As mentioned, the government, with the participation of the business sector, continues to seek to develop the country’s potential to become Asia’s E-Services Hub. The development of information and communication technology (ICT), particularly IT services, IT-enabled services, ICT support activities, and IT parks, continues to drive the growth of the Philippine economy. Any firm desiring to undertake investment and development projects in these fields is entitled to the incentives provided for in the Omnibus Investments Code of 1987.
The Information Technology and Electronic Commerce Council (ITECC) was formed by the government to spearhead the efforts in turning the country into a major IT center. The ITECC is a government-private sector partnership composed of high-level officials from both sectors. It establishes comprehensive plans, strategies, and policies that shape the Philippine IT environment.
A. INCENTIVES FOR IT SERVICES
Pursuant to the policy of encouraging more investments in the Philippine IT sector, the government recently issued a framework of guidelines for the registration and administration of incentives for IT services under the Omnibus Investments Act of 1987. The guidelines cover the following projects that offer domestic and international services and are eligible for BOI registration:
1. ICT services: software development (system software, middleware, application software, application systems).
2. ICT – enabled services: Business process outsourcing (BPO) refers to business lines that can be transformed and delivered through the means of ICT infrastructure. These include: customer contact centers, engineering and design, animation and content creation, distance learning, market research, travel services, finance and accounting services, human resource services and other administrative services (e.g., purchasing). For foreign entities (more than 40% foreign-owned), at least 70% of total services rendered must be exported. Filipino-owned entities, however, must export at least 50% of total services rendered. Entities primarily serving the domestic market must comply to the existing international standards for specific services rendered in terms of equipment, tools, and processes.
3. ICT Support Activities: These include pure research and development centers and services, educational and training institutions for ICT, incubation centers for ICT projects, and community access facilities.
ICT Learning Institutions refer to the establishment and operation of training institutions/centers that specialize in developing skills for the ICT sector and utilize state-of-the-art facilities. To qualify for registration, the project shall be endorsed by either the Technical Education and Skills Development Authority (TESDA) or Commission on Higher Education (CHED) or any other appropriate government agency or endorsed by the recognized industry associations in the field of training. The project to be registered must provide training laboratories utilizing state-of-the-art personal computers (should be the latest model in the market) and with reliable means of connection to the Internet. The ratio of PC to number of students must be 1:1 per class and the ratio of trainer to trainees should not be more than 1:16 per class. Prior to availment of incentives, the firm shall submit proof that its curriculum has been endorsed by either TESDA or CHED or any other appropriate government agencies or recognized industry associations in the field of training. Community Access Facilities refer to activities that will provide facilities for mass-based use of internet/e-commerce. These include internet cafés, kiosks, multipurpose communication centers, and others, which must be located outside Metro Manila, Metro Cebu, and Davao.
The following are the qualifications for registration:
a) Utilizes a network that provides reliability of access;
b) There is a roll-out plan covering various areas of the country;
c) Supports the programs of the Local Government Units (LGUs) aimed at complying with Government On-line; and
d) Assists/partners with schools/educational institutions in promoting E-commerce and in augmenting the lack of sufficient computer facilities.
If the registered project provides access to unserved municipalities as identified by the Department of Transportation and Communication (DOTC), the firm shall be granted pioneer incentives. For ICT Learning Institutions and Community Access Facilities, if the projects fail to comply with the minimum conditions set on investment cost and technical requirements for pioneer status, the status shall be downgraded to non-pioneer. Projects that fail to comply with the minimum conditions set on technical requirements for non-pioneer status shall be required to refund the incentives availed.
Individuals, partnerships, and corporations that are interested to engage in IT services but are not yet registered with the BOI, and businesses that plan to expand their existing BOI-registered projects may qualify for registration under the Omnibus Investments Code. Enterprises in which foreigners own the majority of equity shall be allowed to engage in IT-related endeavors in the Philippines, provided that they undertake pioneer projects or export at least 70% of their output. An enterprise/project is granted a pioneer status when any of the following circumstances is met:
a. Utilizes new or untried technology;
b. Introduces a major innovation in software development; and
c. Project cost should be at least US$2 million.
