Setting Up A Manufacturing Business In The Philippines

How to move or set up a manufacturing company in the Philippines? Find an overview of current market insights in your industry as well as what are the legal requirements you should know in advance. Overview of the Philippine Manufacturing Industry The Philippine economy grew 6.8% in the first quarter of 2018 and manufacturing is […]

How to move or set up a manufacturing company in the Philippines? Find an overview of current market insights in your industry as well as what are the legal requirements you should know in advance.

Overview of the Philippine Manufacturing Industry

The Philippine economy grew 6.8% in the first quarter of 2018 and manufacturing is one of the driving forces of the economic growth. Today it makes nearly a quarter of the Philippines Gross Domestic Product (GDP). Also, manufacturing is currently the third best performing sector of the year.

Manufacturing Production Growth in the Philippines

Manufacturing production has recently seen a healthy growth as well:

manufacturing company in the PhilippinesThe fastest growing industries are ultimately:

  • Printing
  • Petroleum products
  • Beverages
  • Miscellaneous manufactures
  • Machinery except electrical
  • Food

Wages for Manufacturing Industry in the Philippines

The Philippine wages are overall divided by sector and region. There is a government-mandated minimum wage, which is set by tripartite regional wage boards. According to Salary Explorer, the average monthly salary for Factory/Manufacturing is PHP 43,782 (~ $US 815.319). The highest salaries are paid in Dasmarinas, whereas the lowest manufacturing income is statistically in Pasig.

Average Capacity Utilization Rate for Manufacturing

Capacity utilization rate demonstrates the productivity and market potential. February 2018 recordings showed that the average for total manufacturing was 84.21%. Also, 11 of the 20 major industries were operating at an 80% and above capacity utilization rate:

  • Petroleum products (89.6%)
  • Basic metals (89.0%)
  • Non-metallic mineral products (86.8%)
  • Machinery except electrical (85.9%)
  • Food manufacturing (85.5%)
  • Electrical machinery (85.0%)
  • Chemical products (84.5%)
  • Paper and paper products (83.5%)
  • Rubber and plastic products (82.9%)
  • Wood and wood products (81.3%)
  • Printing (81.2%)

Note that new excise taxes were applied at the beginning of 2018, which also had an impact on the business activity growth. However, the demand is expected to return once the tax hikes fade along with the help of public infrastructure projects.

Incentives for a Manufacturing Company in the Philippines

It is vital for a starting business to know that the governmental projects are in place. Thus, before you set up a company in the Philippines, you need to learn about the available incentives in your industry.

Let’s discuss further about the Board of Investment (BOI) as well as the Philippine Economic Zone Authority (PEZA) – both of whose efforts are especially valuable for a manufacturer in the Philippines.

Philippine Economic Zone Authority (PEZA) Incentives in the Philippines

There are benefits that a company in the Philippines only receives after having registered with Philippine Economic Zone Authority (PEZA). PEZA is representing several non-fiscal and fiscal incentives to entrepreneurs, the fields that benefit from the registration the most are:

  • Export Manufacturing
  • Agro-industrial Export Manufacturing
  • Agro-industrial Bio-Fuel Manufacturing

One of the fiscal incentives is receiving the Income Tax Holiday (ITH), which means being 100% exempt from corporate income tax. Here are the benefits that reflect based on your registration with PEZA:

PEZA Fiscal Incentives
Applicable Period
  • Four years Income Tax Holiday for a Non-pioneer Project
  • Six years Income Tax Holiday for a Pioneer Project
Three years Income Tax Holiday for an Expansion Project (ITH applies to incremental sales).
Terms of Extension
  • Project with minimum US$ 500,000.00 as average net foreign exchange earnings for the first three years of operations
  • Project capital equipment to labor ratio does not exceed US$ 10,000.00 to one for the year preceding the ITH extension year
  • The average cost of indigenous raw materials used in the manufacture of the registered product makes minimum fifty percent of the total cost of raw materials for the preceding years prior to the ITH extension year.

Each of the above points equals to one ITH extension year. Also, these apply only if the total ITH entitlement period has not exceeded eight years.

