Business Operations in the Philippines (Portfolio 7290)

Tax Management Portfolio, Business Operations in the Philippines, No. 7290, contains general information designed to enable U.S. and other foreign investors to evaluate the legal and tax factors relevant to conducting business operations in the Philippines. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Business Operations in the Philippines, No. 7290, contains general information designed to enable U.S. and other foreign investors to evaluate the legal and tax factors relevant to conducting business operations in the Philippines.

Chapter I provides an overview of the Philippines, its economy and its government. Chapter IIof the Portfolio contains a detailed analysis of the incentives available for and the regulations governing investment in the Philippines. Chapter III discusses the various forms through which U.S. and other foreign businesses may conduct their operations in the Philippines. Chapters IV-XIV discuss the various Philippine taxes, including the relevant parts of the Philippines-United States tax treaty, and their application to foreign businesses and alien individuals. Chapter XV discusses the legal remedies available to taxpayers in relation to deficiency tax assessments and claims for the refund of taxes erroneously paid or illegally collected.

This Portfolio may be cited as Romulo, Valer, and Fernandez, 7290 T.M., Business Operations in the Philippines.

Authors

Ricardo J. Romulo

Ricardo J. Romulo, B.S., cum laude, Georgetown University (1955); J.D., Harvard Law School (1958); Senior Partner, specializing in foreign investments and taxation, Romulo, Mabanta, Buenaventura, Sayoc & de los Angeles; Trustee, Makati Business Club and Member, Philippines-United States Business Council; Member, 1986 Constitutional Commission, which drafted the present Constitution of the Philippines; former President, Philippine Bar Association. Honorary Consul General to Denmark (2002-2010), decorated by Pope John Paul (1997) and Queen Margarethe of Denmark (2010).

Priscilla B. Valer

Priscilla B. Valer, B.S., cum laude, University of Sto. Tomas (1985); J.D., second honors, Ateneo de Manila University (1992); Partner, specializing in taxation, Romulo, Mabanta, Buenaventura, Sayoc & de los Angeles and Director, Tax Management Association of the Philippines.

Jayson L. Fernandez

Jayson L. Fernandez, A.B. (1991) and J.D. (1995), second honors, Ateneo de Manila University; Partner, specializing in taxation, Romulo, Mabanta, Buenaventura, Sayoc & de los Angeles and member, Tax Management Association of the Philippines.