An application for registration under the guidelines for IT services must be accompanied by a project feasibility study and must strictly comply with the requirements provided in the Omnibus Investments Act of 1987, its implementing rules and regulations, and the 2003 Investments Priority Plan. As soon as such application is approved, the registered IT enterprise shall be entitled to the following incentives:
1. Income tax holiday
a. Income tax exemption for —
● Six (6) years from commercial operation of pioneer enterprises
● Four (4) years from commercial operation of non-pioneer enterprises
b. Possible extension of said periods for two (2) to eight (8) years in any of the following instances:
● Ratio of imported and domestic capital equipment to the number of workers to the project does not exceed US$10,000.00 to one (1) worker
● Net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3) years of operation
2. Employment of foreign nationals under the circumstances provided in the Omnibus Investments Code of 1987 (see discussion above)
3. Additional deduction on labor expense
4. Unrestricted use of consigned equipment
Note that the aforementioned incentives shall be in addition to the incentives granted under the Omnibus Investments Act of 1987, provided that the firm in question is a BOI-registered enterprise.
B. IT PARKS
Aside from the incentives extended by the BOI to certain IT enterprises and projects, the PEZA also provides for similar privileges to enterprises that undertake IT activities and/or situate themselves in approved IT parks.
The PEZA Board of Directors issued the guidelines (Resolution No. 99-264, October 1999) for the establishment and operation of IT parks. An IT park is an area, classified as a special economic zone, that has been developed into a complex capable of providing infrastructure and other support facilities required by IT enterprises, including amenities required by professionals and workers involved in IT enterprises. To date, there are at least 187 approved operational IT parks in the Philippines. The majority of IT parks are currently situated in the Metropolitan Manila area, with more IT parks emerging in the provinces. The following is a list of the ten largest approved IT parks in terms of area:
|NAME OF IT PARK||LOCATION|
UP Science and Technology Park (North)
SM City Pampanga
E-Square Information Technology Park
Leyte Mikyu Economic Zone
Northgate Cyber Zone
SMCI IT Center
McKinley Hill Cyber Park
Sta. Rosa City, Laguna
Quezon City, Metro Manila
Taguig City, Metro Manila
Alabang, Munitnlupa City
Taguig City, Metro Manila
The PEZA allows the establishment of an IT park in any suitable location, the only limitation being that if the same shall be established within the Metro Manila area, that is, Manila, Quezon City, Caloocan City, Makati City, Pasay City, Mandaluyong City, Las Piñas, Marikina, Pasig City, Valenzuela, Parañaque, Muntinlupa, Malabon, Navotas, Pateros, San Juan, and Taguig, only service-type projects are allowed with no manufacturing operations. Generally, an IT park must at least have a minimum area of five (5) hectares. However, those established in the Metropolitan Manila area must have an available business area of at least 5,000 square meters.
The following PEZA-registrable activities may be situated in an IT park:
1. Software development for business, e-commerce, education, and entertainment
2. Content development for multimedia or internet purposes
3. Hardware design, prototype production, and other related activities
4. Knowledge and computer-based support activities (e.g., software support, data encoding and conversion, internet facilitation, systems integration, project implementation, IT consultancy, call center)
5. Research and development services 55
6. Manufacturing facilities (for IT parks established outside Metro Manila)
Any person or entity interested in developing an IT park may do so by following the procedure prescribed by the PEZA. Generally, an IT park must have the following amenities and features:
1. High-speed fiber-optic telecommunication backbone and high-speed international gateway facility or wide-area network, or any high-speed data telecommunications system that may become available in the future
2. Clean and uninterrupted power supply
3. Computer security and building monitoring and maintenance system
4. May provide for IT business and technology incubation centers
An IT park becomes operational as soon as the required Presidential Proclamation is issued.
