After India and Singapore, you are now exploring the Philippines. For the next two weeks, you are housed in a condominium in Katipunan, Quezon City, one of Metro Manila’s largest cities where there are plenty of residential and office spaces for sale and lease. You are looking to set up a back-office operation in South East Asia for your startup company.
You’re familiar with how famous the Philippines is for setting up a business process outsourcing operation, but you don’t know fully well the details. Your goal is to start with a team of IT people to manage the website, a group of researchers, and a couple of administrative people. What is the best model for setting up this type of operation in Manila? How much will it cost?
Here are a few things you should know:
An Overview of Manila as BPO Destination
The Philippines’s ranking in the world as a BPO location is always in the top 10 for the past few decades, because of the savings cost and the skills offered by Filipino workers. The command of the English language and the general business environment in Manila, where English is widely spoken, have always been a plus factor.
While the USA remains to be the number one client, Europe, Australia, and New Zealand have also tapped on what the Philippines can offer in terms of outsourcing business processes.
There are three main options to consider and possibly a fourth one. But before you consider any options, you need to figure out whether the operation in the Philippines will be generating revenue or not, as this will have an impact on the kind of taxes you need to pay. If the customers are global, and payments are received in the head office in the USA, then there might be zero to minimal taxes on income to be paid.
Here are the options:
- Establish a domestic corporation. A domestic corporation can be Filipino-owned or fully foreign-owned, provided the foreign entity pays a capitalization fee or paid-up capital of at least $200,000. A typical arrangement is a 60-40 Filipino-Foreign owned split. In this case, a minimum of less than $100 of paid-up capital is required by the Securities and Exchange Commission (SEC). A domestic corporation is also called a subsidiary, which means income earned globally will be subjected to tax.
- Set up a branch office. You will only need to nominate a Filipino or Philippine resident to represent you in the branch. Unlike a domestic corporation or subsidiary, no board of directors is required. Since there is no board, this setup is 100% foreign-owned, but the paid-up capital must be $200,000. If your operation earns income, it will be subject to a 30% income tax.
- Establish a representative office. If you do not expect to earn income from your operation in the Philippines, this is the setup for you. You would still need to register with the local SEC and pay a “bond,” i.e., an inward remittance of $30,000 annually as proof of support for the operation of the office. The representative office is a mere extension of the head office and therefore does not possess a distinct legal entity different from the head office.
Your fourth option is to engage in a contract with someone you trust as a consultant. The head office, therefore, does not have a legal existence in the country apart from hiring the services of the consultant and his company. As the service provider, you’re billed for all the expenses incurred by the operation.