Upon ITH expiry, a 5% special tax applies on gross income. You are then exempt from all national and local taxes.
Benefits
  • Tax and duty free importation of raw materials, capital equipment, machineries and spare parts
  • VAT zero-rating of local purchases, which is subject to compliance with Bureau of Internal Revenue (BIR) and PEZA requirements
  • Exemption from wharfage dues and export tax, impost or fees as well as from expanded withholding tax
  • Freedom of payment of any and all local government imposts, fees, licenses or taxes*

* There is no exemption from real estate tax. Although, machineries installed and operated in the economic zone for manufacturing, processing or for industrial purposes are exempt from real estate taxes for the first three years of operation of such machineries. As well as production equipment not attached to real estate is exempt from real property taxes.

PEZA Non-fiscal Incentives
  • Simplified Import-Export Procedures (Electronic Import Permit System and Automated Export Documentation System).
  • Non-resident foreign nationals may be employed by PEZA-registered Economic Zone Enterprises in supervisory, technical, or advisory positions.
  • Special Non-Immigrant Visa with Multiple Entry Privileges for the non-resident foreign nationals in a PEZA-registered Economic Zone Enterprise (Investor/s, Officers, and Employees in supervisory, technical, or advisory positions, and their spouses and unmarried children under twenty-one years of age).Simplified Import-Export Procedures (Electronic Import Permit System and Automated Export Documentation System).
  • Non-resident foreign nationals may be employed by PEZA-registered Economic Zone Enterprises in supervisory, technical, or advisory positions.
  • Special Non-Immigrant Visa with Multiple Entry Privileges for the non-resident foreign nationals in a PEZA-registered Economic Zone Enterprise (Investor/s, Officers, and Employees in supervisory, technical, or advisory positions, and their spouses and unmarried children under twenty-one years of age).

If you are an economic zone developer or operator and register with PEZA, the specific incentives that apply to you are:

  • 5% tax on gross income and exemption from all national and local taxes, except real property tax on land owned by the Economic Zone Developer
  • VAT zero rating of local purchases
  • Exemption from expanded withholding tax

Board Of Investments (BOI) Incentives in the Philippines

If your business is capable of contributing to the national economy or the development of a preferred area of business then you are eligible to apply for the BOI incentives. In manufacturing industry, such enterprises may handle:

  • Motor vehicles
  • Shipbuilding
  • Aerospace parts and components
  • Chemicals
  • Virgin paper pulp
  • Copper wires and rods
  • Basic iron and steel
  • Tool and die
  • Green manufacturing

Manufacturing Projects That Qualify for BOI Climate Incentives

BOI has also launched the Climate Incentives for Manufacturing (CLIMA). The goal of this incentive is to encourage energy efficiency and conservation.

CLIMA investment is for projects that involve the manufacturing of goods and for developing facilities related to efficient use of energy. Utilizing either should prove an efficient use of natural resources, energy, raw materials. Or, instead, reduce pollution or greenhouse gas emissions.

Qualified projects receive capital equipment incentives and Income Tax Holiday (ITH). Companies can avail of the incentive between 1 to 10% of capital equipment cost in import duty exemption (given that the installation of new equipment qualifies for registration as a modernization project). You may also avail of ITH equivalent to 50% of the cost of the installed new energy-efficient equipment, which means it will be reckoned one year after installation of said equipment.

Key Employment Regulations in the Philippines

It is essential to know the basic labor laws if you plan to set up a company in the Philippines. For this reason we recently dedicated a full blog post on how to hire in the Philippines. Moreover, our recruiters will gladly advise you on any employment matters you are currently having difficulties with.

However, it is equally important to have a clear understanding about how to terminate a contract. Wrongful termination of an employee is a strong offence in the Philippines which may even lead you to court.

There are Two Types of Employee Termination

Termination can be a very complex process and thus it is always taken seriously. There are two types of termination in the Philippines:

  • Termination by employer
  • Voluntary resignation (termination by employee)

If an employer wants to terminate the contract then the decision must be based on a just or  authorized cause. Just causes are those that involve wrongful behavior and negligence by an employee. Authorized causes on the other hand refer to any lawful grounds for termination.

Employee can also resign voluntarily if they wish to disengage from employment for personal reasons. Although, forcing an employee to resign does not categorize in any rightful termination.

