Doing Business in the Philippines ( BOI Incentives)

By Siesta-friendly

There are many reasons to invest in the Philippines. They could be personal: sun, sea, smiles. Or purely business: cheap skilled labor. But how does our government entice investors in the first place? The Board of Investments (BOI) in fact offers 3 classes of incentives. These incentives are: 1) fiscal, 2) non-fiscal, and 3) incentives for regional headquarters and regional operating headquarters.

But first let’s see exactly how one can be entitled to these incentives.

The Investments Priorities Plan

The IPP lists the preferred areas of investment where the investor may invest and be eligible for BOI incentives. The IPP is issued annually. At the time of this writing, the 2008 IPP[1](approved in May 2008) still applies.

The preferred areas of investment under the current IPP are classified into 4. These are:

1. Preferred Activities which cover: a) agriculture/agribusiness and fishery, b) infrastructure, c) tourism, d) research and development, e) engineered products, and f) strategic activities.

2. Mandatory Inclusions, or those required by law to be included in the IPP. These laws cover: a) Industrial Tree Plantation, b) Exploration, Mining, Quarrying, and Processing of Minerals, c) Printing, Publication and Content Development of Books or Textbooks, d) Refining, Storage, Marketing and Distribution of Petroleum Products, e) Ecological Solid Waste Management, f) Clean Water, and g) Development and Self-Reliance of Disabled Persons.

3. Export Activities namely: a) Manufacture of Export Products/Services, and b) Activities in Support to Exporters

4. ARMM List, or specific projects undertaken in the Autonomous Region of Muslim Mindanao. These cover: a) export activities, b) agriculture, food and forestry-based industry, c) basic industries, d) consumer manufactures, e) infrastructure and services, f) engineering industries, and g) ARMM priority and tourism areas.

You will have to check out the IPP for a more detailed description of each activity falling under a particular area of investment.

BOI Registration

Now, in case you intend to invest in any of the IPP activities above and avail of the incentives, you need to register with the BOI. Pursuant to Art. 32 of the Omnibus Investments Code (OIC)[2], to be entitled to registration under the IPP, you must be:

1) a Philippine citizen, if a natural person; in case of a partnership/association, you must be organized under Philippine laws and at least 60% of its capital is owned and controlled by Philippine citizens; or in case of a corporation/cooperative, you are organized under Philippine laws and at least 60% of the capital stock outstanding and entitled to vote is owned and held by Philippine nationals, and at least 60% of the members of the Board of Directors are Philippine citizens.

If you don’t possess the required degree of ownership by Philippine nationals as mentioned above, the following circumstances must be satisfactorily established:

a) you propose to engage in a pioneer project, which, considering the nature and extent of capital requirements, processes, technical skills and relative business risks involved, is in the opinion of the BOI of such a nature that the available measured capacity thereof cannot be readily and adequately filled by Philippine nationals; or, if you are exporting at least 70% of total production, the export requirement herein provided may be reduced in meritorious cases under such conditions and/or limited incentives as the BOI may determine;

b) you/your enterprise obligate yourselves to attain the status of a Philippine national within 30 years from the date of registration or within such longer period as the BOI may require taking into account the export potential of the project. A registered enterprise which exports 100% of its total production need not comply with this requirement;

c) that the pioneer area you will engage in is one that is not within the activities reserved by the Constitution or other Philippine laws to Philippine citizens or corporations owned and controlled by Philippine citizens.

2) proposing to engage in a preferred project listed or authorized in the current IPP within a reasonable time to be fixed by the BOI or, if not so listed, at least 50% of your total production is for export or you are an existing producer which will export part of production under such conditions and/or limited incentives as the BOI may determine; or that your enterprise is engaged or proposing to engage in the sale abroad of export products bought by it from one or more export producers; or the enterprise is engaged or proposing to engage in rendering technical, professional or other services or in exporting television and motion pictures and musical recordings made or produced in the Philippines, either directly or through a registered trader.

