Why You Shouldn’t Establish a Company in the Philippines
Large enterprises have been reaping the benefits of outsourcing or offshoring to lower-cost countries for many years. Smaller companies wanting access to the same resourcing strategies often don’t know where or how to find a trusted partner. Thinking the easiest and safest option is to establish their own presence in the Philippines leads them down an expensive and complex path, filled with bureaucratic and cultural obstacles.
If you are considering opening your own company in the Philippines, here is what you should know.
Establishing a Company Is Difficult
Before you can open the doors on your Philippine operation, you need to be registered with the Security and Exchange Commission (SEC). There is a myriad of options for this process – are you an ROHQ or is PEZA best? A Branch Office or a Domestic Company? Just getting advice on the options chews up time, money and energy. The best way to expedite the process is to use a law firm with “runners” who visit the SEC every day to follow up on applications. Note that you will need resident and/or Filipino shareholders for any company you establish.
The complexity in setting up a corporate entity has placed the Philippines at 171st in the World Bank’s “Doing Business” rankings.
While the report states that it takes an average of 29 days to get a business permit, frequent changes in the processes and the volume of work that the agencies are processing impact this. Yempo’s business permit took almost 6 months to finalise.
The tasks required to establish a company in the Philippines include:
- Verify and reserve the company name with the Securities and Exchange Commission (SEC)
- Open a temporary trading account at the bank. The requirements for opening a bank account prior to SEC registration are in constant flux.
- Deposit the paid-in minimum capital at the bank.
- Notarize articles of incorporation and treasurer’s affidavit at a notary
- Register the company with the SEC
- Pre-registration for Taxpayer Identification Number (TIN),
- Pre-registration for Security System (SSS),
- Pre-registration for Philippine Health Insurance Company (PhilHealth), and
- Pre-registration for Home Development Mutual Fund (Pag-ibig Fund).
- Obtain barangay clearance. A barangay in the Philippines is like a local council or district
- Pay the annual community tax and obtain the community tax certificate (CTC) from the City Treasurer’s Office (CTO)
- Obtain the business permit to operate from the Business Permits and Licensing Office
- Obtain fire safety and inspection certificate
- Obtain sanitary permit
- Obtain occupancy certificate
- Purchase special books of account at bookstore
- Apply for Certificate of Registration (COR) and TIN at the Bureau of Internal Revenue (BIR)
- Pay the registration fee and documentary stamp taxes (DST) at the Bureau of Internal Revenue
- Obtain the authority to print receipts and invoices from the BIR
- Arrange printing of receipts and invoices at the print shop
- Have books of accounts and Printer’s Certificate of Delivery (PCD) stamped by the BIR
- Final Registration with the Social Security System (SSS)
- Final registration with the Philippine Health Insurance Company (PhilHealth)
- Final registration with Home Development Mutual Fund (Pag-ibig)
Running a Company is Time Consuming and Expensive
There are 10 indicators used to measure the ease of doing business in the Doing Business ranking which placed the Philippines at 99th. This is worse than its 95th ranking in 2015 and 86th in 2014.
Other difficulties which affect the overall score are the ranking of 115th for Paying Taxes and 95th for Trading Across Borders.
There are almost 50 tax payments to make each year which consume on average 200 business hours to process. Employee tax requirements are the highest load with corporate income tax and VAT taking the longest time to process.
You Need the Right Leadership for Your Business
The Philippines is, of course, a different country to yours. It has different practices, customs, and culture. Some processes seem incredibly ineffective and designed to frustrate you but likely have sound reasons for being the way they are.
To manage the setup and build most effectively, you can hire a local expat or despatch someone from your head office to “translate” what’s happening into terms you can relate to. They will drive action when it slows, and be your conduit of information in a familiar format.
Sending or hiring an expat is an expensive exercise. The Philippines is considered a “hardship posting”; a term used to define locations where living conditions are difficult due to climate, crime, health care, pollution or other factors. This means there is a standard of living, standard of safety and an expectation of lifestyle that needs to be fulfilled. Sending an expat “on the cheap” will mean you have a very unhappy member of your workforce when they realise the inclusions in their friends’ employment packages are missing from their own. And this is the person you’ve sent to implement a significant company strategy.
Hiring a localized Westerner can be a lower cost option as they will already be established and have potentially adjusted their expectations on benefits. The downside to this, of course, is they may not understand your company culture.
Attracting and Retaining Talent Is a Huge Challenge
One aspect of Filipino culture is the attraction of brand names and this extends into the workforce. If your company is small with a name unknown in the local market, you will struggle to compete with well-known companies for top talent. How will you lure these folk from the big names to your company? What benefits will you need to offer to entice them from organisations able to offer a multitude of career advancement opportunities due to their size and scale?
Hiring from a different culture also has challenges. Filipinos conduct themselves differently in interviews than you might be accustomed to, which means you may inadvertently make a bad hire, or you may miss out on an exceptional candidate by not understanding subtle differences in style.
There Are Hidden Costs
In establishing your company, you may uncover, in your first year of operation, a multitude of unanticipated costs. These can include:
13th-month payment – this is a statutory payment made to all Filipino workers in December and is equivalent to a full month’s salary.
Annual bonus – most companies offer a bonus as standard, equivalent to one or two months’ salary
Social and Welfare – it is the norm for staff to have a “summer outing” each year, to celebrate Halloween and Christmas, and to participate in Corporate Social Responsibility programs
Janitorial and Messenger – because of the climate, the infrastructure, and the bureaucracy, you may find you need additional back office staff to keep your premises clean, to pay bills and run errands
Based on our experience living and working in the Philippines, establishing a company and setting up three offices, we estimate it is not cost effective to go through this process for less than 50 staff. That is the approximate number of staff you will achieve sufficient cost savings to justify the time, cost and back-office expense for return on investment.
Yempo offers a very easy way to sample the benefits that offshoring to the Philippines can provide. Our exit terms are clear and simple and we even let you take your Yempo employees with you should you decide to set up your own company.
About the Author: Michelle Fiegehen is the CEO of Yempo, a boutique offshoring company in three locations in the Philippines. She has lived and worked in the Philippines and India since 2009, building offshore capability for clients in Australia, United States, Canada, United Kingdom, Singapore and Hong Kong.