Introduction to PHILIPPINES

With a population of about 100 million people, the Philippines, which comprises more than 7,000 islands, is the 12th most populous country in the world. An additional 12 million Filipinos live overseas, representing one of the world's largest diasporas. Economic transformation efforts have been effective over the last decade, and the country enjoyed macroeconomic stability, robust economic growth, a solid external financial position, moderate fiscal deficits and declining government debt-to-GDP ratios.

However, real GDP is expected to decrease by 4.5% in 2020 (after +6% in 2019 and +6.5% on average over the last five years), as the economy has been hard-hit by the COVID-19 shock. Government spending and net exports have not been enough to offset the sharp decrease in private consumption and investment, the two main key drivers of growth (which suffered from high unemployment, depressed remittances and delayed projects due to social distancing measures).

However, while a moderate rebound is expected for 2021, real GDP is projected to continue to grow strongly in the medium term (above 6%), supported by domestic demand. New challenges have emerged, as the external environment has become less growth-supportive, and overheating risks have emerged as the current account deficit continues to widen and credit growth remains strong - although from a low base. In addition, poverty and inequality challenges remain. Duterte’s personality and style of governing also represent a potential risk to the country’s political and institutional stability.

Summary

BNP Paribas presence

BNP Paribas has been present in the Philippines since 1975 with a branch in . The offers a broad range of products and services to its corporate and institutional clients, including loan syndication, bond underwriting, export finance, project and aviation finance; interest rate, foreign currency and commodity hedging and derivatives; correspondent banking and global trade solutions.

Currency

Currency

Philippine Peso (PHP).

Exchange Rates

2015 2016 2017 2018 2019

Exchange rate PHP per USD 45.503 47.492 50.404 52.661 51.80

Source: IMF, International Financial Statistics, July 2020. Central Bank

The Philippines central bank is the Bangko Sentral ng Pilipinas (BSP) (www.bsp.gov.ph).

Bank supervision

The Philippines banking sector is supervised and regulated by the BSP.

Bank accounts

Resident / non-resident status

A company is considered resident in the Philippines if it is incorporated in the Philippines or is licensed to trade or conduct business there.

Bank accounts for resident entities

Inside Philippines Outside Philippines

• Permitted without restriction, convertible subject Local Currency to compliance with foreign exchange transaction • Not permitted rules

• Permitted, convertible subject to • Permitted, convertible subject to compliance with Foreign Currency compliance with foreign exchange foreign exchange transaction rules transaction rules

Bank accounts for non-resident entities

Inside Philippines Outside Philippines

Local Currency • Permitted, convertible with restrictions • Not permitted

Foreign Currency • Permitted convertible with restrictions • Not applicable

Lifting fees

Lifting fees are not applied on payments between resident and non-resident accounts. BNP Paribas Cash Management Capabilities

Liquidity Management

Physical cash pooling

Notional pooling - Balance compensation

Notional pooling - Interest optimisation

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas

Collections

Cash collections

Cheque collections

Direct debit collections

Domestic incoming transfers

Virtual IBAN

Virtual accounts

International incoming transfers

Card acquiring

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas Payments

Cash withdrawals

Cheque payments

Direct debit payments

Domestic outgoing transfers

Commercial cards

Virtual cards

International outgoing transfers

SWIFT gpi

Real-time international payments through BNP Paribas' network

Card issuing

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas

Channels

Local e-Banking

Global e-Banking - Connexis

SWIFT/ host to host

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas Payments & Collections

Market overview

The Philippines has a low card penetration rate; cash remains the dominant payment method in the country. In 2017, only 22.6% of adults had a bank account. However, the Philippine government is committed to accelerating the use of electronic payments. Most recently, the BSP launched the QRPH, the national QR standard. The use of e-payments rose from 1% in 2013 to 10% in 2018. The value of e-payments rose from 8% to 20% over the same period. By the end of 2020, the BSP hopes that 30% of all payments will be digital. In Q4 2019, the Philippines had a smartphone penentration rate of 65%, of this total, 54% used mobile banking.