Table of Contents

Detailed Analysis
I. The Philippines — The Country, Its People, Economy and Government
A. Overview
1. Geography and Climate
2. People, Language and Religion
3. History
B. Economy
1. Agriculture
2. Manufacturing and Industry
3. Services
4. Other Notable Sectors
a. Mining
b. Energy
C. Government
II. Operating a Business in the Philippines
A. Foreign Investment Regulations in General
1. Opportunities
2. Incentives
a. Investments Registered with the Board of Investments
b. Qualified Investors
c. Pioneer and Non-Pioneer Enterprise
d. Non-fiscal Incentives
e. Fiscal Incentives for Board of Investments-Registered Enterprises
f. Incentives for Board of Investments-Registered Enterprises in Less-Developed Areas
g. Incentives for Tourism Enterprises
(1) Definitions
(2) Investor Incentives
(3) Incentives for Tourism Enterprises
3. Restrictions
a. Natural Resources
b. Public Utilities
c. Other Economic Areas
(1) Retail Trade Business
(2) Banking
(3) Investment Houses
(4) Finance Companies
4. Sanctions
a. Foreign Corporations Doing Business Without a License
b. Violations of the Foreign Investments Act of 1991
c. Violations of Executive Order No. 226
B. Investment Incentives Under Special Laws
1. Philippine Economic Zone Authority
a. Creation
b. Incentives for Special Economic Zone and Information Technology Locators
2. Subic Bay Freeport Zone and the Clark Special Economic Zone
a. Qualified Enterprises Within the Zones
(1) Subic Bay Freeport and Special Economic Zone Enterprise
(2) Clark Special Economic Zone Enterprise
(3) Residents of Clark Special Economic Zone and Subic Bay Freeport and Special Economic Zone
b. Incentives to Clark Special Economic Zone Enterprises, Subic Bay Freeport and Special Economic Zone Enterprises, Subic Bay Freeport/Clark Special Economic Zone Residents
3. Incentives Under the Oil Exploration and Development Act
a. Service Contractors
b. Subcontractors of Service Contractors Engaged in Petroleum Operations
4. Incentives Under the Exploration and Development of Geothermal Resources Act
5. Incentives Under the Philippine Mining Act of 1995
6. Incentives Granted Under the Coal Development Act
7. Incentives for Foreign Banks Operating Offshore Banking Units
8. Incentives Under the Special Purpose Vehicle Act of 2002
a. Incentives and Exemption Privileges
b. Additional Tax Exemptions and Fee Privileges
c. Privileges of Participating Financial Institutions
9. Special Incentives for Multinational Companies Establishing Regional or Area Headquarters in the Philippines
10. Special Incentives for Regional Operating Headquarters
11. Special Incentives for Multinational Companies Establishing Regional Warehouses to Supply Spare Parts or Manufactured Components and Raw Materials to the Asia-Pacific Region and Other Foreign Markets
12. Incentives Under the Renewable Energy Act of 2008
C. Currency and Exchange Controls
D. Trade and Commerce Regulation
1. Imports and Exports
a. General
b. Licenses and Quotas
c. Customs Duties and Other Taxes
d. Documentation
2. General Regulation of Business
a. Monopolies and Combinations in Restraint of Trade
(1) Philippine Constitution
(2) Revised Penal Code
(a) Enforcement
(b) Damages
(c) Injunctive Relief
(3) New Civil Code
(4) Jurisprudence
(5) Case Law
b. Antitrust Legislation
(1) The Philippine Constitution
(2) Philippine Competition Act
(3) The Price Act
(4) The Intellectual Property Code of the Philippines
(5) The Consumer Act of the Philippines
(6) Corporation Code of the Philippines
c. Merger and Consolidation
d. Price Controls
e. Securities Regulation
(1) Sale of Securities
(2) Registration Requirements
(3) Civil Liability for Damages
(a) False Registration Statement
(b) Statute of Limitations
(4) Tender Offers
(5) Independent Directors
(6) Protection of Investors in Trading of Securities
(7) Disciplinary Powers of Securities and Exchange Commission with Respect to Self-Regulatory Organizations
(8) Regulation of Pre-Need Industry
(9) Sanctions
