Industry Case Study : Setup and Manage your Outsourcing Office in the Philippines

The Philippines is one of the most in-demand outsourcing destinations in the world and its popularity is still growing today even in the context of the current Covid-19 pandemic.

We will explain why the country is so attractive and how you can successfully open and manage an outsourcing / support office in the Philippines. With the country’s complex tax system - and its administrative burden in general - ensuring smooth and compliant local operations for your outsourcing project in the Philippines is extremely important ! 

The outsourcing world is full of complicated jargon to match specific situations: Outsourcing, Business Process Outsourcing, Nearshoring, Offshoring, etc. We will keep it simple and just use Outsourcing when referring to the action of outsourcing a process or activity to a subsidiary located in the Philippines :

 



The Philippines: a leading outsourcing destination

The Philippines is one of the most dynamic economies in Asia. The country has a young and well-educated population, strong consumer demand and robust remittances from overseas Filipino workers. 

With its singular history - in particular with Spain and more recently with the United States - the archipelago has a strong affinity to Western culture and with more than two-thirds of its 100M+ population fluent in English, it is regarded as one of the largest English-speaking countries in the world. 

And of course labor cost is significantly lower than in developed economies with some businesses saving up to 70% on staff costs with an outsourcing office in the Philippines. 

These are the main reasons why the Philippines has a thriving service sector and has imposed itself as a global Business Process Outsourcing (BPO) hub. 

The Philippine BPO industry currently employs 1M+ people and generates around $25B in revenue, and despite the COVID-19 pandemic, the sector continues to grow, confirming the place of the Philippines as one of the BPO capitals of the world.

Setting-up an outsourcing or support office in the Philippines can definitely help you scale your organization quickly, easily and cost effectively by integrating qualified staff in the Philippines with your operations.

Setting-up an outsourcing company in the Philippines

Incorporating a company in the Philippines for the purpose of outsourcing part of your business processes is actually fairly straightforward.

Even if the Philippines controls foreign investments and a lot of industries still have heavy restrictions in terms of foreign ownership and participation (see latest Negative List here), this is not the case for outsourcing activities that can operate with 100% foreign ownership.

Also your outsourcing office will support one or multiple foreign entities, so you will be able to apply for the Export Market Enterprise status (when a company exports more than 60% of its output) and ask for an exemption to only have a minimum paid-up capital of US$100 instead of the usual minimum paid-up capital for 100% foreign companies of US$200,000.

Here is a summary of the steps to start your outsourcing or support office in the Philippines:

  1. Articles of Incorporation (AOI) Preparation

  2. Securities and Exchange Commission (SEC) Registration

  3. Lease Contract (with Physical or Virtual Office) Signature

  4. Bureau of Internal Revenue (BIR) Registration

  5. Local Government Unit (LGU) Registration and Business Permit Processing

  6. Corporate Bank Accounting Opening

  7. Government Contributions (Pag-IBIG, SSS, and PhilHealth) Registration


Please note that in this article we are referring to the incorporation of a domestic corporation. 

Other options are also available with different tax incentives and specific requirements including setting-up a Representative Office, a Regional Headquarters (RHQ) or Regional Operating Headquarters (ROHQ), or setting-up a company through the Fiscal Incentives Review Board (FIRB) for example under Philippine Economic Zone Authority (PEZA). These options need to be studied with a lawyer.

                      Common finance mistakes to avoid with your outsourcing company in the Philippines

                      Here are 3 of the most common mistakes made by new players when managing an outsourcing or support office in the Philippines:

                      1. Overlooking the tax considerations of the foreign remittances

                      Your headquarters (outside of the Philippines) is setting up an outsourcing office in the Philippines to streamline some of its processes at a competitive cost. The headquarters will send remittances for the outsourcing office in the Philippines to cover the costs of the entity like salaries and wages, rent, utilities, etc. 

