HSBC Cash Management: RP still committed to tax, financial sector reforms

(Conclusion) 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. Foreign banks offer cash management services, often integrated into their global and regional operations. They are able to leverage their services through extensive branch networks and electronic banking solutions. Most foreign banks operating in the Philippines use correspondent bank relationships to access such branch nettworks for collections purposes.

Local treasury practice favors outsourcing as a solution to office-intensive operations such as payables and payroll administration. As demand for cash-management services continues to cling, back-office integration with such solutions has become the favored path. Major considerations for a corporate treasurer in search of locally obtainable optimal cash-management solutions include the following:

Resident and non-resident status accounts. Resident status includes SEC registration, which licenses companies to operate both representative and branch offices. Non-resident company accounts must be capitalized only by inward remittance in a foreign currency. Non-resident company accounts are further distinguished by a differently structures withholding tax.

Currency controls. Foreign exchange is extensively managed via exchange controls. An example of such procedures can be found in the requirements for foreign exchange purchases. To initiate a foreign currency purchase above $5,000 and over 20 days, the procedures mandate the presentation of a notarized application to purchase foreign currency and the provision of full documentary support. The purchase of foreign currency for trade purposes, whatever the amount, has to be thoroughly documented. All trade-related foreign currency purchases, regardless of amount, are required to be documented, and peso remittances overseas in excess of P10,000 must be BSP-approved.

Liquidity Structures. Overdrafts are illegal in the Philippines, thus preventing the use of notional cash pooling, treasury offerings and time deposit are available and other solutions for corporations include the cash concentration services offer by some banks, such as interest-bearing accounts that are topped up from end-of-day fund transfers.

Electronic banking, Internet banking, e-commerce

Some banks offer e-banking solutions via the Internet or proprietary network platforms. These can vary from simple personal banking solutions that only offer balance and transaction data to full-service corporate banking solutions.

Corporations must file and pay taxes electronically through a dedicated government electronic filing and payment system. Operated by the Bureau of Internal Revenue (BIR), and available to other taxpayers as well, the system features online tax return forms and a direct debit facility operation into accredited depository banks enabling individuals as well as corporate entities to pay more than 20 different taxes online through the BIR’s Electronic Filing and Payment System (eFPS).

These include returns for income, withholding and value-added taxes. The BIR launched the eFPS in June 2001, and initially only large corporate taxpayers were able to file their tax returns and pay their taxes electronically through the BIR Website.

Banks are now authorized to receive tax payments under the eFPS including the Philippine National Bank (PNB), the Bank of the Philippine Islands (BPI), Union Bank of the Philippines (Union Bank), Security Banking Corp. (Security Bank), Equitable PCI Bank, Metropolitan Bank and Trust Co. (Metrobank), Standard Chartered Bank of the Philippines (SCBP), Banco de Oro Universal Bank (BdO or Banco de Oro), Rizal Commercial Banking Corp. (RCBC), and the 34-member banks of the BancNet consortium.

Another e-payment system is that operated by the Bureau of Customs (BOC), whereby Manila port duties and taxes, including those related to imported goods clearance, can be settled online. Payments are made through banks that are electronically connected to the BOC. Under the automated Online Release System (OLRS), when the confirmation of payment made through the banks is relayed to the BOC, they in turn key in such payment and lift the hold status of the shipment allowing the port operator to release the goods to the imported or his representative.

Increasingly, new e-commerce initiatives – such as the Government Elecronic Procurement System (GEPS) – are now getting underway. This represents the Philippine government’s first step towards electronic procurement practices and will provide both government agencies and suppliers with a more open, transparent and competitive environment for the procurement of goods and general support services, civil works, and consulting services by the government.

To participate on the GEPS, agencies need to register with Procurement Service. The GEPS offers direct access to government opportunities form one site. They will also be able to take advantage of the GEPS bid-matching services and be automatically notified of new opportunities matching their profile.

Taxation

Residents and non-residents must pay taxes, which are usually calculated on a net-income basis for resident companies and gross-income basis for non-resident companies. Domestically domiciled corporations (defined as all foreign-owned companies registered or incorporated in the Philippines) are taxed on gross income derived from all foreign or local sources, subject to existing tax treaty provisions. Foreign corporations are only taxed on Philippine-derived income.

Headline tax rates are middle-of-the-road compared to other countries. The standard corporate income-tax rate, for example is 32 percent. Some transactions are not counted in gross corporate income returns but are the subject of a withholding tax. Rates on this withholding tax are peso deposits for residents and non-residents are 20 percent and 32 percent, respectively. Rates of 7.5 percent and zero percent for US dollar deposits apply to resident and non-residents, respectively.

Capital inflows are not entirely untaxed, as foreign curency loans granted to resident companies by offshore banking units or foreign currency deposit units attract a 10-percent withholding tax on the interest. Other interest paid is taxed at a similar rate. Since January 2003, the interest paid on loans and on fees and commissions has attracted a value-added tax at a rate of 10 percent (a mechanism that was applied to replace gross receipts tax).

Transaction taxation costs also exist, the documentary stamp tax (DST) applies to a number of transactions, including all trade transactions and any remittances against peso. However, local companies registered as ‘Philippine Economic Zone Authority Export Enterprises’ and as ‘100-percent Export Enterprises’ (under the Board of Investment) can claim tax exemptions.

Conclusion

The Philippine government is technocratically committed to tax and financial-sector reform, but the administration finds itself opposed by vested interests supported by many members of the upper house. Nevertheless, e-commerce is beginning to burgeon, in part propelled by the government moving tax collection and procurement online.

The currency evinces fairly deep liquidity, with significant inward remittances from a huge expatriate workforce, but the banking sector is too beefy and needs to be consolidated. Although the banks have few ways to put this cash to work, deposit-taking in the high street branches is still increasing. Cash pooling is not allowed, but simple cash concentration and some other treasury services are available from a variety of foreign and national banks.

Habir is director for financial services ratings, and Benard is associate director, sovereign and international public finance ratings, both in the Asia Pacific region of Standard & Poor’s. – Ed.