(a) Administrative Sanctions
(b) Penal Sanctions
f. Money Laundering
(1) Covered Institutions
(2) Covered Transactions
(3) Suspicious Transactions
(4) Obligations Under the Anti-Money Laundering Act
(5) Customer Acceptance Policies
(6) Anonymous, Fictitious or Numbered Accounts
(7) Penalties
3. Licensing and Franchising in the Philippines
a. Patents
(1) Patentability
(2) Rights Conferred
(3) Compulsory Licensing of Patents
(a) Grounds
(b) Interdependence of Patents
(c) Semi-Conductor Technology
(d) Requirement
(e) Period for Filing
(f) Terms and Conditions of Compulsory License
(4) Voluntary Licensing
(a) Prohibited Provisions
(b) Mandatory Provisions
(c) Exceptions
(d) Registration
b. Trademarks and Trade Names
(1) Registration of Marks
(2) Rights Conferred by Registration
(3) Assignment and Transfer of Application and Registration
(4) License Contracts
(5) Trade Names or Business Names
c. Copyright
(1) Original and Derivative Works
(2) Ownership of Copyright
(3) Transfer, Assignment and Licensing of Copyright
(4) Copyright/Economic Rights Granted
(5) Limitations on Copyright
(6) Moral Rights
(7) Reprinting of Textbooks
(8) Registration of Rights
E. Immigration Regulations
1. Temporary Visitor Without Visa
2. Temporary Visitor with Visa
3. Treaty Trader/Treaty Investor Visa; Employee of Treaty Trader/Employee of Treaty Investor Visa
4. Permanent Residency Visas for Investors Provided by the Philippine Economic Zone Authority
5. Work and Residency Visas Provided by PEZA
6. Clark Special Economic Zone Visa
7. Subic Bay Freeport Visa
8. Cagayan Economic Zone and Free Port Working Visa
9. Special Investor's Resident Visa
10. Investor in Tourist-Related Project on Tourist Establishment Visa
11. Special Visa to Nonimmigrant for Employment Generation Under Executive Order No. 758
12. Pre-arranged Employee Visa
a. Commercial
b. Missionary
13. Special Nonimmigrant Visa Under Section 47(a)(2) of the Philippine Immigration Act of 1940, as Amended
14. Special Nonimmigrant Visa for Employees of Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies
15. Special Nonimmigrant Visa for Employees of Export Processing Zone Enterprises
16. Special Nonimmigrant Visa for Alien Employees of Offshore Banking Units
17. Special Work Permit
18. Special Resident Retiree's Visa
19. Visa upon Arrival Program
20. Quota or Non-Quota Immigrant
21. Non-Quota Immigrant Visa by Reason of Marriage to a Filipino
22. Non-Quota Immigrant Visa for a Returning Former Philippine Citizen
23. Non-Quota Immigrant Visa for a Returning Resident
24. Temporary Resident Visa
25. Student Visa
26. Special Study Permits
27. Limited Permits to Work
28. “Child” for Purposes of Visa Applications
29. Alien Registration Program
F. Labor Relations
1. Working Hours, Overtime/Rest Day Compensation, Holiday Compensation, Statutory Leave
a. Coverage
b. Working Hours, Overtime/Rest Day Compensation
c. Holiday Compensation
d. Statutory Leave
2. Minimum Wage Rates
3. Right to Self-Organization
4. Collective Bargaining
5. Security of Tenure
6. Strikes and Lockouts
7. Retirement
8. Employment of Nonresident Aliens
G. Financing Businesses in the Philippines
1. Equity Financing
2. Debt Financing
III. Forms of Doing Business in the Philippines
Introductory Material
A. Sole Proprietorships
1. Purpose
2. Registration
3. Liability and Administration
B. Stock Corporation
1. Introduction
2. General Principles
3. Formation
a. Incorporators
b. Articles of Incorporation
(1) Corporate Name
(2) Purpose Clause
(3) Principal Office
(4) Corporate Term
(5) Incorporating Directors
(6) Capital Stock
(a) Par and No Par Shares
(b) Preferred Shares
(c) Nonvoting Shares
(d) Founders' Shares
(e) Redeemable Shares
c. Incorporation Procedure
d. Costs of Incorporation
4. Operation
a. Amendment of Articles
b. Increase and Reduction of Capital Stock
c. Acquisition of Own Stock
d. Corporate Officers
(1) Board of Directors
(a) Liability of Directors
(b) Acts of Disloyalty
(2) Corporate Officers
(3) Common Liabilities of Directors and Officers
