The banking system in the Philippines comprises commercial, universal, thrift, rural, and specialised government banks, with various categories of banks offering differentiated business activities. Most banks that offer structured cash management services fall either in the commercial or universal category, the latter also having the powers to act as investment houses and invest in the equity of companies not related to banking. The banks are governed by Bangko Sentral ng Pilipinas (BSP), the central bank. The Philippine banking system is supported by two other entities, namely:
Clearing and Settlement Systems
Cheques continue to be the main settlement tool for local currency (the Philippine peso, PHP) business transactions since these instruments are still the cheapest and most accessible. In 2002, the number of cheques processed by the clearing house was 118.9 million compared to fewer than one million electronic transfers across the settlement systems.
Clearing Systems for Paper-based Instruments
The nationwide magnetic ink character recognition (MICR) and Automated Clearing Operation covering the inter-regional cheque clearing exchange was launched in October 2001. It is composed of 63 clearing units: nine integrated clearing regions (three-day clearing) and 54 regional clearing units (five- to nine-day clearing). All provinces outside of the coverage are considered ‘out-of-town’ areas that can take as long as 30 days to clear. The volume of out-of-town cheques has fallen sharply after the increase of regional clearing units from 27 to 54 in June 2003 and is expected to decrease further as more centres are converted. The cheque clearing system is run by the PCHC, which is supported and regulated by BSP. Future developments in this area are:
- the integration of the clearing process of selected integrated clearing regions into a single clearing unit, reducing clearing time from seven days to only three days; and
- the conversion of local and, at a later stage, inter-regional clearing operations of the remaining regions (after integration) from MICR to an image-based electronic cheque clearing system.
Settlement Systems for Electronic Transfers across Banks
Peso transfers: The Philippine Payments System (PhilPASS), which was implemented in November 2002, provides real-time gross settlement (RTGS) for both inter-bank transactions and customer transactions. However, the system has yet to be actively used for the latter. The Electronic Peso Clearing and Settlement System (EPCS) replaced the 10-year-old peso netting system in January 2003, and supports both payments and collections. The collections module has not been implemented by most banks as of the time of writing. Both systems are run by the PCHC with BSP as the settlement bank.
US dollar transfers: The Philippine Domestic Dollar Transfer System (PDDTS) provides both real-time settlement (usually referred to as PDDTS GSRT, gross settlement real-time) and end-of-day netting (referred to as PDDTS) facilities. The RTGS system is operated by the Philippine Central Depository (PCD) and the end-of-day netting by the PCHC, with a foreign bank as the settlement bank for both systems.
Cash Management Overview
In addition to the foreign banks that provide structured cash management services in line with their regional and global offerings, a number of large local banks have also introduced similar services. Their advantage lies in extensive branch networks, and many of them offer e-banking solutions as well. Most foreign banks in the Philippines use the services of correspondent banks to enable national coverage for their collections. Outsourcing solutions, especially that for payables and payroll, are becoming increasingly popular with local treasurers. There is an increasing demand for integrated solutions with their back-office systems. Following are some important considerations for corporates seeking cash management services in the Philippines.
Classification of Accounts into Resident and Non-resident
Resident companies are registered with the Securities Exchange Commission (SEC) and have a local licence to operate in the Philippines, including representative and branch offices. Non-resident accounts can be funded only through an inward remittance in foreign currencies and have a different withholding tax structure.
Currency Controls
There are extensive foreign exchange controls in place, and for foreign currency purchases above USD5,000 across 20 days a notarised application to purchase foreign currency needs to be filled out and supporting documents provided. All trade-related foreign currency purchases, regardless of amount, are required to be documented. International outward remittances in pesos in excess of PHP10,000 are not allowed without prior BSP approval.
Liquidity Structures
Notional pooling is not allowed since overdrafts are not allowed in the Philippines. In addition to time deposits and treasury offerings, corporates can opt for the cash concentration services that are offered by a few banks (i.e. the end-of-day transfer of funds to a higher interest-bearing account).
Electronic Banking
A number of banks offer e-banking solutions that include proprietary and internet-based solutions. These vary in their complexity and scope depending on whether they are personal or corporate banking solutions and whether they allow mere balance and transaction reporting as compared to full e-banking capabilities.
The government has made it mandatory for the large tax-paying corporations to pay their taxes through the electronic filing and payment system. This was introduced by the Bureau of Internal Revenue, and comprises online tax forms and a direct debit facility with accredited depository banks. Other taxpayers can also use this system. An e-payment system has also been introduced by the Bureau of Customs that allows payments of duties and taxes at the Port of Manila via the Internet. It is important to note that the Philippines has, through Law RA 8792 passed in 1999, an e-commerce legislation in place. As more government initiatives get underway (e.g. a government electronic procurement system), there will be an increase in e-commerce activity in the Philippines.
Taxation
All income earned in the Philippines, whether by a resident or non-resident entity, is taxable. Tax is generally computed on the basis of net income for residents and gross income for non-resident corporations. Domestic corporations (which include foreign-owned companies registered or incorporated in the Philippines) are taxed on gross income derived from all sources within and outside the country (subject to existing tax treaty provisions), whereas foreign corporations are taxed only on income derived from sources in the country.
Key tax information:
- The basic corporate income tax rate is 32 per cent.
- A number of transactions are excluded from gross corporate income returns but are subject to withholding tax. The withholding tax rates for PHP deposits for residents and non-residents are 20 per cent and 32 per cent, respectively, and that for US dollar deposits for residents and non-residents are 7.5 per cent and 0 per cent, respectively.
- Interest on foreign currency loans granted to resident companies by offshore banking units or foreign currency deposit units are subject to 10 per cent withholding tax.
- Value-added tax is applicable to interest paid on loans and on fees and commissions at 10 per cent (this was imposed with effect from January 2003 in lieu of the gross receipts tax).
- Documentary stamps tax is applicable to a variety of transactions including trade transactions, and remittances against PHP.
- Local entities registered as Philippine Economic Zone Authority export enterprises and as 100 per cent export enterprises (under the Board of Investment) are entitled to tax exemptions and holidays.