Owners/developers of IT parks located within Metro Manila are not entitled to PEZA incentives, unless said owners/developers are already covered by Presidential Proclamations or have secured PEZA approval prior to the guidelines. On the other hand, owners/developers of IT parks located outside of Metro Manila are entitled to PEZA incentives, which include:
1. Income tax holiday
a. Generally, for four (4) years
b. Six (6) years when IT park located in less developed areas, as determined in the Investments Priority Plan
2. After the lapse of income tax holiday period, optional special tax of 5% on gross income earned from enterprises located in the IT park in lieu of all national and local taxes except real property taxes
3. Permanent resident status for foreign investors with initial investments of US$150,000.00
4. Employment of non-resident aliens required in the IT operations
5. Simplified customs procedures
6. May avail of incentive under the Build-Operate-Transfer Law (includes government support for accessing Official Development Assistance and other financing sources)
C. IT ENTERPRISES
IT enterprises, or companies operating or offering IT services, may seek PEZA Board Approval and registration for availment of incentives under the Omnibus Investments Code of 1987, provided that the following registration requirements are met:
1. Duly accomplished PEZA application form
2. Corporate profile
3. Certificate of Registration with the SEC and updated Articles of Incorporation
4. Board resolution authorizing the filing of application with PEZA and designating authorized representative/s
5. Project brief
Upon registration, said enterprise shall be entitled to the following incentives, aside from the incentives provided for in the Omnibus Investments Code of 1987 and the Special Economic Zone Act of 1995, as may be determined by the PEZA Board:
1. Income tax holiday a. Four (4) years for non-pioneer IT enterprises b. Six (6) years for pioneer IT enterprises
2. After the lapse of income tax holiday period, optional special tax of 5% on gross income earned, in lieu of all national and local taxes, except real property tax. A deduction of equivalent to 50% of the training expenses, charged against the 3% national government share in this optional special tax
3. Exemption from import duties and taxes imposed on imported machinery, equipment, and raw materials
4. Permanent resident status for foreign investors with initial investments of at least US$150,000.00
Due regard must also be given to the prevailing wage rates. In the Philippines, such rates may vary across regions. As of March 2015, the National Capital Region, that is, Metro Manila, imposes the highest daily minimum wage rate at PhP481.00 (approximately US$10.36), with a ceiling of PhP290.00, while Region II the lowest at PhP229.00 (approximately US$4.93).
D. SUMMARY CHECKLIST PRIOR TO SETTING UP BUSINESS IN THE PHILIPPINES
Businesses must check if they comply with registration for the following:
|Registration of corporations and partnerships||Securities and Exchange Commission (SEC)|
|Registration of business name/single proprietorship Registration for incentives availment under Executive Order 226||Department of Trade and IndustryNCR (DTI-NCR) Board of Investments (BOI)|
|Registration with other Investment Promotion Agencies for incentive availment||
Philiippine Economic Zone Authority (PEZA)
Subic Bay Metropolitan Authority (SBMA)
Clark Development Corporation (CDC)
Cagayan Export Processing Zone
Phividec Industrial Authority
Zamboanga Economic Zone Authority
|Registration of foreign investments for purposes of capital repatriation and profit remittances||Bangko Sentral ng Pilipinas (BSP)|
Checklist for Utilities and Pre-Operation Requirements:
|Securing Tax Identification Number (TIN)||Bureau of Internal Revenue (BIR)|
|Securing locational clearance/business permit for firms locating in Metro Manila||Metro Manila Development Authority (MMDA)
City Hall/Municipal Offices in the localities where the business will be set up
|Securing an employer’s SSS number||Social Security System (SSS)|
|Securing membership in the government health care benefits system||Philippine Health Insurance Corporation|
|Securing electric services connection||Manila Electric Co. (MERALCO) for businesses within the MERALCO franchise area; local electric utility firms for companies locating in non-MERALCO franchise area|
|Securing water services||Maynilad Water Works and/or Manila Water Company for firms locating in Metro Manila and Local Water Utilities Administration 60 (LWUA) for firms locating outside Metro Manila|
|Securing Telephone services connection||Philippine Long Distance Telephone Co. (PLDT), Bayantel, Digitel, Smart and Globelines|
E. IMPORTANT CLARIFICATIONS BY THE SECURITIES AND EXCHANGE COMMISSION
Recent opinions of the Securities and Exchange Commission have made clarifications regarding the role of certain IT based services in mass media.
Under the Philippine jurisdiction, “mass media” means the gathering and transmission of news, information, messages, signals, and forms of written, oral and all visual communications. It embraces the mediums of print, radio, television, film, movies, wire and radio communication services, as well as advertising in all its phases.
Mass media is a wholly nationalized activity. The negative list ( infra ) prescribes a total ban (with the exception of the recording industry) on foreign ownership of mass media. Thus, an alien cannot be in the board of directors of a company that is engaged in the creation and production of any form of mass media.
A key indicator of when an IT service can be considered as mass media is when the purpose of the service involves the dissemination of information to the general public through the internet. Among the types of IT services that have
been found to be mass media are:
1) the act of operating an online voucher platform for the purpose of increasing sales of a particular product; and
2) the act of producing marketing and operating digital media. Digital media are any media that exist in a computer-readable format, and can reside on a local device (CD, DVD, hard drive), or remote location.
The SEC clarified that a company may be engaged in the conceptualization, creation, preparation and production of the commercial web layout and communication messages so long as it does not own or operate any online media outlet. However, these acts would constitute the company as an advertising agency. Advertising agencies are distinguished from mass media, and are subject only to a 30% foreign equity limit.