By Harry Handley

Under the Foreign Investment Act, 1991, which was amended in 2015, a vast majority of industries in the Philippines are completely open to overseas investment, allowing 100 percent foreign ownership in most cases. The country managed to attract over US$ 7 billion of FDI in 2016, 25 percent more than the previous year. The UNCTAD World Investment Prospects survey positions the Philippines as the 11^th most promising host country for investment over the period 2016-18. In order to best leverage the advantageous conditions, such as widely spoken English and access to the ASEAN Economic Community, the most effective market entry model must be chosen by entrants.

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Entry Models

There are a range of entry modes to choose from when investing in the Philippines. Each one is governed by different rules and, as such, each is suitable for different functions and business models. Below, the four main methods of entry are outlined.

Corporations

Companies can enter the Philippines by establishing as a corporation. This means registering a new legal entity with the Securities and Exchange Commission (SEC) in the Philippines. The structure of a corporation is such that the individual assets of the owners are legally separate from those of the company. Corporations come in two forms:

• Filipino corporation – minimum of 60 percent Filipino equity ownership;
• Foreign-owned domestic corporation – greater than 40 percent foreign equity ownership

The distinction between the two alternatives is important when it comes to land ownership and tax-incentive programs. Corporations can operate all functions of a business, and are typically profit-oriented enterprises. According to the World Bank’s Doing Business guide, setting up a corporation is a complex and long-winded process taking at least 28 days, four days longer than the Asia Pacific average.

Foreign-owned domestic corporations serving the Filipino market require a minimum of five shareholders and at least US$200,000 of paid in capital. The paid in capital can be reduced to US$100,000 if the corporation is involved in advanced technology or employs 50 direct employees. If the corporation is an ‘export market enterprise’ – defined as exporting at least 60 percent of its goods or services – the required capital is reduced significantly to P5000 (US$ 100).

Foreign-owned domestic corporations face the same tax conditions as local corporations: 30 percent corporate income tax and 12 percent VAT on local sales. Foreign corporations can register for numerous tax incentive with the Philippine Economic Zone Authority.

Branch Office

A branch office is a profit-oriented subsidiary of a foreign enterprise that engages in the activities of its parent company in the Philippines. This is the typical structure for business process outsourcing, such as call centers or back offices for multinational firms, which located in the Philippines due to low local wages as well as the large number of fluent English speakers. The establishment of a branch office typically takes three to four weeks from the time of filing with the SEC.

Similar to corporations, the capital requirements are US$200,000 for domestic market serving enterprises and P5000 (US$ 100) for export-oriented companies. The taxation of branch offices is also similar, with 30 percent corporate income tax and 12 percent VAT on local sales. However, branch offices also have to pay a 15 percent profit remittance tax on repatriation of profits to the parent company.

Representative Office

A representative office differs from a branch office in that it is not legally allowed to derive income. The key function of a representative office is to act as a liaison between the parent company and clients or partners in the Philippines. The minimum paid in capital for a representative office is a US$30,000 remittance from the parent company, which must be used for operational expenses. The average set up time for a representative office is similar to a branch office, three to four weeks from the date of application.

Regional HQ

There are two distinct types of regional headquarters: Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ). The graphic below shows what operations are legally allowed for both RHQs and ROHQs.

Regional or Area Headquarters (RHQ) are non-income generating offices of a foreign corporation. RAHQs are not allowed to participate in any management, marketing, or sales activities on behalf of branch offices in the Philippines or the mother company. Similar to representative offices, the main purpose of RHQs is to be a coordination and communication hub for subsidiaries, affiliates, and branches in the Asia Pacific region. The minimum paid in capital is US$50,000, to be used for the running of the office. Managerial and technical expatriate staff members will be taxed at 15 percent of gross compensation, rather than using the tiered income tax system.

On the other hand, a Regional Operating Headquarters (ROHQ) is an office of a multinational typically used for back-office functions. ROHQs are allowed to derive income only from affiliates of the parent company. ROHQs are afforded a special corporate income tax rate of 10 percent on taxable net income, as opposed to 30 percent for corporations and branch offices. In addition, 12 percent VAT is payable on local sales and 15 percent profit remittance tax on repatriation of profit. Similar to RAHQs, a 15 percent final withholding tax on the income of managerial and technical employees is payable rather than the standard income tax system. The minimum paid in capital for ROHQs is US$200,000.