                      First, you need to make sure the transactions between your outsourcing office in the Philippines and your foreign headquarters happen “at arm’s length”. This is essential for ensuring your organization is tax-compliant. “At arm’s length” means that the price agreed in a transaction between your two related parties must be the same as the price agreed in a comparable transaction between two unrelated parties. So you need to set a clear transfer price with a reasonable markup. 

                      Second, for the remittances from your foreign headquarters to be zero-rated VAT transactions, these transactions - supported by the invoices and official receipts sent by the outsourcing office to the foreign headquarters - must be foreign-currency denominated with a foreign currency payment. To save on foreign currency exchange costs, we suggest you open a foreign currency account and do your conversion locally with your bank or a third-party money exchange provider (PETNET, Cebuana Lhuillier , etc).


                      2. Ignoring the foreign currency exchange risk

                      Most of the expenses of your support office in the Philippines will be in Philippine peso. The remittances will come from a foreign headquarters with a different currency. You definitely have foreign currency exchange risk to manage !

                      Let’s take an example where the headquarters is in France and uses Euros. The billable expenses of the outsourcing office to the headquarters for the month is Php 1M. The outsourcing office bills the headquarters on the last day of the month in Eur, with a Eur/Php exchange rate of 60, and a margin of 15%. The invoice amount is 1,000,000 x 1.15 / 60 = Eur 19,166.7. In accordance with the 30 days payment terms, the headquarters sends the payment of Eur 19,166.7 on the last day of the following month. The outsourcing office converts the Eur in Php using the new Eur/Php exchange rate of 50 so gets 19,166.7 x 50 = Php 958,333.3. As you can see this is not enough to cover the local expenses !

                      Not considering or not managing properly your currency exchange risk can be damaging to your business.

                      First, you need to understand how exposed you are to this currency exchange risk across your organization. Then you need to decide how you want to manage this risk (including the option not to manage it at all and consider it as the cost of doing business). 

                      In most cases, you will want your outsourcing office in the Philippines not to be too exposed by this currency exchange risk. Here are some tips on how your outsourcing office in the Philippines can minimize this currency exchange risk: 
                      - Have transactions in Foreign currency but with no or short payment terms. If the costs are fixed, you can even consider advance billings.
                      - Use natural hedge by keeping the Foreign currency and use it for costs in the same currency.
                      - Use hedging arrangements through financial instruments like forward contracts or currency options (more complex). 
                      - Please note that having transactions directly in Philippine peso would not be a good idea as these transactions would be subject to VAT!


                      3. Relying on manual Payroll and Accounting processes

                      Outsourcing is by definition a labor intensive industry which means you can quickly reach tens, hundreds or even thousands of employees. 

                      Since payroll processing is a complex process with corresponding remittance obligations in terms of taxes and government contributions, we highly recommend you to work with payroll professionals that offer automated payroll solutions.

                      We discussed the many advantages of automating your payroll in the Philippines in this blog article here.

                      On top of your payroll process, you should consider outsourcing your bookkeeping, reporting and tax obligations; and focus on your core business (recruitment, customer services, etc.) .

                      We talk about Outsourcing Accounting in another blog article here.

                       

                      Proseso Consulting - Your digital accounting and finance consultant focusing on growth


                      For more information on how to manage and operate your outsourcing office in the Philippines or if you have any questions you may contact me directly at ninoy@proseso-consulting.com.

                      Proseso Consulting provides tailored business advisory and finances managed services (bookkeeping and accounting, outsourced and automated payroll, tax and compliance, financial reporting, etc.). We are implemented in the Philippines and in France and our objective is to support the projects of ambitious companies and professionals. We are here to help you achieve your long-term business goals!

                      Ninoy Salmon is a seasoned business and finance professional with extensive experience working with both fast-growing startups and companies in the Philippines and around the world.

                      Get in touch with our team at contact@proseso-consulting.com or visit us at www.proseso-consulting.com for more information about our services.

                       This blog article does not constitute professional or legal advice. It is only intended to provide general information on a subject.

                      Industry Case Study : Setup and Manage your Outsourcing Office in the Philippines
                      Ninoy SALMON 29 June, 2022
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