3) capable of operating on a sound and efficient basis and of contributing to the national development of the preferred area in particular and of the national economy in general; and

4) engaged or proposes to engage in undertakings or activities other than preferred projects, must have installed or undertake to install an accounting system adequate to identify the investments, revenues, costs, and profits or losses of each preferred project undertaken by the enterprise separately from the aggregate investment, revenues, costs and profits or losses of the whole enterprise or to establish a separate corporation for each preferred project if the BOI should so require to facilitate proper implementation of the OIC.

Sorry, we can’t make it any more simpler than the above. Now on to the incentives.

Fiscal Incentives[3]

Fiscal incentives fall under 6 categories which are briefly discussed below:

I. Income Tax Holiday (ITH)

BOI-registered enterprises are exempt from the payment of income taxes reckoned from the scheduled start of commercial operations, as follows:

a) New projects with a pioneer status for 6 years;

b) New projects with a non-pioneer status for 4 years;

c) Expansion projects for 3 years. As a general rule, exemption is limited to incremental sales revenue/volume;

d) New or expansion projects in less developed areas (LDAs) for 6 years, regardless of status;

e) Modernization projects for 3 years. As a general rule, exemption is limited to incremental sales revenue/volume.

Export traders may be entitled to the ITH only on their income derived from the following:

i) Export of new products, i.e. those which have not been exported in excess of US$100,000 in any of the 2 years preceding the filing of application for registration, or

ii) Export to new markets, i.e., to a country where there has been no recorded import of a specific export product in any of the two 2 years preceding the filing of the application for registration.

Plus, the following mining activities are not entitled to an ITH:

a) Exploration and development of mineral resources;

b) Mining and/or quarrying without mineral processing; and

c) Mining and processing of aggregates.

New registered pioneer and non-pioneer enterprises and those located in LDAs may avail themselves of a bonus year in each of the following cases:

a) the indigenous raw materials used in the manufacture of the registered product must at least be 50% of the total cost of raw materials for the preceding years prior to the extension unless the BOI prescribes a higher percentage; or

b) the ratio of total imported and domestic capital equipment to the number of workers for the project does not exceed US$10,000 to 1 worker; or

c) the net foreign exchange savings or earnings amount to at least US$500,000 annually during the first 3 years of operation. In no case shall the registered pioneer firm avail of the ITH for a period exceeding eight 8 years.

II. Exemption From Taxes And Duties On Imported Spare Parts

A registered enterprise with a bonded manufacturing warehouse is exempt from customs duties and national internal revenue taxes on its importation of required supplies/spare parts for consigned equipment or those imported with incentives.

III. Exemption From Wharfage Dues And Export Tax, Duty, Impost And Fees

All enterprises registered under the IPP are given a 10 year period from the date of registration to avail of the exemption from wharfage dues and any export tax, impost and fees on its non-traditional export products.

IV. Tax Exemption On Breeding Stocks And Genetic Materials

Agricultural producers are exempted from the payment of all taxes and duties on their importation of breeding stocks and genetic materials within 10 years from the date of registration or commercial operation.

V. Tax Credits

1) Tax credit on tax and duty portion of domestic breeding stocks and genetic materials - A tax credit equivalent to 100% of the value of national internal revenue taxes and customs duties on local breeding stocks within 10 years from date of registration or commercial operation for agricultural producers.

2) Tax credit on raw materials and supplies - A tax credit equivalent to the national internal revenue taxes and duties paid on raw materials, supplies and semi-manufacture of export products and forming part thereof shall be granted to a registered enterprise.

VI. Additional Deductions from Taxable Income

1) Additional Deduction for Labor Expense (ADLE) - For the first 5 years from registration, a registered enterprise shall be allowed an additional deduction from taxable income equivalent to 50% of the wages of additional skilled and unskilled workers in the direct labor force. The incentive shall be granted only if the enterprise meets a prescribed capital to labor ratio and shall not be availed simultaneously with ITH. This additional deduction shall be doubled if the activity is located in an LDA.

2) Additional deduction for necessary and major infrastructure works - Registered enterprises locating in LDAs or in areas deficient in infrastructure, public utilities and other facilities may deduct from taxable income an amount equivalent to the expenses incurred in the development of necessary and major infrastructure works. The privilege is not granted to mining and forestry-related projects which naturally locate in certain areas so as to be near their sources of raw materials.