Electronic banking services are available from most . There is no national electronic banking standard in the Philippines, so companies use bank’s proprietary services. Digital banking services are available. It is expected that Covid-19 will accelerate the adoption of online and mobile banking accounts. The central bank predicts that the share of digital transactions will reach 50% by 2023.

Payment systems

PhilPaSS Type • Real-time gross settlement.

Participants • 173 direct.

• High-value and urgent PHP-denominated interbank transactions. Transaction types processed • Net obligations from the EPCS payment system.

Operating hours • 09:00–17:45 PHT, Monday to Friday.

• Payments are cleared and settled in real time between Clearing cycle details (cut- 09:00–18:00 PHT. off times) • Cut-off time = 18:00 PHT.

• PhilPaSS is closed on all Philippine bank holidays. • The Philippines’ bank holidays are: System holidays • 2nd half 2020: 21, 31 August, 1, 30 November, 25, 30, 31 December. • 2021:1 January, 1, 2, 9 April, 1, 13* May, 12, 24 June, 20* July, 21, 30 August, 1, 30 November, 25, 30, 31 December.

PDDTS Type • Online real-time gross settlement.

Participants • 47 banks.

• Online domestic and third-party account-to-account USD- Transaction types processed denominated interbank transactions.

Operating hours • 06:00–16:00 PHT, Monday to Friday. • Payments are cleared and settled in real time between Clearing cycle details (e.g. 09:00–16:00 PHT.

cut-off times) • Cut-off time = 16:00 PHT. • Philippines is the sole settlement bank for the PDDTS.

System holidays • PDDTS is closed on all Philippine bank holidays, as listed above.

EPCS Type • Interbank account transfer system.

• 76 direct. Participants

Transaction types processed • Low-value domestic interbank PHP-denominated transactions.

Operating hours • 09:00–16:00 PHT, Monday to Friday.

• Payments are cleared and settled between 09:00–16:00 PHT. Clearing cycle details • Funds are available to payees on a same-day basis. • Final settlement takes place via PhilPaSS.

System holidays • The EPCS is closed on all Philippine bank holidays, dates as above.

CICS Type • Multilateral net settlement system.

Participants • All financial institutions in the Philippines.

Transaction types • Cheque payments. processed

• 09:00–16:30 PHT, Monday to Friday for cheque payments. Operating hours • 22:00–07:30 PHT, Monday to Friday for returns.

• Cheques are truncated, with images and information exchanged digitally. Clearing cycle details (e.g. • Multilateral net settlement takes place across participants’ accounts cut-off times) held at the BSP via PhilPaSS. • Final settlement takes place via PhilPaSS.

• The ECCS is closed on all Philippine bank holidays, dates as above. • * The date shown may vary by or minus one day. These dates are derived by converting from a non-Gregorian calendar (e.g., System holidays Muslim or Hindu) to the Gregorian calendar. Some of these dates cannot be determined in advance with absolute accuracy, even by the governing authorities. In the case of Muslim dates in particular, the feast days are determined by the sighting of a new/full moon.

Credit transfers

Credit transfers are used by companies to pay salaries and suppliers, and to make tax and treasury payments. High-value and urgent PHP-denominated credit transfers are settled on a same-day basis via PhilPaSS. Low-value and non-urgent PHP-denominated credit transfers are processed via the EPCS. USD-denominated credit transfers can be processed on a next working-day basis via the PDDTS. PESO Net and InstaPay (up to PHP 50,000 per transaction) process electronic retail credit transfers. PESO Net facilitates fund transfers, which are not time critical, from one account to one or several accounts. Funds will be available in the recipients account within the same banking day, or immediately upon clearing. There are 58 participants in PESO NET. InstaPay enables the real-time transfer of funds up to PHP 50,000 24/7/365. Thirty-two financial institutions currently participate in InstaPay. Cross-border transfers can be made via SWIFT and settled through correspondent banks abroad.

Direct debits

Direct debits are used for low-value regular payments, such as utility bills. Direct debits are processed on a next working-day basis via the EPCS.

