For foreign investment in the Philippines to be formally established, it is required to register a legal business entity. The choice of a better structure would contribute to a smooth flow of its intended operations, and a bad choice would lead to so much waste. More importantly, a good decision may lead to an efficient structure as to taxes and protection of assets.
Hereunder are the common questions and initial considerations that may serve as a guide in conceptualizing an intended Philippine legal business entity:
1. Nature of business operations
The nature of intended business operations would define the rest of the requirements, restrictions, and tax-implications. As such, the nature of operations in the long-run should clearly be defined so as to determine the applicable restrictions and limitations.
2. Foreign ownership
Foreign ownership could be full or limited depending on the nature of operations and level of capitalization. Service exporters and export producers of goods could be owned 100% while those industries reserved could have limited foreign participations such as mining extractions, realty operations, overseas manpower agency, and the likes.
Taxability attaches to the nature of legal business entity and nature of its operations. BOI-registered export oriented producers, could enjoy years of income tax holiday and 0% VAT on exports, while PEZA-registered enterprises could enjoy 5% special tax in lieu of all internal revenue taxes throughout its operations.
4. Repatriation of capital and profit
Repatriation of capital and profit using the banking system is not much of a problem for Philippine registered investments. Tax on profit remitted to foreign principals are taxed based on under what nature it is remitted – e.g. dividend, royalty, management fee, service fee, branch profit remittance. Tax treaties have great impact on taxability and a good source of tax savings. Tax incentives such as freeport zones and income tax holidays are also good options on saving international double taxation.
5. Appropriate legal business entity
Tax-efficient and appropriate legal business entity is a good combination and inter-relation of the above factors – nature of operations, foreign equity, taxability and manner of repatriation. A carefully studied business structure in the Philippines provides much tax savings based on underlying circumstances. The length of time to complete the incorporation and registration with various government agencies will also depend on the type of business entity. Hereunder are the common legal business entities for foreign investors:
– 40% or 100% subsidiary;
– Philippine branch;
– Representative office;
– Regional operating headquarters (ROHQ)
– Regional Area Headquarters (RAHQ)
6. Labor Cost and benefits
This factor is normally considered for manpower based legal business entities. Labor cost is relatively cheaper in the Philippines compared to other jurisdictions and employee benefits are not much of an issue. Minimal government provisions on working conditions and mandatory benefits are in place.
Based on the above, you may now proceed with your Philippine business targets and gather your thoughts about how you view your Philippine operations. In case of doubts and missing links, a number of professionals in the Philippines could render professional advice and technical assistance. Charges vary from time charges at a certain rate per hour of consultancy work, or packaged deal from a series of consultancies on initial registrations to complete company registration.
This is a guest post by Garry S. Pagaspas. Garry is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted a number of investors in structuring intended Philippine business operations and in the complete registration of the same with the various agencies preparatory to operations. For comments and clarifications, you may please send mail at firstname.lastname@example.org.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.