(4) Dealings of Directors and Officers of the Corporation
e. Shareholders' Meetings
(1) Regular Meetings
(2) Special Meetings
(3) Place of Meetings
(4) Quorum
f. Directors' Meetings
(1) Regular Meetings
(2) Special Meetings
(3) Place of Meetings
(4) Quorum
g. Books and Records
h. Financial Statements
i. Manual of Corporate Governance
j. Dividends and Other Distributions of Profits
5. Statutory Merger
6. Dissolution
a. Voluntary Dissolution
b. Involuntary Dissolution
7. Liquidation
C. Partnership
1. Introduction
2. General Principles
a. Separate Juridical Personality
b. Elements
c. Parties
3. Formation
a. General Partnership
(1) Formalities
(2) Firm Name
b. Limited Partnership
(1) Formalities
(a) Requirements
(b) Effect of False Statements
(c) Contributions
(d) Amendments
(2) Firm Name
4. Management
a. General Partnership
(1) Obligations of Partners Among Themselves
(2) Obligations of Partners with Respect to Third Parties
(a) General Transactions
(b) Real Property
(c) Liability for Torts
b. Limited Partnership
5. Dissolution and Winding Up
a. General Partnership
(1) Nature
(2) Grounds
(3) Effect on Authority of Partners
(4) Effects on Liabilities of Partners
(5) Authority to Wind Up
(6) Rights of Partners
(7) Settlement of Accounts
(8) Rights of Creditors in the Case of Continuation of the Business
(9) Rights of Withdrawing Partner in the Case of Continuation of the Business
b. Limited Partnership
(1) Grounds for Dissolution
(2) Settlement of Accounts
(3) Formalities
D. Branch or Representative Office of a Foreign Corporation
1. Registration
2. Liability
3. Books and Records
4. Reporting Requirements
E. Other Business Entities
1. Joint Ventures
2. Regional or Area Headquarters
a. Registration
b. Liability
c. Reporting Requirements
3. Regional Operating Headquarters
a. Registration
b. Liability
c. Reporting Requirements
F. Other Registration Requirements
1. Registration of Business Name
2. Permit to Operate
3. Registration with the Bureau of Internal Revenue
IV. Principal Taxes
A. Sources of Authority in Tax
1. Legislative
a. Organization of the Tax Law
b. Other Legislative Documents that Can Be Used to Interpret the Law
c. Legislative Process
d. Constitutional Challenge
2. Administrative
3. Courts
B. Principal Taxes Outlined
1. Income Tax
2. Estate and Donor's Taxes
a. Estate Tax
(1) Person Liable
(2) Territorial Scope of Estate Tax
(3) Taxable Base
(a) Gross Estate
(b) Exempt Transfers
(c) Deductions
(d) Tax Credit
(4) Estate Tax Rates
(5) Time and Place of Payment
(6) Tax Clearance Requirement
b. Gift Tax
(1) Person Liable
(2) Territorial Scope of Gift Tax
(3) Taxable Base of Gift Tax
(a) Taxable Property
(b) Exempt Transfers
(c) Tax Credit
(4) Gift Tax Rates
(5) Time and Place of Payment
(6) Tax Clearance Requirement
3. Value-Added Tax
a. Concept of Value-Added Tax
b. Persons Subject to Value-Added Tax
c. Transactions Not Subject to Value-Added Tax
d. Transactions Subject to 0% Value-Added Tax
e. Payment of Value-Added Tax
4. Other Internal Revenue Taxes
a. Excise Taxes
b. Percentage Taxes
c. Stock Transaction Tax
d. Documentary Stamp Tax
(1) Rates of Documentary Stamp Tax
(2) Documents Not Subject to Documentary Stamp Tax
5. Inland Withholding Taxes
a. Payroll Taxes
(1) Withholding Tax on Wages
(a) Persons Liable
(b) Taxable Base
(2) Fringe Benefits Tax
(a) Person Liable
(b) Tax Rate
(c) Inclusions and Exclusions
(i) Taxable Fringe Benefits
(ii) Exempt Fringe Benefits
b. Creditable Expanded Withholding Tax
(1) Persons Liable
(2) Income Payments Subject to Creditable Withholding Tax and Applicable Rates
c. Final Income Tax
6. Local Taxes
a. In General
b. Fundamental Principles of Local Taxation
c. Limitations
d. Local Tax Rates
e. Real Property Tax
(1) In General
(2) Fundamental Principles
(3) Accrual and Payment
V. Taxation of Domestic Corporations
A. What Is a Domestic Corporation?
1. Corporation
2. Domestic Corporation
B. Corporate Income Tax
1. Taxation of Worldwide Income