Cheques

The cheque is a popular cashless payment instruments, used by both consumers and companies. Cheques are processed electronically via the CICS. Funds are available within two days.

Card payments

There were nine million credit cards (just 2% of households have credit cards) and 43 million ATM (debit) cards in circulation in 2019. Most payment cards are co-branded with MasterCard, Visa, BanKard, BPI Express Card, Unicard, Diners Club and . Domestically issued debit cards are usually issued in the form of ATM cards linked to the holders’ deposit account. All cards issued in the Philippines are expected to have EMV chips.

ATM/POS

There were 21,278 ATMs in the Philippines at the end of 2019. Payments are processed on a same-day basis via the BancNet, , , Nationlink and Encash ATM and POS networks. Final settlement of payments transacted at the BancNet and MegaLink networks takes place via PhilPaSS.

Electronic wallet

The dominant electronic wallet schemes are reloadable pre-paid cards used to withdraw cash and pay utility bills, and single purpose e-cards used for public transport, such as the Beep card. There are approximately 70 million re-paid cards in circulation. E-cards in the Philippines have a maximum monthly limit of PHP 100,000. Payments are processed and cleared via the individual schemes. Mobile wallet schemes, such as GCash and PayMaya, are available. QR codes are also available. A National QR Code Standard has been adopted, the QRPH.The number of active e- money wallets increased by 74% between 2018 and 2019, to 8.8 million. There were 20.6 million pre-paid cards linked to e-money accounts.

Channels

Market overview

Liquidity management

Domestic: notional pooling

Domestic notional cash pools are not permitted in the Philippines.

Domestic: cash concentration

Domestic cash concentration structures are available in domestic and foreign currency. Central bank reporting requirements may apply.

Cross-border notional pooling

Cross-border notional cash pools are not permitted in the Philippines.

Cross-border cash concentration

Cross-border cash concentration structures are are not commonly used due to limit restrictions on cross-border transfers. Central bank reporting requirements may apply.

Short term investments

Market overview

Interest payable on credit balances

Interest-bearing current accounts in PHP or foreign currencies are permitted in the Philippines.

Demand deposits

Demand deposits denominated in PHP or major foreign currencies are available.

Time deposits

Time deposits are available in PHP or major foreign currencies for terms up to 12 months.

Certificates of deposit

Domestic banks issue certificates of deposit with terms ranging from one month to one year. They can be issued paying fixed or variable interest. The minimum investment amount is typically PHP 50,000.

Treasury (government) bills

The Philippines Bureau of Treasury auctions Treasury bills for terms of three, six and 12 months. The minimum investment amount is PHP 50,000.

Commercial paper

Domestic commercial paper is issued by companies with a maturity of 365 days or less. The issuance of commercial paper needs to be registered with the SEC and requires a rating from a Philippine credit rating agency.

Money market funds

Money market funds are available as short-term investment instruments.

Repurchase agreements

Repurchase agreements are widely available with maturities ranging from one day to three months.

Banker's acceptances

Banker's acceptances are available in the Philippines.

BNP Paribas insights

BNP Paribas Trade Finance Capabilities

Trade payments

Documentary credits

Documentary collections

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas

Guarantees

Bank guarantees

Standby letters of credit Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas

Supply chain management

Receivables

Payables

Inventory

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas

Trade channels

Connexis Trade

Connexis Supply Chain

SWIFTNet Trade for Corporates

Connexis Connect

Supported by BNP Paribas

Not required / permitted in PHILIPPINES or not supported by BNP Paribas

International trade

General trade rules

As a member of the Association of Southeast Asian Nations (ASEAN), the Philippines has entered into the ASEAN Trade in Goods Agreement (ATIGA) between member states (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam). The Philippines is also a member of the ASEAN Free Trade Area (AFTA) and is committed to reducing and eliminating tariffs between members. As a member of the Asia-Pacific Economic Cooperation (APEC) forum, the Philippines has agreed to liberalise trade and investment rules between members.

