Economic Overview
– The Philippines is one of the most dynamic economies in the East Asia and the Pacific region.
With increasing urbanization, a growing middle-income class, and a large and young population, the Philippines’ economic dynamism is rooted in strong consumer demand supported by improving real incomes and robust remittances. Business activities are buoyant with notable performance in the services sector including the Business Process Outsourcing, real estate, and finance and insurance industries.
– The Philippines remains a consistent growth performer in the East Asia region.
In 2017, the Philippines was among the top three growth performers. The Philippine economy grew from 6.9 percent year-on-year in 2016 to 6.7 percent year-on-year in 2017. Growth was anchored in strong exports, while investment growth significantly slowed and consumption growth moderated.
The Philippine economy is projected to continue on its expansionary path and grow at an annual rate of 6.7 percent in both 2018 and 2019. In 2020, growth is expected to level at 6.6 percent.
The economy is currently growing at its potential, making productive investment in physical and human capital essential so that the economy can continue to grow along its current growth trajectory. Investment growth hinges on the government’s ability to effectively and timely implement its ambitious public investment program.
Unemployment has reached historic low rates. Majority of Filipino workers that transition out of agriculture generally end up in low-end service jobs.
Main industries in Philippines:
- Electronics assembly
- Aerospace
- Business process outsourcing
- Food manufacturing
- Shipbuilding
- Chemicals
- Textiles
- Garments
- Metals
- Petroleum refining
- Fishing
- Rice
The Philippine is still largely an agricultural society and produces large amount of rice for local consumption and large amounts of copra for export. It also produces a lot of bananas and pineapples, particularly in Mindinao, many of which are export quality. There is also a large fishing industry made-up mostly of relatively small local fisherman.
Tourism is a large industry and many kids are studying HRM and culinary arts. The Philippines also supplies 1–2 million seaman to the world’s merchant fleets and it is one of the best employment opportunities for young man.
Labor is relatively inexpensive so the Philippines produces a lot of clothing including NBA uniforms in at least one case that I know of. There are also many call centers which pay relatively well, for PI, but have difficult hours in many cases to synch times with North American. Assembly of labor intensive products such as car air bags also takes advantage of low wages.
Construction is booming at the moment with many casino and condo projects going up in Manila and Cebu.
Taxes in Philippines
There are many different kinds of taxes in the Philippines. But we can group them into two basic types, namely, national taxes and local taxes. National taxes are those that we pay to the government through the Bureau of Internal Revenue.
Capital Gains Tax – is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.
Documentary Stamp Tax – is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property incident thereto. Examples of documentary stamp tax are those that are charged on bank promissory notes, deed of sale, and deed of assignment on transfer of shares of corporate stock ownership.
Donor’s Tax – is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer. Donor’s tax is based on a graduated schedule of tax rate.
Estate Tax – is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition. Estate tax is also based on a graduated schedule of tax rate.
Income Tax – is a tax on all yearly profits arising from property, profession, trades or offices or as a tax on a person’s income, emoluments, profits and the like. Self-employed individuals and corporate taxpayers pay quarterly income taxes from 1st quarter to 3rd quarter. And instead of filing quarterly income tax on the fourth quarter, they file and pay their annual income tax return for the taxable year.
Individual income tax is based on graduated schedule of tax rate, while corporate income tax in based on a fixed rate prescribed by the tax law or special law.
Percentage Tax – is a business tax imposed on persons or entities who sell or lease goods, properties or services in the course of trade or business whose gross annual sales or receipts do not exceed the amount required to register as VAT-registered taxpayers.
Percentage taxes are usually based on a fixed rate. They are usually paid monthly by businesses or professionals. However, some special industries and transactions pay percentage tax on a quarterly basis.
Value Added Tax – is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer, causing this to increase the prices of most goods and services bought and paid by consumers. VAT returns are usually filed and paid monthly and quarterly.
Excise Tax – is a tax imposed on goods manufactured or produced in the Philippines for domestic sale or consumption or any other disposition. It is also imposed on things that are imported.
Final Withholding Tax – is a kind of withholding tax which is prescribed only for certain payors and is not creditable against the income tax due of the payee for the taxable year.
Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the said income. An example of final withholding tax is the tax withheld by banks on the interest income earned on bank deposits.
Expanded Withholding Tax – is a kind of withholding tax which is prescribed only for certain payers and is creditable against the income tax due of the payee for the taxable quarter year. Examples of the expanded withholding taxes are those that are withheld on rental income and professional income.