Choosing an Effective Entry Model for Vietnam Investments

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By Bradley Dunseith

The Philippines is an archipelago comprising of 7,641 islands. The country shares maritime borders with China, Indonesia, Japan, Malaysia, Taiwan, Vietnam, and the island nation of Palau. In 2015, the Philippines exported goods valued at US$77.9 billion and imported products worth US$76.8 billion. The Philippines’ top export destinations are China, Japan, the United States, and Singapore; and the country’s top import partners are China, Japan, Korea, the United States, and Thailand. In this article we explain best practices for importing into and exporting out of the Philippines.

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Registration

For importers

To register as an importer, businesses first need an Import Clearance Certificate from the Bureau of Internal Revenue. Importers then register with the Bureau of Customs (BOC) and set up an account with the Client Profile Registration System (CPRS). The Import Clearance Certificate is valid for three years while the Customs Client Profile Accreditation must be updated annually. The CPRS accreditation costs P1000 (US$20) and typically takes 15 working days to process.

For exporters

First time exporters need to register with the CPRS through the Philippine Exporters Confederation. As with importers, the CPRS accreditation must be renewed annually, costs P1000 and takes approximately 15 business days. For certain types of exporters, the Philippines requires additional registration. For instance, coffee exporters must register with the Export Marketing Bureau. Exporters operating out of a special economic zone (SEZ) must register with the Philippine Economic Zone Authority (PEZA) while companies exporting out of free port zones must register with the specific free port.  Once registered, exporters will receive a Unique Registration Number, necessary for all export activity.

Required documents

For importers

Businesses importing into the Philippines must provide the following documents when their goods arrive:

• Packing list;
• Invoice;
• Bill of lading;
• Import Permit;
• Customs Import Declaration; and
• Certificate of Origin.

Additional documents for certain imports

Importers bringing in animals, plants, foodstuff, medicine or chemicals must additionally obtain a Certificate of Product Registration from the Philippines’ Food and Drug Administration.

For exporters

Businesses exporting out of the Philippines must provide the following documents before their goods depart:

• Packing List;
• Invoice;
• Bill of Lading;
• Export License;
• Customs Export Declaration; and
• Certificate of Origin.

Additional documents for certain exports

Certain products require government permission to be exported. Below is a detailed list of products requiring additional permission as well as the concerned government authority:

• Endangered species of flora and fauna (Bureau of Biodiversity Management);
• Animals and animal products (Bureau of Animal Industry);
• Fish and fish products (Bureau of Fisheries and Aquatic Resources);
• Plants (Bureau of Plant Industry);
• Rice (National Food Authority);
• Radioactive materials (Philippine Nuclear Research Institute) and;
• Sugar and molasses (Sugar Regulatory Administration).

Tariffs and Taxes

For importers

The Philippines follows the United Nation’s Standard International Trade Classification (SITC). Import tariffs can range from 0 to 65 percent. Imported goods in sectors which have high domestic production typically incur higher tariffs. For non-agricultural goods, tariffs average at 6.7 percent.

The Philippines Tariff Commission has launched a ‘tariff finder’ web portal to help importers, which can be accessed here.

The Philippines Customs apply a value added tax (VAT) for imported goods at 12 percent. The Philippines’ customs levy no tariff or tax for goods worth less than P10,000 (US$200).

For exporters

The only exported good which incur a tariff are logs at 20 percent.

Special Economic Zones

Businesses operating in Special Economic Zones (SEZs) or free port zones are exempted from paying taxes and tariffs on imported raw material and manufacturing equipment. As stipulated in the Customs Modernization and Tariff Act, 2015, the main SEZs in the Philippines include:

• Clark Freeport Zone;
• Poro Point Freeport Zone;
• John Hay Special Economic Zone;
• Subic Bay Freeport Zone;
• Cagayan Special Economic Zone;
• Zamboanga City Special Economic Zone and;
• Freeport Area of Bataan.

As mentioned earlier, exporters and importers operating in SEZs or free port zones must register with either PEZA or the specific free port regulator.

Free trade agreements

The Philippines is a member of six regional free trade agreements (FTAs) as well as one bilateral FTA with Japan. As a member of the Association of Southeast Asian Nations (ASEAN), the Philippines is naturally a participant in the ASEAN Trade in Goods Agreement (ATIGA). The country enjoys significantly reduced tariff rates within ASEAN though some tariff lines on sensitive food products still remain. The Philippines, by virtue of its membership in ASEAN, is also a party to the five FTAs that ASEAN has signed with the following countries or group of countries:

• Australia and New Zealand;
• China;
• India;
• Japan; and
• Korea

The Philippines government offers a breakdown of each FTA and the applicable preferential tariff rates here.