Trade agreements

The Philippines has signed an FTA with Japan and the European Free Trade Association (EFTA) member states. ASEAN has signed free trade agreements (FTAs) with Australia, China, Hong Kong, Japan, India, New Zealand and South Korea. It is negotiating an FTA with the EU.

Imports / exports

Machinery Electronic Mineral and Iron and Textile Imports products Grains Chemicals Plastics fuels transport steel fabrics

equipment

Primary South China Japan USA Thailand Indonesia Singapore Import Korea (18.1%) (11.4%) (7.4%) (7.1%) (6.7%) (5.9%) sources (8.8%)

Semi- conductors Transport Copper Petroleum Coconut Exports and Garments Fruit equipment products products oil electronic products

Hong South Export Japan USA China Singapore Thailand Germany Kong Korea markets (16.4%) (14.6%) (11.0%) (6.1%) (4.3%) (4.1%) (13.7%) (4.0%)

Import / export volumes

2015 2016 2017 2018 2019

- goods USD m 43,197 42,734 51,814 51,985 53,382 Exports - services USD m 29,065 31,204 34,832 38,397 40,974

- goods USD m 66,506 78,283 92,029 102,958 99,848 Imports - services USD m 23,610 24,161 26,139 26,789 27,928

Current account as % GDP 2.5 - 0.4 - 0.7 - 2.7 NA Source: IMF, International Financial Statistics, July 2020.

Trade finance - imports

Documentation

The following documentation is required in order to import goods into the Philippines: customs declaration commercial invoice bill of lading certificate of origin packing list delivery order.

Import licences

Prior clearance or a licence from the relevant government regulatory agency is required for the importation of regulated items.Import taxes and tariffs Tariffs are generally set in one of four categories: 0%, 1%, 3%, and 5%, although tariffs can be as high as 50%. A VAT rate of 12% is levied on imports.

Import taxes and tariffs

Tariffs are generally set in one of four categories: 0%, 1%, 3%, and 5%, although tariffs can be as high as 50%. A VAT rate of 12% is levied on imports.

Financing requirements

Foreign exchange purchased in connection with imports must generally be remitted directly to non-resident beneficiaries on the date of purchase. An importer’s foreign currency deposit account can be credited with purchased foreign exchange, pending its remittance to non-residents.

Risk mitigation

None

Prohibited imports

The Philippines prohibits the import of certain items in order to protect health and safety, industrial policy and/or for national security.

Trade finance - exports Documentation

The following documentation is required in order to export goods from the Philippines: customs declaration commercial invoice bill of lading packing list export license.

Export licences

Licences are required when exporting items regulated for environmental, health and security reasons. Prior clearance from the relevant government regulatory agency is required for regulated exports.

Export taxes and tariffs

None

Financing requirements

None

Risk mitigation

The Philippine Export-Import Credit Agency (PhilEXIM), the Philippines’s national export credit agency, provides state-supported export credit finance and insurance.

Export credit finance and insurance are available from private companies and commercial banks.

Prohibited exports

The Philippines prohibits exports in line with international treaty obligations. Specific exports are prohibited in order to protect fauna and flora.

Regulatory requirements

Reporting regulations

The BSP requires companies to submit a monthly Cross-border Transaction Survey (CBTS). These reports must provide details of all resident to non-resident transactions including transactions settled in resident accounts abroad. All transactions between resident accounts and accounts held by non-residents must be reported to the relevant government departments. Details must include transactions involving resident accounts abroad and all borrowing in foreign currency. Companies are also required to notify the Bureau of Customs of all inward and outward foreign currency transfers exceeding USD 50,000 or its equivalent. Up to USD 10,000 or its foreign currency equivalent can also be brought in or out of the country. BSP authorisation is required for domestic currency imports and exports in excess of PHP 10,000. Banks are required to report the details of sales of foreign exchange to residents for investments purposes to the International Operations Department of the BSP.

Reporting Method

CBTS reports must be submitted 22 days after the end of the reference month. Companies must report cross-border transactions and foreign direct investments on a monthly or quarterly basis respectively. Foreign direct investment by companies in the Philippines must be accompanied by an application for registration which must be filed with the BSI within a year of the transfer of assets or inward remittances. Banks electronically submit information to the International Operations Department of the BSP on a monthly basis.