a. Normal Corporate Income Tax
b. Minimum Corporate Income Tax
c. Special Tax Rates on Certain Income
d. Tax on Improperly Accumulated Earnings
2. Accounting
a. In General
b. Accounting Period
c. Accounting Methods
(1) Accounting for Long-Term Contracts
(2) Installment Sales
(a) Dealers in Personal Property
(b) Real Property; Casual Sales of Personal Property
d. Inventories
e. Reserves
f. Net Worth-Expenditure Method
3. Calculation of Gross Income
a. In General
b. Capital Gains
(1) Definition of “Capital Assets”
(2) Sale of a Business
(3) Distribution in Liquidation
(4) Exceptions
(a) Mergers
(b) Definition of “Merger” or “Consolidation”
(c) Transfer of Assets to a Corporation
(d) Basis of Property
c. Dividend Income
(1) Cash or Property Dividends
(2) Stock Dividends
(3) Sources of Distribution
d. Income from Foreign Sources
e. Other Inclusions in Gross Income
(1) Sale of Patents or Copyrights
(2) Sale of Goodwill
(3) Condemnation of Property
(4) Cancellation of Indebtedness
(5) Acquisition or Disposition by a Corporation of Its Own Stock
(6) Retirement by the Corporation of Corporate Bonds
(7) Contribution by Shareholders
f. Exclusions from Gross Income
4. Business Expenses
a. In General
b. Organizational Expenses
c. Traveling Expenses
d. Expenses for Entertainment, Amusement and Recreation
(1) Requisites for Deductibility
(2) Ceiling on Entertainment, Amusement and Recreation Expenses
e. Bribes, Kickbacks and Other Similar Payments
f. Interest
(1) Requisites for Deductibility
(2) Nondeductible Interest
g. Royalties
h. Taxes
(1) Meaning of “Taxes”
(2) By Whom Deductible
(3) Fee or Tax
(4) Foreign Taxes
i. Depreciation and Amortization
(1) Depreciable Property
(2) Capital Sum Recoverable
(3) Methods of Depreciation
(a) Patents and Copyrights
(b) Drawings and Models
(4) Determination of Useful Life
(5) Obsolescence
j. Depletion Allowance
(1) Computation
(2) Accelerated Deduction
k. Charitable Contributions
(1) General
(2) Contributions or Gifts to Favored Donees
(3) Amount Deductible
l. Capital Losses
m. Casualty Losses
(1) When Deductible
(2) Amount Deductible
n. Reserve Accounts
o. Bad Debts
(1) Proof of Uncollectability
(2) Necessity for Legal Action
p. Rents
q. Salaries and Wages
(1) Bonuses
(2) Pensions and Disability Payments
r. Research and Development Expenses
s. Payments to Pension Trusts
t. Other Requirements for Deductibility of Income Payments
u. Optional Standard Deduction
5. Capital Expenditure
6. Loss Carryovers and Carrybacks
7. Filing of Return and Payment of Tax
a. Who Must File
b. When to File
c. Where to File
d. When to Pay
e. Penalties
(1) Quarterly Return
(2) Final Return
8. Consolidated Returns
9. Reorganizations
a. Mergers, Spin-offs, Etc.
b. Liquidation
10. Advance Rulings
a. Types of Rulings
b. Authority to Issue Rulings
(1) Exclusive and Original Jurisdiction
(2) Delegated Authority
(a) Rulings Issued by the Assistant Commissioner, Legal Service
(b) Rulings Issued by the Regional Director
c. Non-retroactivity of Rulings
d. Binding Effect of Rulings
VI. Taxation of Foreign Corporations
A. What Is a Foreign Corporation?
1. Resident Foreign Corporation
a. Definition
b. Method of Taxation
c. Tax Rates
(1) Normal Corporate Income Tax Rate
(2) Minimum Corporate Income Tax
(3) Tax on Branch Profits Remittances
(4) Special Tax Rates on Certain Income
2. Nonresident Foreign Corporations
a. Definition
b. Tax Rates
(1) In General
(2) Interest
(3) Dividends
(4) Film Rentals
(5) Other Rentals
(6) Capital Gains on Sale of Shares of Stock
c. Method of Taxation
B. Determination of Taxable Income
1. General Rule
2. Source Rules
3. Income from Sources Within the Philippines
4. Income from Sources Without the Philippines
5. Income from Sources Partly Within and Partly Without the Philippines
a. Where an Independent Factory Price Exists
b. Where No Independent Factory Price Exists
c. Special Cases
6. Rule on Deductions
VII. Taxation of a Branch
Introductory Material
A. Determination of Taxable Income
B. Method of Taxation