RELATED: The Philippine Economic Zone Authority – Incentives and Assistance

Conclusion

The Philippines is a dynamic and strategic trading location. As the country continues to comply with ASEAN-wide economic integration, opportunities for both importers and exporters will continue to grow. Utilizing experts with up-to-date local knowledge can help exporters and importers to not only avoid customs-related delays and frustrations but also ensure import and export activity occurs quickly and remains profitable. Local experts at Dezan Shira & Associates possess years of experience supporting the establishment and growth of businesses across ASEAN, and are well situated to guide companies through the Philippines’ constantly evolving regulatory landscape.

By Alexander Chipman Koty and Zhou Qian 

China’s State Council released an updated foreign investment negative list for its 11 free trade zones (FTZs) on June 16, 2017, removing a number of restrictions on foreign investment.

The new negative list, which comes into effect on July 10, 2017, cuts 10 items and 27 special administrative measures from the previous negative list released in 2015. The lifted restrictions on foreign investment apply to a number of industries, including mining, manufacturing, transportation, information, commercial service, finance, scientific research, and culture.

The updated negative list presents new opportunities for investment in China’s growing number of FTZs, and provides a glimpse into future economic reforms.

FTZ negative list explained

China’s negative list specifies the industries where foreign investment is prohibited or restricted in the country’s FTZs.

For prohibited industries – such as those relating to national security – foreign investment is not allowed. For restricted industries, foreign investors may need to acquire special approval or enter into a joint venture (JV) with a Chinese partner. Foreign investors enjoy domestic treatment in industries not listed on the negative list.

China currently has 11 FTZs, with the seven latest in Chongqing, Henan, Hubei, Liaoning, Shaanxi, Sichuan, and Zhejiang. The Shanghai Pilot FTZ was China’s first FTZ, launched in 2013, while FTZs in Fujian, Guangdong, and Tianjin were opened in 2015.

Changes in the new negative list

Of the 27 special administrative measures removed from the 2015 list, 10 are related to manufacturing, four to finance, and four to other services.

Overall, the new negative list reduces restrictions in over 20 industries, including railway transport equipment, pharmaceuticals, road transport, insurance, accounting and audit, and other commercial services.

Foreign investors are no longer be obligated to enter into a JV when engaging in rail transport equipment or civilian satellite manufacturing, as well as certain types of civilian helicopter design and production, for instance. The full list of removed special administrative measures can be found at the end of this article.

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Notably, restrictions may still apply for items removed from the negative list. An industry’s absence on the negative list simply means that foreign investors will be treated the same as Chinese investors in that industry.

For example, though military, police, political, and Chinese Communist Party special training institutions were removed from the negative list, those industries are blocked for Chinese investors as well, meaning that there is no effective change for foreign investors.

The 95 special administrative measures remaining are exactly half as many as there were in the first negative list introduced in the Shanghai Pilot FTZ in 2013. In 2015, the total number of measures were reduced to 139, and then to 122 in late 2015.

Evaluating the new negative list

The updated negative list comes as Premier Li Keqiang reiterated China’s commitment to trade and globalization at the World Economic Forum currently being held in Dalian, echoing the remarks President Xi Jinping made earlier in the year at Davos.

It is part of another round of economic liberalization, which includes the new Catalogue for the Guidance of Foreign Investment Industries, soon to be released by the Ministry of Commerce and the National Development and Reform Commission.

 RELATED: Pre-Investment and Entry Strategy Advisory from Dezan Shira & Associates

The updated Catalogue is expected to introduce a similar style of negative list for the rest of China, effective in 2018, and to ease restrictions in similar industries as the FTZ negative list, including rail transport equipment and mining. FTZs are often treated as grounds for experimental reform in China, making it unsurprising that policies tested since the Shanghai Pilot FTZ opened in 2013 are now being carried over to the rest of China.

Many of the newly liberalized industries, however, are sectors in which Chinese companies are already dominant. China is known for its high-speed rail development, for example, a strength it hopes to export through the One Belt, One Road project.

Further, foreign investors in China’s FTZs may still be subject to national security reviews when participating in sensitive industries. Although the updated negative list provides new areas for investment, foreign investors should carefully study the opportunities and challenges that may arise in practice prior to entry.