The Employer’s Right to Terminate a Contract

If you find that an employee’s contract must be terminated then you need to follow the regulations coming from the Labor Code. According to the law, the just causes give you the right to follow through with the termination if there has been:

  • Serious misconduct as well as willful disobedience by the employee of the lawful orders of their employer or representative in connection with their work
  • Gross and habitual neglect by the employee of their duties
  • Fraud or willful breach by the employee of the trust reposed in them by their employer or duly authorized representatives
  • A crime or offense by the employee against the employer or any immediate member of their family or their duly authorized representatives

You can also terminate an employee due to authorized reasons like business or health.

Separation Pay

Philippine laws indicate the separation pay submission only to those who were dismissed from service not due to their own fault or negligence but for reasons that are beyond their control. Also, the amount depends on the exact authorized cause for termination.

Setting Up a Foreign-owned Company in the Philippines

Only a company with more than 40% of foreign ownership classifies as a foreign company. As a foreign national, you can hold shares or control in the following three legal entities:

  • Branch
  • Representative office
  • Domestic corporation

Domestic Corporation in the Philippines

Majority of the foreign investors in the Philippines usually choose to set up a domestic corporation. They do so for the convenient conditions of a corporation:

  • Liability is limited to the equity of the company
  • Setup time is much faster and easier compared to a branch
  • Unlike representative offices, domestic corporations can earn revenue in the Philippines

There are two types of domestic corporations that include foreign ownership:

  • Fully foreign-owned domestic corporation (up to 100% foreign owned)
  • 60/40 domestic corporation (maximum 40% foreign ownership)

If you are thinking of setting up a domestic corporation in the Philippines, note that the total incorporation period is around 6-8 weeks. Also, learn how to form a corporation and read furthermore from our complete guide to setting up a company in the Philippines.

Minimum Capital Requirements in the Philippines

The minimum capital requirements in the Philippines mostly depend on foreign-ownership percentage:

Amount of Minimum CapitalMinimum capital applies to
$US 200,000General requirement for foreign-owned businesses
$US 100,000Businesses considered as a pioneer, employs at least 50 Filipinos or uses advanced technology
$US 30,000Paid up capital for representative offices
P 5000 ( ~ $US 100)Businesses exporting at least 60% of its products or with at least 60% of local ownership

The minimum investment amount also depends on the activities you plan to conduct further down the line. Yet, at the same time there are smart ways to lower the required minimum capital requirement in the Philippines.

Structure of a Domestic Corporation

In order to set up a domestic corporation in the Philippines you need to appoint at least three corporate officers:

  • President
  • Corporate Secretary
  • Treasurer

Treasurer will sign a document called Treasurer’s Affidavit to ensure that your company is complying with the authorized, subscribed, and paid up capital requirements. Thus, a Corporate Treasurer needs thorough knowledge of the local compliance requirements. Additionally you need a Corporate Secretary that has to be a Filipino citizen. Although, the latter citizenship restriction applies neither to a Company’s President nor a Treasurer.

In conclusion, the Corporate Secretary and Treasurer will be very much involved in the process of incorporation. Hence, companies often choose an outsourced professional service provider like Emerhub to do this for them.

Requirements for Setting up a Manufacturing Business in the Philippines

  • Minimum 5 natural shareholders/incorporators (legal persons are not allowed) that each owe at least one share in the company
  • Majority of the incorporators (but not shares) have to be residents of the Philippines. Yet, residents don’t have to be citizens
  • 5-15 directors/trustees that all have to own at least one share. Majority of them also have to be residents of the Philippines
  • Minimum paid up capital of $US 200,000 unless the company qualifies for the reduced capital requirements
  • Note that some industries are in the Negative Investment List which also reduces the maximum foreign ownership for certain business classifications. Consult with us to further understand the restrictions in your industry

Contact Emerhub to discuss in detail on how to setup a manufacturing company in the Philippines. Our team will gladly support you by sharing legal advice, preparing documents and doing recruitment for you.

Since 2011, Emerhub has helped over 500 companies of all sizes enter Southeast Asian markets.

Get in touch with Emerhub by filling in the form below to discuss how we can help your business thrive in Indonesia.