The 4th CFO Innovation Philippines Forum held earlier this year in Makati, Manila, brought together chief financial officers from three distinct groups – with one key concern.
The level of compliance required to successfully manage business operations in the Philippines can come as a surprise – even to CFOs of companies with an already well-established presence. This was most recently highlighted to me at the 4th CFO Innovation Philippines Forum where, following my ‘Navigating the minefield...’ presentation, I received numerous requests for information on entity health checks. These came not just from the financial officers of companies looking to enter the market for the first time, but from CFOs of companies that are already set up; in some cases they’ve been operating in the market for a very long time.
Doing business in the Philippines can be complicated
As illustrated by the Philippines’ 25th ranking in TMF Group’s Financial Complexity Index 2017, it’s far from easy to understand how to successfully operate in this jurisdiction while remaining compliant with all rules and regulations. Many international companies establish their presence in the Philippines without being aware that their books of accounts should be registered with the Bureau of Internal Revenue (BIR) before they can use them. These statutory books can be registered in three different ways: as manual books of accounts (an old-school way of recording), loose-leaf books of accounts, and computerised books of accounts.
Some entities also overlook the requirement to submit audited financial statements with the Security Exchange Commission (SEC) after the same has been filed with the national tax office. Also, for entities registered with agencies administering certain tax fiscal incentives to registrants such as the Board of Investments and the Philippine Economic Zone Authority, audited financial statements must be submitted to such agencies, along with other requirements. A representative office should maintain separate books of accounts, and they are also required to have audited financial statements. A common result of these oversights is that entities are caught by surprise when they receive a penalty note or a memo from government agencies.
You don’t have to be new to be caught out
It’s not just the finance departments of market newcomers who are finding themselves failing to comply. Entities registered with the Philippine Economic Zone Authority have experienced several changes to their reportorial requirements in the last few years. Registrants who were not aware of the changes found themselves subject to some administrative penalties.
The time for compliance is now
Philippine government agencies are tightening the compliance process to ensure that companies operating in the country are adhering to statutory requirements including their tax obligations. We have seen an increase in the number of tax audits and notices from government agencies to local business entities. The agencies are probing entity compliance not just in current operations, but also as far back as five years ago.
For SEC compliance matters, the basic penalty for first offences usually ranges from PhP2,500 to PhP5,000 per violation. However, this can add up where there is continuous non-compliance with the same requirement every year. Companies that find themselves on the wrong side of tax compliance in the Philippines can expect a 25% surcharge based on the total tax due, plus 20% interest per annum and compromise penalties. The total amount is determined based on the tax type that the entity failed to comply with.