Setting up in the Philippines: What you need to know
As the business world continues to respond to the challenges created by the Covid-19 pandemic, it’s looking increasingly clear that some trends are going to continue, even if the world manages to return what was considered normal before 2020. More people are working remotely than ever before, and those numbers are likely to stay high even if offices become safe spaces to work. And distributed teams will continue to promulgate as more companies look to expand overseas.
Not surprisingly, the Philippines has been a major target for outside expansion. It offers affordable labor costs and a population where some 80% of the citizens speak English at a high level. The people are known for hard work and strong values. The Philippines also has relatively low costs in terms of taxes paid by the employer compared to many other locations.
Before getting started, however, it’s useful to consider some of the basics, including how to get started in the new location, how you plan to pay your employees to ensure legal compliance, and some essential labor laws to avoid problems later.
1. Incentives for Foreign Companies to Open Branches in Philippines
The government of the Philippines offers a set of incentives for companies to open branches in the country. There are currently more than 400 economic zones throughout the country offering different types of incentives to foreign companies.
In June, the government announced the opening of 12 new zones specializing in hi-tech and manufacturing. Under the Philippine Economic Zones Authority (PEZA), companies that partake of the new opportunities will receive an income tax holiday of 3-6 years, a preferential tax rate the tax holiday finishes, and additional deductions for labor costs.
Other incentives include tax credits to companies that use local materials for export, and duty-free import of materials for manufacturing.
2. Termination Requires Just or Authorized Cause
In the Philippines, terminations are serious business. You can only fire someone for a serious breach of company policy (or a violation of the country’s labor code), and the burden of proof is on the employer, not the employee. In the case of a just cause dismissal, there is no severance pay required on the part of the employer.
Another type of recognized termination is known as recognized cause. That is when a company must downsize or cut jobs for financial reasons, not because of the actions or performance of the employee. In that case, it is considered a recognized termination and the employer must provide 30 days’ notice and severance pay equal to one months’ pay for every year the employee was with the company.
The same applies in the other direction as well. An employee must provide 30 days’ notice when resigning from a company.
3. The 13th Month Salary
Employees are entitled to at least five days of paid vacation, a wide range of paid holidays, and a major bonus known as the 13th month salary.
The term refers to the bonus being outside the regular 12 monthly paychecks that employees receive. However, most employees in the Philippines are paid twice a month, on the 15th and 30th of the month. The reference to the 13th month salary is simply a way of expressing that it is a significant bonus, equivalent to a whole months’ pay.
Employers are required to provide the bonus by the 24th of December. It is usually delivered in two parts – half at the start of the school year in June and the other half ahead of the Christmas holiday. (For more information see this guide: https://papayaglobal.com/countrypedia/country/philippines/).
4. Hiring Employees Legally Without an Entity
Traditionally, only large, multinational companies had the time and money to expand overseas because the process of opening legal entities was costly, cumbersome, and time-consuming. In recent years, however, the situation has changed dramatically. Today, any business – even a small office with a few employees – can open a branch almost anywhere in the world with full legal compliance.
With the advent of the Employer of Record (EoR), companies from abroad can open an office in the Philippines, pay their employees properly, withhold all necessary taxes, and provide competitive benefits without opening an entity.
This is how it works: the EoR serves as the legal employer for the people you want to hire. The EoR functions as an outsourced administrative office, handling all of the workforce management issues such as payroll, keeping track of hours and paid time off, and creating payslips. Meanwhile, your company directs the employees in their day-to-day tasks. It’s the quickest and easiest way to start a business in the Philippines.
5. When to Open an Entity
Ultimately, every successful business in the Philippines will eventually have a legal entity in the country. It’s the most stable way to have a presence, and allows for the most business options. Some local businesses may not want to engage in partnerships until you open an entity because they want to know that you plan to be around for the long term.
The question, however, is when you should do it. If you are making a long-term commitment to the Philippines and are not in a major hurry to get started, you can start the process immediately and wait out the 2-3 months it takes to get started.
If you are less certain and want to try a test run to see if your business is viable before making a commitment, you can start with an EoR, and grow the office slowly. After a few years and about 10-15 employees, it becomes more cost efficient to switch to a legal entity. The business has proven stable and growing, and you are ready to take the leap to having legal status in the country.
