Credit Management September 2023

COUNTRY FOCUS
AUTHOR – Adam Bernstein
The Philippines
is a highly
visited country.
An estimate from
Brittany.com.ph
suggests that there
were over 8m
visitors to the
country before the
pandemic.
It follows – like elsewhere in the world – that
the services sector was curtailed the most
during the pandemic. However, it has shown
a steady recovery in 2022, mainly driven by
the wholesale, retail trade, information and
communication, accommodation and food
service activities, and human health and
social work activities.
Tourism
The Philippines is a highly visited country.
An estimate from Brittany.com.ph suggests
that there were over 8m visitors to the
country before the pandemic started; by 2021
PSA thought the tourism industry accounted
for 5.2 percent of GDP and employed around
4.9m workers in 2021.
Mordor Intelligence backs this view. It
wrote on a page hawking its reports that
“the Philippines' tourism sector increased
by 129.5 percent in 2021, reaching $41bn.”
Quite a feat considering the 80 percent
drop in 2020 when the sector was worth just
$17.8bn as a result of COVID.
Other considerations
It’s never easy to open up a new enterprise
overseas and doing so in the Philippines is
no different. A helpful briefing note from
Viettonkin Consulting, Doing business in
the Philippines in 2022, details that there are
a few challenges to overcome. In particular,
while it’s simple to register a new business,
there are requirements for large amounts
of paid-up capital and some sectors – retail
and agriculture appear to be barred from
receiving foreign investment. Further some
industries appear on the Philippine Negative
List (Executive Order No. 175, s. 2022) and
must be 100 percent domestically owned.
Other issues to counter are a low per capita
income of around $3000 per annum with
25 percent of the population considered in
poverty, and patches of political violence in
at least one location.
Lastly, the Philippines still seems mired in
corruption. The Transparency International
2022 Corruption Perceptions Index placed
the country in 116th place with a score of
just 33. In comparison, the UK was highly
placed in 18th position with a score of 73.
Tax
For domestic resident firms, Corporate
Income Tax (CIT) is, in general, set at 25
percent. However, on net income from all
sources, domestic corporations with total
assets not exceeding PHP 100m and total
net taxable income not exceeding PHP
5m, pay a rate of 20 percent. There is also
Minimum Corporate Income Tax (MCIT)
on gross income, which applies from the
fourth taxable year following the year of
commencement of business operations.
MCIT is imposed where the CIT at 25 percent
is less than 2 percent MCIT on gross income.
For resident foreign businesses, the rate
is 25 percent. The same applies to nonresident
foreign businesses with the added
complications of rates for interest on foreign
loans, dividend income and rentals of
aircraft, machinery, and other equipment.
VAT
The general rate of VAT is 12 percent with
some goods zero rated (such as renewable
power generation, international shipping
and transport) or exempt – there’s a long list
on Asean Briefing – search for A Guide to
Taxation in the Philippines.
Personal
The Philippines taxes its resident citizens
on their worldwide income. Non-resident
citizens and ‘aliens’ are taxed only on income
from sources within the Philippines. Rates
of tax on income of aliens depend on the
nature of their income, that is compensation
income, income subject to final tax, or other
income.
From 1 January 2023, the current rates
of tax are nil on income to PHP 250,000; 15
percent between PHP 250,001 and 400,000;
20 percent between PHP 400,001 and 800,000;
25 percent between PHP 800,001 and 2m; 30
percent between PHP 2,000,001 and 8m; and
35 percent on income above that level.
For resident and non-resident aliens
engaged in trade or business in the
Philippines, the maximum rate on income
subject to final tax (usually passive
investment income) is 20 percent. For nonresident
aliens not engaged in trade or
business in the Philippines, the rate is a flat
25 percent.
Summary
The Philippines has issues that every
exporter will need to counter – geography,
low per capita incomes and corruption. But
that doesn’t mean that it should be ignored.
If anything, as the country grows those
who take a chance could gain first mover
advantage. And with the UK joining the
Comprehensive and Progressive Agreement
for Trans-Pacific Partnership it’s only a
matter of time before the Philippines joins
and the Filipino market opens up further.
Adam Bernstein is a freelance finance writer.
Brave | Curious | Resilient / www.cicm.com / September 2023 / PAGE 37