Exchange controls

Exchange controls are administered by the BSP. Capital transactions and transactions affecting the trade balance must be conducted through the formal exchange market, which is composed of banks and other institutions licensed to operate by the BSP. Foreign exchange can be traded by banks on a forward basis. Except for imports from, and exports to, ASEAN countries, the use of PHP for international payments and receipts is not permitted. Resident investors may purchase USD 1 million from the banking system without supporting documentation (other than an application to purchase FX) for Non-Trade Current Account Transactions with Non-Residents. Resident investors may purchase FX USD 60 million without prior BSP approval. Foreign exchange of any amount can be purchased by residents from accredited banks to cover advance payment requirements for import transactions without BSP approval.Foreign exchange purchases for import obligations can be achieved by the submission of applications containing supporting documentation to licensed foreign exchange dealers. Prior BSP approval is required for imports and exports of PHP in excess of PHP 50,000 in the form of cash, cheques, money orders and other bills of exchange. As a member of the Association of Southeast Asian Nations (ASEAN), the Philippines is a participant in the ASEAN Swap Arrangement and the Bilateral Swap Arrangements under ASEAN+3.

Taxation

Resident / non-resident

A corporation is resident if it is incorporated in the Philippines or, if incorporated outside the Philippines, it has a branch in the Philippines.

Tax authorities

Bureau of Internal Revenue (national taxes); City/Municipal Treasurer's Office (local taxes); and Bureau of Customs.

Tax year/filing

A company’s tax year can be either a calendar or fiscal year of an accounting period of 12 months ending on the last day of any month other than December. With the approval of the Securities and Exchange Commission and the Commissioner of Internal Revenue, companies can change their tax year from one to the other. Every company must file a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters, upon which income tax is levied, collected and paid. The tax so computed is reduced by the amount of tax previously paid or assessed during the preceding quarters, and needs to be paid not later than 60 days from the close of each of the first three quarters of the company’s taxable year. The final self-assessed tax return for the whole year must be filed by the 15th day of the fourth month after the end of the calendar or fiscal year-end, along with any balance of tax payable. Where the three quarterly payments exceed the final tax due, it can be claimed as a refund or a tax credit against future income tax payments. A Philippine head office and its Philippine branches may file consolidated returns for corporate income tax and VAT purposes. Otherwise, consolidated returns are not permitted and each company must file a separate return.

Financial instruments

The Philippines has no specific rules for the taxation of financial instruments; however, see Stamp duty section below.

Interest and financing costs

The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business is allowed as a deduction from gross income. However, the allowable tax deduction for interest expense is reduced by an amount equal to 33% of the company’s interest income that has been subjected to final withholding tax. No deduction is allowed if the indebtedness is incurred to finance petroleum exploration.

Foreign exchange

Foreign exchange gains and/or losses are taxed as a separate item. Only the realised portion of a foreign exchange gain or loss is taxable or deductible. Income tax returns (ITRs) must be prepared in the Philippine peso (PHP), whether or not taxpayers have adopted a different functional currency for their financial statements and books of accounts. Therefore, all entries in the ITR are in PHP. The translation of the functional currency should be done on a monthly basis using the average exchange rate (under the Philippine Dealing System (PDS)) during each month. All tax returns other than the ITR also need to be filed in PHP using the historical peso amount or the actual conversion/prevailing PDS rate on the transaction date, whichever is applicable. As provided under Revenue Regulation No 1–79, if income is received in a foreign currency other than US dollars (USD), it is first converted into USD at the average annual exchange rate of the foreign currency versus the USD for the year in which the income was earned. Revenue Memorandum Circular No 26–85 provides the following rules as amended, to govern the conversion of USD to PHP. The conversion rate to be applied is the prevailing interbank reference rate for the day of the transaction. In the event that this foreign exchange rate is impractical or not feasible, the average interbank reference rate during the year applies. For the purpose of converting a foreign tax liability in USD to PHP, the prevailing interbank rate at the time of payment is applied when payment is made before the due date of the tax, or the prevailing interbank reference rate at the due date of tax when paid on or after the due date of the tax; certain foreign taxes are tax- deductible.