Non-Fiscal Incentives

The non-fiscal incentives are as follows:

I. Employment Of Foreign Nationals - A registered enterprise may be allowed to employ foreign nationals in supervisory, technical or advisory positions for 5 years from date of registration. The position of President, General Manager and Treasurer of foreign-owned registered enterprises or their equivalent are not be subject to the foregoing limitations.

II. Simplification of customs procedures for the importation of equipment, spare parts, raw materials and supplies and exports of processed products.

III. Importation of consigned equipment for a period of 10 years from date of registration, subject to posting of a re-export bond.

IV. The privilege to operate a bonded manufacturing/trading warehouse subject to Customs rules and regulations.

Incentives for Regional Headquarters (RHQ) and Regional Operating Headquarters (ROHQ) in the Philippines

RHQ are entitled to the following incentives:

I. Exemption on the Payment of Corporate Income Tax - An annual information return of a tax-exempt corporation must be filed with the Bureau of Internal Revenue (BIR) to effect exemption.

II. Exemption on the Payment of Value-Added Tax - The exemption includes the sale or lease of goods and property including the rendition of services to RHQ.

ROHQ, on the other hand, can avail of the following incentives:

I. On Corporate Income Tax - Income derived by the ROHQ from performing qualifying activities are subject to a preferential rate of 10% on taxable income.

II. On Branch Profit Remittance Tax - Any income derived from the Philippines when remitted to the parent company shall be subject to the tax on branch profit remittances.

III. On Value-Added Tax - ROHQ are subject to 10% value-added tax unless otherwise provided under the National Internal Revenue Code.

Following are the exemptions common for both RHQ and ROHQ:

I. Exemption on the Payment of All Kinds of Local Taxes, Fees, or Charges. But payment shall be made for real property tax on land improvements and equipment.

II. Tax and Duty Free Importation of Training Materials and Equipment are applicable to materials not locally available, subject to prior BOI approval.

III. Sale or disposition of equipment within 2 years after importation, entered tax and duty free, requires prior BOI approval and prior payment of applicable taxes and duties.

IV. Entitlement to Importation of New Motor Vehicles and subject to the payment of the corresponding taxes and duties.

Finally, under RA 8756[4], the following incentives are given to expatriates of a registered RHQ/ROHQ in the Philippines:

I. Multiple Entry Visa - issued to expatriates, their respective spouses and unmarried children under 21 years old. A non-immigrant visa shall be issued within 72 hours upon submission of all required documents.

The multiple entry visa is be valid for 3 years and extendible for another 3 years upon submission to the Bureau of Immigration of a sworn certification by a responsible officer of the RHQ/ROHQ that its license to operate remains valid and that it complied with all requirements stipulated under relevant Philippine laws.

II. Withholding Tax of 15% on Compensation Income is applied to both alien and Filipino executives holding managerial or technical positions.

III. Tax and Duty Free Importation of Personal and Household Effects is applicable on imports made within 90 days before or after conversion of the alien executive's admission category to multiple entry visa.

IV. Travel Tax Exemption - issued by the Philippine Tourism Authority upon recommendation by the BOI during the period of the expatriate's assignment in the country.

We think the incentives are worth it. We also think not a lot of people are aware of these benefits. So give them a good read. In case you want to know more, you may just inquire with the BOI. We can’t give you any more info without already billing you for it =)

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[1] 2008 Investments Priorities Plan. Retrieved April 28, 2009, from Philippine Board of Investments Web site: http://www.boi.gov.ph/pls/portal/docs/PAGE/BOIINDEXPAGE/DOING%20BUSINESS/OPPORTUNITIESTAB/IPPTAB/2008IPPCOMPLETE.PDF

[2] Executive Order No. 226, July 16, 1987.

[3] Fiscal Incentives. Retrieved April 28, 2009, from Philippine Board of Investments Web site: http://www.boi.gov.ph/

[4] “An Act Providing For The Terms, Conditions And Licensing Requirements Of Regional Or Area Headquarters, Regional Operating Headquarters, And Regional Warehouses Of Multinational Companies, Amending For The Purpose Certain Provisions Of Executive Order No. 226, Otherwise Known As The Omnibus Investments Code Of 1987”, November 23, 1999.

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