Withholding Tax on Government Money Payments – is the withholding tax withheld by government offices and instrumentalities, including government-owned or -controlled corporations and local government units, before making any payments to private
individuals, corporations, partnerships and/or associations.
Withholding Tax on Compensation – is the tax withheld from individuals receiving purely compensation income. This tax is what employers withheld in their employees’ compensation income and remit to the government through the BIR or authorized
accrediting agent.
Local Taxes in the Philippines
Professional Tax – an annual professional tax on each person engaged in the exercise or practice of his profession requiring government examination.
Amusement Tax – tax collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement.
Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products – an annual fixed tax for every truck, van or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the panlalawigan, to sales outlets, or consumers, whether directly or indirectly, within the province.
Tax on Business – taxes imposed by cities, municipalities on businesses before they will be issued a business license or permit to start operations based on the schedule of rates prescribed by the local government code, as amended. Take note that the rates may vary among cities and municipalities.
Tax on Transfer of Real Property Ownership – tax imposed on the sale, donation, barter, or on any other mode of transferring ownership or title of real property.
Tax on Business of Printing and Publication – tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of similar nature.
Franchise Tax – tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.
Tax on Sand, Gravel and Other Quarry Resources – tax imposed on ordinary stones, sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction.
Community Tax – tax levied by cities or municipalities to every inhabitant of the Philippines eighteen (18) years of age or over who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who is required by law to file an income tax return.
Community tax is also imposed on every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines.
Service Fees or Charges – fees or charges that may be collected by the barangays for services rendered in connection with the regulations or the use of barangay-owned properties or service facilities, such as palay, copra, or tobacco dryers.
Barangay Clearance – a reasonable fee collected by barangays upon issuance of barangay clearance – a document required for many government transactions, such as when applying for business permit with the city or municipality.
Investing in Philippines
The Philippines has the 12th largest population and the 43rd largest economy in the world, making it a popular destination for international investors. In fact, Goldman Sachs named it as one of its Next Eleven economies, projecting that it will become the 14th largest economy in the world by 2050 – an economic miracle by many measures.
Growing Emerging Market Economy
The Philippines’ newly industrialized economy has transitioned from an agricultural focus to a service-based economy over the past several years. Approximately 52% of the economy is based in the service sector, 33% is based in the agricultural sector, and 15% is based in the industrial/manufacturing sector, according to the CIA World Factbook.
From Toyota to Intel to IBM, the country houses many large multinational corporations looking to lower their costs and take advantage of low domestic wages and a highly educated English-speaking workforce. The country also houses a large mineral and geothermal resource, producing more geothermal energy than all other countries except the United States.
Ways to Invest in the Philippines
Exchange-traded funds (ETFs) represent the easiest way to invest in the Philippines since they can be purchased on U.S. stock exchanges and offer instant diversification. But investors can also consider purchasing American Depository Receipts (ADRs) or purchasing stock directly on the Philippine Stock Exchange (PSE) using a foreign brokerage account.
The most popular Philippines ETF is the MSCI Philippines Investable Market Index Fund (EPHE), which offers exposure to over 40 different companies.
Benefits & Risks of Investing in the Philippines
The Philippines offers international investors exposure to one of the Next Eleven economies, but there are many risks that should be carefully considered, ranging from geopolitical risk to reliance on foreign economies to support its growth.
Benefits of investing in the Philippines include:
– Emerging Market Economy. The Philippines is considered an emerging market economy and one of Goldman Sachs Next Eleven economies.
– Leadership in Outsourcing. The Philippines is a leader in business process outsourcing (BPO), which is one of the fastest growing industries in the world.
Risks of investing in the Philippines Include:
– Reliance on Foreign Trade. The Philippines economy is heavily dependent on foreign economies in both its export and BPO industries.
– Geopolitical Risks. The Philippines faces a number of geopolitical risks, including political corruption, and potential trouble in the South China Sea.
Key Takeaway Points
– The Philippines is a well-known investment destination and a Goldman Sachs’ Next Eleven economy position to grow significantly over the coming years.
– The Philippines economy is primarily known for its business process outsourcing (BPO) service sector and high tech export sector.
– The easiest way to invest in the Philippines is by purchasing the MSCI Philippines Investable Market Index Fund (EPHE).