C. Subsidiary v. Branch
VIII. Taxation of Partnerships
IX. Taxation of Other Business Entities
A. Representative Office
1. Nature and Permissible Activities
2. Income Tax
3. Permanent Establishment Issues
4. Value-Added Tax
5. Withholding Tax
B. Regional or Area Headquarters
1. Income Tax
2. Branch Profits Remittance Tax
3. Withholding Tax
4. Value-Added Tax
5. Local Tax
6. Importation of Training Materials
C. Regional Operating Headquarters
1. Income Tax
2. Branch Profits Remittance Tax
3. Withholding Tax
4. Value-Added Tax
5. Local Tax
6. Importation of Training Materials
X. Taxation of Individuals — Residents
A. Global Net System
B. Taxation of Resident Citizens and Resident Foreigners
1. Resident Citizens
2. Resident Foreigners
a. Manner of Taxation
b. Residence
3. Allowances
4. Premium Payments
5. Tax Rates
a. In General
b. Citizens Employed by Regional or Area Headquarters, Regional Operating Headquarters, Offshore Banking Units or Foreign Petroleum Service Contractors and Sub-contractors
c. Foreigners Employed by Regional or Area Headquarters, Regional Operating Headquarters or Offshore Banking Units
d. Foreigners Employed by Foreign Service Contractors
6. Payment of Tax
7. Fringe Benefits
8. Exclusions from Gross Income
9. Deductions
a. Itemized Deductions
b. Optional Standard Deduction
10. Passive Income
XI. Taxation of Individuals — Nonresidents
A. Nonresident Citizens
B. Nonresident Foreigners
1. Nonresident Foreigners Engaged in Trade or Business in the Philippines
2. Nonresident Foreigners Not Engaged in Trade or Business in the Philippines
XII. Intercompany Pricing
A. Adjustment of Intercompany Prices — Scope of the Provision
B. Determination of Arm's-Length Price
1. The Comparable Uncontrolled Price Method
2. The Resale Price Method
3. The Cost Plus Method
4. The Profit Split Method
5. Transactional Net Margin Method
C. Advance Pricing Arrangements and Mutual Agreement Procedure
D. Documentation
XIII. Multinational Corporations
XIV. Avoidance of Double Taxation
A. Foreign Tax Credit
1. In General
2. Conditions
3. Illustrations
4. Foreign Tax Deduction
B. Tax Treaties
1. General
2. Procedure for Claiming Tax Treaty Relief and Treaty Interpretation
3. Taxation of Business Income
4. Planning to Minimize Taxation of Business Income Under the Philippines' Tax Treaties
5. Taxation of Investment Income
a. Taxation Under the Tax Code
b. Taxation Under the Tax Treaties
(1) Dividends
(2) Interest
(3) Royalties
(4) Capital Gains
C. Philippines-United States Tax Treaty
1. Taxation of Business Income
a. Permanent Establishment
b. Business Profits
2. Taxation of Investment Income
a. Income from Real Property
b. Dividends
c. Interest
d. Royalties
e. Capital Gains
D. Exchange of Information Treaties
E. Inter-Governmental Agreement with the United States pursuant to FATCA
XV. Taxpayer Remedies
A. Right of the Government to Collect and Assess
1. Collection
2. Suspension of the Statute of Limitations
3. Statute of Limitations for Criminal Action
B. Judicial Remedies of the Taxpayer
1. Assessment
2. Claim for a Tax Refund or Tax Credit
a. Statute of Limitations
b. Procedure
c. Appeal to the Court of Tax Appeals En Banc and the Supreme Court

Working Papers

Table of Worksheets
Worksheet 1 Articles of Incorporation
Worksheet 2 Model Manual on Corporate Governance
Worksheet 3 Revenue Memorandum Circular No. 4-2003
Worksheet 4 Excerpts from the Manual of Regulations for Foreign Exchange Transactions, the Program for Conversion of Philippine External Debt into Equity Investments, and the Guidelines on Domestic Borrowings of Foreign Firms
Worksheet 5 1976 Philippines-United States Income Tax Treaty
Worksheet 6 Senate Foreign Relations Committee Report on the 1976 Philippines-United States Income Tax Treaty
Worksheet 7 Ratification of the 1976 Philippines-United States Income Tax Treaty
Worksheet 8 List of Countries with Which the Philippines Has In Force Income Tax Treaties and Other Tax-Related Agreements as of March 31, 2018