however, might want to eventually take things a step further and set up shop in the Philippines permanently.
This chapter will broach this subject, and some of the advantages and disadvantages that go along with that. Setting up a business in the Philippines can be complicated, but not difficult. With the exception of Singapore, it is relatively easy, although very time consuming, to legally establish a business here compared to its Southeast Asian counterparts.
All forms are in English, or have English translations, so you can read through them yourself. There is the usual red tape that you will find in most Asian countries, which can be frustrating, but nothing that a good lawyer and a whole lot of patience can’t fix.
If you are setting up a Business Process Outsourcing center, the process can be even easier as the Business Processing Association of the Philippines (BPAP) can put you in touch with the right law firms and representatives to help you set up.
There have been a lot of incentives laid out for foreign investors, despite the fact that you cannot have 100% ownership of a company. A bit of a downer, even though historically speaking, the rule makes sense. The Philippines, and a lot of Southeast Asian countries, have been screwed out of deals by early foreign investors, and the rules make sure that there isn’t a repeat of those mistakes.
But, like most of Southeast Asia, you’ll find that there are always legal loopholes to get around certain laws. In the case of the Philippines, where majority shares go to Filipinos, you can – legally – make them sign their rights to you after the paperwork has been done, giving you 100% control of your company.
It’s a weird process that works, as the Philippines works it’s way into improving it’s image to foreign investors. Some of the recent perks in establishing a company in the Philippines include:
- A 4-8 Income Tax Holiday for companies established in a Philippine Economic Zone Authority (PEZA) site, or other Ecozone sites. More on this later.
- A special 5% tax rate on gross income after your 4-8 years have lapsed.
- Tax and duty exemption on imported capital equipment, if your business is located in a PEZA or Ecozone.
- An exemption from input of Value Added Tax (VAT) onallowable local purchase of goods and services.
- Exemption from wharfage dues.
Some sites claim that companies established in PEZA or Ecozone sites, otherwise known as IT Parks, can have it completely tax-free. When the truth is, anything not listed in the above is taxable, but only computed at the end of the 4-8 years.
No one is quite clear on how it’s computed, so it’s better to have a lawyer sit with you along with a long list of explanations. And even though the taxes are minimal, it’s a very good idea to have them hold your hand as the numbers come through later.
But considering the added perks of cheaper labor, established IT parks, the promise of future upgrades, and a booming economic climate, it makes a lot more sense to build. There are a few options available, depending on your long-term vision: how big you want to grow, how much money you are looking to spend, and your exit strategy.
For Small to Medium sized enterprises, you can:
- Form a Joint Venture
- Establish a Branch Office
- Establish a Representatives Office
If you’re looking to sell your company in the future, then it makes more sense to establish a joint venture, which is essentially a domestic corporation. Forming a company in the Philippines gives you better tax breaks, and the ability to attract quality talent, making it easier for you to scale as you get more funds. The only downside to a JV is that you must go into a partnership with a Filipino, with them controlling majority shares.
Initial investment required is $200,000 if foreign interest exceeds 40%, but may be lowered to $100,000 if advanced technology is involved, or you employ more than 50 people. Corporate taxes are derived from income sourced within and without the Philippines at 35% or the Minimum Corporate Income Tax (MCIT), depending on which is higher. These numbers are for non-PEZA site companies, and do not include taxes on dividends.
For investments this big, it is absolutely critical to lawyer up as soon as possible. This not only expedites the process, but the costs in legal fees are not that high compared to that of Western countries. The amount you spend is worth the service you get, and will no doubt let you sleep better at night. So choose carefully.
A joint venture is a corporation on its own, and can conduct income- producing activities, including product creation. This is the best option if you’re looking to expand your market to include Asia.
Also read: OTTP007 – How To Build A Virtual Team And Set-Up Shop In The Philippines, With Jared Croslow