When foreign companies or business entities are considering to enter the Philippine market, most of them think of setting up a wholly owned subsidiary. However, there is an option to doing business in the Philippines short of creating a subsidiary and it is establishing a representative office. A representative office is the easiest and most convenient way to market to the Philippines and Southeast Asia. This paper examines the benefits and comparative advantages of a Philippine representative office and consider alternatives to Philippine base. If you’re looking to establish a representative office in the Philippines, our firm can help.
Republic Act No. 7042, Foreign Investments Act of the Philippines and its Implementing Rules and Regulations (IRR), under Department of Trade and Industry (DTI) Administrative Order No. 2, Series of 2007, allows corporations to wholly-owned branches to register with the Department of Trade and Industry (DTI) as a Philippine-based representative office. Its activities are defined as “Market Research and Information Gathering”.
A Representative Office is an ideal solution for foreign corporations planning to market locally manufactured or parent company-branded products and services in the Philippine market. Based on the feedback at the seminar and requests for follow-up information, the FCA developed a handy guide on the key advantages of setting up a Philippines Representative Office (RO) in conjunction with an outline on guidelines and procedures involving its incorporation.
The smaller ones, primarily the representative offices, do not engage in local business. They are authorized to provide informational and promotional services and perform back-office activities in support of their headquarters. They play a very important role in specialized business which may involve complex financial transactions, the providing of after-sales services, and the movement of goods and resources within the same corporate organization. The mixture of business conducted by them is broad in scope and ranges from trading and engineering services arranging to construction project services support and shipping and airline operations support.
In this age of intelligent, technology-driven business, the boundaries of commerce have extended far beyond the country of origin. In response to this interesting trend, governments around the world have given the green light for the establishment of local subsidiaries and representative offices. These local operations are the primary means by which companies communicate on a daily basis with their customers and partners in commerce. The big ones, principally the subsidiaries, marshal the resources such as personnel, capital, and physical facilities to produce and sell goods and provide services to the local market. The use of subsidiaries to conduct business covers a diverse spectrum which spans the manufacturing and sales of consumer goods and capital goods, the providing of business and consumer services, and the delivery of project services (e.g., engineering, procurement, construction).
Understanding Representative Offices
A representative office does not generate income or sell goods and services, hence, it does not pay taxes. It is, however, required to register with and secure business permits and licenses from appropriate government agencies. These are specifically tailored for its purpose and size, considering also that it eventually does not have substantial physical assets and resources, or local permanent employees. For more information and a consultation on representative office Philippines, contact our team.
Commercial and economic officers from foreign embassies or consulates, consultants, and other advocacy groups often confuse a “branch” and a “representative office” in the context of foreign investments. To clarify, a branch is a separate unit of a foreign corporation and it mindlessly mirrors the parent company in terms of activities and responsibilities. On the other hand, a representative office, through its activities, promotes and advances its parent company’s corporate interests rather than a profit-making motive.
A representative office is one of the corporate vehicles available to a foreign corporation that seeks to establish a presence in the Philippines. Philippine laws define the scope of activities of a foreign corporation through a representative office to include: acting as a buying and/or sourcing office for products and services for its parent company, acting as marketing, promotion and/or sale of products of the parent company, and performing such other services as approved by the appropriate government authority. These services are rendered to the foreign corporation’s head office and/or network of affiliates.
Definition and Function
However, for those interested in establishing the RO, you will find it attractive to note that it will be subjected to lower compliance and the allowed number of foreign nationals holding key positions, compared to those of Representative and Branch Offices. Moreover, a RO may employ foreign nationals and their dependents, provided that it employs at least 10 direct employees. As a RO is often applied for by parent companies of foreign enterprises who have only a small number of clients in the Philippines, they have no fixed income and so no permission to render services in the Philippines. Therefore, the permitted activities of the RO will be limited by the above criteria. Establishing a Philippine representative office may be a daunting task, but our team is well-equipped to help.
A RO is an option for companies interested in exploring the Philippine market and promoting their products, services, and the locations of their head/foreign offices. The RO is not allowed to derive income from the country, provide repair and maintenance services, and/or offer services to affiliates. In terms of inward supplies, a Philippine RO is also not allowed to input tax credits against its purchases of goods and services. ROs are allowed to buy, sell, or distribute goods or services, or engage in any other business commensurate with their status or capacity relevant to the entity it represents. Do note that the following activities are non-permissible for ROs: issuing receipts and invoices for cash disbursements in the Philippines; soliciting or concluding sales, or negotiating with potential customers; creating a market in the Philippines for their parent company’s goods; promoting the company’s products in the Philippines.
Legal Services Offered by FCB Law
FCB Law’s services typically encompass a wide scope of activities due to the challenges faced by multinational clients establishing a business or seeking investment opportunities in the Philippines. Regulatory needs that are very specific to the Philippine Representative Office (RO) operation will be addressed extensively in the RO service proposal. The RO operation could, in fact, be the first Philippine venture for the multinational client. However, these clients should not look at the RO service provided by the in-country manager as a “them and us” obligation. Instead, the multinational client should look at the establishment of the Philippine RO operation as a mutual relationship engagement, with the two parties working together to achieve success. This would include, at a RO needs assessment, periodic client-side appointment, coordination of group corporate objectives, and assistance in the management of the expanding group corporate setup.
The legal profession is a complex and multi-faceted field, which lends itself to numerous legal services. Although the services offered by FCB Law are not confined to Philippine laws, the firm’s lawyers have a practice focusing on Philippine laws. FCB Law provides a broad range of expertise and knowledge applicable to many areas in the practice of law. This document outlines only those services offered in relation to incorporation and other transactional services. No formal listing of the firm’s practice is contained in this document, nor is any limitation suggested on the conduct of the firm’s members with regards to the legal services to be performed.
Market Entry Support
Using the Philippine Trade and Investment Center, the DTI can also coordinate with the various industry sectors concerned for Foreign Direct Investments (FDIs), to research on permits and clearances needed, and schedule meetings between the company and the relevant industry agencies. The PTIC can also provide market research that is need-specific to the company’s inquiry. It is strongly recommended that companies visit or send their representatives to the Philippines to identify and meet with prospective business partners, as well as visit and conduct product demonstrations to potential clients.
The DTI and the Board of Investments (BOI) provide direct support for foreign companies interested in setting up a Representative Office in the Philippines. The Philippine Trade and Investment Center (PTIC), the commercial section of the Philippine Embassy or Consulate, provides market entry support by presenting the company and its business plans, as well as other available commercial assistance services. The DTI shall assign a Foreign Trade Service Officer to oversee the setting-up of a Representative Office in the Philippines to ensure its compliance at the onset of their business venture in the country.
As a company with multinational clients serving the Asia Pacific market, establishing a Philippine RO can provide significant benefits. A Philippine RO provides the means to take advantage of new opportunities by using official representatives to explore local markets, establish contact with local companies and potential partners in the Philippines and nearby markets, police and establish goodwill for the parent company in areas where the company does not possess a legal entity or is not currently represented by representatives capable of transacting business and establishing a commercial presence, and assisting and providing services to importers and customers in the region in the host country. Small companies can better prepare for the economic challenges presented by globalization by establishing an offshore office in the Philippines, particularly in light of the ASEAN Economic Community (AEC) in 2015.