Advance tax ruling availability

The tax authorities will issue an advance ruling on the tax consequences of a contemplated transaction at the request of a taxpayer. Capital gains tax

Generally, capital gains are taxed at the rates applicable to a company’s taxable income. Capital losses may only be offset against capital gains of similar transactions. Gains on the sale of shares listed and traded on the stock exchange are taxed at 0.6% of the gross selling price. Gains on the sale of shares not traded on the stock exchange are subject to a 15% withholding tax. Net capital gains realised by foreign corporations not exceeding PHP 100,000 are taxed at 5%, while net capital gains in excess of PHP100,000 are subject to 10% final tax.

Withholding tax (subject to tax treaties)

Payments to: Interest Dividends Royalties Other income

Resident entities 20% (see note 1) None 20% 1-15%

Non-resident entities 20% 15%/30% (see note 2) 30% 4.5-30% (see note 3)

1. Except interest from bank deposits and foreign currency loans granted by offshore banking units and foreign currency depository banks where the withholding tax is 7.5%. Also see the section on corporate taxation for details on the scope and application of the Philippine final withholding tax. 2. Dividends distributed by a Philippine company to a non-resident are taxed at a rate of 15%, provided the country of the non-resident foreign corporation allows a tax credit of 15%. Otherwise, the dividends are taxed at 30%. 3. Other payments to non-residents may be subject to a final tax (e.g. management fees at 30%, certain payments related to vessels at 4.5% or aircraft, machinery and other equipment at 7.5%). 4. Branch profit remittances to head offices are subject to a 15% branch profit remittance tax.

Tax treaties / tax information exchange agreements (TIEAs)

Philippines has exchange of information relationships with 43 jurisdictions through 45 double tax treaties and no TIEAs.

Thin capitalisation

Specific thin capitalisation rules have yet to be issued in the Philippines. However, Revenue Audit Memorandum Order No 1–98 provides that it is necessary to determine the reasonable ratio of debt to equity considering all relevant factors.

Transfer pricing

Revenue Regulations No 02–2013 provides guidelines on the arm’s-length principle for transfer pricing. Such regulation adopts the arm’s-length methodologies set out under the OECD Transfer Pricing (TP) guidelines. Revenue Audit Memorandum Order No. 1-2019 (the Transfer Pricing (TP) Audit Guidelines) provides standardised audit procedures and techniques applicable to taxpayers with related-party and/or intracompany transactions. The audit procedure consists of three phases: preparation; implementation; and reporting. The Philippine transfer pricing rules apply to both domestic and international related-party transactions. Stamp duty

A documentary stamp tax (DST) is levied on financial instruments, including shares, bonds, leases, sale agreements, loan agreements, debentures, certificates of indebtedness, bank cheques, warehouse receipts, bills of lading, letters of credit, mortgages, powers of attorney, insurance policies and proxies. DST is levied at rates of 0% to 1.5% of the relevant value (e.g. par value, consideration received etc.), depending on the type of asset. The DST return must be filed within five days after the close of the month when the taxable document was made, signed, issued, accepted or transferred, and the tax thereon must be paid at the same time. The tax return must be filed with, and the tax due be paid through, the authorised agent bank within the territorial jurisdiction of the revenue district office for the location in which the taxpayer is resident or has its principal place of business. In places where there is no authorised agent bank, the return is filed with the revenue district officer collection agent, or duly authorised treasurer of the city or municipality in which the taxpayer has their legal residence or principal place of business.

Cash pooling

The Philippines has no specific tax rules that apply to cash pooling arrangements.

Financial transactions / banking services tax

There is no specific financial transactions or services tax.

All tax information supplied by Deloitte Touche Tohmatsu and Deloitte Highlight 2020 (www.deloitte.com).

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Market data updated as of 05-11-20